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                                Before the
                      Federal Communications Commission
                          Washington, D.C. 20554
The City of Pasadena, California        )         CSR 5441-R
                                     )
The City of Nashville, Tennessee        )         CSR 5373
                                     )
and                                 )
                                     )
The City of Virginia Beach, Virginia         )         CSR 5282-R
                                     )
Petitions for Declaratory Ruling on Franchise         )
Fee Pass Through Issues             )
                   MEMORANDUM OPINION AND ORDER
   Adopted:  October 1, 2001            Released:  October 4, 2001
By the Commission:  Commissioners Abernathy and Martin issuing a joint statement.
     I.   INTRODUCTION
1.   The City of Pasadena, California ("Pasadena"), the City of Nashville, Tennessee ("Nashville") and the
City of Virginia Beach, Virginia ("Virginia Beach") (the "Cities") have filed separate requests with the Commission
asking for clarification of whether Federal law authorizes the "pass through" of franchise fees to subscribers on cable
television bills based on gross revenues that encompass non-subscriber related revenue, specifically income generated
by advertising sales and home shopping commissions.  The Cities also question certain itemization practices of cable
operators stemming from the pass through of such non-subscriber revenue. These requests are supported by the
National Association of Telecommunications Officers and Advisors ("NATOA") and a number of individual
municipalities.  The requests are opposed by the National Cable and Telecommunications Association ("NCTA")
and a number of individual cable operators.  The Commission's Local and State Government Advisory Committee
("LSGAC") adopted and filed an Advisory Recommendation supporting the grant of the City of Pasadena's petition.
2.        Cable operators have traditionally passed through to subscribers franchise fees based on a
percentage of gross revenues.  Where cable rates are subject to rate regulation, this pass through is specifically
provided for in the Commission's rate rules.  Cable operators, such as Charter which serves the City of
Pasadena, have begun to itemize and pass through to subscribers franchise fees imposed on non-subscriber
revenue sources.  This pass through gives rise to the instant proceeding.
3.     The Order concludes that franchise fees based on non-subscriber revenues can properly be passed
through by cable operators to subscribers.  In addition, the Order finds that cable operators may pass through
the entire amount of the franchise fee assessed by the local franchising authority at any time regardless of
whether the cable operator passed through the entire amount of the franchise fee at the first opportunity, or
subsequently opted to do so.  Finally, the Order determines that cable operators are permitted to itemize on a
subscriber's monthly bill the full amount assessed by the LFA as a franchise fee, including non-subscriber
related revenues.
     IV.  BACKGROUND
5.    Three separate but related provisions of the Communications Act ("Act") relating to franchise fees are
involved in this proceeding.  Section 622(b) limits the amount a cable operator may be required to pay as a franchise
fee under the terms of a franchise.  The term "franchise fee" includes any tax, fee, or assessment of any kind
imposed by a franchising authority or other governmental entity on a cable operator or cable subscriber, or both,
solely because of their status as such.  The Act prohibits Federal agencies from regulating the amount of the
franchise fees paid by a cable operator or regulating the use of funds derived from such fees, except as provided in
Section 622.
6.    Section 623 directs the Commission to adopt regulations, to be applied by local franchise
authorities, specifying the process for regulating basic tier and equipment rates where effective competition is
absent.  In devising the rules governing basic cable service, the Commission was instructed to take into account
amounts assessed as franchise fees.  In implementing this statutory provision, the Commission permitted the
total amount of franchise fees to be accorded external treatment (i.e., added back to the rate after other
calculations are performed) at the time the system becomes subject to regulation, rather than only the amount
of additional franchise fees incurred after that date.  Section 76.924(f)(3) of the Commission's rules provides
that the costs of franchise fees shall be allocated among the equipment and the service cost categories in a
manner that is most consistent with the methodology of assessment of franchise fees by local authorities.
7.     Section 622(c) permits cable operators to identify as a separate line item on each regular subscriber bill
the amount of the total bill assessed to satisfy any franchise fee obligation, stating:
     Each cable operator may identify, consistent with the regulations prescribed by the
     Commission pursuant to section 623, as a separate line item on each regular bill of each
     subscriber, each of the following:
            (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.
4.    The legislative history accompanying Section 622 states that a cable operator shall itemize "only
[the] direct and verifiable costs" associated with the above-listed categories of costs and should "not include in
itemized costs indirect costs."  The Conference Report adopted Section 622(c), with the specific amendment
that Section 622(c) be construed consistently with the Commission's rate regulations implementing Section 623
of the Cable Act.   In implementing this provision, the Commission noted that the purpose of Section 622(c)
was to assure that there were no regulations preventing cable systems from identifying certain governmentally
imposed costs on subscriber bills.  The Commission held that operators are not required by this provision to
undertake any such itemization, nor does the provision, by itself, preclude the itemization of additional costs
(whether or not governmentally imposed) or otherwise mandate that subscriber bills have any particular format
or content.  The Commission noted that the policy of Section 622(c) was to permit subscribers to be fully
apprised of the effect of the enumerated governmentally imposed costs on their bills.   The Commission
believed that the intent of the statute would be frustrated if a franchising authority imposed burdensome
additional itemization restrictions on an operator or otherwise attempted to nullify the effect of a Section 622(c)
itemization through local regulations.
III. DISCUSSION
  III
4.     We are presented three related questions regarding the appropriate regulatory treatment of
franchise fees resulting from non-subscriber revenue.  First, may such revenues, together with subscriber-
related revenue, be passed through to subscribers in accordance with Section 623(b)(2)(C)(v) of the
Communications Act and Section 76.924(f)(3) of the Commission's rules?  Second, if franchise fees resulting
from non-subscriber revenue can be passed through to subscribers, do our rules permit the entire fee, or only
increases thereto, to be passed through to subscribers?  Third, if such non-subscriber related revenue can
appropriately be passed through to subscribers, does Section 622 of the Communications Act permit the amount
of the total franchise fee, including non-subscriber related revenue, to be separately itemized on a subscriber's
bill?  We address each question below.
5.   Pasadena and its supporters, as well as Nashville and Virginia Beach in their separate requests,
generally ask that the Commission determine the legality of passing through franchise fees based on gross
revenues that include cable advertising revenue and home shopping commissions.  The LFAs argue that there
is no basis, legal or equitable, for allowing a cable operator to add onto and increase rates based on non-
subscriber revenues that are not legitimately connected to the subscriber.  NATOA argues that while much of
the franchise fee paid by a cable operator is related to cable services in general, the pass through of non-
subscriber related revenue has no relationship to basic cable services.
6.     The LFAs contend that those portions of the franchise fee payment derived from non-
subscriber sources should not be charged to subscribers.  Rather, non-subscriber based fees should be
allocated to the entities from which the revenues are derived.  Pasadena suggests that Charter should absorb the
franchise fee on non-subscriber revenue or incorporate it into the rates that advertisers pay for cable advertising
time instead of having its subscribers subsidize the cost of franchise fees paid to the LFA based on advertising
and home shopping revenue.   La Canada Flintridge argues that a subscriber who does not purchase goods
from the Home Shopping Network and who does not benefit from increased advertising revenue should not be
required to pay a franchise fee based on revenue from these activities.  LSGAC argues that because franchise
fees are the rent cable operators pay for the use of public rights-of-way, they should not pass through to basic
subscribers those rental expenses associated with non-subscriber services.
7.    NCTA comments that the Commission has made clear that all franchise fees, regardless of the
source of the revenue, may be passed through to subscribers.  Comcast contends that Section 622 confirms
that Congress intended to provide cable operators with the discretion to pass through all franchise fees to
subscribers.  Comcast believes that neither Section 622(c) nor (f) condition in any way the right of a cable
operator to pass through or itemize franchise fees in their entirety.  Comcast believes that the requirement in
622(e) that operators pass through any decrease in franchise fees implies that Congress assumed cable
operators would assess the entire franchise fee on subscribers.
8.   LSGAC argues that a cable operator should not allocate 100% of its franchise fee expense to
subscribers.  It states that the Commission should clarify that cable operators do not have discretion under the
rate regulation rules to pass through expenses related to competitive services to the subscribers of monopoly
basic services.  LSGAC states that Generally Accepted Accounting Principles ("GAAP") require that rent,
like any other expense of doing business, be proportionally allocated among the various sources of revenues.
It also states that antitrust law and regulatory principles prohibit the use of cross subsidies between competitive
and monopoly services, and to allow more than a proportional pass through is to permit an explicit cross
subsidy.
9.    In response to LGSAC, Charter contends that the Committee cannot contest the fact that operators
are permitted to assess their customers the cost of this "rent."  Charter states that LGSAC's objection in this
proceeding is premised on the fact that a cable operator's "rental" obligation is often expressed in terms of
revenue, rather than a flat fee.  Charter argues that it is immaterial whether the revenue was generated directly
from subscribers, through monthly subscriber fees, or indirectly, through advertising and home shopping
revenues; franchise fees are based on all gross revenues and may be passed on to subscribers in their entirety.
Charter argues that there is no reason to deny an operator the right to pass through to customers its entire
franchise fee cost, regardless of whether that cost is expressed in terms of a flat fee or a gross revenue
calculation the fact that some of the franchise fee obligation is derived from non-subscriber revenues should
have no bearing on the subscriber pass through.
10.    We first address the question of whether, under any circumstances, franchise fees based on non-
subscriber revenue can be passed through to subscribers.  The Commission's rate regulation rules provide that
rates are to be calculated initially without franchise fees included.  After the proper rates are calculated,
franchise fees are added on as an "external cost."   The rate rules further provide that the "costs of franchise fees
shall be allocated among the equipment basket and the service cost categories in a manner that is most consistent
with the methodology of assessment of franchise fees by local authorities."  These rules have their origin in Section
623(b)(2)(C)(v) of the Communications Act, which provides that in establishing rate rules the Commission shall take
into account "the reasonably and properly allocable portion of any amount assessed as a franchise fee. . . ."
     15.  There is no dispute among the parties to this proceeding, or in relevant precedent, that
advertising revenue and home shopping commissions can be considered part of an operator's gross revenues for
franchise fee calculation purposes. The Fifth Circuit's decision in Dallas v. FCC makes clear that gross revenues are
derived from "all money collected" by the cable operator.   The initial question presented in this proceeding is
whether franchise fees based on such revenues can properly be passed through to subscribers.  We find that they can.
Section 623 does not expressly speak to this question other than to provide that the Commission shall establish rate
regulations that take into account "the reasonably and properly allocable portion of any amount assessed as a
franchise fee. . . ."  In the absence of a specific statutory provision on this matter, we must examine the overall
structure of this Section and the Act's legislative history.  There is nothing in either the text or legislative
history of Section 623 to indicate that Congress intended other than the full amount of the franchise fee to be
reflected in a cable operator's rates, or that a specific class of franchise fee should be excluded from such rates.
If Congress was concerned about increases in franchise fees, it could have enacted language limiting the pass through
to particular sources of gross revenue.  It did not expressly do so, and there is no legislative history suggesting that
such intent was implied.  Indeed, an amendment made to a companion provision of the Act appears to support the
opposite inference.  We believe that if the cable operator agrees to include non-subscriber revenue in the definition
of gross revenues, the operator is permitted to pass through any portion of the total franchise fee, based on that
definition, to subscribers.   If the local franchising authority includes advertising revenue and home shopping
commissions in the definition of gross revenue, Section 623 permits the entire amount of the franchise fee to be
passed through to subscribers.
     16.  We are cognizant of the fact that our decision herein can lead to the result that, as a cable operator's
home shopping and advertising revenues increase and consequently the non-subscriber revenue portion of the LFAs
franchise fee increases, so too will the rates charged to subscribers.  We are nevertheless constrained by our
determination that such pass through is permissible under the Communications Act and our rules and that this
process is consistent with the political accountability purposes of Section 622.  We note that cable operators and
LFAs may, through contractual agreement, modify the definition of gross revenues during the franchising process,
if no pertinent state or local law otherwise prohibits.  If LFAs and cable operators do not want to burden subscribers
with higher franchise fee pass throughs, they may expressly omit certain items, such as advertising revenue and home
shopping commissions, from the gross revenue definition.  If the parties so limit the amount of gross revenues paid
to the LFA to exclude non-subscriber revenue, there would be no franchise fee based on these amounts for the cable
operator to pass through to subscribers.  In such a case and as advocated by Pasadena and the Cities in this
proceeding, the cable subscriber would be required to pay a franchise fee pass through based solely on subscriber-
related gross revenues.
     17.  A related matter, raised in some of the filings, involves the second question of whether, under
the rate rules, in those situations where there is no dispute that the category of fee involved can be itemized and
passed-through, can the entire fee be itemized and passed-through or only increases in such fee. According to
Pasadena, Charter has begun billing subscribers for the entire franchise fee amount sixteen years after the
operator signed the franchise agreement.  Pasadena complains that this action does not comport with the
Commission's rate regulation rules because only real changes in external costs may be passed on to subscribers,
not a change due to a different method of accounting.  Los Angeles County maintains that under Section
76.933, a franchise authority has the power to review and refund an increase in pass-through of franchise fees
to subscribers upon determining that the increase exceeds the amount of franchise fees allocable to the basic
tier.
     18.  Charter contends that the fee as specified in the franchise had been the same since the franchise
was enacted, but that nevertheless, its method of accounting and payment has changed.  Charter maintains that
it developed a methodology for estimating franchise fees based upon third party revenues from prior quarters,
and has subsequently provided its calculations to the City of Pasadena.  Comcast argues that under Pasadena's
"use it or lose it" approach, an operator would be required to pass-through the full amount of the franchise fee
from the onset of rate regulation or otherwise forfeit the right to pass it through at a later date.  Comcast
argues that franchise fees form a unique class of external costs that may be passed through to subscribers at any
time.  NCTA argues that the Commission has determined that franchise fees, unlike other external costs, are
to be recovered separate and apart from the maximum permitted subscriber rate, making them outside of the
rate regulation formula and always subject to external cost pass-through.  NCTA asserts that there is nothing
in the rules that prohibits a cable operator that has elected not to recover all of the franchise fee payments to
later decide to exercise its statutory and regulatory right to pass the entirety of its payments through and to
itemize them on the subscriber's bill.
     19.  We do not agree with the arguments raised by Pasadena and the other local franchising
authorities that only fee increases are eligible for pass-through under the Commission's rate rules.  It does not
matter whether Charter's action in passing through increased franchise fees can be considered a "change" for
the purposes of Section 76.922 because, as discussed above, the Commission's rate regulation rules permit
cable operators to pass through franchise fees in their entirety as external costs.  Indeed, prior to the enactment
of the 1992 Cable Act, Section 622(c) expressly limited a cable operator's franchise fee pass through to fee
increases and provided that "a cable operator may pass through to subscribers the amount of any increase in a
franchise fee, unless the franchising authority demonstrates that the rate structure specified in the franchise
reflects all costs of franchise fees and so notifies the cable operator in writing."  This version of Section
622(c) was repealed by the 1992 Cable Act and replaced with the current version of Section 622(c) that permits
the cable operator to itemize "the amount of the total bill assessed as a franchise fee. . . ."  The apparent intent
of this amendment was to enable cable operators to pass through to subscribers the entire amount of the
franchise fee assessed by the LFA at any time regardless of whether the cable operator passed through the
entire amount of the franchise fee at the first opportunity, or subsequently opted to do so.
     20.  Nor do we find the Commission rule provisions cited by the Cities to be persuasive evidence
to the contrary.  Section 76.922(e)(2)(ii)(A) provides that cable operators may project increases in related costs
to the extent they are reasonably certain and reasonably quantifiable.  Section 76.933(g)(5) provides that an
LFA regulating the basic service tier may review and order refund of rate increases based on increased
franchise fees if such increased rates exceed the increased franchise fee allocable to the basic tier.  These rule
provisions merely acknowledge the fact that franchise fees can increase over time.  The provisions do not,
however, stand for the proposition, as asserted by the Cities, that only increases in franchise fees are permitted
to be passed through to subscribers, or that cable operators that have elected not to pass through the entire
amount of a franchise fee are prohibited from subsequently so doing.
     21.  We now move to the related issue of whether Section 622 permits a cable operator to itemize
the full amount of the franchise fee, including non-subscriber related revenue, on a subscriber's bill. We find
that it does.  Pasadena and the LFAs generally argue that Charter and other cable operators misrepresent the
rate of the franchise fee on subscribers' bills when they itemize and add to subscriber bills fees on non-
subscriber revenues. Pasadena maintains that the change in subscriber billing practices undermines subscribers'
expectations that the franchise fees they pay will be directly related to the dollar amount of the monthly cable
services that they purchase from the cable operator.
     22.  In opposition, Charter maintains that by itemizing the full amount of the franchise fee,
subscribers are fully informed of the scope of the franchise fee assessments, which was the purpose intended
by Congress in enacting Section 622.  Charter argues that line itemization prevents franchising authorities
from evading political accountability.  NCTA argues that the function of the pass through is to inform
subscribers as to what portion of their cable bill goes to the government.  NCTA submits that LFAs are
preempted from determining the extent to which franchise fees may be identified as a separate line item on
monthly bills by Section 622.
     23.  Fee itemization under Section 622, as is reflected in the legislative history quoted above, is intended
to inform subscribers that local elected officials are imposing franchise fees so that there will be a measure of
political accountability for fees and fee increases.  Section 622 expressly permits the itemization of "the amount
of the total bill assessed as a franchise fee" and further provides that the operator may "designate that portion
of a subscriber's bill attributable to the franchise fee as a separate item on the bill." We have already
concluded that Section 623 permits a cable operator to pass through, as an external cost, the total franchise fee,
including non-subscriber related franchise fees, in its regulated rates.  The itemization provisions of Section 622
and the rate provisions of Section 623 are intended to work in tandem so that the amount of franchise fee added as
an external cost is the same as the amount itemized on a subscriber's bill.  Permitting cable operators to itemize on
a subscriber's monthly bill the full amount assessed by the LFA, including non-subscriber related revenue, best
effectuates this intent.
     24.  In this proceeding, we have provided clarification regarding the appropriate allocation of non-
subscriber related franchise fees. The parties also have raised a variety of peripheral franchise fee matters in
their pleadings.  We believe that these other matters are not appropriately addressed in the context of this
order and are more appropriately resolved in proceedings related to the specific factual circumstances in which
they arise.
IV.  ORDERING CLAUSE
     25.  Accordingly, IT IS ORDERED that the requests of the Cities ARE DENIED to the extent
indicated herein.
                         FEDERAL COMMUNICATIONS COMMISSION
                         Magalie Roman Salas
                         Secretary
APPENDIX A
COMMENTS IN SUPPORT OF PASADENA
1.        Azusa, Duarte, and West Covina, CA (jointly)
2.        Burbank, CA
3.        Calabasas, CA
4.        Glendale, CA
5.        La Canada Flintridge, CA
6.        Los Angeles County, CA
7.        Milpitas, CA
8.        Monterey Park, CA
9.        Temple City, CA
     10.  The Communications Support Group (on behalf of unnamed California municipalities)
     11.  Lexington Fayette Urban County Government, KY
     12.  Michigan Coalition to Protect Public Rights of Way ("Protec")
13.       N. Charleston and Charleston County, NC
14.       Plano, Texas
     15.  Texas Coalition of Cities on Franchised Utility Issues; Fairfax County, VA; Montgomery
     County, MD; St. Louis, MO; and National Association of Telecommunications Officers and
     Advisors ("NATOA") (filing jointly)
     16.  Bowling Green, KY
     17.  The Local and State Government Advisory Committee ("LSGAC")
COMMENTS IN OPPOSITION TO PASADENA
1.        Charter
2.        Comcast  Cox (filing jointly)
3.        California Cable Television Association ("CCTA")
4.        National Cable Television Association ("NCTA")

Separate Statement of Commissioners Kevin Martin and Kathleen Abernathy
Re:  The City of Pasadena, California, the City of Nashville, Tennessee, and the City of Virginia
Beach, Virginia, Petitions for Declaratory Ruling on Franchise Fee Pass Through Issues
We agree with today's Order that the Communications Act does not prohibit cable operators from
itemizing and passing through to their cable television subscribers the full amount of franchise fees,
even when those fees are based partially on revenues not related to the subscribers' services.  We
write separately to emphasize two points.
First, nothing in today's Order prevents local franchising authorities ("LFAs") and cable operators
from reaching an agreement through contract to change how franchise fees are calculated or passed
through.  As the Order explains, "If LFAs and cable operators do not want to burden subscribers
with higher franchise fee pass throughs, they may expressly omit certain items, such as advertising
revenue and home shopping commissions, from the gross revenue definition."  Order at 17.
Second, nothing in today's Order authorizes a cable operator to collect more money from
subscribers as a franchise fee pass-through than the operator ultimately pays as a franchise fee to the
LFAs.  Thus, if a cable operator unintentionally over-collects from subscribers due, for instance,
to a mis-calculation or estimation of gross revenues the cable operator must take some action to
correct the discrepancy.
With the above two concerns addressed, we support today's Order.