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Franchise Fee Pass-Through Under the Dallas Decision
One complex issue involves the ability of cable operators to pass through franchise fees to consumers based on a particular 1995 decision by the FCC.
In 1995, the FCC, as part of a rate decision involving the city of Baltimore, ruled that cable operators could deduct amounts paid as franchise fees from their gross revenues. In effect, this allowed cable operators to calculate their franchise fees based on net revenues – net of franchise fees – rather than gross revenues. After this FCC decision, some cable companies notified local communities that they would be changing the method used to calculate fees and paying the communities a reduced amount.
The FCC’s Baltimore order was challenged in court by local governments, and overturned by the Fifth Circuit in City of Dallas v. FCC, 118 F.3d 393 (5th Cir. 1997). The Fifth Circuit held that franchise fees are not taxes on subscribers, but represent a cost the cable operator pays for use of the public rights-of-way. Thus, the cable operator cannot recover the franchise fee from subscribers as if it were a tax added on over and above the operator’s charge for service. Rather, the fee has to be considered part of the cable operator's cost of doing business. This means that the money the cable operator takes from subscribers to pay this cost is part of its gross revenues.
Once local communities’ right to collect the full franchise fee was vindicated in court, however, a second issue arose. When local governments asked the cable companies to pay the amounts that operators had withheld unilaterally after the FCC's original decision, the operators responded by threatening to increase rates to cover the cost. The cable operators asked the FCC to rule that operators could increase their rates to recover amounts owed for these past periods.
What the FCC decided was that cable operators could pass through the back payments required by the franchising authorities, but only if the cable operator had "properly" implemented the Baltimore decision that was later overturned. In other words, if the cable operator decreased its franchise fee pass-through to subscribers based on the FCC's Baltimore decision, then it could pass through the amounts – and only the amounts – that it had not recovered from subscribers in reliance on the FCC's decision. In re Franchise Fee "Pass Through" and Dallas v. FCC, CSR 5147-R, Memorandum Opinion and Order, DA 98-396 (March 2, 1998).
Thus, in order for a cable operator to pass through these franchise fee costs, it must meet two conditions. There must have been a change in the amount the cable operator charged consumers for its franchise fees; and the change must have been due to reliance on the FCC's Baltimore rate decision. If the cable operator continued to pass through the full franchise fee to subscribers but only paid the reduced “Baltimore” franchise fee to the franchising authority, then obviously the operator cannot charge subscribers again for the fees it has already recovered. Moreover, if the operator was already itemizing the reduced franchise fee before the FCC’s order, its continuation of the reduced pass-through after that order would seem to reflect a prior business decision, rather than reliance on the FCC’s order Finally, the special pass-through allowed by the FCC applies only to fees assessed for the period between the FCC’s Baltimore decision and the Dallas decision overturning it - April 6, 1995 to July 31, 1997.
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