On September 25, 2018, the Federal Communications Commission adopted a Second Further Notice of Proposed Rulemaking (NPRM) that clarifies the power of local franchising authorities (LFAs) to impose “in-kind” (i.e., non-monetary) exactions in cable franchise negotiations and to regulate non-cable services offered by cable providers.

The Commission seeks comment on various interpretations and asks for cost data from LFAs to the extent they intend to argue that the rules would hamper their ability to meet any statutory obligations. The Commission seeks data from providers regarding the effect, if any, excluding cable-related, in-kind contributions from “franchise fees” would have on infrastructure development and other investments.[1] The Commission also seeks comment on tentative conclusions and analysis regarding the mixed-use rule, and it seeks data to determine the extent to which LFAs currently regulate non-cable services.[2]

The Commission also seeks comment on whether to apply the proposals and tentative conclusions set forth in the NPRM, as well as the Commission’s decisions in its 2007 Franchise Reform Orders,[3] to franchising actions taken at the state level and state regulations that impose requirements on local franchising. Specifically, the Commission seeks comment as to whether there any statutory basis to maintain the distinction between state-level franchising actions and local franchising actions and whether state level franchising actions or state regulations governing the local franchise process today impede competition or discourage investment in infrastructure that can be used to provide services to consumers. 

The newly adopted NPRM arises out of rules initially adopted in 2007, which certain LFAs successfully challenged in two respects in the US Court of Appeals for the Sixth Circuit following the Commission’s denial of their petitions for reconsideration. As discussed below, the newly adopted NPRM largely reinstates the Commission’s restrictions on LFAs’ regulatory authority over cable providers.

“In Kind” Contributions Required by Franchise Obligations. In 2007 the Commission adopted rules to prevent LFAs from imposing unreasonable demands on applicants for competitive cable franchises.[4] The Commission later extended many of these rules to apply to incumbent cable operators when those operators apply to renew their franchises.[5] Among other things, the Commission interpreted the term “franchise fee” in § 622(g)(1) of the Communications Act of 1934, as amended (the Act), to include “in-kind” exactions from cable operators related to the provision of cable services.[6] Because § 622(b) of the Act caps franchise fees at five percent of a cable company’s gross revenues for cable services in any twelve-month period,[7] including the value of any in-kind exactions within the meaning of “franchise fees” would limit the total commitments that LFAs may demand in exchange for franchise agreements. 

The NPRM proposes to reestablish the Commission’s prior interpretation that both non-cable-related and cable-related in-kind contributions are franchise fees that fall under the five percent cap, explaining that the Commission sees no basis for distinguishing between in-kind contributions unrelated to the provision of cable services on the one hand and cable-related contributions on the other.[8] The effect of this interpretation, if adopted by the Commission, will require LFAs to reduce their demands for monetary fees to stay below the cap.

According to the NPRM, if cable-related, in-kind contributions are not franchise fees, “LFAs could circumvent the five percent cap by requiring, for example, unlimited free or discounted cable services and facilities for LFAs, in addition to the five percent franchise fee,” which the NPRM views as contrary to Congress’ intent in defining “franchise fees” broadly.[9] Addressing the various statutory exclusions from the term “franchise fee” in § 622(g)(2), the NPRM tentatively determines that none apply to in-kind exactions, except for the narrow category of public, educational and governmental access (“PEG”) capital costs required by franchises granted after 1984.[10] The NPRM also confirms the Commission’s earlier view that the rules regarding franchise fees should apply to both new entrants and incumbent cable operators, as § 622 “does not distinguish between incumbent providers and new entrants.”[11] 

However, the NPRM explains that build-out obligations should be excluded from the definition of “franchise fees”[12] because build-out obligations “involve the construction of facilities that are not specifically for the use or benefit of the LFA or any other entity designated by the LFA.”[13] The cost of requirements that cable providers build-out their network, therefore, would not count toward the five percent cap under the NPRM. 

The “Mixed-Use” Rule. The mixed-use rule, which the Commission adopted along with the in-kind franchise obligations rules, prohibits LFAs from leveraging their franchising authority to extract regulatory commitments related to non-cable services, such as broadband Internet access services.[14] 

Except with respect to institutional networks (I-Nets), which LFAs may regulate expressly by statute,[15] the NPRM tentatively concludes that the Act bars LFAs from regulating the provision of non-cable services offered by incumbent cable operators over their cable systems, including cable operators that are not also common carriers.[16] First, the NPRM tentatively concludes that, to the extent any incumbent provider offers telecommunications services such as business data services, that provider qualifies as a “telecommunications carrier” and, therefore, falls under the common carrier exception to Section 602(7)(C) of the Act, meaning it can be regulated by LFAs only to the extent they provide cable service.[17] The NPRM notes that the Commission “see[s] no basis in the statute to treat differently incumbent cable operators that are common carriers and new entrants that are common carriers for the purposes of application of the common carrier exception.”[18]

Second, responding directly to the issue remanded by the Sixth Circuit remand, the NPRM “tentatively conclude[s] that the statute [also] bars LFAs from regulating the provision of broadband Internet access and other information services by incumbent cable operators that are not also common carriers.”[19] The NPRM finds that Section 624(b) of the Act prohibits LFAs from regulating the provision of information services, including BIAS, by incumbents that are not common carriers over a cable system.[20] Under Section 624(b)(1), LFAs may not “establish requirements for . . . information services.” The term “information services” is undefined, but the legislative history supports that the term corresponds closely to the 1996 Act’s definition of “information service.” So construed, the statute bars LFAs from regulating the provision of BIAS and other information services by incumbent cable operators that are not also common carriers.

More broadly, the NPRM expresses the Commission’s belief that LFA regulation of information services would be inconsistent with longstanding federal policy. Broadband Internet access service is a jurisdictionally interstate service, and LFAs regulation of service would, therefore, interfere with the lighttouch information service framework established by Congress and reaffirmed in the Restoring Internet Freedom (RIF) Order.[21] In particular, the RIF Order preempted economic and public utility-type regulation, which includes requirements that incumbent cable operators obtain new franchises to provide broadband Internet access service. The NPRM tentatively concludes that it would be contrary to the goals of the Communications Act to permit LFAs to treat incumbent cable operators that are not common carriers differently from incumbent cable operators and new entrants that are also common carriers with respect to the provision of services.[22]

Implications. The newly adopted NPRM would substantially limit LFAs’ authority to seek concessions through the imposition of in-kind contributions to avoid the five percent cap on franchise fees and would stop the growing efforts by LFAs to extend their regulatory authority to non-cable services offered by incumbent cable providers. LFAs are likely to challenge the rules again in litigation at the end of the rulemaking process, but their arguments may be less persuasive to the Sixth Circuit, or another reviewing court, in light of the Commission’s more detailed explication of its conclusions that the Sixth Circuit found lacking in Montgomery County