FCC Applies Certain Competitive Franchising Rulings to Existing Cable Operators

On Oct. 31, 2007, the Federal Communications Commission (FCC) adopted its Second Report and Order in the Section 621 franchising proceeding and extended a number of cable franchising rules that previously applied only to new video competitors to incumbent cable operators.

On March 5, 2007 the FCC released its First Report and Order and Further Notice of Proposed Rulemaking ("First Report and Order" and "Further Notice" respectively) in its cable franchising docket. The First Report and Order adopted rules streamlining the local cable franchising process for new video entrants (i.e., telephone companies) and also clarified that certain payments often demanded by local franchise authorities (LFA) would be considered franchise fees and therefore counted against the 5 percent franchise fee cap. These payments include non-capital payments for public, educational and governmental (PEG) access, charges "incidental" to the award or enforcement of a franchise (e.g., consultant and attorney fees, and free or discounted services to the LFA), and in-kind requirements unrelated to the provision of cable service. The First Report and Order also clarified what PEG and I-Net requirements are permissible (and therefore not subject to the franchise fee cap) and that LFA authority over "mixed-use" networks (i.e., telephone networks providing video) is limited to regulating cable service.

The Further Notice inquired whether the rules and policies adopted in the First Report and Order for new video competitors should also be applied to incumbent cable operators and, if so, whether they should apply immediately or following the expiration of existing franchises.

Based on statements made during the FCC's Open Meeting and in its Press Release, it appears the Second Report and Order (the full text of which has not been released) will conclude that the following rules and policies adopted in the First Report and Order are applicable to incumbents:

• The findings regarding what costs, fees and other compensation to LFAs are subject to the 5 percent franchise fee cap;
• The findings regarding PEG and I-Nets; and
• The findings regarding "mixed-use" networks.

The FCC refused to immediately preempt inconsistent provisions in existing franchise agreements. Based on Commissioner comments, incumbents seeking relief from existing franchise provisions that are inconsistent with the FCC's rulings will be required to challenge such provisions on a case-by-case basis, substantially lessening the benefit of this ruling—and undercutting the Commission's announced goal of providing incumbent cable operators "parity" with new telephone entrants. The incumbent will have the burden of proving that an existing franchise provision should be rendered unenforceable. (The Commission's hesitation to impose federal rulings on existing franchise agreements stands in marked contrast to the Commission's simultaneous decision, in an accompanying agenda item, to immediately void all exclusivity terms in existing cable agreements to serve multiple dwelling units.)

The FCC did not apply the streamlined franchising provisions or the build-out limitations in the First Report and Order to incumbents. In addition, the FCC decided that it did not have the authority to preempt state or local customer service requirements that exceed the FCC's customer service rules.

As with the First Report and Order, an LFA appeal of the Oct. 31 decision is expected.