New FCC Order on Cable Franchising

Yet again the FCC has had a busy summer, this time reopening their decades-long focus on cable franchise fees.

In August, the FCC issued its Third Report and Order pertaining to cable franchise fees, in response to the 6^th Circuit Court of Appeals remand in Montgomery County, Md. et al. v. FCC, 863 F. 3d. 485 (6^th Cir. 2017). The focus of the Order was to better define “in-kind” contributions found in many franchises and preempt local authority pertaining to the cable operator’s use of the cable system for non-cable services.  This new Order, if upheld, will have repercussions for future cable franchises, can potentially impact municipal budgets, and may require a reopening of existing franchises. 

The FCC Order started by reframing the definition of franchise fee as defined in the Cable Act (47 USC § 542).  The FCC determined that only those specifically enumerated items within the statutory definition of franchise fee may be excluded as a franchise fee. Statutory exclusions from Franchise Fees include:

1. Taxes and fees of general applicability;
2. Capital costs for PEG channels;
3. Requirements or charges incidental to the awarding or enforcing of the franchise (such as bonds, security funds, and letters of credit); and
4. Any fee imposed under Title 17.

According to the Order, all other contributions (specifically labeled “in-kind”) are subject to the 5% franchise fee cap and must be offset against the franchise fees. 

Changes to the Definition of an In-Kind Contribution

As part of this Order, the FCC issued a new rule to codify what it considers to be an in-kind contribution. The new rule states: 

(a) In-kind, cable-related contributions are “franchise fees” subject to the five percent cap set forth in 47 U.S.C. 542(b). Such contributions, which count toward the five percent cap at their fair market value, include any non-monetary contributions related to the provision of cable service by a cable operator as a condition or requirement of a local franchise, including but not limited to:

1. Costs attributable to the provision of free or discounted cable service to public buildings, including buildings leased by or under control of the franchising authority;
2. Costs in support of public, educational, or governmental access facilities, with the exception  of capital costs; and
3. Costs attributable to the construction of institutional networks.

(b) In-kind, cable-related contributions do not include the costs of complying with build-out and customer service requirements.

What Does This Mean for Washington Municipalities?

As enumerated in the above regulation, these in-kind contributions count towards the 5% cap at their fair market value. In-kind contributions include, but are not limited to, free or discounted services to public buildings such as schools, fire stations, and libraries; maintenance and operational costs associated with PEG channels; and I-Net related maintenance and construction costs. However, build-out requirements and customer service requirements are specifically excluded from the definition of “in-kind” and are therefore not subject to the 5% cap. Interestingly, the FCC determined that the value of the in-kind services should be measured using fair market value. Contrast this decision with the 2018 FCC Order pertaining to small wireless facilities, which requires that municipalities charge a reasonable approximation of the municipality’s reasonable costs. 

Though the FCC noted in its notice for proposed rulemaking that it was considering categorizing channel capacity as an in-kind contribution, it acknowledged that the record was not fully developed. The FCC indicated that it was still considering how to appropriately categorize channel capacity, a new order we can likely look forward to in the coming year.

The FCC Order also stated that municipalities cannot regulate non-cable services offered by cable operators. The FCC agreed with cable operators’ arguments that a cable franchise authorizes the installation of any equipment in the ROW, regardless of whether it is used for cable service.

Conclusion

The effective date of this Third Report and Order is September 26, 2019, and it is applicable to existing franchises but is prospective only (so the cable franchisees cannot request offsets against past franchise fee payments).

Looking forward, municipalities will need to determine what exactly they want and assess the impact of this Order on their cable franchises and franchise fees. Discussions with both internal and external stakeholders will be key to understanding what in-kind services a municipality will want to continue with, what offsets it will accept, and whether or not it will need to reduce a service. Many municipal decisions will ultimately be driven by the impact this Order will undoubtedly have upon their budgets for 2020 and beyond.