Since its inception, cable companies have provided video services to customers under franchise agreements that governed terms and conditions for use of the rights of way, within a regulatory framework established by various federal statutes, such as the 1992 Cable Act and the 1996 Telecommunications Act.
The Texas Legislature in 2005 became the first state in the nation to usher in a new regulatory framework for providers of video services, with the exception of direct broadcast satellite providers. Traditional telephone providers had the right to offer video services by pursuing individual franchises as the cable industry had done for decades, but they didn’t want to go city-by-city to negotiate agreements. Instead, they pushed for a state-franchising regime under which they could more easily offer video service. This legislation, known as Senate Bill 5, allowed new landline video providers to file a simple form with the Public Utility Commission of Texas to offer service to a particular community.
Cable Regulation Today
Thanks to legislation supported by the cable industry and passed in 2011 (Senate Bill 1087) plus court rulings following a seven-year legal battle, most cable operators are now competing under essentially the same terms and conditions as telecom video providers, and are no longer bound by old municipal franchises.
A State Issued Certificate of Franchising Authority (SICFA) issued by the Public Utility Commission of Texas does not contain any specific terms or conditions and does not reflect any “agreement” between the franchising authority and the provider. Instead, a SICFA is a “granting” document that grants the company authority to provide cable or video service as requested in the application and use and occupy the public rights-of-way in the delivery of that service.
Key provisions of the statute are:
FRANCHISE FEES: SICFA holders must pay a franchise fee to each municipality in the amount of 5% of the provider’s annual gross revenue as defined in the statute. The complex definition is nearly five pages long, encompassing not just revenues from subscribers but also from advertisers and home shopping purchases made within the municipality. Operators itemize the franchise fee on customers’ bills as allowed by law, and the pass-through receipts themselves are considered revenue subject to the 5% fee, making the effective fee 5.25%. This is what often is referred to as a “fee on fee.”
PEG CAPITAL FEES: SICFA holders must pay a PEG Capital fee in the amount of 1% of gross revenues in lieu of in-kind compensation and grants. This fee may be used only to pay for capital expenditures related to Public, Educational and Government Access channels, but it is paid to a municipality automatically. Some (but not all) cities are opting to waive the 1% fee if the municipality has no PEG channels. SB 1087, passed by the Texas Legislature in 2011, introduced transparency standards so cities can be held accountable for how those funds are used. Like the Franchise Fee, the PEG Capital Fee collections are subject to “fee on fee.”
CONSTRUCTION OF FACILITIES: The statute requires a municipality to let SICFA holders install, construct, and maintain a communications network on a nondiscriminatory basis. Further, a municipality may not discriminate against a SICFA holder regarding access to a building or a municipal utility pole attachment. The statute also lets a municipality or municipally-owned utility charge a cable operator up to the federal telecom rate for pole attachments and requires that they charge a single, uniform pole attachment rate to all entities regardless of the services carried over the networks. Where poles are not owned by a municipality or municipally-owned utility, operators pay fees to the investor-owned utility under terms and rate formulas generally set by federal law.
MUNICIPAL AUTHORITY: A municipality is authorized to enforce police power-based regulations in its management of a public right-of-way to protect the health, safety, and welfare of the public so long as such enforcement is competitively neutral and not unreasonable or discriminatory. A municipality may require that SICFA holders obtain a construction permit, but it must be without cost and the terms of the permit must be the same for all users of the public right-of-way. A municipality can—and often does—require right-of-way users to move facilities, at the user’s cost, when a street is widened or straightened or when a municipality embarks on a project that brings utilities underground instead of on poles. Such expenses are in addition to the franchise fees paid to a municipality.
FREE SERVICES TO CITIES: SICFA holders that provided free services to municipal buildings and/or schools under the terms of municipal franchises are required to continuing to provide such services but may charge the municipality for the “actual incremental cost” of those services, as defined in the statute. In practice, most cable operators have merely “grandfathered” free services rather than charging the actual incremental cost. New providers are not required to offer free or at-cost service at all. This requirement is a remaining discrepancy in regulatory burdens on incumbent cable operators.
PEG ACCESS CHANNELS: SICFA holders must provide the municipality with “no fewer” PEG access channels than the municipality had activated under the incumbent’s municipal franchise. The city is responsible for all programming expenses. A note about unincorporated areas: Service to customers in unincorporated areas of Texas is authorized under the Texas Utilities Code. No franchise fees are collected from customers or paid to non-municipal government entities.