August 1, 2019 Federal Communications Commission (FCC) vote to change the cable franchise fee calculation rules

MMLA Member Bill August, our expert on all matters relating to cable franchising, has provided us with his explanation of the August 1, 2019, FCC vote relating to new franchise fee rules.  Here is Bill’s explanation:

I believe some further explanation of the August 1, 2019 Federal Communications Commission (FCC) vote to change the cable franchise fee calculation rules is in order in light of the importance of the new franchise fee rules and the complexity of some aspects of these rules.   I offer what I hope are some simple explanations of the new framework (below).  As this will impact significant payments to many (not all) municipalities, it is important for municipal officials to be aware of these developments and have access to background information explaining the changes. The following is a basic explanation.

Cable companies pay ‘franchise fees’ to municipalities if required by cable license and Federal law caps franchise fees at 5% of the cable company’s Gross Annual Revenues (GAR).  In the past, most cable companies took the position in practice that only monetary payments to the municipality would count toward the 5%-of-revenues cap.  That will be history once the FCC approved new rules are released, published and become effective in the near future, as cable companies will soon be able to count both monetary and ‘in-kind benefits’ toward the statutory 5% franchise fee cap.  That’s the big picture.  Many of the details are yet to be released including which assets may and may not be counted toward the 5% cap, how the valuations of the assets will be implemented and to what extent they will be negotiable.

The heart of the rulemaking is to allow cable companies to not just count the money they pay to the Town as a franchise fee subject to the Cable Act franchise fee cap of 5% of company’s gross annual revenues (GAR), but to also count certain (not all) ‘in-kind benefits’ allocated to the municipality by the cable license toward the cap.  That means you hit the cap sooner and get less if you are one of the communities exceeding the 5% cap.  Those will be real cuts.

So if your town receives 5% of gross revenues in the form of monetary payment, but also gets an Institutional Network (I-Net) video return line or, or public school courtesy service (or certain other ‘in-kind’ benefits), the FCC has decided that these non-monetary benefits (Institutional Network, public school service) are franchise fees too, and thus should be counted towards the 5% cap.  It took some twisting of the definition of franchise fee to get there, but the FCC found a way!  The FCC’s Notice of Proposed Rulemaking went so far as to say an access channel was a franchise fee, but in a recent draft of the Report & Order they backed off from that (counting channels as fees); but then just last week there were reports that the FCC again revised the draft so no one yet knows exactly which in-kind benefits the FCC will allow to be included in the calculation of what the cable company is paying/providing as the franchise fee.  But any deduction from or offset against franchise fee is important, and may well be inconsistent with negotiated agreements, so municipal attorneys should be aware of this, as the impacts will in all likelihood be hitting in the months ahead.

The cable company can now say it should not have to make 5% cash/check payments anymore because the cost or value of the I-Net and other in-kind benefits bring their total package in excess of the 5% cap, so the Town will either have to forego some monetary payments or forego some I-Net and/or other in-kind benefits IF the aggregate of the monetary payments and in-kind benefits exceed the 5% which cannot be exceeded.

What you can do?  Town will probably be in a position to request documentation and proof of the value of the in-kind benefit being deducted from franchise fee IF (a big if) the Town is already at the 5% franchise fee level, or if the combined value of the monetary franchise fee payments AND the in-kind benefits valuations exceed 5%.   We are all on a learning curve as we have not seen the new rules yet, nor does anyone yet know how the companies will value the in-kind benefits they can now offset against the franchise fee cap.  One of the most controversial aspects of the FCC rulemaking is that it (incredibly) proposed to allow cable operators to count NOT JUST THE COST OF THE INKIND BENEFIT AGAINST FRANCHISE FEES REACHING THE 5% LEVEL…….BUT TO COUNT THE MARKET VALUE OF THE INKIND BENEFIT TOWARD THE 5% FRANCHISE FEE CAP.   Thus the company can pay for its franchise fee obligation by counting an asset at market value, even though it paid a lower cost for that asset.  This opens room for municipal/company review and negotiation of market value of franchise fee offsets rather than just accepting company ‘market value’ at face value, so to speak.

The rulemaking was poorly thought out as it provided no guidance on how franchise fee in-kind benefit market value should be determined.  And until the document is released, no one knows for sure the extent to which market value model will be part of the rules as proposed and as appearing in a recent FCC draft of the Order.

There are more interesting elements of this rulemaking beyond the scope of this introductory background, and there is more to learn.  One great piece of news is that the FCC draft order (not final order) would not allow cable operators to count regular community studio equipment costs/values toward the 5% franchise fee cap.  Hopefully this capital exclusion will be continued in the final draft.

I have been immersed in this FCC proposed rulemaking for months, counseling multiple renewal communities on it, and sharing info with other municipal attorneys interested in this all of whom have been fantastic sharing and exchanging info.  As this is important, complex and evolving I welcome anyone interested in discussing it further to feel free to contact me at any time.

Bill August, Esq.
Epstein & August, LLP
875 Massachusetts Avenue, Suite 31
Cambridge, MA 02139
Tel:   (617) 951-9909Cell:  (617) 548-3735
billaugust@epsteinandaugust.com

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