On Aug. 1, the Federal Communications Commission ruled, by a 3-2 vote, that cable-related, in-kind contributions required by local franchising authorities from cable operators are in fact franchise fees subject to the statutory 5% cap.

The FCC ruled that the definition of “in-kind, cable-related contributions” includes “any non-monetary contributions … including but not limited to free or discounted cable service to public buildings, costs in support of PEG [Public, Educational and Governmental] access other than capital costs, and costs attributable to the construction of I-Nets. It does not include the costs of complying with build-out and customer service requirements.”

The FCC’s Third Report and Order on Cable Franchising Fees largely adopts the tentative conclusions of the Second Further Notice of Proposed Rulemaking, issued last September. The decision runs counter to the flood of concerns the FCC received during the public comment period about its tentative conclusions.

The National Association of Telecommunications Officers and Advisors said the Aug. 1 ruling “provides a windfall to largely monopoly cable companies on the backs of local communities,” adding that the commission “decided to drastically rewrite federal law and wipe out 35 years of cable franchise agreements that had been negotiated based on mutual understanding of what the law meant.”

Irma Esparza Diggs, federal advocacy director at the National League of Cities, said the decision “creates an enormous loophole” that shields providers from state and local oversight “for the growing portion of broadband services provided by cable companies.”

She added, “This vote represents a serious misinterpretation of FCC authority under the Cable Act, and we intend to fight its implementation.”

The MMA and Massachusetts officials joined thousands of local officials and PEG access providers from across the country, and more than 60 members of Congress, in objecting to the FCC proposal, which they argued would upend the understanding of franchise fees, strip power from local governments to control cable operators’ use of rights of way when providing non-cable services, and undermine PEG programming.

Commenters asserted that the loss of revenue and support would force municipalities either to divert resources away from core municipal and school services in order to maintain PEG programming, or to dramatically reduce or eliminate PEG channels.

After determining that its previous definition of “capital costs” was overly narrow, the FCC in its Aug. 1 decision defined capital costs as costs incurred in acquiring or improving capital assets for PEG access facilities. This could include the acquisition of non-construction-related capital assets, such as a van or a camera, insofar as they are used for PEG channel capacity. The Internet and Television Association had lobbied against this broader definition, which was a small win for local franchising authorities.

The FCC declined to take up whether PEG channel capacity is a capital cost that should be excluded from the franchise fee cap, but it hinted that there will be further rulemaking on this issue in the coming months.

The franchise fee rulings in the Aug. 1 order are prospective, and cable operators and local franchising authorities must now assign a fair market value to the cable-related, in-kind contributions. The FCC states that, “to the extent a franchise agreement that is currently in place conflicts with this Order, we encourage parties to negotiate franchise modifications within a reasonable time.” In a footnote, the FCC states that in most cases, 120 days is a “reasonable time” for modifications to franchise agreements.

The order prohibits local franchising authorities from using their cable franchising authority to regulate any services other than cable services, including information services such as broadband internet access, provided over a cable system. As such, franchising authorities may not require a cable operator to pay fees or secure a franchise to provide broadband service via a franchise cable system, and may not require it to meet prescribed quality or performance standards for broadband service over that cable system.

The FCC expressly preempts local franchising authorities from imposing fees or other requirements on cable operators under the guise of regulating “non-cable services,” or otherwise restricting a cable operator’s construction, operation or management of facilities in rights-of-way.

The FCC’s Report and Order will become effective 30 days after publication in the Federal Register.

The NATOA will host a webinar on the FCC order on Aug. 21. For details, visit www.natoa.org/events/enatoa.html.

On Aug. 27, the NLC will host the webinar “The FCC and Cable Franchising: What Cities Need to Know.” To register, visit https://register.gotowebinar.com/register/8357605986606592269.

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