Franchise Agreement Basics

Overview

In the government context, a 'franchise' is a contract right to use the public right-of-way (ROW), most commonly to construct, expand, and maintain underground facilities for public utility service.

The general ROW use rights in franchises are legally distinct from other property rights, such as easements and leases, which more commonly extend rights or obligations to specific individual properties. For example, a granted utility franchise may give rights that cross over (or under) properties that are also subject to easement or lease rights.

General Franchise Authority

Government authority to grant franchise rights is vested in the state, which has delegated franchising authority to localities through the statutes listed below.

Code Cities

• RCW 35A.47.040
• RCW 35A.12.120

First-Class Cities

• RCW 35.22.280
• RCW 35.22.195
• RCW 35.22.340

Second-Class Cities

• RCW 35.23.440(37)

Towns

• RCW 35.27.370(12)

Counties

• RCW 36.55.010
• RCW 36.55.030

Other Considerations

Additionally, Chapter 35.99 RCW limits and clarifies the authority of all classes of cities when regulating telecommunications facilities in the public ROW.

Local governments can refuse to grant requests for franchises, but granted franchises are legal contracts binding on both parties. While local governments can require privately owned utilities or companies to obtain a franchise before occupying the ROW, they cannot force a utility or company to accept proposed franchise terms. Instead, governments can condition a franchise on the terms, conditions, and limitations they see fit, leaving the franchise applicant free to either accept or reject the offered franchise terms.

Franchise Fees and Limitations

Drafting, negotiating, approving, and overseeing a franchise consumes staff time and resources, and local governments often seek to impose franchise fees to offset these costs. While cities, towns, and counties are generally permitted to impose franchise fees, there are legal limitations to be aware of at the state and federal level.

Limitations at the state level:

• RCW 35.21.860(1) – Allows cities and towns to charge franchise fees to light and power businesses, gas distribution franchisees and telephone businesses, but only to the extent that the fees recover the agency’s actual administrative expenses that are directly related to receiving and approving such franchises. This limitation means that cities and towns may need to forecast and document their administrative expenses in approving these franchises. Importantly, King County v. King County Water Districts (2019) specifically noted that the fee restrictions in RCW 35.21.860 apply only to city franchises, and not to those granted by counties.
• RCW 35.99.040(2)(c) – Requires cities and towns to comply with section 253 of the Federal Telecommunications Act in setting telecommunications franchise fees.

Limitations at the federal level:

• 47 U.S.C. Sec. 253 – Local government telecommunications franchise fees must be fair, competitively neutral, nondiscriminatory, and reasonable, and must be publicly disclosed.
• 47 U.S.C. Sec. 542(b) – Local government franchise fees on cable TV providers cannot exceed 5% of the franchisee ’s gross revenues in a 12-month period.

For more information on fees related to telecommunications franchises, see our Telecommunications Regulation webpage.

Franchise Adoption – Required Ordinance and Adoption Procedure

Franchises have the legal status of contracts, but local governments adopt them through legislation. For example, procedures for the adoption of a negotiated franchise for second-class cities are outlined in RCW 35.23.251 and include the following:

• The city council cannot pass a franchise ordinance or resolution until at least five days after its initial consideration of it;
• The city council can only pass a franchise ordinance or resolution at a regular meeting;
• A franchise ordinance or resolution must be submitted to the city attorney before passage; and
• At least five councilmembers must vote in favor of passing the franchise ordinance or resolution.

Similar procedures are outlined for code cities in RCW 35A.47.040, for town franchises in RCW 35.27.330, and for county road and bridge franchise adoption in RCW 36.55.060.

Common Franchise Contract Components

The terms of a granted franchise can vary depending on the type of utility or business involved, proposed ROW use, any history between the franchisee and the local government, and other factors.

Common franchise negotiated terms include a set of definitions, scope of franchisee ROW use, insurance, bond, indemnity requirements, and more, as explored below.

Working Definitions

These working definitions should cover terms used to regulate and govern the franchise, such as:

• Right-of-way (ROW): The types of properties that a franchisee will be able to use under the franchise (streets, sidewalks, alleys, etc.)
• Franchise area: The geographical area in which the ROW is located.
• Facilities and services: The types of facilities a franchisee can install, maintain, or use within the ROW (conduit, transmission lines, pipelines, etc.)

A franchise agreement establishes its own agreed-upon terms and definitions or may adopt definitions by reference from state law, local codes, or other sources.

Defined Scope of ROW Use

Franchises often address how expansive or restrictive a franchisee’s ROW use will be under the franchise terms. For example, will the franchise allow the franchisee to only use its existing facilities in the ROW, or will it also allow the franchisee to place, modify, relocate, or remove these types of facilities?

Franchise Exclusivity, Location Preference, and Subordination of Rights

Most franchise agreement do not give exclusive rights to a single franchisee, which allows the franchising authority (i.e., the local government) to offer franchise rights to multiple franchisees (e.g., utilities, telecommunications providers) concurrently.

A franchise may also indicate that prior existing franchises in a ROW will be given a preference regarding the location of facilities in order to regulate and prevent potential disputes between franchisees and the local government.

By law, franchise contract rights are also subordinate to a local government’s police power to enforce general laws. Franchise terms can reflect and reinforce this legal principle.

Insurance, Bond, and Indemnity Requirements

Franchise insurance and indemnity provisions are important to protect the local government and third parties from damage and loss resulting from acts of franchisees or their agents or subcontractors. For example, some utility services, such as those involving pollutants or potentially hazardous substances, pose higher risks than others.

Insurance and indemnity protections are also especially important if franchisee rights include an ability to undertake construction work or other higher-risk activities in the ROW.

State laws permit franchising authorities to require bonds from franchisees. For example, RCW 35A.47.040 permits code cities to require bonds set in reasonable amounts from franchisees to ensure their faithful performance and adherence to franchise terms.

Identification and Regulation of Franchisee Subcontractors

Franchisees commonly exercise their franchise rights through subcontractors. Franchise agreements can include requirements that franchisees identify and get local approval of any franchisee subcontractors scheduled to work in the ROW.  Such requirements help to ensure that subcontractors are qualified and legally able to work in the ROW, have obtained all required permits, are insured to cover losses and damage, and can be contacted if an emergency occurs.

Permit Requirements for Franchisee Activities

While franchises grant broad, general rights to use a locality's ROW, a franchisee’s specific acts under those granted rights often contemplate work that requires a locally issued permit. For example, franchises that give utilities the right to install, relocate, or remove utility facilities with a public ROW may require construction work like trench digging or road repaving. For that reason, franchises should adopt local construction permit codes and procedures for permit applications, plan review, and approval of such work.

Local governments granting franchises should also consider the coordination required between different agency departments or divisions to ensure efficient processing and oversight of the franchise.

Relocating, Abandoning, or Removing Franchisee Facilities

Franchises are typically granted for a specific number of years. For example, if a utility’s franchise expires and is not renewed, what happens to the facilities it installed in the ROW?

Local governments can consider adding franchise provisions that require franchisees to relocate or remove facilities upon expiration or termination of the franchise agreement (or if facility removal or relocation otherwise becomes necessary during the franchise term).

Description of How ROW Vacations Can Affect a Franchise

Cities, towns, and counties can legally vacate their public interest in a ROW. Doing so transfers ownership and control of the vacated ROW to private parties.

Franchise agreements often provide that if the local government intends to later vacate a ROW that includes facilities installed by the franchisee in order to provide services (utility or otherwise), the local government will reserve an easement in the vacated ROW pursuant to RCW 35.79.030 (for cities and towns) or RCW 36.87.140 (for counties). This ensures that the franchisee’s rights to occupy and use the ROW to provide services to the community will continue even after local government vacates it.

A review of existing utility franchises is, accordingly, a prudent step in a local government’s decision to vacate a local ROW.

Emergencies and Notice Requirements

Damage to a facility installed and/or operated within a franchised ROW (such as pipelines, wiring, conduit, etc.) can lead to emergencies—after hours ones in particular. For example, utility facility damage can cause leaks of polluting or hazardous substances, damage to a local government’s property, disruption of utility service, and other issues.

It is important that franchise agreements include provisions for emergency notice between a local government and the franchisee should unexpected emergencies arise. These provisions can indicate the person(s) to be notified of an emergency, an agreed-upon communication method, and procedures for changing emergency contact information.

Franchise Assignments or Transfers

Franchisees may want to assign or transfer their franchise rights to another entity, such as a company that purchases the franchise or a subsidiary that the franchisee creates.

Franchise transfers and assignments can be beneficial in some cases. For example, if a franchisee intends to cease its utility operations, assigning or transferring the franchise rights to another provider may avoid utility service disruptions to the community.

However, since an assignee or transferee is a new franchisee, and may be unfamiliar to the local government, the franchise agreement should require local review and approval of any such transfer. Common provisions indicate that a local government will not 'unreasonably withhold' such consent.

Franchise Term, Extensions, and Month-to-Month Status

Abrupt franchise termination (even those occurring on an anticipated franchise expiration date) can cause service disruptions and other complications for local communities.

To avoid these issues, many franchises include clauses that allow the franchise to continue after termination on a month-to-month status. This allows franchise operations to continue until the local government and franchisee either negotiates a new franchise agreement or agrees to extend the term of a franchise for a specified period. (Note, however, RCW 36.55.060 limits county road and bridge franchises to 50-year terms.)

Facility Relocation and Construction Delay Claims

In addition to the ROW construction activities addressed in a franchise agreement (such as the work required to install franchisee facilities), some franchise construction work becomes necessary due to projects undertaken by the local government. For example, a road-widening project may necessitate franchisees to move their underground facilities to accommodate the project. Accordingly, franchise agreements often include franchisee requirements to relocate facilities at the local government’s request.

If a request is made to accommodate a local government construction project, and the relocation of a franchisee's facility delays the construction project, the local government could face construction delay claims from its contractor. For example, see Scoccolo Const., Inc. ex. rel. Curb One, Inc. v. City of Renton (2006), which holds that city franchisees relocating their facilities at the city’s request “acted for” the city for purposes of a construction delay claim under RCW 4.24.360.

Indemnity provisions in local government franchises should be expansive enough to address this issue with franchisees.

Recommended Resources

Below are some additional resources from MRSC:

• Easements
• Right-of-Way Use Permits
• Street and Road Vacation Procedure