FCC Proposes to Include In-Kind Contributions in the Assessment of Franchise Fees
On September 25, 2018, the Federal Communications Commission took its latest action in a longstanding effort to provide national standards under Section 621 of the Communications Act to limit the authority of franchising authorities to regulate and assess fees on cable operators and other providers of wireline video and broadband services. Specifically, the Commission issued a Second Further Notice of Proposed Rulemaking (Second FNPRM) in response to the 2017 decision of the United States Court of Appeals for the Sixth Circuit in Montgomery County, Md. v. FCC, which vacated and remanded two parts of prior Commission orders for failing to provide sufficient support for its rulings.
The Second FNPRM proposes to reinstate the two rulings by tentatively concluding that:
- Non-cash “in-kind” contributions required by local franchising authorities (LFAs) are “franchise fees” that count against the statutory five percent cap, even if they are cable-related; and
- LFAs may not use their video franchising authority to regulate cable operators’ provision of non-cable services – such as broadband Internet service and VoIP – delivered over “mixed use” systems that carry both cable and non-cable services.
The FCC also seeks comment on whether to apply these tentative conclusions and its prior orders limiting the actions of LFAs to state-level franchises and regulations.
Comments on the Second FNPRM will be due 30 days after it is published in the Federal Register, which can sometimes take a few weeks, with reply comments due 60 days after publication.
The Second FNPRM follows eleven years of Commission rulings in the same docket and subsequent appeals. In 2007, the FCC issued its so-called 621 Order to promote competition by removing unreasonable barriers to new entrants into the marketplace for cable and broadband service. The 621 Order addressed franchise agreements for new entrants, and concluded that many up-front costs assessed against the franchisee, such as the LFA’s attorney or consultant fees, and requirements for in-kind contributions unrelated to the provision of cable service, count toward the five percent franchise fee cap. Relying on the common carrier exception in Section 602(7)(C), the 621 Order also preempted local regulation of non-cable services offered by new entrants. On appeal, the Sixth Circuit upheld the 621 Order in its entirety.
Later in 2007, the FCC adopted its Second Report and Order, extending the findings of the 621 Order to incumbent cable operators.
In response to petitions for reconsideration, in 2015 the Commission ultimately affirmed its findings in the Second Report and Order, and clarified that non-incidental in-kind payments were subject to the five percent franchise fee cap, whether or not related to cable service.
On appeal, the Sixth Circuit in 2017 upheld all but two of the FCC’s conclusions in the Second Report and Order and the Order on Reconsideration. The court found that the FCC had not sufficiently explained its rationale for treating cable-related “in-kind” exactions as franchise fees, and had not offered a statutory explanation to support its extension of the mixed-use rule to incumbent operators who were not also common carriers.
The Commission sets forth the statutory language and legislative history of Section 622 to support its tentative conclusion that “cable-related, in-kind contributions” are franchise fees. Franchise fees are defined broadly and include “any kind” of tax, fee, or assessment. This broad definition, the Commission tentatively concludes, supports the treatment of any form of in-kind contribution as a franchise fee, because otherwise LFAs could evade the statutory cap on fees simply by demanding non-monetary exactions.
The FCC proposes to define “cable-related, in-kind” contributions as: “any nonmonetary contributions related to the provision of cable services provided by cable operators as a condition or requirement of a local franchise agreement, including but not limited to free or discounted cable services and the use of cable facilities or equipment.” Unless expressly excluded by the statute, all cable-related, in-kind contributions constitute “franchise fees.” The FCC seeks comment on its analysis that the following statutory exclusions do not include cable related, in-kind contributions: (1) any tax, fee, or assessment of general applicability; (2) fees imposed under the Copyright Act; (3) requirements or charges incidental to awarding or enforcing a franchise, including bonds, security funds, insurance, etc.; (4) PEG capital costs; and (5) buildout obligations.
Notably, the FCC tentatively concludes that cable-related in-kind contributions would include the value of channel capacity required under a franchise for PEG use and I-Nets. The Commission explained that, while the statute authorizes LFAs to require the cable operator to designate channel capacity for PEG and I-Net use, that authorization does not mean the value of those obligations should be excluded from the franchise fee cap. The Commission points to the fact that Section 622 expressly excludes PEG related capital costs, but “makes no mention of an I-Net related exclusion, nor does it contain a general exclusion for all PEG related costs.” The Commission proposes that cable-related in-kind contributions be valued at their fair market value and seeks comment on how to perform such a valuation. Alternatively, the Commission asks whether such contributions should be valued at the cable operator’s cost.
The Commission seeks comment on the effect, if any, that its tentative conclusions with respect to in-kind contributions may have on the ability of LFAs to require PEG channel capacity and support, and I-Net requirements in franchises. It likewise seeks information on the effect, if any, of this tentative conclusion on infrastructure investments by new entrants and incumbents.
The Second FNPRM proposes once again to extend the mixed-use ruling to all incumbent cable operators, regardless of whether they are Title II telecommunications carriers. The Commission tentatively concludes that LFAs may not regulate most non-cable services offered by incumbent operators that offer any telecommunications services and the equipment and facilities used to make such offerings. As in the Section 621 Order, the Commission relies on Section 602(7)(C), which exempts from the definition of a “cable system” common carrier facilities subject “in whole or in part” to Title II regulation.
For incumbent cable operators that do not provide any telecommunications services, the Commission tentatively relies on Section 624(b). Section 624(b) prohibits LFAs from establishing “requirements for video programming or other information services,” and does not authorize LFAs “to regulate facilities or equipment to the extent they are used to provide [information] services, including broadband Internet access service.” The Commission tentatively concludes that, under this provision, LFAs “are expressly preempted from requiring incumbent cable operators to obtain franchises to provide broadband Internet access service.” The Commission reinforces this tentative conclusion on grounds that LFA regulation of non-cable services offered by incumbent cable operators is inconsistent with longstanding federal policy, including prior decisions of the Commission.
The Commission also seeks comment on any LFA regulations, other than franchise requirements, of broadband Internet access services that should be considered entry and exit restrictions, or other types of economic barriers. Finally, the Commission asks whether there are any other statutory provisions that relate to the authority of LFAs to regulate the provision of non-cable services offered over a cable system by an incumbent operator, or the facilities used to provide such services.
The FCC also seeks comment on whether its prior orders and the tentative conclusions from this FNPRM should be applied to state level franchising and regulations. Many state franchising laws had been in effect for only a short period of time when the Commission first issued its 621 Order. Given the passage of time, the Commission seeks comment on whether the holdings of its prior 621 Order, as well as any of the proposals and tentative conclusions of the Second FPNPRM, should be applied to state level video franchising laws, actions, and regulations.