BB&K Provides Order’s Four Major Elements and Offers Response Options

The FCC released its third Section 621 Report and Order late Friday, which has the potential to cost local governments hundreds of millions of dollars in cable franchise fees. Also, unlike FCC cable orders in the past 10 years, this Order, with its required offset from franchise fees of in-kind benefits, I-Nets and potentially Public, Educational and Governmental Access Channel capacity, applies in states where franchises are granted at the state level. This includes California, Texas, Michigan and 20 others. Best Best & Krieger LLP, which represented scored of local governments in the proceeding, has a plan for local government response (see below).

The consequences of the Order, formally titled Implementation of Section 621(a)(1) of the Cable Communications Policy Act of 1984 as amended by the Cable TV Consumer Protection and Competition Act of 1992, can be boiled down to four major elements:

1. In-Kind Order Reduced to a Mathematical Formula
(market value of in-kind cable-related contributions including I-Nets) + franchise fees + any PEG grant – (costs of complying with build out or customer service requirements + PEG capital costs ) ≤ 5 percent of gross revenues of cable service over cable system

Some notes on the above equation:

• “Market value” is to be established by both parties, according to the Order.
• The Order defines “in-kind cable-related contributions” as: “…[A]ny non-monetary contributions related to the provision of cable services provided by cable operators as a condition or requirement of a local franchise, including but not limited to free or discounted cable service to public buildings, non-capital costs in support of PEG access, and costs attributable to the construction [construction, maintenance, and service ] of I-Nets. It does not include the costs of complying with build-out and customer service requirements.”
• Regarding I-Nets, the Order states: “We find that the costs associated with the construction, maintenance, and service of an I-Net fall within the 5 percent cap on franchise fees.”
• The FCC finds capital cost “should be given its ordinary meaning, which is a cost associated with the acquisition or improvement of a capital asset. Applying that interpretation, we conclude that the exclusion for capital costs under section 622(g)(2)(C) could include equipment that satisfies this definition, regardless of whether such equipment is purchased in connection with the construction of a PEG access facility… We also find that the installation of PEG transport facilities are capital costs that are exempt from the 5 percent franchise fee cap, and that maintenance of those facilities are operating costs that count toward the cap.”
• Under 47 U.S.C. section 542, “For any 12-month period, the franchise fees paid by a cable operator with respect to any cable system shall not exceed 5 percent of such cable operator’s gross revenues derived in such period from the operation of the cable system to provide cable services.”

2. Shot Clock for Resolving Disputes Over Market Value
While an earlier draft of the Order proposed the judicial review process outlined in 47 United States Code section 545 for review of disputes — the final Order does not. It simply tells the parties to resolve their differences within a reasonable period of time (120 days ). The Order adds that, should there be a franchise agreement already in place that conflicts with this Order, the FCC encourages the parties to negotiate franchise modifications within a reasonable time. “If a franchising authority refuses to modify any provision of a franchise agreement that is inconsistent with this Order, that provision is subject to preemption under section 636(c),” the Order states. Any franchise term that is inconsistent with the Order is subject to preemption under 47 U.S.C. section 556 (c).

3. Mixed-Use Rule
A franchising authority may not regulate the provision of any services other than cable services offered over the cable system of a cable operator, with the exception of channel capacity on institutional networks. (New 47 Code of Federal Regulations section 76.43)

4. Application to State Franchising
“[T]he rules and decisions adopted in this Order apply to state-level franchising actions and regulations,” according to the Order.

Dual Response
BB&K will create a coalition to challenge the Order and seek a stay of its terms until a court can determine its legality. Please let your BB&K attorney or the author of this Legal Alert know if you wish to support the coalition’s efforts as soon as possible — as we will need to move quickly. The FCC did not grant our request for a workable effective date and made the order effective 30 days following publication in the Federal Register. With publications estimated to take place around Aug. 15, that means the Order could go into effect as early as the middle of September. An appeal may need to be filed as soon as late August.

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