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The FCC will vote this month on whether to consider adopting a set of rulings that would limit the authority of cable local franchise authorities (LFAs) in the franchising and regulation of cable systems in response to a recent court case that threatens to expand LFA authority over cable systems and their diverse service offerings. In preparation for this vote, the FCC has pre-released a draft Second Notice of Proposed Rulemaking (NPRM) that contains these proposals.

I. Background on the Shared Local and Federal Regulatory Authority Over Cable Systems

Before discussing the NPRM, a little background is in order. Cable franchising is an arcane area of law, which mixes federal, state, and local law and regulation. The Cable Act of 1984, as amended in 1992, sets the rules for what has been called a “deliberately structured dualism.” That is, dual locality/FCC authority over cable systems and cable service. Localities exercise this authority through LFAs (that in many cases are not even separate local offices), who control the public rights-of-way that cable companies use to string their cable, while the FCC is charged by the Cable Act with exercising federal jurisdiction. FCC policy and LFA desires are frequently in tension, with LFAs often seeking franchise agreements that will give them greater regulatory authority and payments than the FCC or cable operators believe to be appropriate. It is rare to find a LFA that is actually interested in or capable of regulating any services offered by a cable system.

For the LFA, it is all about what they can get from the cable operator –Public, Educational and Governmental access channels and the franchise and other fees that LFAs extract from cable operators who pass the fees along to subscribers. For years, LFAs have fought with cable operators and the FCC over franchise fees and other ways to extract money (and other benefits) from cable operators, as well as the regulatory authority of LFAs. While we thought these battles had been settled by definitive court and FCC rulings, certain very aggressive LFAs (particularly Montgomery County, MD) have continued to fight for more money and power, and have had some recent success in convincing courts that FCC limits on LFA-imposed fees and LFA regulatory authority have not been legally justified. The proposed NPRM is a reaction to these recent LFA successes.

II. The Montgomery County Court Decision

The primary impetus behind the proposed NPRM is the 2017 decision of the Sixth Circuit US Court of Appeals in Montgomery County v. FCC. In this case, the LFA attacked the FCC’s doctrine that LFAs are prohibited from regulating non-cable services offered over cable systems – business data services, VoIP services, and high speed Internet access services among others. This doctrine is called the “mixed-use” doctrine. Because of this doctrine, LFAs have not been able to require cable operators to obtain separate franchises for these non-cable services or to assess franchise fees on these non-cable services. In addressing the challenge to this doctrine, the Court found that the FCC had adequately justified the doctrine only as applied to the services of a common carrier that provides cable services. For other cable companies, the Court found that the FCC had not shown a sufficient basis for shielding their non-cable services from LFA regulation.

The Court also determined that the FCC had not adequately justified the decision to treat cable-related in-kind contributions as franchise fees. An example of these “contributions” are cable services to government buildings provided at no charge. This is important because franchise fees are limited to five percent of a cable system’s gross cable services revenues.

III. Proposals in the NPRM to Respond to the Montgomery County Decision

The proposed NPRM would look to correct these deficiencies in the FCC’s rulings. First, the NPRM would declare that the “mixed-use” doctrine applies to cable systems not owned by telephone companies (e.g., Comcast or Charter) as well as cable systems owned by telephone companies (e.g., AT&T and Verizon). The Montgomery County Court found that the “mixed-use” doctrine applies to telephone company cable systems because the Cable Act’s definition of a “cable system” says that LFAs may regulate these “Title II” carriers only to the extent that they provide cable services.  The proposed NPRM would tentatively find that this “Title II exception applies not just to traditional telephone companies (e.g., AT&T and Verizon), but to any entity that offers a Title II service over its cable system. Thus, if Comcast offered a telecom service with its cable plant (e.g., business data service), this exception would apply to Comcast. In other words, LFAs would not be able to impose regulations on traditional telecom services provided by cable companies.

As for those cable systems that offer information services but not traditional telecom services, the NPRM would tentatively conclude that Section 624(b) of the Cable Act bars LFA regulation of their non-cable services, as it bars LFAs from establishing “requirements for … information services.” This ruling would prohibit LFA regulation of Internet access services, which were classified as telecommunications services but are now classified as information services. The NPRM notes that Internet access services cannot be regulated at the state or local level for the additional reason that the FCC preempted regulation of those services when it recently reclassified Internet access services as information services.

The proposed NPRM is less clear on whether and to what extent the FCC would prohibit LFAs from regulating the third leg of the familiar cable “triple play” offering – interconnected VoIP. Interconnected VoIP is an application riding on the cable system (or any other Internet service). The FCC has resisted giving it a regulatory classification. It is treated in some respects as an information service and other respects as a telecommunications (common carrier) service although the FCC has made some rulings as to how the service may be regulated at the state level and has taken the position in court proceedings that state PUC-like regulation of interconnected VoIP should be preempted. And just days ago the Eighth Circuit US Court of Appeals found that interconnected VoIP service is an information service. Presumably, the limitations on state regulation of interconnected VoIP entry and rate regulation would be sufficient to stop LFAs from franchising and imposing fees on this type of service.

Turning to franchise fees, the NPRM proposes that cable-related, in-kind contributions by the cable operator to, or at the direction of, the LFA are franchise fees. An example of these in-kind contributions would be free or discounted cable services provided at government buildings. This FCC proposal matters because the Cable Act imposes a limit on the LFAs ability to collect franchise fees. That limit is the amount that is equal to five percent of the cable system’s gross cable revenues. Generally, LFAs collect cash franchise fees to this limit. Thus, if the FCC adopts this proposal, LFAs will have to either forego these in-kind contributions or reduce the cash franchise fees they collect.

So why are these proposals important? In the last few years, LFAs have seen cable systems gradually transitioning from multichannel video programming platforms to high-speed Internet access platforms. Sure, the number of cable channels is in the hundreds and increases almost yearly, but consumers are “cutting the cord” with greater frequency, taking the Internet service and not the cable service. Because the franchise fee can be assessed only on cable service revenues (due to the “mixed-use” doctrine), the dollars taken by LFAs in the form of these fees is declining. Facing this decline, the LFAs have attempted to take control over the Internet access services and to claim a right to assess franchise fees on these services. Taking control of these services will not only result in greater expense to consumers (governmental fees are typically passed through to end users), but could result in attempts to impose net neutrality regulations through the back door, subjecting cable operators to requirements that lack uniformity across jurisdictions and that are truly beyond the understanding or enforcement abilities of all but the largest LFAs.

Keep an eye on CommLawBlog as we monitor these developments.