TOP FIVE FRANCHISE ENFORCEMENT ISSUES

The job of enforcing cable television franchise can be one of the easiest or one of the most difficult depending upon a number of factors, only some of which are within your control. Your community may have the benefit of working with a cable operator and particularly a local manager, which makes your job easy. High quality service with prompt, courteous customer service and good lines of communication are ways in which cable operators can make the job of the cable administrator much simpler.

Cable television franchises can range in length from 20 pages to 100 pages. The franchise may include a local regulatory ordinance and/or a customer service ordinance as well as a separate franchise agreement with one or more cable operators. Within these lengthy contracts there are a number of specific requirements that a cable operator must meet on a monthly, quarterly or annual basis.

1. Periodic franchise fee audits.

Virtually every franchise in the country contains a requirement that a franchise fee between 1% and 5% of gross revenues should be remitted to the community on a periodic basis. Many franchises will include either monthly or quarterly payments of these franchise fees by a date certain. Typically, cable operators will simply forward a check with very minimal information regarding how the franchise fee payment was calculated. A cable administrator should carefully review the amount of each check submitted and attempt to verify the accuracy of the franchise fee payment based on an estimation of total gross revenues.

Periodically, every community should consider the need for a franchise fee audit to ensure that the payments are being properly made. Issues which often arise in franchise fee audits include failure by the cable operator to properly include residences within the community’s jurisdictional boundaries for purposes of calculating the franchise fee. In addition, cable operators may exclude certain revenue such as advertising, home shopping network receipts, or revenue from other ancillary services on which the franchise may require payment.

An experienced auditor will be able to review the procedures used by the cable operator to calculate the franchise fees and determine whether such payments have been accurate. Audits generally do not need to be done on an annual basis but rather periodically over the length of the franchise particularly in the event the franchise has been transferred. In some cases, franchising authorities have seen three or more cable operators over the last ten years and there may not be consistency with respect to the manner in which franchise fee payments are calculated.

2. Bonds, letters of credit and security funds.

It is not uncommon for a franchise to require a bond to ensure the faithful performance of the cable operator with all terms and conditions in the franchise. The cable operator will then secure the bond from a company and will submit the bond for the franchising authorities’ approval. Franchising authorities routinely accept these bonds without careful review not knowing that there may be terms within the bond that directly conflict with the terms of the franchise.

For example, bonds will often require an additional notification to the bonding company at the time an alleged breach is discovered. The franchise typically only requires notification to the cable operator in order trigger an enforcement procedure. Failure to properly notify the bonding company could result in a dispute regarding whether the bond may be drawn upon. In addition, bonds will often contain a statute of limitation regarding when the bond may be drawn upon based upon the date that the alleged breach was committed. The statute of limitations contained within a bond should be consistent with the statute of limitations prescribed under the franchise or under state law. Shortening of the statute of limitations in the bond may serve to significantly reduce the franchising authorities’ rights of collection thereunder.

Similar review should be conducted with respect to any letters of credit or other security provided by the cable operator under the franchise. The basic rule is to ensure that nothing in these separate documents should in any way conflict with or reduce rights otherwise available to the franchising authority under the franchise.

3. Customer service standards.

All franchises contain some provisions regarding customer service. In some cases, the customer service obligations may be rather minimal or worded in such a way that enforcement is difficult. Many other franchises have incorporated the FCC’s customer service obligations or have included obligations above and beyond those prescribed by the FCC. A cable administrator should carefully review the customer service obligations and ensure that the cable operator is complying with each term and condition.

If the obligations mandate that customers reach a customer service representative within 30 seconds, 90% of the time, measured on a quarterly basis, the cable administrator should ensure that reports are provided by the cable operator verifying such compliance. If the customer service obligations require that subscribers receive a busy signal less than 3% of the time, reports should also be generated verifying this standard. If the franchising authority is receiving verbal or written complaints regarding customer service, a detailed written log should be maintained of all subscriber complaints as this may ultimately be valuable should the cable operator fail to provide reports verifying compliance.

In the event your franchise contains substandard or inadequate customer service obligations, federal law at 47 C.F.R. § 76.309 permits a franchising authority to adopt a customer service ordinance. Such an ordinance can be adopted despite the fact that the franchise may not be up for renewal. Moreover, a customer service ordinance can include the FCC’s customer service obligations or can include obligations above and beyond those specified by the FCC.

Recently, franchising authorities have experienced enforcement issues regarding cable operators’ attempts to regionalize their customer service obligations. The creation of large regional call centers servicing multiple jurisdictions means franchising authorities no longer get individual customer service statistics. Cable administrators must now grapple with reports that are not specific to their system and may contain data which is not indicative of the customer service received by subscribers in that community. Cable administrators should carefully review franchise language to ensure that the operations put in place by the cable operator comply with the franchise requirements and satisfy the customer service obligations of the community.

4. Technical audits.

Cable television franchises often extend for periods of 10-15 years with little or no obligation for the cable operator to upgrade the cable system during the life of the franchise. Despite the fact that your system may have been recently upgraded to 750 MHz or better, there is still an oversight obligation under the franchise. As the system deteriorates good cable operators will have in place a maintenance plan which will result in ongoing maintenance and upkeep of the system to ensure it operates at a high level.

However, franchising authorities will often conduct technical audits during renewal proceedings and find that the system has not been maintained as promised. Some of the problems frequently discovered during a technical audit include safety code violations, failure to properly ground the system, broken and damaged pedestals and improper lashing of cable. Franchising authorities must then address these issues during franchise renewal.

Such safety code violations should instead be addressed throughout the term of the franchise to ensure that the system is maintained in the proper manner. This will help to alleviate safety issues for the community’s residents and will also help to improve the signal quality and operation of the system. While a technical audit may be expensive, it need not be completed on an annual basis. Rather, a technical audit can be performed perhaps once or twice during the life of the franchise and can be budgeted for well in advance.

5. Basic service rate regulation.

Cable operators remain subject to rate regulation, but only for the Basic Service Tier (“BST”). All other service tiers including digital and premium channels are free from rate regulation. Moreover, regulation of the BST is accomplished only through the FCC’s rate regulations established on either a benchmark or cost of service formula. While franchising authorities can only regulate rates for the BST, such regulation can still provide meaningful relief to cable subscribers for both the price of the BST as well as the equipment necessary to receive the BST.

Franchising authorities that may not previously have been certified to regulate rates are still permitted to obtain certification and begin regulating the rates for the BST. In certain cases, operators may be forced to trace back to rates from the early 1990s to justify the current BST rates. This could result in significant refunds or reductions for BST subscribers.

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Brian T. Grogan is a shareholder with the Minneapolis law firm of Moss & Barnett specializing in telecommunications and cable television regulation.