**FCC Local and State Government Advisory Committee**

**Advisory Recommendation Number 21:**

**Unauthorized Cable Television Franchise Fee Pass-Throughs**

1\. At its March 28, 2000 meeting, the Local and State Government
Advisory Committee ("LSGAC") of the Federal Communications Commission
("Commission") considered the issue of cable television subscriber bills
reflecting franchise fees from Non-Subscriber revenues.

2\. The Commission sought public comment on the City of Pasadena's
Petition for a Declaratory Ruling. [In re Petition of the City of
Pasadena]{.underline}, CSR 5441-R, released October 20, 1999 ("Pasadena
Petition"). The LSGAC submits this Recommendation for the Commission's
consideration.

3\. The LSGAC believes there is obvious unfairness and consumer
deception in any billing practice which misstates the amount of a
franchise fee or which attempts to cross-subsidize a competitive service
by shifting costs to a monopoly service. The Commission should reject
arguments that franchise fees are "taxes". A franchise fee is not a tax,
but an [expense of doing business]{.underline} that is "essentially a
form of rent." *City of Dallas v. Federal Communications Commission*,
118 F.3d 393, 397-398 (1997).

4\. Franchise fees are the rent cable operators pay for the use of
public rights-of-way. Operators should not pass through to basic
subscribers those rental expenses associated with
[non]{.underline}-subscriber services.

5\. A cable operator should not allocate 100% of its franchise fee
expense to just one of several sources of revenue. The Commission should
use the instant petition to clarify that monopoly service cable
providers do not have discretion under the Commission=s cable rate
regulation rules to pass through expenses related to competitive
services to the subscribers of monopoly basic services.

> a\. Generally Accepted Accounting Principles (\"GAAP\") require that
> rent, like any expense of doing business, be proportionately allocated
> among the various sources of revenues.
>
> b\. Similarly, antitrust and regulatory principles prohibit the use of
> cross-subsidies between competitive and monopoly services. To allow
> more than a proportional pass-through is to permit an explicit
> cross-subsidy. The operator is cross-subsidizing its competitive
> services by hiding costs in its monopoly cable service.
>
> c\. The Commission's own cable rate regulations reference the
> "franchise fee expense associated with revenues from the sale of
> services". This allocation principle is consistent with other
> Commission allocation approaches.

6\. Many cable operators are misstating the amount of the franchise fee
attributable to basic tier customers. This deceptive practice should be
explicitly prohibited.

> a\. Local Franchising Authorities do not, and by statute cannot,
> impose franchise fees beyond 5% of the cable operator's gross revenues
> derived from the operation of the cable system to provide cable
> services. Yet, it is common practice for cable operators to assert the
> franchise fee is 5.25%.
>
> b\. This problem is exacerbated when the operator passes through
> non-subscriber related franchise fees, as in Pasadena where the cable
> operator is asserting a franchise fee of 5.75%.
>
> c\. It harms the Commission's credibility in the eyes of the public
> when operators are permitted to line itemize percentage claims that
> exceed the explicit federal statutory limit on franchise fees. The
> Commission should order operators who choose to itemize the franchise
> to do so with a simple statement, such as, "5% of this bill is
> attributable to franchise fees levied by local governments."

**RECOMMENDATIONS**:

Federal law directs the Commission to regulate basic cable rates in a
manner that is reasonable and based on "proper allocation," or
proportionate division, of any fees, taxes or charges to the
transactions between the cable operator and the subscriber. The
Commission's rules on pass-throughs were designed to follow this
directive. Cable operators should not pass through franchise fees in a
manner that is disproportionate nor that deceptively misstates the
amount of the franchise fee. The Commission should grant the City of
Pasadena's Petition and prohibit the deceptive practices as described in
this Advisory Recommendation.

Adopted by the LSGAC on May 3, 2000.

[\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_]{.underline}

Kenneth S. Fellman

Chairman