Financial Support

         A.  Franchise fees

         B.  Capital funding for PEG

         C.  Distinction between PEG support and franchisee fees

         D.  A funding partnership

The funding for PEG access channels, explains the Buske Group, "falls into two broad categories, funding for equipment and facilities and funding for access services. Typically, the funding for equipment and facilities is provided by the cable company. Under the Cable Act local franchising authorities have the ability to require and enforce a requirement of funds for this purpose in the franchise agreement."  Unlike capital costs (which under Section 624(b)(1) of the Cable Act are the responsibility of the cable operator), programming and operating expenses are normally shared between the cable company and the city (using of a portion of cable franchise fees received by the city under Section 622 of the Cable Act).

These lines of demarcation are often blurred in the franchise negotiation process, however.  In its legal challenge of the proposed San Jose cable franchise, for example, Comcast has argued that amounts contributed by an operator to support construction of an institutional network must be treated as part of the franchise fee payment.  Other cable operators have argued, moreover, that the cost of providing access services can be treated as a payment "in-kind" and deducted from the franchise fee payment owed.  But as James Horwood of Spiegel & McDiarmid explains in "Cable Franchise Renewal and Local Right of Way Management," "The Cable Act … does not state that the operator has the right to treat provision of services as in-kind payments.

Based on legislative history, there is a strong argument that access service requirements do not get counted against the franchise fee. The House Report underlying the 1984 Cable Act states, with respect to Section 622, that that section "defines as a franchise fee only monetary payments made by the cable operator, and does not include as a 'fee' any franchise requirements for the provisions of services, facilities or equipment." Id at 65, adding "[i]n addition, any payments which a cable operator makes voluntarily relating to support of public, educational and governmental access and which are not required by the franchise would not be subject to the 5 percent franchise fee cap."

The FCC adopted rules that provide that the costs attributable to satisfying franchise requirements shall include (47 CFR § 76.925): the sum of: (1) all per channel costs for the number of channels used to meet franchise requirements for public, educational, and governmental channels; (2) any direct costs of meeting such franchise requirements; and (3) a reasonable allocation of general and administrative overhead. The FCC's determination of costs associated with meeting franchise requirements, including costs of PEG, is particularly significant because of language added by the 1992 Cable Act to Section 622(c), 47 U.S.C. § 542(c), to provide that a cable operator may itemize, as a separate line item on subscribers bills:

(1) The amount of the total bill assessed as a franchise fee and the identity of the franchising authority to which the fee is paid.

(2) The amount of the total bill assessed to satisfy any requirements imposed on the cable operator by the franchise agreement to support public, educational, or governmental channels or the use of such channels.

(3) The amount of any other fee, tax, assessment, or charge of any kind imposed by any governmental authority on the transaction between the operator and the subscriber.

A.  Franchise fee:  The most basic aspect of the cable funding structure (although not necessarily tied to PEG support) is the 5 percent franchise fee, which is essentially the "rent" paid by the cable operator in exchange for the use of a community's rights-of-way (i.e., access to public property in order to string the wire and bury the lines that make the system possible). On October 4, 2001, the FCC ruled that cable operators may pass through to consumers and itemize on monthly bills the entire amount of a franchise fee assessed by the local franchising authority, including franchise fees from non-subscriber related revenue, pursuant to the Communications Act.

Austin's franchise fee arrangement is typical of such requirements:

SECTION 14. COMPENSATION TO THE CITY

14.1. General Compensation. For the reason that the Public Rights-of-Way to be used by Grantee in the provision of services within the boundaries of the Franchise Area are valuable public properties, acquired and maintained by the City at great expense to its taxpayers, and because the grant to Grantee of the use of said Public Rights-of-Way is a valuable property right without which Grantee would be required to invest substantial capital in right-of-way costs and acquisitions, the Grantee agrees to pay to the City as General Compensation during each year of this Franchise, a franchise fee consisting of 5% (five percent) of Grantee's Gross Revenue derived within the Franchise Area. Any other franchise granted by the City to a similarly-situated service provider for services allowed herein shall be granted on a competitively neutral basis…..

A.2.  Because franchise fees are limited to certain cable revenue streams (including non-subscriber revenues resulting from the selling of advertising, airtime, and other services via the cable system, but excluding voice and data services), and because such payments are based on the operator's own accounting practices, stipulations in the franchise for reporting requirements are also common. Montgomery County's franchise, for example, asks for "supporting information" to accompany each quarterly fee payment.

Montgomery County's franchise fee requirement:

8. FRANCHISE FEE.

…

 (c) Supporting Information. Each Franchise fee payment shall be submitted with supporting detail and a statement certified by the Franchisee's chief financial or accounting officer or an independent certified public accountant, reflecting the total amount of quarterly Gross Revenues for the payment period and a breakdown by major revenue categories (such as basic service, cable programming service, premium service, etc.). In the information provided with each payment, the Franchisee shall also indicate the number of subscribers within the corporate limits of each Participating Municipality. The County shall have the right to require further supporting information.

B.  Capital funding for PEG:  Because franchise fees (or a portion thereof) are not necessarily earmarked for PEG or even for telecommunications-related uses, stipulations for capital funding for PEG (i.e., support for facilities and equipment rather than for programming and operations) are especially important.  A number of communities have enacted generous capital funding requirements:

St. Paul's funding provisions:

Section 304. Support for public, educational and government use of the cable system.

304.(a). In addition to satisfying the other requirements of this Article III, the company is required to provide the following additional PEG use funding (as used in this section 304, PEG access refers to the channels, facilities and equipment used in connection with the channels on the subscriber network provided under section 300 and associated interconnections; PEG use includes PEG access and institutional network use):

304.(a).(1). On the effective date of the franchise, and on each of the first four (4) anniversaries of that effective date, the company will pay the city one hundred thousand dollars ($100,000.00), in 1997 dollars, for any use in connection with the institutional network.

304.(a).(2). The company will provide the following periodic capital grants for PEG access, in 1997 dollars:

(A). On the effective date of the franchise: five hundred thousand dollars ($500,000.00).

(B). On each of the third and seventh anniversaries of the effective date of the franchise: five hundred thousand dollars ($500,000.00).

(C). On the effective date of the franchise, and on each anniversary of the franchise: fifty thousand dollars ($50,000.00).

(D). If the franchise term is extended, the company will continue to pay the amount required by subsection 304(a)(3), and it shall pay an additional two hundred fifty thousand dollars ($250,000.00) on the eleventh anniversary of the effective date of the franchise.

304.(a).(3). In addition to the capital grant provided under section 304(a)(1)--(3), the company will provide the following capital grant for PEG use for so long as it continues to operate under this franchise: six hundred thirty thousand dollars ($630,000.00) per year, increased each year for the increase from the Minneapolis-St. Paul Consumer Price Index for all consumers, all items, with the base year for the calculation being 1997 (if there is no CPI for Minneapolis-St. Paul, the closest equivalent index will be used). Thus, by way of example, the payment due in 1999 would be multiplied by the increase in the CPI for 1998 over 1997 levels, and the resulting amount would be added to six hundred thirty thousand dollars ($630,000.00) to yield the total amount due. The payment due in the year 2000 would be the 1999 payment, plus an amount equal to the 1999 payment multiplied by the 1999 increase in the CPI over 1998 levels. The amounts owed for a year will be spread evenly over four (4) quarterly payments, with payments due on February 15, the second payment due on May 15, the third payment due August 15 and the fourth payment due November 15. Provided that, for the first year of the franchise, the first payment owed under this franchise will be made on the effective date and will be a pro-rated amount, reflecting the time remaining in the then-current calendar quarter from the effective date. For example, if the franchise became effective March 1, the company would pay fifty-two thousand five hundred dollars ($52,500.00) (one-third of the quarterly payment due on May 15).

B.2.  Palo Alto's provision for support of PEG facilities and equipment is based on a per-subscriber rate:

7.11.4 PEG Equipment and Facilities. Beginning seventy-five days after the effective date of this Agreement and continuing monthly throughout the term of this Agreement, TCI [now Comcast] shall pay to the City, on behalf of the Joint Powers, an amount equal to $0.88 per month per Residential Subscriber (as defined below) for PEG Access facilities and equipment. These grants will be used by the City in its sole discretion for any lawful PEG Access purposes.

B.3.  Portland's PEG capital funding requirement amounts to 3 percent of gross revenues:

9. PEG ACCESS CAPITAL FUNDING

9.1 3% Gross Revenue Annual Setaside. Grantee shall allocate three percent (3%) of Gross Revenues Annually to support PEG Access Capital Costs as follows:

(A) Grantee shall pay to the Jurisdictions one percent (1%) of Gross Revenues to provide support for Access Corporation Capital Costs funds. Pursuant to the terms of agreements between the Access Corporations and the Jurisdictions, the Jurisdictions shall use these funds to defray Access Capital Costs identified by the Access Corporations in their approved budgets. Funds not utilized in the year provided may be carried over into future years for Access Capital Costs and/or the Jurisdictions may apply such carryover amounts to funds granted by the Jurisdictions under Section 9.1(B).

(B) (1) Grantee shall pay to the Jurisdictions one percent (1%) of Gross Revenues as a dedicated Access Capital Development Fund to be granted by the Jurisdictions to PEG Institutions for Capital projects.

(2) With the Jurisdictions's approval, funds granted by the Jurisdictions under this Subsection in support of projects to be paid or constructed by the Grantee may be credited by the Grantee against payments to be made to the Jurisdictions under this Subsection.

(C) One percent (1%) of Gross Revenues shall be expended by Grantee to fund Institutional Network Capital requirements and extensions, subject to ongoing oversight and approval by the Jurisdictions in the manner provided in this Franchise. Expenditures under this Subsection must tangibly benefit PEG Institutional users and shall include only Incremental, direct costs, but shall not be disqualified by the Jurisdictions if they also accomplish a business purpose of Grantee.

(1) The Jurisdictions may require Grantee to advance additional funds under Section 9.1(C), up to an additional One Million Dollars, ($1,000,000), provided that Grantee may subsequently reduce annual payments under this Section by up to twenty percent (20%) of the amount advanced plus the time value of money as calculated pursuant to Section 14.9(D), until such reductions equal the amount advance plus the time value of money, pursuant to a schedule agreed to by the Jurisdictions and Grantee at the time of the advance.

B.4.  Monterey's capital funding requirement includes both initial and ongoing support:

7.11.E. Equipment and Facilities. The Grantee shall pay to the City, or the access management corporation designated by the City, for PEG access equipment and facilities the following amounts:

1. for initial equipment and facilities -- eight hundred thousand dollars ($800,000), to be deposited on the effective date of the Franchise; and

2. for ongoing PEG access capital support -- thirty-five cents (35¢) per basic subscriber per month, to be provided on a quarterly basis.

3. Nothing in this section 7.11.E. requires or shall be deemed to require the Grantee to make any payment which constitutes a Franchise Fee under 47 U.S.C. § 542.

B. 5.  Austin's PEG support requirement includes both capital and operating expenses (with the latter independent of franchise fee payments):

4.8. Grantee Contributions for PEG Access. Grantee shall provide funds for production facilities and equipment for PEG Access in an amount up to $1.5 million in the period January 1, 1997 through August 12, 2005 and up to $500,000 in the period August 13, 2005 to August 12, 2011. The City may increase or decrease the amounts of support provided by the Grantee under this paragraph and Section 7.3 and reallocate such amounts, provided that in no event shall Grantee's combined obligations thereunder exceed $3 million from the period January 1, 1997 through August 12, 2005 and $1 million in the period August 13, 2005 through August 12, 2011. All such facilities and equipment shall be for the benefit of the City and its residents and shall be subject to the sole control of the City, but Grantee may hold legal ownership title….

The Grantee also agrees to provide ongoing annual support grants, as provided in Exhibit B to this Franchise, for the operation of Public, Educational and Government Access.

… For purposes of this Franchise the Grantee agrees that such contributions, services, equipment, facilities, support, resources, and other things of value are not deemed to be (i) "payments-in-kind" or involuntary payments chargeable against the compensation to be paid to the City by the Grantee pursuant to Section 14 hereof, or (ii) part of the compensation to be paid to the City by the Grantee pursuant to Section 14 [i.e., franchise fee]….

EXHIBIT B

ACCESS GRANTS

     1.   The Grantee shall make annual payments in support of Public, Educational, and Government Access with funds obtained through a $0.35 per month charge on all residential, non-bulk Subscribers.  

     2.   All payments made under Paragraph 1 above shall be made quarterly at the time of the Franchise Fee payment required under Section 14 of this Franchise unless otherwise noted.  

     3.   The amount of the monthly per-Subscriber charge may be reduced by the City Council at its discretion upon sixty (60) days' written notice to Grantee.  

B.6.  Montgomery County's PEG capital grant:

7 (b) Capital Grant for Access Equipment and Facilities:

(1) The Franchisee shall provide a capital grant to the County, on its behalf and on behalf of the Participating Municipalities, of $2 million for the first year of the Franchise, $1.2 million in Year 2, and $200,000 per year, adjusted by CPI for the balance of the Franchise (the "Capital Equipment Support Grant") to be used by the County, in its sole discretion, for PEG equipment (including, but not limited to, studio and portable production equipment, editing equipment and program playback equipment), or for PEG-related facilities renovation, or construction. Payment of the Capital Equipment Support Grant shall be made quarterly, concurrently with the franchise fee payment. The first payment shall be due on the same date as the first franchise fee payment made by the Franchisee under this Agreement.

C.  Distinction between PEG support and franchise fees:  To avoid any possible misunderstanding (and to make certain that the cable operator meets its full financial obligation to the community), some cities have adopted franchise language that clearly distinguishes between franchise fees and PEG support.

St. Paul stipulates that PEG support is independent of franchise fees:

Section 306. Support not franchise fees.

The parties agree that any cost to the company associated with providing any support for PEG use required under this franchise (including the provision of the institutional network and support therefor) and payments made outside this franchise, if any, are not part of the franchise fee, and fall within one (1) or more of the exceptions in 47 U.S.C. § 542.

C.2.  Portland's separation of PEG capital funding and franchise fees:

9.4 PEG Access Support not Franchise Fees; Applicable Federal Law. Grantee agrees that financial support for Access Capital Costs arising from or relating to the obligations set forth in Section 9 shall in no way modify or otherwise affect Grantee's obligations to pay franchise fees to the Jurisdictions. Grantee agrees that although the sum of franchise fees and the payments set forth in Section 9 may total more than five percent (5%) of Grantee's Gross Revenues in any twelve (12)-month period, the additional commitments are not to be offset or otherwise credited in any way against any franchise fee payments under this Franchise.

D.  Funding partnership:  Although in some instances PEG support is limited to the per-subscriber fees that show up as a line-item on subscribers' bills every month, enlightened cities view the support of PEG as a collaborative, public-private effort.  Monterey, for example, describes PEG support in this manner.

Monterey's provisions for access channel support:

7.11.D. Support for Access.

1. The City and the Grantee agree that support of PEG access is a partnership.

2. The City will commit to dedicating a portion of its franchise fees to the support or PEG access as well as identifying facility space for a PEG access center. 3. The City directs and the Grantee agrees that commencing no later than sixty (60) days after the effective date of the Franchise, the Grantee shall pass-through seventy cents (70¢) per subscriber per month for any additional support for the Access Corporation. Such a pass-through will be paid quarterly to the Access Corporation designated by the City pursuant to Section 7.11.C.1. The Access Corporation initially designated shall be Access Monterey Peninsula. The Grantee shall have the right to identify this passthrough on subscriber's bill as the community access fee line item…. This passthrough amount to the Access Corporation may be increased (or decreased) if the City Council takes action by resolution to change the pass-through amount to be provided to the Access Corporation. The City agrees to meet and confer with the Grantee prior to any City Council action to approve an increase in the community access fee described in this section when such amount exceeds one dollar ($1.00) per subscriber per month.

D.2.  Montgomery County built matching support into the franchise transfer agreement that was settled in 1998, just prior to the issuing of a new franchise.

Montgomery County's PEG Access support requirement:

SECTION 4. PEG ACCESS SUPPORT

4.1. Effective July 1, 1998, the Franchisee shall pay to the County an amount equal to $1.5 million in each year of the renewed Franchise Agreement, adjusted annually by the CPI (the "PEG Support Fund"). Payments made under this provision shall be made quarterly. Beginning in the first year of the Franchise, the County shall distribute a portion of the PEG Support Fund equal to $50,000 per year adjusted annually by the CPI to each of the following PEG Channels: City of Rockville; City of Takoma Park; and the Montgomery Chapter of the Maryland Municipal League. Provided, however, that in each of years 6 though 15 of the Franchise, the County's obligation to distribute a portion of the PEG Support Fund to each PEG Channel is conditioned on appropriation and encumbrance by the operating authority for each PEG Channel, within the same fiscal year, of a matching amount equal to that distributed to it by the County. To the extent the operating authority for a particular PEG Channel spends less than the amount otherwise required of the County under this Section 4.1, the amount required of the County shall be reduced to a level equal to the amount spent by the Participating Municipalities. The County may use these funds at its discretion for support for PEG access.

4.2. The PEG Support Funds are to be deposited in the County's Cable Television Special Revenue Fund and specifically designated for PEG access purposes. The funds do not constitute franchise fees.