Brian T. Grogan

(612) 347-0340

E-Mail:  GroganB@moss-barnett.com

 

Communications Law Update

 

To:                  Moss & Barnett Clients and Interested Parties

From:              Brian T. Grogan, Esq.

Date:               November 16, 2001

 

 

1.                  FCC HANDS CABLE OPERATORS FRANCHISE FEE VICTORY.

 

On October 1, 2001, the Federal Communications Commission (“FCC”) issued an order in a proceeding involving the City of Pasadena, California and other jurisdictions which is having the effect of raising subscriber’s cable rates through increased franchise fees (Memorandum Opinion and Order FCC 01-289 released October 4, 2001 hereinafter the “Pasadena Order”).  The proceeding involved questions raised by franchising authorities regarding whether federal law permits cable operators to “pass-through” franchise fees to subscribers on cable television bills based on gross revenues that encompass non-subscriber related revenue, specifically income generated by advertising sales and home shopping commissions. 

 

In the Pasadena Order the FCC ruled that cable operators can pass-through to subscribers all of the franchise fees which cable operators pay under local franchises including fees on non-subscriber revenues.  By way of example, if a cable operator sells $100 worth of advertising to a local business to provide commercial spots on the cable system, many franchises throughout the country require the cable operator pay up to a 5% franchise fee on the $100 of revenue.  Cities have generally argued that the local business should be required to pay the applicable franchise fee just as such businesses are required to pay applicable local and state sales tax.  Cable operators, however, have argued that federal law permits operators to assess their subscribers for all applicable franchise fees and therefore the subscribers, rather than the advertiser, should collectively pay the $5 franchise fee on the $100 of local advertising.

 

The FCC concluded that 47 U.S.C. § 543 does not address the question of passing through franchise fees on subscriber’s bills and congress intended that the “full amount of the franchise fee be reflected in a cable operator’s rates.”  Since nothing in § 543 prohibits the cable operator from passing such fees on to subscribers, the FCC determined that federal law does not prohibit such a practice.  Thus, the more successful a cable operator is in selling advertising, the greater the increase in a subscriber’s bill as a result of the increased franchise fee.  Some have even suggested that the more commercials a subscriber is forced to view on the cable system (at least with respect to those sold by the cable operator), the higher the subscriber’s bill.

 

This issue is not limited solely to advertising revenue but also includes other forms of non-subscriber revenue including commissions from sales on home shopping channels and related revenue sources.  The FCC argues that franchising authorities, as opposed to cable operators, can limit the imposition of new pass-throughs on subscriber’s bills by simply relieving cable operators of the franchise fee burden with respect to these revenue items.  Under such a scenario municipalities that previously received franchise fees on advertising revenues are being encouraged by the FCC to forego that revenue or, in the alternative, franchising authorities are now being encouraged by the FCC to limit the application of franchise fees in renewed contracts.

 

In separate statements issued by FCC Commissioners Kevin Martin and Kathleen Abernathy it was noted that the Pasadena Order does not prevent a franchising authority and cable operator from reaching agreement in a local franchise regarding how franchise fees are to be calculated and passed through.  However, many fear that cable operators will have no motivation to negotiate any agreement with franchising authorities regarding the itemization and pass-through of franchise fees.  Instead, cable operators are likely to reserve all of their rights to maximize the amount of the franchise fee to be passed through as a line item on subscriber’s bills.

 

The impact of the Pasadena Order is already being felt by cable subscribers.  AT&T has placed many franchising authorities on notice that the franchise fee will be increased by .23%, about $.09 per subscriber per month on an average cable bill of $40.00.  Within the next several billing cycles most anticipate that cable operators will begin to pass-through non-subscriber revenue in franchise fee line items which will result in a rate increase for all cable television subscribers.  Under applicable federal law the cable operator is not required to give advance written notice of this rate increase as it relates to an increase in a regulatory fee.  Therefore, franchising authorities can expect confusion and questions regarding this rate increase.  Moreover, it is entirely possible that many cable operators may choose to deflect any rate increase criticism back to the franchising authority arguing that the franchise fee is imposed on cable subscribers through the local franchise.  Fortunately, several municipalities disagree with the FCC decision and have challenged the order at the 5th Circuit Court of Appeals.

 

2.                  IS A NEW WAVE OF CABLE TELEVISION TRANSFERS ABOUT TO HIT?

 

For months, AT&T Broadband (“AT&T”) has been making headlines regarding the future of its cable system operations.  Over the summer, Comcast made an unsolicited offer to purchase AT&T’s cable systems and since then AT&T and Comcast have been in discussions regarding a potential acquisition.  Newspaper reports have also suggested that AOL Time Warner has made inquiries regarding AT&T’s systems although many regulators doubt such a merger would receive approval given the unprecedented market power the resulting company would possess.  At the same time, AT&T has brought back many executives from predecessor companies such as MediaOne and Continental Cablevision in an attempt to strengthen its upper level management.  Whether this is a negotiation strategy to increase the value of the company or a long term commitment to retain AT&T ownership is unknown.  AT&T has stated that it intends to clarify the future ownership of the company by year-end.

 

In the event AT&T is acquired by either Comcast, AOL Time Warner or another entity, nearly 1/3 of all cable systems in the United States will require transfer approval.  Moreover, it is entirely likely that once the initial acquisition is completed, additional system trades, swaps and consolidations will occur as the remaining cable operators seek to enlarge regional operating clusters.  Depending upon AT&T’s actions, 2002 could be a year dominated by cable system transfers.

 

If your municipality is served by AT&T or is adjacent to AT&T operated systems you may wish to begin considering issues which may be raised during a transfer proceeding.  Recall that federal law provides franchising authorities only 120 days from the date they receive a transfer request to take action.  The steps a city can begin taking now include a detailed review of its existing franchise to ensure the cable operator is complying with all material terms and provisions.  To the extent issues of noncompliance are discovered, these should be immediately documented and notice to your operator should be provided so that issues can either be cured prior to transfer or resolved during the transfer proceeding.

 

If you would like additional information regarding the transfer process please contact either Terri Hammer (ph. 612-347-0349 or e-mail at hammert@moss-barnett.com) for a free copy of presentation papers by Moss & Barnett on this issue.  Or visit our new website at www.municipalcommunicationslaw.com to receive an electronic copy of such materials.

 

3.                  HIGH-SPEED INTERNET ACCESS.

 

On August 9, 2001, the FCC released preliminary data regarding its findings on the deployment of high-speed Internet services in the United States.  The information relates to data as of December 31, 2000.  Among the more interesting findings by the FCC were the following:

 

·                      The growth rate for high-speed lines connecting homes and businesses to the Internet was 158% during 2000.

·                      There are 7.1 million high-speed lines connecting homes and businesses to the Internet.  High-speed DSL (ADSL) lines increased by 435% during 2000 to 2 million lines.

·                      High-speed Internet connections over cable systems increased by 153% to 3.6 million lines.

·                      High-speed lines provided by satellite and fixed wire technology increased from 50,000 in 1999 to 112,000 in 2000.

 

4.                  NEW WEBSITE – MUNICIPALCOMMUNICATIONSLAW.COM

 

Over the past decade clients and friends of Moss & Barnett have received complimentary copies of our Communications Law Update.  The Update is intended to provide interested parties with information on key decisions and issue regarding the municipal regulation of voice, video and data communications.  Moss & Barnett also regularly participates in state, regional and national conferences regarding communications issues.  In many cases, presentation papers are prepared and distributed at the conferences.  Often, we will refer to these presentation materials in our Communications Law Update to provide recipients with additional information on a topic of interest. 

 

In an effort to provide greater services to our clients we are pleased to announce the creation of our new website www.municipalcommunicationslaw.com which will provide a variety of information regarding communications issues facing municipalities.  The website includes recent additions of the Communications Law Update, copies of presentation papers on a variety of topics as well as additional information regarding Moss & Barnett’s communications law staff and services.  Please visit our new website and feel free to provide feedback regarding ways in which the website can be improved to maximize our services to clients and interested parties.

 

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The materials in this Communications Law Update have been complied 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 that may apply to your situation.  You should consult with legal counsel before taking any action on matters covered by this Communications Law Update.

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Phone:  (612) 347-0349; Fax:  (612) 339-6686

E-mail:  hammert@moss-barnett.com