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Franchise Fees and In-Kind Benefits
One potential complication that arises in franchise negotiations has to do with the relationship between franchise fees and in-kind benefits (that term used here to include capital grants in support of access as well as actual equipment and facilities).
Franchise fees do not form the entire compensation a community receives for the use of its public rights-of-way under a cable franchise. The Cable Act recognizes that a community can obtain additional compensation in kind. These benefits may consist of actual cameras, studios, institutional network fiber, or the like provided directly by the cable operator. They may also consist of capital grants with which the community itself can acquire such equipment and facilities. Such capital grants may be stated in fixed dollar amounts, or (like the franchise fee) as a percentage of the operator’s gross revenues.
In order to receive in-kind benefits over and above the franchise fee, a community must ensure that these benefits do not fall within the definition of “franchise fee” in the Cable Act at 47 U.S.C. § 542(g). That provision defines “franchise fee” very broadly, but carves out certain specific exceptions. The one most applicable to in-kind benefits is § 542(g)(2)(C): “capital costs which are required by the franchise to be incurred by the cable operator for public, educational, or governmental access facilities” are not part of the franchise fee.
In pre-Cable Act franchises, this exclusion covered payments in support of access generally (see § 542(g)(2)(B)). Thus, pre-Cable Act franchises often required support for PEG operating costs (such as staff salaries) as well as capital costs. In franchises granted or renewed after 1984, however, it is much more difficult to arrange for operating cost support without having such support counted as part of the franchise fee.
In 1999 the FCC issued a somewhat misleading letter (DA 99-934) that seemed to suggest that PEG “capital costs” were limited to the cost of construction of PEG facilities. The Commission clarified its response, however, in a second letter shortly afterward (DA 99-1252), making clear that its response should not be interpreted as altering the general understanding of the capital cost provision that dates from the original passage of the Cable Act.
In sum, local communities must be careful in structuring agreements with cable operators to ensure that any in-kind benefits they negotiate do not fall within the five percent franchise fee cap.
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