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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ********************************* ******************************** Before the Federal Communications Commission Washington, D.C. 20554 Time Warner Entertainment/Advance-) 5126-R Newhouse Partnership ) ) and ) ) The City of Orlando, Florida ) 5148-R ) Petitions for Declaratory Ruling on Franchise) Fee Issues ) MEMORANDUM OPINION AND ORDER Adopted: May 17, 1999 Released: May 18, 1999 By the Chief, Cable Services Bureau: I. INTRODUCTION 1. Time Warner Entertainment/Advance-Newhouse Partnership ("Time Warner"), on behalf of its Orlando, Florida cable system, filed a Petition for Declaratory Ruling, asking the Commission to clarify two issues relating to the calculation of franchise fees: Issue 1: Whether a local franchising authority's imposition of a 5% fee on amounts billed to subscribers, but not collected, is in compliance with the statutory 5% cap on the amount that local franchising authorities may collect as franchise fees? Issue 2: Whether a right of way permit fee which is imposed on cable, but not on telecommunication companies, is discriminatory and could be considered part of the cable franchise fee, subject to the 5% cap? 2. The City of Orlando, Florida (the "City" or "Orlando") also filed a Petition for Declaratory Ruling, asking the Commission to determine essentially the same issue as Time Warner but presented in a slightly different fashion: Issue Presented: Whether the term "gross revenues," as used in 47 U.S.C. 542(b) to determine the franchise fee payable by a cable operator, consists of total subscriber revenues, without deduction for accounts deemed uncollectible? The City did not raise the second issue presented by Time Warner but nonetheless addresses the question in its responsive pleading. For the purposes of administrative efficiency and convenience, we will jointly address the two Petitions. II. BACKGROUND 3. Under Section 622 of the Communications Act, a cable operator may be required under the terms of any franchise to pay a franchise fee. 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 of such. Franchise fees do not include, inter alia, any tax, fee or assessment of general applicability or requirements or charges incidental to the awarding or enforcing of the franchise, including payments for bonds, security funds, letters of credit, insurance, indemnification, penalties, or liquidated damages. For any twelve month period, the franchise fees paid by a cable operator with respect to any cable system shall not exceed 5 percent of such cable operator's gross revenues derived in such period from the operation of the cable system to provide cable services. Cable operators may identify franchise fees as a separate line item on subscriber billing statements. 4. While the Act prohibits Federal agencies from regulating the amount of the franchise fees paid by a cable operator or regulate the use of funds derived from such fees, the Commission is still permitted to determine definitional issues that may arise under Section 622. In re Amendment of Parts 1, 63 and 76 of the Commission's Rules to Implement the Provisions of the Cable Communications Policy Act of 1984 ("Memorandum Opinion and Order"), the Commission elaborated on its authority to entertain jurisdiction over franchise fee disputes. In the Memorandum Opinion and Order, the Commission stated that "given our recognition of the concurrent judicial and FCC jurisdiction over disputes involving Section 622, we will continue to entertain disputes only involving matters that directly impinge on a `national policy concerning cable communications' that call upon our expertise and we direct parties to resort to courts to decide all other matters." In particular, the Commission noted that "disputes involving whether a particular levy by a state is an impermissible franchise fee disguised as a tax . . . ., payments made under the Copyright Act . . . ., incidental payments made under terms of the franchise . . . . or challenges to the constitutionality of a particular fee will be directed to the courts whose jurisdiction is established by the Act." III. ISSUE ONE--UNCOLLECTED DEBTS A. Arguments 5. Time Warner states that franchise fees should be calculated as a percentage of gross receipts. Time Warner further states that the language of the Communications Act of 1934, its legislative history, and case law interpreting the Act, provide no support that Congress ever intended cable operators to pay franchise fees on money they never receive. Time Warner asserts, for example, that when the Commission addressed the issue of franchise fee caps, it described industry practices for calculating franchise fees, observing that franchising authorities generally "capture[d] some of the profits of cable operators by assessing fees on systems' gross receipts." According to the operator, the Commission had never suggested that franchise fees should be based on uncollected amounts. 6. Time Warner adds that Congress has further indicated that gross revenues should be based on amounts actually collected by the operator; for example, in describing the provision in the 1992 Act permitting cable operators to itemize franchise fees and other franchise-related costs on subscriber bills, the House Committee evidenced the understanding that franchise fees were based on amounts collected from subscribers. In its example of how itemization would operate with a five percent franchise fee and a $30 bill for basic cable service, the Committee understood that the franchise fee would be $1.50 (5% of $30). Time Warner posits that if franchise fees were based on amounts not collected, the fee in the example would have to be more than $1.50 to account for the amounts uncollected from some subscribers; if the cable operator was not able to collect six percent of its bills, it would be necessary to collect and itemize $1.59 (1.06 x $1.50) to account for the system's bad debt. Time Warner asserts that the numbers used in the Committee's example would work only if the franchise fee is based on amounts actually paid by subscribers. According to the operator, the legislative history of the Telecommunications Act of 1996 confirms that the gross revenues for determining the maximum permissible franchise fee should be comprised of "compensation received" from various sources. 7. Time Warner suggests that the structure of the Commission's rate regulations also supports the inclusion in gross revenues only of amounts actually collected by the cable operator. Time Warner explains that the Commission's rules permit cable operators to pass through to subscribers the costs of any franchise fees without prior regulatory approval and the regulatory structure is premised on all subscribers paying equal shares of the franchise fee. Time Warner argues that if cable operators were required to calculate the amount of their franchise fees based on amounts received plus amounts billed but not received, it would artificially inflate the amount that could be passed through to subscribers who pay their bills; specifically, under this scenario, the rules permitting automatic pass-through of "franchise fees" would result in customers who pay their bills paying to offset five percent of the cable operators' bad debt. According to the operator, the amount passed through in such a situation would be a hard-to determine fluctuating number, depending on the operator's current bad debt experience. In sum, Time Warner asserts that, based on the pronouncements of both Congress and the Commission with respect to franchise fees, the appropriate methodology for determining such fees is a straightforward calculation of a percent of revenues received from subscribers. 8. Time Warner also asserts that the decision reached by the 5th Circuit in the City of Dallas case supports its interpretation of the franchise fee issue. Time Warner argues that the court's analysis indicates that only amounts received by the cable operator should be included in the definition of gross revenues and it cites to several passages in the opinion to prove its point. The operator argues that the court's ultimate conclusion was that "all money collected from subscribers, including funds used to pay franchise fees must be included in a cable operator's gross revenue." Following the court's precedent, Time Warner reiterates that amounts billed to subscribers, but never collected, should not be included in the "gross revenue" used to calculate franchise fees and to rule any differently would be inconsistent with the Fifth Circuit's decision. 9. In opposition, the City of Orlando argues that under 47 C.F.R. 76.924(b), cable operators are required to maintain their accounts in accordance with generally accepted accounting practices in a manner that will enable identification of appropriate investments, revenues and expenses. According to the City, generally accepted accounting principles and the Financial Accounting Standard Board's Statement of Financial Accounting Standards No. 5 do not provide for the deduction of bad debts in determining one's gross revenues, but instead treats bad debts in the same manner as other operating expenses which are to be taken into account in determining the net income of the business, not as a direct offset to gross revenues. The City argues that just as the Fifth Circuit found franchise fees to be a normal expense of doing business, so should the Commission find amounts billed to subscribers and not received as being a normal expense of doing business and, therefore, not an offset to gross revenues. The City contends that any difference between the traditional definition of gross revenues and the definition urged by Time Warner will not result in a significant increase in cable bills. 10. The City further contends that the cable operator, without any additional resources or burden on its billing software, can easily determine its bad debts as of the end of a franchise fee reporting period, and include five percent of that amount in its remittance of franchise fees to the franchising authority; because the cable operator may not be able to pass through this particular cost, does not mean that such cost should not be part of "gross revenues" nor does it mean that the franchising authority is now somehow imposing a franchise fee in excess of five percent of gross revenues. The City asserts that even though some component of the franchise fee may not be capable of being passed-through by the cable operator to some or all of its subscribers, does not therefore cause the franchise fee to exceed the federal cap. 11. In reply, Time Warner reiterates that amounts billed, but never collected, should not be included in gross revenues for calculating franchise fees. The operator asserts that the City, in its opposition, never confronts the Fifth Circuit's explicit holding in the City of Dallas that gross revenues include only amounts that are received. Time Warner also argues, contrary to the City's assertions, that it has never suggested that the inclusion of uncollected amounts in gross revenues would cause difficulties in calculating the amount of franchise fees due nor has it argued that it would be unable to pass through the entire fee to paying subscribers. B. Discussion 12. We will address the first issue presented by Time Warner noting that the treatment of uncollected debt in determining gross revenues is a matter that potentially affects cable operators nationwide. This is precisely the kind of issue that falls within the Commission's "national policy" rubric. 13. We believe that Time Warner's arguments are persuasive and find that uncollected debts cannot be considered part of an operator's gross revenues for franchise fee calculation purposes. The language of the Act, its legislative history, and the Commission rate rules regarding franchise fee passthroughs, support the notion that only revenues actually received by the cable operators can be included in the gross revenue determination. As Time Warner notes, the Congress and the Commission have repeatedly used such terms as "profits" and "compensation received" when discussing the gross revenue calculation. Time Warner also makes reference to the Fifth Circuit Court's holding that gross revenues are derived from "all money collected" by the cable operator. The Court provides a litany of references supporting its holding stating, inter alia, that "Gross revenues is defined by Black's [law Dictionary] as receipts of a business before deduction for any purpose except those items specifically exempted" and "The term 'all gross revenue'. . .is to be construed in the broadest sense, i.e. all money received." The terms provided by the Act and the Commission's regulations, as well as the Court's interpretation of gross revenues, can be reasonably equated with money the cable operator has actually received. We determine that revenues never received by a cable operator cannot rationally be counted in the gross revenue calculation. We note, however, that if the operator ultimately collects this revenue, it would be required to account for it, along with any related late fees, in its gross revenue calculation and remit the appropriate franchise fees. IV. ISSUE TWO--RIGHT OF WAY PERMIT FEE A. Arguments 14. Time Warner asserts that the City's right-of-way permit fee is unduly discriminatory against cable and, therefore, should be deemed to be a franchise fee. Time Warner explains that the City imposes a per-foot permitting fee on entities constructing facilities in the public right-of-way and the City's ordinance requiring payment of a "right-of-way permit fee" is applied to telecommunications companies to a limited extent because a Florida statute caps the total amount that telecommunications companies may be required to pay local authorities at 1% of gross receipts. Time Warner asserts, however, that while telecommunications companies are permitted to deduct the permit fee from their franchise fee payments, cable operators are not permitted to deduct the permit fee from their franchise fee payments. Time Warner argues that the federal cap on cable franchise fees is intended to protect cable operators from franchising authority attempts to require precisely this sort of payment above and beyond the franchise fee. 15. The City responds by arguing that the Commission is not the proper forum for determining whether a cable operator must pay the fee associated with the application for, and issuance of, the City's engineering permit. The City asserts that the matter is one of local and state authority affecting the City's municipal home rule powers and its effective performance of a municipal function. In the alternative, the City argues that, should the Commission be found to be the proper forum for resolution of this issue, the permit fee is not imposed against cable operators "solely because of their status as such" nor is it "unduly discriminatory" against cable operators. The City states that the permit fee is not a form of rent or compensation for the use of the public rights-of-ways; rather, it is charged for the purpose of recouping costs associated with the City's administration, processing and inspection of work within the public rights-of-ways. The City further states that the permit fee is not an annual or monthly charge, but a non-reoccurring fee payable whenever a company or individual performs construction in the public right-of ways. Based on these arguments, and the fact that the fee is assessed against all persons performing similar work, the City asserts that the permit fee should not be calculated as part of the cable operator's franchise fee. 16. In reply, Time Warner takes issue with the City's contention that the permit fee is not discriminatory, arguing that it would not have to pay the fee if it were offering telecommunications service. Time Warner asserts that because a telecommunications company may obtain permits for telecommunications work while offsetting its permit fees against their one percent franchise fees, whereas cable operators cannot take a similar credit against the franchise fees it pays, it is difficult to understand how such a fee structure could not be considered discriminatory. Time Warner intimates that this issue is a federal one because the statutory five percent fee cap is directly involved. B. Discussion 17. Consistent with the directive contained in the Memorandum Opinion and Order, we shall decline to rule on Issue Two because the matter presented involves a dispute that does not directly impinge on a "national policy concerning cable communications." The permit fee issue appears to be a local one involving the City's municipal home rule powers and the interpretation of a state statute. Controversies concerning such matters should be directed to the Florida judicial system. Given our disposition on the matter, we will not pass judgment on the merits of Time Warner's arguments. V. ORDERING CLAUSES 18. Accordingly, IT IS ORDERED that Issue 1 contained in both Time Warner's and the City of Orlando's Declaratory Ruling IS CLARIFIED. Uncollected debts are not counted as part of an operator's gross revenues and are not to be calculated as part of the franchise fee owed to the City. 19. IT IS FURTHERED ORDERED that Issue 2 contained in Time Warner's Declaratory Ruling IS DISMISSED WITH PREJUDICE as being a matter not within our jurisdiction. 20. This action is taken by the Chief, Cable Services Bureau, pursuant to authority delegated by Section 0.321 of the Commission's Rules, 47. C.F.R.  0.321. FEDERAL COMMUNICATIONS COMMISSION Deborah A. Lathen, Chief Cable Services Bureau