Brian T. Grogan

(612) 347-0340

E-Mail: GroganB@moss-barnett.com

 

 

 

 

Municipal Communications Law Update

 

 

To:              Moss & Barnett Clients and Interested Parties

 

From:                   Brian T. Grogan, Esq.

                  

Date:          August 5, 1997

 

                        Ócopyright 1997, Moss & Barnett, A Professional Association

                                                                                                                                                           

 

I.        System Transfers Continue

            In part due to pressure from Congress to reduce the number of subscribers it controls, TCI, the nation’s largest cable operator, has recently entered into several partnerships in many cases relinquishing management control of subscribers and taking a minority stake in the ventures.  These proposed partnerships also allow TCI to reduce debt and reduce its total subscriber count. 

            In the last several months, TCI has announced deals involving Cablevision Systems Corp., Adelphia Communications Corp., Intermedia Cable Partners and Falcon Holding Group.  Trade press has also hinted at a possible TCI deal with MediaOne in the Chicago market and with Time Warner in a variety of markets.  To date, TCI has reduced its debt by approximately $2 billion and has relinquished management control of over 1.6 million subscribers.  TCI’s President, Leo J. Hindery, Jr., has been quoted as saying that TCI planned similar deals involving “something like 4 million subscribers.”  These mergers and system swaps are not limited to TCI but include all of the industry as operators continue their efforts to build large regional clusters of systems to prepare to do battle with the baby Bells.

a.         What do these mergers and swaps mean to your City?

These proposed system mergers typically trigger transfer of ownership provisions in your local franchise as well as transfer provisions under the Cable Act.  The Cable Act (47 U.S.C. § 537) provides:

Sales of cable systems

A franchising authority shall, if the franchise requires franchising authority approval of a sale or transfer, have 120 days to act upon any request for approval of such sale or transfer that contains or is accompanied by such information as is required in accordance with Commission regulations and by the franchising authority.  If the franchising authority fails to render a final decision on the request within 120 days, such request shall be deemed granted unless the requesting party and the franchising authority agree to an extension of time.

Moreover, the Federal Communications Commission has promulgated regulations governing the sale of cable systems.  Section 76.502 of the FCC’s regulations (47 C.F.R. § 76.502) provides:

Time limits applicable to franchise authority consideration of transfer applications

A franchise authority shall have 120 days from the date of submission of a completed FCC Form 394, together with all exhibits, and any additional information required by the terms of the Franchise Agreement or applicable state or local law to act upon an application to sell, assign, or otherwise transfer controlling ownership of a cable system.

            Often cable operators will rush to submit FCC Form 394 in an attempt to trigger the 120 day time period.  These Form 394’s will often contain very limited information regarding the proposed transferee’s legal, technical and financial qualifications and may not even include a complete copy of the sale instrument by which the proposed transfer will occur.  FCC regulations, however, allow a franchising authority to question the accuracy of the information contained within FCC Form 394.  Generally, a franchise authority “must notify the cable operator within 30 days of the filing of such information [FCC Form 394], or such information shall be deemed accepted, unless the cable operator has failed to provide any additional information reasonably requested by the franchise authority within 10 days of such request.”  See 47 C.F.R. § 76.502(b).

b.         Carefully review proposed transfer resolutions

In recent transfers a trend has developed where the incumbent cable operator (seller) will suggest a consent resolution to be adopted by the franchising authority to approve the proposed transfer.  Typically, these resolutions include broad recitals indicating that “the franchise is in full force and effect without default thereunder” or that the seller has “complied with each and every term and condition as set forth in the franchise and that no breach or default has occurred or is continuing under the franchise.”  These consent resolutions will often also include a stipulation that the City give prior approval to the proposed transferee (buyer) to “assign or transfer or otherwise convey one or more liens or security interests in its assets, including its rights, obligations and benefits in and to the franchise.”

While this language works to the benefit of the cable operators, it presents significant problems for cities.  Resolutions offered by the cable operator should be carefully reviewed to ensure the City is not waiving its rights under the franchise or to approve a subsequent transfer. 

For your convenience, we have included below a chart outlining a typical process which may be followed by a franchising authority when confronted with a request for transfer approval.  Please note that this process is subject to change based on differences in state law and the language contained within your franchise documents.  Please consult with legal counsel before taking any action to process a request for transfer.

II.       Franchise Fees Are Not A Tax

On July 31, 1997, the Fifth Circuit Court of Appeals gave cities a significant victory holding that “Franchise fees are not a tax . . . but essentially a form of rent:  the price paid to rent use of public right-of-ways.”  City of Dallas, TX et al v. FCC, No. 96-60427 (5th Cir. July 31, 1997).  The court concluded that cable operators must include franchise fees in their calculation of “gross revenues.”  The court rejected industry arguments that operators merely serve as collecting agents for cities.

Under this decision, a gross revenue calculation will now occur as follows:

1.         If the franchise fee is not passed through to subscribers:

Cable bill = $20; franchise fee = $1;  operator keeps $19.

2.         If the franchise fee is passed through to subscribers (normally the case):

Cable bill = $20; franchise fee add on = $1.05 (not the $1 desired by the industry); operator keeps $20.

The financial impact under example #2 above for a community with 20,000 subscribers, assuming only a $20 average monthly bill, is $.05 x 20,000 x 12 = $12,000 per year or $120,000 over a 10 year franchise.   For a copy of this important decision which contains a thorough analysis of the term “gross revenues,” please contact Susan Olson (612/ 347-0390).

III.      Impact of the Sturgis, Kentucky Case on Franchise Renewals

On February 24, 1997, the Sixth Circuit Court of Appeals issued a decision (Union CATV v. City of Sturgis, Kentucky, 107 F.3d 434 (6th Cir. 1997))* affirming a district court decision which upheld the City of Sturgis, Kentucky’s denial of Union’s request for franchise renewal.  The case represents only the second time in the country that an operator’s request for renewal has been successfully denied.  Moreover, it represents the first case where the denial was based on the operator’s failure to present a proposal which met the needs and interests identified by the City.

Judge Cornelia B. Kennedy authored the decision for the 6th Circuit which found that the “granting of the cable franchise is a legislative act traditionally entitled to consider deference from the judiciary.”  Judge Kennedy also found that the Cable Act recognizes that “municipalities are best able to determine a community’s cable-related community needs and interests” and that a City council’s “knowledge of a community give it an institutional advantage in identifying the community’s cable needs and interests.”  The 6th Circuit therefore concluded that it “would be inappropriate for a federal court to second guess the City in its identification of such needs and interests” and that judicial review of the municipalities identification of its cable-related community needs and interests is therefore “very limited.”

            Upon receipt of the 6th Circuit’s decision upholding the City’s denial of Union’s request for franchise renewal, the question then became what would happen to the cable system and what entity would provide cable service in the community.  The City had planned all along to require Union to terminate service and remove its facilities.  The City also planned to immediately go out to bid to seek an alternative cable television provider.  Faced with this proposition, Union was at risk of losing all of the value of its cable system (between $500,000 and $750,000).  To complicate matters, Union had filed for Chapter 11 Bankruptcy protection and was attempting to work out an acceptable plan with its main creditor, PNC Bank of Ohio. 

            In an attempt to insure that residents of the City of Sturgis would continue to receive cable television service uninterrupted and to allow Union an opportunity to transfer interest in the system to another party, on April 21, 1997, the City and Union entered into an Agreed Order in federal district court.  The terms of the Order are as follows: 

1.         The City shall grant Union a renewal of its franchise on the terms and conditions set forth in the City’s original needs assessment report. 

2.         Union agrees to assign and transfer control of the renewed franchise to a “receiver” to be appointed by the district court in a separate bank foreclosure proceeding.  The receiver must exercise all reasonable efforts to sell the cable system serving the City within six months from the date of appointment.

3.         The receiver shall pay the City out of the proceeds of the sale of the cable system a sum representing substantially all of the City’s attorneys’ fees and expenses incurred in connection with the entire renewals process including the litigation between the parties.

4.         In the event any portion of the agreed Order is unable to be fulfilled, the Order will be dissolved and Union will be without any further right of franchise renewal and will be forced to immediately cease providing cable service and be required to remove its facilities from the City’s rights of way.

            What the Sturgis case means for future franchise renewals is that cable operators will likely no longer spend significant time and money conducting their own needs assessment process in an attempt to contradict the findings of the City.  The operator will most likely instead review the City’s identified needs and interests and prepare cost information demonstrating whether those needs and interests can be economically accomplished.  This will require cable operators to produce significantly more financial information and pro forma with projections for the City’s review and should result in more informed franchising decisions. 

            Cities across the country have reacted to the Sturgis case and many more are undertaking a “formal” renewal process under the Cable Act as opposed to the more often used “informal” renewal process.  The result is that cable operators no longer enter franchise renewal negotiations assuming that renewal is “guaranteed,” but rather knowing that if a City does its homework a cable operator must carefully review the assessed needs and present a responsive proposal or risk potentially losing its right to provide cable television service in that community.

            For a copy of the Sturgis case and a more detailed paper describing the issues involved in the case, please feel free to contact Susan Olson (612/347-0390).

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            Brian T. Grogan is an attorney with the Minneapolis law firm of Moss & Barnett, specializing in cable television, telephone and communications law.  Mr. Grogan represents municipalities throughout the country on franchise renewals, transfers of ownership, telecommunications planning, rate regulation, zoning and tower site issues, First Amendment issues, right-of-way regulation, litigation and other related communications matters.  Mr. Grogan is a frequent presenter at state and national conferences regarding cable and telecommunications.

            The materials in this Municipal Communications Law Update have been compiled from a variety of sources and address only a portion of the relevant issues contained within hundreds of pages of regulations and decisions.  We have not addressed many important points which may apply to your situation.  You should consult with legal counsel before taking any action on matters covered by this Municipal Cable Communications Law Update.

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* Brian Grogan served as co-counsel to the City of Sturgis, Kentucky throughout the litigation and drafted the City’s needs assessment report which ultimately supported the City’s denial of Union’s request for renewal.