FCC Approves Dramatic Changes to Cable Franchise Fees Collected by Cities

August 19, 2019

The decision reduces the amount cities can charge for cable franchise fees.

Note: There is updated information on this topic. Read the latest article.

The Federal Communications Commission (FCC) voted 3-2 on Aug. 1 to approve a report and order making dramatic changes to cable franchises, many of which are managed by cities.

The order is very similar to the draft order the FCC released in July. It will have serious negative implications for cities and other local franchising authorities that collect franchise fees from cable operators.

The order will become effective 30 days following publication in the Federal Register. It is expected to be published in the next 10 to 30 days, meaning the effective date could be mid- to late-September.

—See the FCC report and order (pdf)

‘In-kind’ provisions considered franchise fees

The FCC order classifies “in-kind exactions” as franchise fees subject to the 5% franchise fee cap. Only capital costs associated with public, educational, and governmental (PEG) access facilities, including PEG channel capacity, buildout requirements, and PEG transmissions, are exempt from being classified as a franchise fee subject to the cap.

This means that the fair market value of non-monetary provisions, including institutional networks and complimentary or discounted cable service to public buildings, must be calculated in the 5% franchise fee cap.

The order specifies that fair market value will be determined by the cable operators based on rate cards utilized to set rates they charge customers for services.

With these changes, cities and other local franchising authorities could take a substantial financial hit.

Bringing current franchise agreements into compliance

In the initial draft order, the FCC required cities and other local franchising authorities to use the process outlined in Section 625 of the Cable Act to make modifications to existing cable franchise agreements to comply with the order. The process would have allowed modifications to be initiated at the local level with the cable operator having the opportunity to seek judicial review.

However, the approved order eliminated that provision and instead ruled that cable operators and local franchising authorities must negotiate modifications within a reasonable amount of time to comply with the order.

The order also preempts any provision in a franchise agreement that is inconsistent with the order that a franchising authority refuses to modify.

Mixed-use rule

In addition to the proposed changes to the calculation of franchise fees, the FCC order also preempts state and local governments from requiring a franchise or license for non-cable services provided over a cable system. This includes internet services.

Order is not retroactive

It is important to note that the provisions in the order are not retroactive and can only be applied to “ongoing and future in-kind contributions toward the 5% franchise fee cap after the order is effective.”

Potential next steps for cities

In response to the order, here are few actions cities may take:

  • Review current cable franchise agreements to determine the fiscal impact of the order. The reduction in payments will likely affect current and future city budgets.
  • Monitor franchise fee payments received after the order has gone into effect to determine if cable operators are offsetting the fee based on their calculation of the fair market value of certain in-kind contributions. Operators must be able to justify the reduction in payments.
  • Monitor League updates on the efforts to appeal the order and any efforts by the FCC to make the fair market value of PEG channel capacity subject to the 5% franchise fee cap.