Fifth Circuit Affirms FCC's "Pasadena" Decision Allowing Cable Operators to Pass Through to Subscribers All Franchise Fees on Subscriber and Non-Subscriber Revenues
In a significant victory for the cable industry, on March 27, 2003, the United States Court of Appeals for the Fifth Circuit affirmed the FCC’s October 2001 decision halting local franchising authorities’ efforts to hide from subscribers the franchise fees they collect from cable operators on ancillary cable revenues. The unanimous decision in Texas Coalition of Cities, et al. v. FCC, No. 01-60804 (5th Cir. March 27, 2003) affirmed the FCC’s interpretation that Title VI of the Communications Act allows cable operators to pass through the entirety of franchise fee payments assessed by LFAs on all components of “gross revenues,” including fees measured by advertising, home shopping and other non-subscriber revenues. The LFAs had argued that the pass through must be limited to only those franchise fees assessed on subscriber revenue. The Court held that if an LFA chooses to collect franchise fees on ancillary revenues then cable operators have a right to flow all of those franchise fees back to cable subscribers as an identified line item on the customer bill.
Charter historically passed through to its cable subscribers some, but not all, of the franchise fees assessed by the City of Pasadena. The City was getting the full benefit of the franchise fee it imposed, but Charter’s subscribers were not paying, nor were they fully informed about, the extent of the fees their local government imposed on cable television. In 1999, Charter changed its invoices to identify and flow through more of the franchise fees assessed by the City, including those measured by Charter’s local advertising sales and home shopping revenues. Charter duly noticed the billing change, and assured the City that it would “true-up” to protect against over-collection. In October 1999, the City of Pasadena filed a petition asking the FCC to declare that Charter should continue to pay franchise fees on its ancillary revenue, but not identify that cost or pass it through on the subscribers’ bills. The cities of Nashville and Virginia Beach raised similar issues against its cable operators, Intermedia, Comcast and Cox,and those cities’ petitions were consolidated with Pasadena’s. In May 2000, the Local & State Government Advisory Committee (“LSGAC”), which frequently lobbies the FCC on municipal issues, added its objection, and adopted an “Advisory Recommendation,” under the name “Unauthorized Cable Television Franchise Fee Pass-Throughs.”
The Commission issued its decision in October 2001 finding that cable operators could, consistent with the Communications Act and FCC regulations, pass through franchise fees on all revenues earned by the operator. City of Pasadena, 16 FCC Rcd. 18,192 (released Oct. 4, 2001). Municipal interests, led by the Texas Coalition of Cities for Utility Issues and the National Association of Telecommunications Officers and Advisors (“NATOA”), thereafter sought review in the U.S. Court of Appeals for the Fifth Circuit. The cities of Pasadena, Nashville, and Albuquerque, as well as the National League of Cities, intervened in support of the Petitioners. Charter and NCTA intervened in support of the FCC, filed a separate brief and argued in support of the FCC’s decision.
Fifth Circuit Argument
In the Court of Appeals, the municipal interests again argued that collecting franchise fees calculated on advertising and home shopping revenue from cable subscribers unfairly shifts costs related to “competitive” services to “monopoly” services. The cities also argued that it was deceptive to identify a “5%” franchise fee that in effect is greater than 5% of the subscriber’s monthly service fees. The Petitioners argued that a cable operator could not change its franchise fee recovery mechanism after the initiation of rate regulation if the LFA had not changed the fee assessment in the interim. The Petitioners also challenged the right of a cable operator to be made whole for franchise fees, suggesting that allowing a pass through “subsidized” the cable operators’ other activities even though the entirety of the franchise fees collected were paid to the LFAs. The Petitioners concluded that the legislative history of the 1992 Act and Title VI of the Communications Act, as amended, meant that the only pass though allowed was for franchise fees assessed on the service charges appearing on those subscribers’ individual bills.
Fifth Circuit Decision
The Fifth Circuit rejected all of the municipal arguments. The Court found that the scheme of federal rate regulation contemplated that franchise fees would be an external item added on to the charges for service and could reflect the entirety of the fees the operator paid, not just those paid on the charges on the subscribers’ bills. The Court noted that the FCC had correctly determined that the purpose of itemizing the entire amount of franchise fees on subscriber bills was to promote the political accountability of local governments and that there could be nothing deceptive about telling consumers exactly what franchise fees were being paid to their LFAs. The fact that some of the franchise fee obligation would be calculated on ancillary revenue streams has no bearing on the fee itemization. The FCC had found—and the Court agreed—that if LFAs do not want to burden subscribers with higher franchise fee pass throughs, they may expressly omit certain items, such as advertising revenue and home shopping commissions, from the gross revenue definition. LFAs simply cannot impose a franchise fee and then preclude the full itemization of that fee on customers’ bills.
This case involved important issues of political accountability and was hotly contested at the FCC and in the Fifth Circuit.