LFA Negotiations Likely More Complicated After FCC's 621 Order, 'Eugene' Decision
Nearly a year after the 6th U.S. Circuit Court of Appeals' decision on a challenge to parts of its 2019 cable local franchise authority (LFA) order (see 2105260035), localities interests and lawyers told us negotiations with cable operators have become more complex. Some think the pace of such negotiations and agreements picked up again in recent months, after a slowdown during the 6th Circuit appeal and subsequent, unsuccessful petition for writ of certiorari by appellant localities Eugene, Oregon, and others (see 2111010048). NCTA, ACA Connects, Comcast, Charter and Altice didn't comment.
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Localities interests and advocates said they think the FCC needs to start a proceeding on the Eugene decision about fair market vs. marginal costs. The agency didn't comment. Fairfax County, Virginia, Dallas and NATOA in a meeting with FCC Media Bureau Chief Michelle Carey urged the agency to update its LFA rules to make clear in-kind cable related franchise obligations must be valued at the cable operator's marginal cost, per a docket 05-311 ex parte posted Monday. Some cable operators issued invoices to local governments for the retail price of cable connections, they said. They said local governments also face problems with cable operators, when asked to build out institutional networks (I-net) to small businesses, demanding the customer or franchising authority pay for those networks, even though the Eugene decision was clear that buildout costs are the responsibility of the cable operator. They urged the FCC to make clear that I-net and public, educational and government (PEG) channel capacity is a capital cost excluded from franchise fees. They also urged the FCC to repeal its mixed-use rule that preempted LFAs' regulation of non-cable services delivered over cable networks, saying that rule "flowed from [a] flawed [preemption] analysis."
The Section 621 order could have a heavy financial impact on localities, but it remains unclear what cable operators want to do about in-kind contributions, said Rick Ellrod, Fairfax County director-Communications Policy and Regulation Division, in an interview. There haven't been cable system demands to amend current agreements, but in-kind benefits are coming up more in renewal talks, he said. The order also left vague what to do if a cable operator says it's paying more than the franchise fee cap, other than "you should negotiate," he said. He said there's a debate about whether Virginia's communications service sales tax counts as a franchise fee, and that issue is intensified post 621 order. Section 621 of the Cable Act covers franchising requirements.
The FCC order slowed negotiations, and cable operators were reluctant to make commitments, Ellrod said. "Everyone has been uncertain," he said. SCOTUS letting stand the 6th Circuit decision adds to the complexity, he said.
"If you were wise, you were waiting," said Alliance for Community Media President Mike Wassenaar. He said it's not clear how franchise fees and community obligations can be balanced. He said he hopes for support for the reintroduced Protecting Community TV Act, (S-3361), which would clarify that cable operators' franchise fees are only monetary, and in-kind contributions don't count toward them.
Most cable operators are abiding by the ruling that franchise obligations be valued at marginal cost, but the use of fair-market value has come up in cases of LFAs asking for PEG channels be shown in high-definition, said NATOA General Counsel Nancy Werner. She said in those situations, the cable operator said it would charge similar to what it would charge for upgrading a commercial channel to HD. She said when the cable operator is told it can deduct only marginal cost, not fair-market value, the response has been "too bad, take us to court."
The difference between marginal and fair-market values can be "potentially huge," Werner said. If a cable company wants to say PEG transport is comparable to the most-robust high-speed data service available to businesses, the cost for that transport could be "very, very high," she said.
Thus far, there haven't been big changes in how franchise fees are being computed, said localities lawyer Mike Bradley. Marginal costs typically aren't very high because cable operators have recovered such costs through their rates charged subscribers, he said. Bradley said the Eugene decision makes clear that LFAs can consider the adequacy of cable and non-cable services being provided in franchise agreement renewals, and that issue could be brought up more often by LFAs.
Before the FCC order, cable operators would typically offer free cable TV service, and sometimes internet, to schools, libraries and municipal facilities, said localities lawyer Dan Cohen. Since then, cable companies haven't determined what the marginal cost of those services are, with some saying they will continue to provide it gratis until they determine the marginal cost, and others leaving that math to the municipality, he said.
Cable operators can take advantage of in-kind service offsets to their franchise fees, but aren't required to do so, Best Best's Gail Karish and Cheryl Leanza wrote this week.. They said operators would have to notify LFAs about taking such offsets, and have to negotiate them, but it's not clear how local governments would receive the notification or participate if the California Public Utilities Commission is the one notified. They said the mixed-use rule gives cable operators an incentive to shift revenue to non-cable services, which "may be a significant issue to watch for in franchise fee audits."