CABLE TELEVISION FRANCHISE RENEWALS A PRIMER
By JOHN M. MYERS and DANIEL P. SCHUERING
Pfeifer & Kelty, P.C.
(Part One of Two)
Numerous cable TV franchises, negotiated in the early to mid 1970's, are currently up tor renewal. Such agreements were, of course, executed prior to the Cable Communications Policy of 1984, which, as most municipal practitioners know, .substantially changed the rules of the cable game. The purpose of this article is to provide a brief overview of the Cable Communications Act of 1984 (the "Cable Act") and to offer some concrete suggestions for negotiating cable television franchise renewals in today's regulatory environment.
THE 1984 CABLE ACT
The Cable Act fundamentally altered the relationship between franchisor and franchisee. Depending on one's point of view, the Cable Act was either a Magna Charta for cable operators on the one hand, or a Carte Blanche to print money, on the other.
The most notable change in the law reflected in the Cable Act had to do with regulation of rates. Many pre-Cable Act franchise agreements contained elaborate provisions for municipal regulation of cable rates. Section 623 of the Cable Act, together with FCC regulations implementing Section 623, did away with rate regulation except in those rare instances where cable system was not subject to "effective competition." "Effective competition" has been defined by FCC regulations as a situation where any three off the air broadcast signals are available in the cable franchise community. "Availability" depends upon signal strength in the community and whether the signal is "significantly viewed" in the community. It is a safe bet that almost all of Illinois has "effective competition" under the FCC regulations.
The second major feature of the Cable Act, Section 622, limits franchise fees to 5% of gross revenues. (Even though the Act limits the amount of fees which the franchise may impose, the Act actually increased the fees from 3% under prior FCC Regulations to the current 5%.) "Franchise fee" is defined as "any tax, fee or assessment of any kind imposed by a franchising authority or other governmental entity on a cable operator or cable subscriber, or both, solely because of their status as such." "Franchise fee" does not include "any tax fee or assessment of general applicability (including any such tax fee or assessment imposed on both utilities and cable operators or their services... .)" "Franchise fee" also excludes payments required to be made by the cable operator in support of the use of public educational and governmental access facilities.
The third major feature of the Cable Act, one particularly pertinent to the franchise renewal process, is
the renewal provision of Section 626. That section provides that during the six month period beginning with the thirty-sixth month before franchise expiration, the municipality may on its own initiative, and shall at the request of the franchisee, commence public hearings regarding renewal. Also, upon submission by a franchisee of a proposal for renewal of a franchise, the municipality must provide prompt public notice of the proposal, and during the four month period which begins on the completion of any public hearings, renew the franchise or issue a preliminary assessment that the franchise should not be renewed. The decision not to renew a franchise must be supported by various specific factual findings, and is reviewable by a court. If the refusal to renew results in a transfer of ownership of the cable system to another person or to the municipality, then the sale price is governed by Section 627 of the Cable Act, which provides that any such acquisition or transfer shall be "at fair market value, determined on the basis of the cable system value as a going concern but with no value allocated of the franchise itself." (Section 627 also says that if a franchise is terminated for cause, the transfer of ownership shall be "at an equitable price.") Section 626 is reviewed in greater detail below.
A final provision of the Cable Act relevant to franchise renewals is Section 624, relating to regulation of services, facilities and equipment. This provision allows the municipality to establish in its franchise requirements for facilities and equipment but not for programming or other information services, subject only to the right of the municipality to ban obscene or otherwise constitutionally unprotected speech.
Obviously, the remainder of the Cable Act should be reviewed and considered by the municipal practitioner prior to advising a municipality regarding a franchise or franchise renewal. But, we believe we have mentioned the salient points.
WHAT CAN A MUNICIPALITY DO
BY CONTRACT THAT IT CANNOT DO BY ORDINANCE?
Even a cursory review of the Cable Act, such as that provided in the last few paragraphs, shows that the cable operators enjoy significant protection from municipal constraints on their operations. The first question in the mind of a municipal lawyer considering a franchise renewal is whether any of these protection may be waived by the cable operator. The current answer to this question seems to be a qualified "yes".
Two recent cases have involved cable franchise
January 1991 / Illinois Municipal Review / Page 21
agreements containing some limitations on rates. The first such case was Nashoba Communications Limited Partnership Number 7 v. Town of Danvers, 893 F.2d 435 (1st Cir. 1990). In that case, the Town of Danvers and Nashoba, the cable operator, entered into a contract as a result of a competitive bidding process, the Town asked the license applicants whether they would honor a rate freeze for at least the first two years of operations. Nashoba made the commitment and won the contract. Later, Nashoba tried to escape the rate freeze as violating the Cable Act. The court noted that the rate freeze "is not regulation, is enforcement of a contractual commitment proposed unilaterally, in full awareness of the Cable Act." The court then held that since Nashoba's suit raised only state court contractual issues and not federal issues under the Cable Act, the federal court lacked jurisdiction over the dispute.
In the Town of Norwood v. Adams-Russell Co., 401 Mass. 677, 519 N.E.2d 253 (1988), the Massachusetts supreme court upheld a judgment against a cable operator for violating a rate freeze provision in its cable franchise. The court noted that neither the Cable Act nor FCC regulations prohibit enforcement of a "time limited, mutually agreed upon" rate freeze provision.
These two cases certainly suggest that under the Cable Act a municipality may do by contract that which it is forbidden to do by regulatory ordinances. Obviously, a couple of cases from Massachusetts do not give Illinois municipalities ironclad protection when they sign cable franchises and renewal agreements containing rate clauses. But, the decisions certainly provide some comfort. Moreover, depending on how the rest of the cable franchise agreement is structured, the parties may agree that the invalidation of any provision invalidates the entire agreement (whereupon the whole Agreement would have to be renegotiated) or that invalidation of any provision does not affect the remainder of the contract (in which case if the cable operator challenged only, say, rate limitations, any other contractual commitments would remain in place.).
THE FUTURE OF THE CABLE ACT AND INDUSTRY
Dissatisfaction by consumers and municipalities with the Cable Act have led to numerous proposals to Congress which would again allow rate regulation by municipalities. Thus far, no such bill has been passed by both houses of Congress and reached the President's desk. It is a safe bet, however, that attempts to re-regulate the cable industry will continue over the next few years. Exactly what shape these efforts will take is anyone's guess, and whether they will be successful is unknown. But in negotiating a franchise renewal, the municipal attorney should be careful to make provisions anticipating a change of law.
It is also anyone's guess what the cable industry will look like in ten years. Efforts by the telephone companies to compete have been barred by the AT&T Antitrust Consent Decree, but anyone reading the Wall Street Journal or other business publications is by now aware of an intensive lobbying and public relations campaign by the "Baby Bells" to change the situation legislatively. If this effort is successful the industry will change fundamentally with totally unpredictable side effects. The technology of cable also continues to change. The upshot of this for franchise renewals is that the municipality must guard against locking itself into old structures and technologies. •
Page 22 / Illinois Municipal Review / January 1991