the Cable Industry Goliath: Negotiating Franchise Agreements
(from Maine Townsman, December 1992)
by Carl Betterley, Town Manager, Town of Scarborough
The Town of Scarborough has just completed franchise renewal negotiations with its cable television franchisee, Public Cable Company. At times the town felt like David up against Goliath; the negotiations took nearly a year and, before it was over, involved arduous negotiations and threatened litigation with a corporate mammoth called Time-Warner, Inc. But the effort produced good results and, as a by-product, gave the town a great deal of insight into the negotiation process.
All of this was happening while the United States Congress was adopting legislation which broadens the powers of municipalities to regulate and influence how cable television services are provided to the public. It's clear that Maine cities and towns need to take a hard look at how to exert their newly strengthened powers. This article gives other municipal Davids a few more slingshots against the cable industry Goliath.
At a time when Maine towns and cities are besieged with budget constraints and other challenges, the last thing a municipality wants is a protracted series of negotiations with a well-armed adversary in an area so unfamiliar both legally and technically. The temptation is huge to simply let it go and rely on market forces to somehow yield maximum advantages to our citizens. And yet Scarborough's recent experience shows that yielding to that temptation is likely to shortchange the community; citizens will have less say over public access to cable programming and technological changes, less equipment, less influence over the product, and they may be burdened with higher rates.
What's the First Step?
If you decide to make a go of it and negotiate the best available deal, how should you go about it? The first step is to find other municipalities which face a similar task and to combine forces wherever possible. Hiring a lawyer might be a burden to a town of 2,000 but not nearly so much of a burden if the effort is combined with those of one, two, or more other towns. The triggering event for negotiation is often the renewal deadline, the date on which the original franchise agreement expires. Find out which towns or cities are facing a renewal deadline similar to yours, and approach those franchisors with the idea of a consortium or group approach. This technique not only cuts costs; it also increases your leverage.
What Do You Want From the Negotiations?
Once the negotiation group is in place you have to figure out the particular needs and desires of your community. Every municipality is to some degree unique. One community may have a very active public cable access and programming committee; another may not care about local programming at all, and may be interested only in rates or franchise fees. Every community has to ask itself what it wants out of the process.
Not every issue is fair game for negotiation. Programming content, for example, is out of bounds under federal law. You generally cannot tell the cable company what to televise and what not to televise. Rates for non-basic service is also off limits for the most part.
As was true for Scarborough, most municipalities are interested at least in the following fundamental questions:
How much free equipment is the cable company willing to donate to enable citizens to produce their own programming and to televise their own local political, educational, and sporting events?
How willing is the company to provide cable services to all residents of the community, particularly in less profitable sparser areas of town?
How quickly is the company going to install technological improvements, such as fiber optic cabling?
How flexible is the company about renegotiating the franchise in light of future legislative and technological changes?
Should the municipality charge a franchise fee; if so, how high should the fee be in light of the fact that the company can simply pass that expense on to consumers?
What Arguments Will You Hear From Cable Co.?
The Presumption of Renewal. The cable company's opening gambit will assuredly be that under federal law a cable company which has done a good job in the past is entitled to a presumption of renewal for the future; in effect, unless a company really falls short in its performance, it has a "leg up" on whether its contract will be renewed. The presumption of renewal can lead municipalities into the erroneous belief the there is no use in negotiating the renewal and conversely can lead cable companies into believing that they have nothing to lose in taking a hard line in negotiations.
Both views miss the mark. Even if a cable company has performed adequately, a municipality can deny renewal if it determines that the proposed terms of renewal do not meet the following criteria, among other:
Does the cable company offer the technical, legal, and financial capability to do the job in the future?
Is the cable company's proposal for the future "reasonable" in light of the costs of the services and benefits covered by the proposal?
The "Reasonableness" of the Proposal. The "reasonableness" of the proposal is often the crucial question.. Even if a cable company has performed well in the past and even it has the capability financially and otherwise to perform well in the future, it is not entitled to renewal unless its proposal is "reasonable" in light of the costs of the services covered by the proposal.
Federal law does not define "reasonable." Municipalities therefore have to make their own assessment based on the particular facts of each case. If the issue is, for example, how dense must the population be to require the cable company to provide cable free of charge to citizens in sparse areas of town, then the actual cost of such an extension must be weighed against the anticipated revenue and expected subscriber participation in the extension area. This will obviously vary from town to town.
Likewise, if the debate centers on how much equipment and public access capabilities the company should provide to a municipality free of charge, then the population of the town, the cost of the equipment and the technical expertise of volunteer equipment operators are all factors which are fair game in negotiations.
What If Negotiations Fail?
Who determines ultimately what is "reasonable" if the parties fail to agree?
The Administrative Proceeding and the Appeal to Federal Court. Like any other negotiation, the parties either will settle voluntarily or some dispute resolution procedure will take over. In the case of cable television franchise negotiation, there is a two-level method for resolving disputes if the parties themselves are unable to resolve them. The first level of dispute resolution is called an "administrative proceeding," meaning a hearing conducted at the municipal level on the basic issue of whether the renewal criteria set forth by federal law have been met. In Scarborough's recent case, there wasn't any serious issue regarding the capability of the franchisee, or the quality of its past service, but there was sharp disagreement as to the "reasonableness" of Public Cable's initial proposal. When Public Cable Company's initial proposal finally arrived in the spring of 1992, the Scarborough Town Council rejected the proposal as being far short of the "wish list" of concessions the town had developed months before. The town then made a "preliminary assessment of non-renewal," which triggered the "administrative proceeding." If the parties had not settled, the primary issue at the administrative hearing would have been the reasonableness of Public Cable's proposal, and this in turn would have required the hiring of industry experts, as well as the presentation of testimony from Scarborough citizens.
The next level of dispute resolution is for a disappointed contestant in the administrative proceeding to appeal to federal court (federal court because much of the cable television procedure is prescribed by federal law).
How does an "administrative proceeding" work? Who listens to the evidence? Who presents the evidence? Surprisingly, the federal statutes and regulations do not address these fundamental issues. Public Cable made the argument that the Town Council itself was not an appropriate body to adjudicate the controversy, and suggested the appointment of an independent hearing officer who would take in the evidence and render a decision. The Town of Scarborough resisted this argument, essentially making the point that the evidence would either justify a non-renewal or not, without regard to who actually made the decision.
Ultimately, the parties settled their differences. One reason for the settlement, to be sure, was that both sides had to worry about the uncertainties in the law both on the administrative proceeding level and on the federal court level, not to mention the expense of conducting both proceedings. It is also remarkable how few municipalities actually take the renewal process as far as the Town of Scarborough did. Most often settlements occur relatively early in the process. For this reason, there is very little precedent on the "do's" and "don't" of the process. The real point for all municipal officials to remember, however, is that the threat of an administrative proceeding is available to the municipality even where the cable company has historically performed well in the past.
How Long Should the Renewal Term Last?
If the municipality decides to renew the franchise, what other arguments will the cable company make? Fast on the heals of the argument regarding entitlement to renewal will come the argument that the cable company ought to get at least a fifteen-year franchise term. Cable companies are obviously a capital-intensive affair, and they want a long span of time over which they can amortize their heavy capital expenses. In Scarborough's case, Public Cable emphasized very strongly Time-Warner's nationwide corporate objective to obtain a fifteen-year renewal term. Public Cable was willing to make significant additional concessions to the town in exchange for a 15-year term. The parties ultimately achieved a compromise by providing for a ten-year term which will be renewed for an additional five years if, among other things, Public Cable complies with the agreement and generally performs well.
On the issue of franchise fees, cable companies are quick to point out that these fees are passed through to the subscriber and therefore cost the cable companies nothing. This is true, but that doesn't mean that cable companies don't care how high franchise fees are. Under federal law, cable companies are indeed entitled to pass franchise fees through to subscribers, but even so cable companies are anxious to have franchise fees be as low as possible. The higher the franchise fee, the higher the overall cost to the consumer, and the more likely it is that consumers will opt not to have cable at all. All things being equal, therefore, cable companies will make some concessions in exchange for a municipality's agreement to assess a lower franchise fee. Under federal law, franchise fees may not exceed five percent (5%) of the cable company's gross annual revenue.
Documenting the Deal
Once the final agreement in concept has been achieved, you have to prepare a definitive franchise agreement. It obviously makes no sense to make gains at the negotiation table and then fail to draft an effective document to guarantee those hard won rights. Municipalities should make sure, for example, that the franchise agreement gives them audit rights to verify that they are receiving properly calculated franchise fees from the company, and provides mechanisms to assure that rates have been charged and collected correctly and to ensure that customer complaints have been dealt with in a reasonable fashion. Late charges and attorney's fees should be assessed for any unexcused delay in payment.
The franchise agreement also should provide for periodic performance evaluations. In Scarborough's case, these evaluations must occur at the third, fifth and seventh year of the renewal term, and are supplemented by additional annual evaluation sessions on request of either party. Such periodic overviews are crucial in light of dynamic technological and legislative changes.
A most important legislative change is the new federal cable act enacted by the U.S. Congress last fall. The Federal Communication Commission ("FCC") is just now starting to issue proposed regulations to implement the new act. Among issues of concern to municipalities is the requirement that all franchising authorities "register" with the FCC if they wish to engage in the regulation of rates. Although rate regulation under the new act applies only to basic tier service (and excludes such "luxury" items as HBO and Cinemax), most municipalities will want to register, if for no reason other than to retain their rate regulation power, even if they finally choose not to exercise that power.
Americans with Disabilities Act
Municipalities should also be aware of the impact of the Americans with Disabilities Act ("ADA"). There is a body of opinion, for example, that when a municipality presents cable access programming, it must provide some kind of access to the hearing-impaired. Although it is not clear that closed captioning is absolutely required, it is clear under the regulations that some kind of access must be supplied.
There is a lot at stake and a lot involved in the negotiation of cable franchise. This article only sketches the overall process. As one who has put in many hours to achieve a result of which Scarborough is proud, I hope that I have saved my colleagues and fellow citizens some time and care as they confront these challenging but exciting issues.
Mr. Betterley was assisted in the preparation of this article by George F. Burns, an attorney with Amerling & Burns in Portland, who helped the Town of Scarborough in its recent negotiations with Public Cable Company.