Monday, November 26, 2007

UPDATE: The FCC’s Second Report and Order on Cable Franchising

On October 31, 2007, the Federal Communications Commission adopted a Second Report and Order in MB Docket No. 05-311, FCC 07-190, released November 6, 2007, that addressed whether findings and relief for new entrants, promulgated in the Docket’s First Report and Order, also known as the Section 621 Report and Order, should be extended to current cable service providers (“incumbents”). The FCC found the following:

1. Application Time Limits. The provisions regarding time limits for franchise negotiations are only applicable to new entrants. The time limits cannot apply to incumbent renewals, which are governed by the renewal procedures set forth in Section 626 of the Communications Act (the “Act”), 47 U.S.C. § 546. The underlying rationale, to prevent unreasonable delays and to allow new entrants to provide service, is inapplicable to incumbents who are able to provide service during renewal negotiations.

2. Build-Out Requirements. The findings of the FCC regarding build-out requirements are only applicable to new entrants. Specifically, the finding that a local franchising authority (“LFA”) cannot refuse to award a competitive franchise because the applicant would not agree to unreasonable build-out requirements, is based on Section 621(a)(1) of the Act, 47 U.S.C. § 541(a)(1), a provision which does not apply to incumbents. The underlying rationale, that build-out requirements may act as a barrier to new entrants, is inapplicable to incumbents.

3. Franchise Fees. The FCC’s findings in the First Report and Order that certain costs, fees, and other compensation required by LFAs must be counted toward the statutory 5% cap on franchise fees, should be extended to incumbents. The findings interpreting Section 622 of the Act, 47 U.S.C. § 542, apply equally to incumbents and new entrants and include the following: (a) that an operator is not required to pay franchise fees on revenues from non-cable services; (b) that certain fees are not “incidental” and must therefore be counted toward the 5% cap; (c) that funds requested by LFAs for municipal projects unrelated to cable services are subject to the 5% cap; and (d) that payments to support the operation of public, educational, and governmental (“PEG”) facilities are subject to the 5% cap unless the payments are for capital costs.

4. Public, Educational, and Governmental Access and Institutional Networks. Many of the FCC’s findings relating to PEG access facilities and institutional networks (“I-Nets”) should be extended to incumbents. The findings relating to PEG access and I-Nets include the following: (a) all non-capital costs to support the operation of PEG facilities are subject to the 5% franchise fee cap; (b) the FCC’s refusal to adopt standard terms for PEG channels for new entrants applies to incumbents; and (c) the FCC’s refusal to hold that it is per se unreasonable for LFAs to require ongoing PEG support by new entrants (so long as the costs are subject to the 5% cap) applies to incumbents. The FCC held that other findings relating to PEG access and I-Nets should not apply to incumbents.

5. Authority Over Mixed-Use Networks. The findings of the FCC regarding mixed-use networks are based upon interpretations of Section 602 of the Act, 47 U.S.C. § 522, which does not distinguish between incumbents and new entrants, and as such, the findings should be applicable to incumbents as well. Since the jurisdiction of an LFA applies to cable services that are provided over cable systems, an LFA may not use its franchising authority to regulate an entire mixed-use network. It would be unreasonable for an LFA to impose its authority over non-cable services or facilities that do not qualify as a cable system.

Existing Franchise Agreements

The FCC recognized that since franchise agreements involve contractual obligations, the Second Report and Order does not give incumbents any right to breach their existing contractual obligations contained in franchise agreements. Instead, the FCC believes that each situation must be assessed on a case-by-case basis under the applicable law to determine whether the FCC’s statutory interpretation should modify the incumbent’s existing franchise agreement. The FCC encourages LFAs to work cooperatively with an incumbent who asserts that terms of its franchise should be amended as a result of the Second Report and Order. The FCC stated that some incumbents may seek modifications to franchise agreements pursuant to a most favored nation clause in the franchise agreement, pursuant to a compliance with law provision in the franchise agreement, or pursuant to the modification provision, Section 625 of the Act, 47 U.S.C. § 545. The FCC also recognized that if these efforts fail, some disputes may eventually find their way to court.

Customer Service Requirements

In the Second Report and Order, the FCC addressed the application of different state and local cable customer service requirements. Based upon the statutory language of Section 632 of the Act, 47 U.S.C. § 552, the FCC declined to preempt state or local cable customer service requirements that exceed FCC customer service standards, and stated that LFAs and cable operators may agree to more stringent customer service requirements.

Effective Date

The Second Report and Order will be effective 30 days after publication in the Federal Register.