Protecting Your City's Rights During Franchise Renewal

Introduction

Many franchise renewal presentations emphasize the procedure which should be followed by franchising authorities (cities) when faced with a request for renewal from their cable television operator (operator). Generally, cities are familiar with the distinction between the “formal” renewal process outlined in Section 546(a-g) of the Cable Act (47 U.S.C. 546) and the “informal” renewal process described at Section 546(h). While there are numerous issues to be considered in developing the appropriate process to address your operator’s renewal request, the ultimate goal of your city is to develop franchise documentation which will protect your residents’ cable-related needs and interests throughout the franchise term.

This paper will therefore only briefly review the procedural considerations regarding franchise renewal and will instead focus on several of the key substantive issues which should be addressed in franchise documentation. This paper will review some of the salient considerations regarding each particular issue and identify the likely position of the operator during renewal negotiations. The paper will also outline relevant legal authorities to be reviewed prior to negotiating any of these provisions with your operator.

The goal in drafting franchise language on each of these issues is to retain maximum regulatory authority for your city while at the same time creating sufficient flexibility so that your city can adapt to changes which will inevitably occur in both the cable industry and the laws and regulations governing operators.

Renewal Procedure

Formal

47 U.S.C. § 546 (a-g)

Notification Letter from Operator

City Action Within 6 Months

Needs Assessment

Operator’s Proposal

Within 4 Months = Preliminary Decision

Administrative Hearing

Judicial Review

Standard = Preponderance of Evidence

City can only deny renewal based upon:

1. Operator’s failure to comply with existing franchise.

2. Quality of operator’s service.

3. Operator’s legal, technical and financial qualifications.

4. Reasonableness of operator’s proposal in relation to costs.

Informal

47 U.S.C. § 546 (h)

Agreed-Upon Process
	Negotiations
		Renew or Back to Formal Process

Grant of Authority

Purpose

This provision will dictate the types of service your operator can provide over its cable system. The provision will usually allow the operator access to all of your city’s public rights-of-way and easements for the purpose of construction, operating and maintaining its cable system. The issue is what “services” can the operator provide over that cable system.

Cable television franchises typically include regulations relevant only to the distribution of video programming. Since operators often desire to provide many other “non-cable services” over their systems, the language in this section must be carefully drafted to ensure the city’s rights with respect to its public rights-of-way are protected.

Issues to Consider

It is prudent to include language in this section specifying exactly what services the operator can and cannot provide over the cable system. You may consider a requirement that the operator must seek additional approval from your city to provide non-cable services to the extent not inconsistent with state and federal law. If you authorize the operator to provide any and all services it desires over the cable system, you may wish to add provisions to your franchise documentation to ensure that reasonable regulations regarding the provision of such services will be available to protect the rights and interests of your citizens.

Operator’s Perspective

Operators typically desire franchise language which will allow them to provide any possible services over their cable systems. These services may include data or other electronic intelligence transmissions such as online services, facsimile reproductions, burglar alarms, and telephone services. Interestingly, operators are often reluctant to agree to any franchise fees on the revenues derived from the provision of these ancillary services arguing that they cannot compete with other service providers if such fees are assessed.

Relevant Law

Section 541(a)(2) of the Cable Act provides that a franchise shall be construed to authorize the construction of a cable system. Section 522(7) defines cable system as “a facility consisting of a set of closed transmission paths and associated signal generation, reception and control equipment that is designed to provide cable service which includes video programming and which is provided to multiple subscribers within a community . . . “ Section 522(6) defines cable service, in part, as “the one way transmission to subscribers of video programming, or other programming service . . .” Finally, Section 522(13) defines other programming service as “information that a operator makes available to all subscribers generally.”

While an initial review of these definitions appears to support the operator’s position that it can provide whatever services it desires over the cable system, the legislative history of the Cable Act supports a more narrow interpretation of the definition of “cable service”:

Grant of Authority (continued)

Making available a cable system for voice communication between cable subscribers would not be a cable service because the information transmitted between the parties would not be generally available to all. Similarly, offering cable system capacity for the transmission of private data such as bank records or payrolls (for instance to and from data processing centers or between the separate locations of a single business in a local area) would not be a cable service because only specific subscribers would have access to this information. . . All services offered by a cable system that go beyond providing generally-available video programming or other programming are not cable services. For instance, a cable service may not include “active” information services such as at-home shopping and banking that allow transactions between subscribers and operators or third parties. In general, services providing subscribers with the capacity to engage in transactions or to store, transform, forward, manipulate, or otherwise process information or data would not be cable services.

This legislative history provides strong support for the position that an operator is not entitled to use its cable system for any purpose it desires unless authorization has been specifically provided. While your city may desire that the operator provide ancillary services on the cable system, it is important to retain the necessary regulatory authority to address legitimate health, safety and welfare concerns regarding the operator’s use of the public rights-of-way. These regulations may include assessment of a reasonable fee for such use.

Franchise Term

Purpose

Traditionally, operators have desired a lengthy franchise term of 15 or more years to ensure a sufficiently stable financial future and to allow enough time to earn a return on their investment. Cities typically desire a far shorter franchise term to ensure that the cable system serving their community does not become antiquated and lose pace with the ever changing industry. Determining the appropriate length of the franchise term often hinges on the commitments made by the operator regarding upgrade/rebuild and related long term financial obligations.

Issues to Consider

Some cities have used a graduated franchise term in an effort to preserve flexibility. Under this plan, an operator will be granted an initial franchise term of five years, then will be rewarded with an additional five to ten year term if certain objective conditions are net. These conditions usually involve upgrade of the cable system, improvement of customer service operations, payment of PEG access grants and otherwise satisfactory performance of franchise obligations.

Operator’s Perspective

Recently, several large multiple system operators have begun to express a change in attitude arguing for a ten year franchise term as opposed to a more lengthy franchise term. One possible reason for this change is the belief that as competition continually emerges, franchise obligations will be reduced or eliminated. Therefore, operators may be better served by allowing more burdensome franchise documents to expire.

Relevant Law

There are no express provisions under federal law governing the appropriate length of time for a franchise. The only reference to franchise term is contained in the House Report to the Cable Act on the franchise renewal provision (47 U.S.C. Section 546). In the House Report a statement is made that “franchises are granted for a determined length of time -- generally 10 to 15 years.”

Prior to adoption of the Cable Act, FCC regulations recommended a 15 year term. 47 C.F.R. Section 76.31 (note) (1982) (deleted 1985). During the initial franchising phase in the early 1980’s, many cities used the 15-year term as an industry standard. Several states across the country have also adopted limitations on the length of franchise terms. In the State of Minnesota, the franchise term cannot exceed 15 years. In Kentucky, Kansas and North Carolina, 20-year terms are the maximum while in Nebraska a 25-year term is the maximum.

One case on the length of a franchise term is Preferred Communications, Inc. v. City of Los Angeles, No. CV 83-5846 C.D. Cal. (Jan 5, 1990), which held that a five-year franchise term exerted a “potentially chilling effect” on operators and therefore was unconstitutional. It is important to note, however, that in the Preferred case the facts dealt with an “initial” franchise where the operator was forced to expend considerable capital to build out the entire system. In the case of franchise renewals, the franchise term will often be dictated based upon the capital investment needed for a system upgrade/rebuild and other long term financial commitments.

System Upgrade

Purpose

When considering a system upgrade or system rebuild, three main issues should typically be considered: 1) channel capacity; 2) system reliability; and 3) quality of signal.

Issues to Consider

Given the advent of many new programming services, available channel capacity has become a major issue for cities. Any franchise granted to an operator should address the future needs of your community for available channel capacity to ensure that sufficient programming choices are available to your residents.

With respect to system reliability, there is a concern in more antiquated systems that the cable plant and/or supporting electronics may lack sufficient integrity to ensure a reliable signal will be delivered to subscribers. If frequent system outages have been reported, or given the remaining useful life of the equipment more frequent outages are expected, this issue should be addressed.

Further, the quality of the cable signal will depend upon the configuration of the system. In many antiquated systems it is not uncommon for signals to be amplified numerous times from the headend to system extremities. In some cases the number of amplifiers in line (cascade) can approach 30 or more. This results in significant degradation of signal quality, particularly for subscribers located at the outer reaches of the system. This can be resolved by using fiber optic cable to replace existing coaxial trunk cable in order to reduce the number of amplifiers and improve picture quality and reliability.

Operator’s Perspective

Operators share the interests of cities in improving the technical capabilities of the system. Since most operators seek to provide ancillary services beyond video programming, additional capacity is required and a sufficient technical platform must be in place before these ancillary services can be implemented. The only limitation for operators is the expense associated with such a system upgrade/rebuild. If a large expenditure is required, operators typically desire a sufficient length of time in the franchise term to ensure the capital can be paid off and a sufficient rate of return can be generated on the system. Operators also seek flexibility regarding when the upgrade must be completed to maximize their flexibility.

Relevant Law

Section 546(b)(2) of the Cable Act allows cities to require proposal for an upgrade of the cable systems as part of the franchise renewal process. In considering a proposal of an operator, the city must consider whether the operator’s proposal is reasonable to meet the future cable-related community needs and interests, taking into account the cost of meeting such needs and interests.

Given this standard, it is essential that cities clearly document all needs and interests during the needs assessment proceeding. The needs assessment report will serve as the foundation on which to base the cities’ negotiation position. If the needs assessment report lacks credible evidence to support specific needs such as a system upgrade, the operator will be in a strong position to argue that its proposal is sufficient to meet the needs of the city.

Franchise Fees

Purpose

The payment of a franchise fee is considered compensation for the use of public rights-of-way and other public property and for the ongoing enforcement and administration of the cable television franchise. The key reason for issuing a franchise is that the operator uses the public rights-of-way to string cable and provide service thereby generating a profit. Aside from the city’s responsibility to ensure that the public health, safety and welfare are protected with respect to the operator’s use, the city has a legitimate right to obtain fair compensation for allowing a public resource to be used for the benefit of a private company. Failure of a city to collect a franchise fee may mean the residents of the city are in essence subsidizing cable subscribers.

Issues to Consider

While most operators will pay a 5% franchise fee, there is often heated debate regarding the base on which the franchise fee should be paid. Therefore, it is important to pay particular attention to the definition of “gross revenues” and to define this term as broadly as possible. Properly defining “gross revenues” will ensure that the operator is required to provide compensation on any and all revenue derived from the operation of the cable system.

Operator’s Perspective

Operators also have the right under Section 542 of the Cable Act to identify the franchise fee as a line item on subscriber bills. Therefore, for cities which are not currently assessing a franchise fee, it is quite likely the operator will begin including this fee as a separate line item and may blame any rate increase on the city for imposing an additional tax on cable service.

Operators also may argue that imposing a 5% franchise fee places them at a competitive disadvantage with other service providers such as direct broadcast satellite or wireless television operators. Operators therefore attempt to include language which will relieve them of franchise fee payment obligations when effective competition exists. Of course, operators argue that competition is already present, while cities believe otherwise.

Relevant Law

Section 542(b) of the Cable Act permits cities to charge up to a 5% franchise fee based on the operator’s “gross revenues from the operation of the cable system.” The House Report indicates that the language “from the operation of the cable system” is not intended to prescribe any particular accounting method but limits the application of the franchise fee to revenues derived from the cable system to which the franchise applies.

As originally promulgated in 1972, FCC regulations limited franchise fees to “gross subscriber revenues.” In 1977, the FCC amended this rule, changing the revenue base from gross subscriber revenues to “gross revenues from all cable services in the community” and capping the fee at 3%, subject to certain exceptions. Under these FCC rules, all cable revenues, whether from basic television service, pay cable, advertising, auxiliary services, equipment associated with receiving the services, as well as installation charges, were included in the fee calculation. In adopting Section 542 of the Cable Act, the House Report indicates that Congress was cognizant of the FCC’s franchise fee methodology and used the same reference to “gross revenues” but simply increased the maximum permissible amount of the franchise fee from 3% to 5%.

Customer Service

Purpose

Both the Cable Act and FCC regulations provide cities with the ability to establish and enforce customer service standards at the time of renewing a franchise. In general, the FCC’s customer service standards address the specific performance of the operator in the areas of telephone response, repair service, installation, billing practices and system reliability. The FCC’s standards, however, contain no enforcement guidelines and, thus, it is up to cities to create remedies if the standards are not met. Cities are free to enact and enforce consumer protection laws over and above those found in federal law. When drafting such provisions cities should strive for specific, quantifiable and verifiable standards by which to measure the operator’s performance.

Issues to Consider

If you choose to simply incorporate by reference the FCC’s customer service standards at 47 C.F.R. § 76.309, recognize that if these FCC standards are amended or deleted your community may lose its right to enforce any objective customer service standards on the operator. It is best to specifically outline the standards within the franchise and require compliance with the standards and with all other federal laws and regulations regarding customer service standards which may go beyond those outlined in the franchise.

Operator’s Perspective

Operators have recently been publicizing their compliance with the FCC’s aggressive customer service standards. Interestingly, however, operators have become quite resistant to include specific, quantifiable and verifiable customer service standards within franchise. Operators argue that their competitors are not obligated to comply with such standards and that, while operators may currently exceed all industry standards, they do not which to be tied to these standards throughout the term of the franchise. In return, operators often suggest very minimal customer service standards in an attempt to reduce any administrative burdens which may result from these requirements.

Relevant Law

Section 522 of the Cable Act outlines the consumer protection laws and customer service agreements permitted under federal law. Often your state’s laws will also include customer service requirements for operators.

47 C.F.R. § 76.309 outlines the FCC’s customer service standards which may be implemented by a city at any time upon 90 days advance written notice to the operator. These standards include aggressive requirements for:

1. Office hours and telephone availability;

2. Installations, outages and service calls;

3. Communications between operators and cable subscribers; and

4. Billing, refunds and credits.

Rate Regulation

Purpose

Although rate regulation is now governed by an incredibly complex web of FCC regulations, it is important that the city retain all of its rights to regulate all of the rates and charges assessed by the operator to the extent not prohibited by federal law. Over the last ten years, we have witnessed the cable industry become completely deregulated (1986 - per 1984 Cable Act) then reregulated (1993 - per 1992 Cable Act) and now very nearly deregulated once again (via pending federal legislation). It is, therefore, important in your franchise documentation that your city retain maximum flexibility to regulate rates, to the extent allowed under federal law.

Issues to Consider

Since existing federal law require specific procedures to be followed to regulate an operator’s rates, it is probably not prudent to spend significant time developing a rate regulation process which deviates from federal law. Language should be included, however, which will allow the city to develop procedures to regulate the operator’s rates consistent with then-existing state and federal law, should the FCC no longer be involved in rate regulation at some future date.

Operator’s Perspective

Operators obviously desire to limit a city’s ability to regulate any of their rates which may be charged for cable services. The operator will seek the narrowest possible language in this area and may even propose language which would result in the city waiving some of its federal rights. Operators argue that, since competition is present from direct broadcast and other service providers which are not regulated, the operator’s services likewise should be accorded similar, unregulated treatment.

Relevant Law

Section 543 of the Cable Act governs the regulation of rates charged by an operator. Congress essentially delegated much of the responsibility for rate regulation to the FCC which promulgated rules at Part 76, Subpart N, Sections 76.900-76.987. Changes have occurred in the FCC’s regulations on a monthly basis since they were promulgated in 1993. Further, pending federal legislation may significantly alter rate regulation by completely eliminating regulation on the expanded tier of service which would allow operators to recoup any reductions in the basic tier rates.

PEG Access Requirements

Purpose

If your city desires local programming channel(s), numerous issues must be considered. First, you must determine the appropriate number of channels to accommodate the public, educational and governmental (PEG) programming needs within your city. Second, you must determine who will be in control of programming these channels -- the operator or the city. Third, you must identify the needed capital support to purchase equipment and facilities to produce the programming to be aired on the PEG channels. Fourth, you must identify funding sources for personnel to facilitate the production and related details of the access programming.

Issues to Consider

In addition to the issues listed above, the city should carefully consider the details of operating PEG access channels and possibly owning equipment and controlling PEG access facilities. Invariably, certain details are forgotten and heated debates often occur attempting to interpret subtle issues regarding PEG access operations. These issues may include whether the operator can access a charge for the use of channel time on the PEG channels, who is responsible for bicycling PEG access programming tapes to and from the operator’s master control facilities and who make the editorial decisions regarding programming to be carried on the system.

Operator’s Perspective