Cable TV

The Process

In 2005, the Public Service Commission adopted rule changes that address competitive franchising situations. Under new Part 894, an applicant for a competing franchise is required to file an application with the municipality in a format and with the information specified by section 894.5. The applicant must also indicate whether it will provide service on the same terms and conditions as those contained in the incumbent provider's franchise and may submit a proposed franchise document that is consistent with that stated commitment. 

The municipality is required to exercise due diligence in evaluating the application and negotiating a franchise document that serves the interests of the municipality and its residents. A properly noticed and conducted public hearing (see new Sec. 894.7) must be held. If the municipality accepts the applicant's offer to comply with the same terms and conditions as the incumbent, the hearing shall be held and the franchise may be awarded within 30 days of the municipality's receipt of the application. Otherwise the hearing generally must be held within 60 days of receipt of an application and the franchise must be awarded or denied within six months of the hearing date. 

A municipality may not unreasonably refuse to award an additional competitive franchise. (Please refer to Sec. 894.5 through 894.8 of the Commission's Rules and Sec. 621 of the Federal Cable Act.)

Special Considerations to Keep in Mind

• As with renewals, this is not a competitive bidding process. Competing providers are dealt with on a one-to-one basis and, assuming they each meet the reasonable requirements of the municipality and applicable federal and state standards, each can reasonably expect to receive a franchise to operate.
• Under Sec. 895.3, no municipality may award or renew a franchise which contains economic or regulatory burdens which when taken as a whole are greater or lesser than those burdens placed upon another cable television franchisee operating in the same franchise area. In this regard, municipalities should take special care to ensure that the agreement with a new provider will not put at risk commitments previously negotiated with an incumbent.
• Under Sec. 895.1 (f), if the municipality requires PEG access support in excess of the PSC-mandated minimums, the channel designation requirements must be the same for both providers and the provisions for facilities, equipment and support must be competitively neutral when compared with those requirements in the other provider’s franchise.
• Competition may present some new situations requiring attention. Two such areas may involve PEG access funding and logistical arrangements, as well as customer service considerations engendered by the opportunity to transition between competing services.
• Municipalities also may need to prepare for some initially unanticipated effects of competition. These may include the advent of more complex marketing approaches and pricing plans with the potential for increased consumer confusion and complaints, as well as more unpredictable service rates resulting in less reliable anticipation of franchise fee revenues for municipal budgeting purposes.

What's Required in a Franchise Document?

[cf. PSC regulations Sec. 895.1 (a) through (s) and Sec. 895.4 (b)]

• “Recitations” attesting to the fact that (a) “franchisee’s technical ability, financial condition and character were considered and approved in a full public proceeding affording due process”; (b) “franchisee’s plans for constructing and operating...were considered and found adequate and feasible in a full public proceeding affording due process”; (c) franchise complies with PSC’s franchise standards; (d) franchise is non-exclusive.
• A description of the system "as constructed and as will be expanded or enhanced during the term of the renewal." Minimum channel capacity must be specified.
• A provision stating that the franchisee will construct and maintain its cable system using materials of “good and durable quality” and all work involved will be performed “in a safe, thorough and reliable manner”. (Section 896)
• An anti-redlining provision.
• Provisions specifying public, educational and government (PEG) access support requirements.
• A provision stating that rates and charges are subject to regulation in accordance with federal law.
• A provision specifying the term of the franchise. (Not more than 15 years.)
• A provision prohibiting abandonment “in any portion of the franchise area” without written consent of the franchising municipality.
• A full indemnity and insurance specification.
• A provision requiring prompt repair or replacement of any damaged or destroyed municipal property with restoration to serviceable condition.
• A commitment to Equal Employment Opportunity standards.
• A provision reserving for the municipality the right to adopt “additional regulations that it shall find necessary in the exercise of its police power” provided such regulations are reasonable, not materially conflict with the franchise and consistent with federal and state laws and rules.
• “Right to inspect” [with] reasonable notice and during normal business hours...pertinent books, records, maps, plans, financial statements and other like materials of the franchisee.”
• Designation of the municipal official or office responsible for “the continuing administration of the franchise”.
• Franchise fee. It must be “precise” as to the “amount or method of calculation”, with an express commitment to competitive neutrality with regard to the franchise fee provision in any other cable television franchise granted by the municipality. This provision also must state "whether any facilities or support for PEG access" are part of the franchise fee. (See also the Department’s publication entitled “Issues in Cable Franchising: The Franchise Fee”.)
• A severability clause which may also specify any material provisions.
• A provision stating that the franchise is subject to approval of the PSC.
• A provision stating that an application for PSC certification and any required FCC applications must be filed by franchisee within 60 days of the municipal grant.
• A provision stating whether municipal approval is required to transfer the franchise.
• A provision permitting system-wide reporting for matters other than the franchise fee and consumer complaints.

What's Negotiable?

[cf. PSC Regulations 895.2, 895.4, 895.5 and Federal Cable Act, Parts III and IV.]

• “Equipment and facilities” (including institutional networks and system extensions, but not mandated technology.)
• Franchise fee. (May be specified by the franchising authority without negotiations and made a condition of renewal. See also the Department’s publication entitled “Issues in Cable Franchising: The Franchise Fee”.)
• Public, educational and government (PEG) access facilities, support and management. (Municipality may designate a management entity other than the franchisee at any time.)
• Service to schools and public buildings.
• Right-of-way management and safety.
• Consumer protection. (May also be regulated by local law in a manner not inconsistent with rights granted in the franchise.)
• Accountability standards and procedures.
• Term. (May not exceed fifteen years.)

What's Out of Bounds?

[cf. Federal Cable Act, Parts III and IV.]

These subject areas have been preempted from local franchising authority consideration by Federal law and, therefore, cannot be addressed in nor enforced by a franchise document.

• Requirements for “video programming” (other than for “broad categories”) and “other information services”.
• Rates. (Separate methodology mandated; see Sec. 623 of the Federal Cable Act.)
• Specifics of technologies employed.
• Matters not pertaining to “cable service” (such as telephone service and internet service).

Is There Help Available?

Yes—and it’s free of charge. The Department provides consulting services to municipalities to assist them in all their dealings with cable television service providers. Contact us at 518-474-2213 or by writing to the NYS Department of Public Service, Office of Telecommunications, 3 Empire State Plaza, Albany, NY 12223.
 

Franchise fees are governed by Section 622 of the Federal Cable Act. Under Section 622, municipalities are entitled to a maximum of 5% of gross revenues derived from the operation of the cable system for the provision of cable services.

The 5% limitation pertains to any twelve month period applicable under the franchise agreement for accounting purposes. Prepayments and deferred payments are permitted, as long as such payments do not exceed the amount which would have lawfully been collected if such fees had been paid on an annualized basis. The time value of money may be taken into account in these situations.

While these provisions may appear to be rather unambiguous and straightforward, a number of issues and misunderstandings can arise when they are put into practice.

Common Issues and Cautions

The Fee Can Be Non-Negotiable.

In general, municipalities are entitled to the maximum franchise fee permitted under Federal law and can make payment of such a fee a condition of agreeing to renew a company’s franchise. There are a number of reasons why this doesn’t always happen. These reasons are described in the text that follows.

How “Gross Revenues” is Defined is Important.

If the percentage were applied to the plain meaning of the term “gross revenues”, all revenue sources of the franchisee derived from the operation of the cable system for the provision of cable services would be included in the fee basis. In most cases, however, municipalities and their franchisees have agreed to definitions that exclude, either explicitly or implicitly, certain revenue sources. Some common examples noted include the use of terms like “subscriber revenues”, “gross receipts”, “video programming services”, and “revenues paid by subscribers for service”. Some franchise definitions, in attempting to list contemplated sources of revenue, purposely or inadvertently exclude one or more permitted sources. Still others specifically exclude one or more sources in the mistaken belief that they are not entitled to fees based on revenues from such sources. An example of the latter is the amount collected by the company from subscribers for franchise fees. Unless specifically excluded from the definition of gross revenues in the franchise, companies are required to include such collections in the franchise fee basis.

The point here is not to imply that municipalities should or must collect the highest possible franchise fee. However, municipalities do need to be aware of the true upper limits of their rights in this regard because other policy decisions they make in the course of the franchise renewal process can be affected by how they approach this issue.

The PSC’s Assessment on Companies and Its Effect on Municipal Revenues.

Many franchises have provisions which reduce the fee payable to the franchising municipality by the amount of the regulatory assessment (currently about two-tenths of 1%) payable annually to the Public Service Commission under Article 11 of the Public Service Law. In nearly all cases, this reduction is not required as a matter of law.

The legal reason necessitating such a reduction applies only to situations where a company is required to pay 5% and on a fee basis that includes every allowable source of revenue under the law. In these rather rare cases, the 5% statutory federal limit on franchise fees would be exceeded without such a reduction.

However, the fact that the vast majority of franchises have provisions for fees that are paid on some basis or some percentage (or both) that is less than the maximum permitted by law, means that the statutory limit will not be exceeded by payment of the PSC assessment. Therefore, such an offset, though certainly permitted, is not necessary.

The Franchise Fee Pass-Through.

Under federal law, the company has the right to pass through the amount of the franchise fee directly to subscribers. The pass-through is not limited to subscriber-based revenues. If the franchise requires payment on non-subscriber-based revenue sources, such as advertising and home shopping, the company may also pass through these amounts to subscribers as well. While federal law does not require companies to utilize these pass-throughs, meaning that it is at least theoretically possible to negotiate them away, companies have been generally consistent in insisting on their right to do so.

The Franchise Fee as a Line Item on the Subscriber Bill.

Under federal law, the company also has a right to include both the amount of the franchise fee and the name of the franchising authority to which the fee is being paid as a separate line item on each subscriber’s bill. Again, this is not a requirement under federal law; but companies have been generally consistent in insisting on their right to do so.

The Franchise Fee and PEG Access Support.

Under federal law, the company may deduct the amount it pays to provide operational support for PEG access from its franchise fee payment to the municipality, if such operational support is required by the terms of the franchise agreement. Support in the form of underwriting capital costs may not be deducted from the franchise fee, but may be included in the calculation of the basic monthly subscriber rate.

The Section 626 Real Property Tax Law Offset.

Cable companies also are assessed a special franchise tax on the value of their physical plant (cables, poles, etc.) in the municipal right-of-way. Section 626 gives companies the right to offset the amount payable under this special franchise tax against the amount of their franchise fee. Not all companies utilize this offset.

Cable Modem Service.

The FCC has issued a declaratory ruling that cable modem service is an interstate information service that is not subject to a franchise fee derived from the operation of a cable system for the provision of cable services. As a result of this ruling, companies which have heretofore paid a fee based on cable modem service revenues have notified franchising authorities that they will no longer be doing so. At present, several municipal franchising authorities are considering mounting a legal challenge to the FCC ruling.

Telephone Service.

Since telephone service is regulated under federal and state laws and regulations wholly different and apart from cable television, cable franchises may not be used to regulate telephone service. Telephone service, therefore, is not subject to cable franchise fees.

Section 221 of the New York State Public Service Law states that "no person shall exercise a franchise, and no such franchise shall be effective, until the commission has confirmed such franchise." Therefore, any company seeking to exercise a franchise for cable television service in this state must file an application for a certificate of confirmation after obtaining a franchise from a municipality.

The certificate of confirmation affirms that the applicant, the cable television system and the proposed franchise conforms to the standards established in Public Service Commission regulations and that operation of the cable television system as described in the franchise will not be in violation of any law, regulation or standard promulgated by the Commission.

Although at one time issued as a formal Commission Order, from May 2000 the certificate is conveyed in the form of a letter from the Secretary of the Commission setting out the conditions (if any) placed by the Commission on its approval of the certificate. A formal order is no longer issued or necessary.

Required Contents of an Application

Clearly, it is in the best interests of both parties to a franchise to have early and timely approval of a certificate of confirmation. Unfortunately, delays in the process occur when, upon review by Commission staff, one of more parts of an application for a certificate of confirmation are found to be missing. In order for an application to be complete, and therefore eligible for the consideration of the Commission, the following elements must be on file with the Secretary:

1. A transmittal letter requesting commission approval of a certificate of confirmation pursuant to section 221 of the Public Service Law.
2. A fully completed and properly signed and dated "Application for Renewal of Franchise or Certificate of Confirmation", commonly referred to as Form R-2.
3. A full and complete copy of the franchisee’s most recent annual test data compiled pursuant to section 897 of Commission rules for the cable system serving the municipality for which the application is being filed.
4. A copy of the public hearing notice filed by the clerk of the municipality, along with an affidavit of publication from the official newspaper of the municipality in which the notice was published showing the dates on which the notice appeared in the newspaper.
5. A duly certified copy (by seal or other legal certification of the clerk of the municipality) of the resolution voted by the municipality’s governing body granting the franchise.
6. A full, complete and properly signed, dated and executed copy of the entire franchise agreement, including any appendices or other material constituting the Agreement.
7. A copy of the public notice filed by the applicant for the certificate of confirmation, along with an affidavit of publication from the official newspaper of the municipality in which the notice was published showing the dates on which the notice appeared in the newspaper.

Commission procedures require that an original and four complete copies of the application must be filed with the Secretary.

Common Problems and Cautions

Apart from an incomplete application, there are a few other factors that, if missing or improperly accomplished, can cause a delay in processing at the Commission. Careful attention to the following matters also will ensure early and timely consideration of an application for certificate of confirmation.

1. Ensure that the applicant’s name and address used in all elements of the application is the applicant’s proper legal name and address at the time the application is completed. Applications are often filed in stages and, over time, either or both of these items may change. It is the sole responsibility of the applicant to ensure the accuracy of this information. Applicants are advised to file amended elements or applications if necessary.
2. Ensure that all required signatures in each element of the application have been secured and are properly dated and notarized or attested.
3. Ensure that the public hearing notice published by the municipal government contains all the information and statements required by section 897 of the Commission’s rules which states that such notices "shall conform to all applicable State and local laws and shall indicate that copies of the renewal application are available for public inspection during normal business hours at the office of the clerk of the municipality, whose address shall be stated in the notice."
4. The applicant should satisfy itself that the conduct of the public hearing was proper. Section 897 states, "All persons shall be given full opportunity to participate in the hearing and to ask questions of the applicant or any other participant in the hearing".
5. Ensure that the application for certificate of confirmation is timely filed--that is, within 60 days of the adoption of the municipal resolution approving the franchise.
6. Ensure that the clerk of the municipality to which the application pertains is served by the applicant with a copy of the application and that proof of such service is filed with the Commission by the applicant.
7. Ensure that the public notice of application for certificate of confirmation is timely filed (within ten days of the last publication date) and is in proper form. Section 897 requires that the notice be published "at least twice in a newspaper of general circulation in the municipality...to which the application relates." Furthermore, "the notice shall indicate that copies of the materials constituting the application are available for public inspection at the offices of the commission and those of the clerk" of the municipality to which the application pertains "during normal business hours and that comments with respect to the application may be filed with the commission."

Applicants may obtain assistance in properly completing the application process by telephoning the Cable Municipal Assistance section at 518-474-2213.