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                                Before the
                     Federal Communications Commission
                          Washington, D.C. 20554

In re                                )
                                     )           CSR 5147-R
Franchise Fee "Pass Through" and     )
Dallas v. FCC                        )           
                                     

                      MEMORANDUM OPINION AND ORDER

Adopted:  February 26, 1998                        Released:  March 2, 1998  

By the Deputy Chief, Cable Services Bureau:

I.      INTRODUCTION

  1.    This Order is issued in response to a request by the National Cable Television Association
("NCTA") regarding the appropriate regulatory treatment of local franchise fee payments as a result of
the Fifth Circuit Court of Appeals' decision in Dallas v. FCC ("Dallas"), which reversed the
Commission's decisions in United Cable Artists (United Cable Artists Orders).

  2.    NCTA requests clarification of whether cable operators that relied on the United Cable
Artists Orders and excluded franchise fee payments from the gross revenues pool upon which their
franchise fees were calculated may pass through to subscribers increases in their franchise fee payments
that they are now required to make to compensate for previous underpayments pursuant to requests from
local franchise authorities.  This request  was placed on Public Notice and in response the Commission
received various comments and reply comments from both cable operators and local franchising
authorities.  

  3.    In this Order, we hold that cable operators may "pass through" on customer bills the
underpayment of franchise fee charges assessed for the period from the date of the first United Cable
Artists Order (April 6, 1995) to the date of the Dallas decision (July 31, 1997) that resulted from the
cable operators' reliance on the methodology approved in the United Cable Artists Orders.  This is
consistent with Sections 622(a) and (b) of the Communications Act, which limit franchise fees that cable
operators may be required to pay, and with Section 622(c), which permits a separate line item to be added
to subscriber bills identifying the franchise fee assessed.

II.     BACKGROUND

  4.    As part of the Cable Communications Policy Act of 1984, Congress limited   local
franchising authorities to charging cable operators franchise fees of more than 5% of the cable operators'
"gross revenues derived in such period from the operation of the cable system to provide cable services." 
Although cable operators are responsible for paying the franchise fee, under the Commission's subscriber
rate regulations, cable operators may, in turn, "pass through" to subscribers the full amount of the fee,
which is an "external cost" that is calculated separately from the maximum monthly charge per
subscriber.  Pursuant to the Cable Television Consumer Protection and Competition Act of 1992,
Congress authorized cable operators to itemize on subscribers' cable bills the amount of the total bill
assessed for franchise fees. 

  5.    Cable operators may charge subscribers for the imposition of, or increase in, the franchise
fee within the periods applicable to the cable operators' choice of accounting methods.  Cable operators
are also required to adjust subscriber charges to reflect any decrease in the franchise fee obligation. 
Underpayment of the franchise fee obligation is a contractual matter between local franchising authorities
and cable operators.

  6.    In United Cable Artists, the Cable Services Bureau rejected the City of Baltimore's
contention that the franchise fee obligation must equal 5% of the total amount United Artists Cable of
Baltimore received from its subscribers, including amounts that represent franchise fee pass throughs,
and held that gross revenues do not include the franchise fee collected from subscribers.  Several 
franchising authorities participating in that action filed petitions for reconsideration, which the Cable
Services Bureau referred to the Commission.  On Reconsideration, the Commission affirmed the
Bureau's decision and held, among other things, that "franchise fees that a cable operator collects from
its subscribers are not part of an operator's `gross revenues' for purposes of calculating the total amount
of franchise fees owed by the operator to its local franchising authority."

  7.    The Commission's Order on Reconsideration was appealed to the United States Court of
Appeals for the Fifth Circuit by certain Texas franchising authorities.  The Court reversed the
Commission's decision.  The Court addressed the issue of whether the term "gross revenues," as used
in 47 U.S.C.  542(b), "includes money collected from subscribers that is ultimately allocated by the
cable operator to pay a franchise fee" and concluded that it did.

III.    Discussion

  8.    The sole issue before us now is whether cable operators may "pass through" on customer
bills the franchise fee payments they are now required to make to recompense local authorities for the
underpayments made during the period beginning April 6, 1995 and ending on July 31, 1997 that resulted
from following the Bureau and Commission's directives contained in the United Cable Artists Orders,
which were subsequently reversed on appeal as of July 31, 1997.

  9.    Local franchising authority commenters contend that cable operators should pay them for
lost franchise fees for the period that the United Artists Cable Orders were in effect, but should not be
able to pass through the amount of the underpayment to subscribers because it does not qualify as an
"increase in" franchise fees, which can be passed through to subscribers under statute and regulations. 
They argue that the underpayments arise out of the cable operators risky reliance on Orders that they
knew were subject to appeal.  Various cable interests reply that cable operators were directed to follow
the Orders and should not be punished for following and relying upon the Bureau and Commission's
directives.

  10.   We agree that cable operators were entitled to follow the United Artists Cable Orders
gross revenues methodology for calculating their franchise fee obligations and should not be penalized
for their reliance on those decisions as urged by some local franchising authorities.  Those Orders were
never stayed and consequently were valid and binding until reversed on appeal.  Although it is true that
cable operators were on notice of the appeal, they were obligated to follow the directives of those Orders
while those Orders were in force.

  11.   Although local franchising authorities technically are correct that there are no increases
in stated franchise fee levels, actual payments on the part of operators relying on the Orders in question
will increase when the previous underpayments are made-up.  Moreover, cable operators only seek
confirmation that they may pass through to subscribers that which they would have been entitled to pass
through in the first instance if they did not use the United Artists Cable gross revenues methodology.

  12.   We disagree with GMTC that the issue should not even be decided by the Commission. 
The limitation in question is contained in Section 622 of the Communications Act and the rate regulation
and franchise fee pass through rules have been adopted pursuant to Section 623 of the Communications
Act.  The Commission has specifically stated that it would exercise jurisdiction over franchise fee
disputes that impinge on "national policy concerning cable communications."  We believe that this issue
properly is before us because we required cable operators to calculate
their franchise fee obligations based upon our United Artists Cable gross revenues methodology.

  13.   We further note that our decision here applies only to cable operators that properly
followed the United Artists Cable Orders.  Various franchising authorities raise concerns that there are
cable operators that allegedly passed through to subscribers franchise fee charges based on the Dallas
gross revenues methodology but forwarded to their local franchising authorities franchise fees based on
the United Artists Cable gross revenues methodology.  Operators that have already collected the fees
in question from subscribers, however, can not collect those fees again under this decision. We note that
if such situations exist, those cable operators would be subject to various actions by their local franchising
authorities.  Contrary to the concerns of some authorities, the cable operators will not be permitted to
"double-dip" by passing through additional amounts to subscribers who already paid their share of the
franchise fees based on the Dallas gross revenues methodology.

  14.   Finally, we disagree that allowing a pass through here results in an increase of regulated
programming rates.  Our decision does not affect regulated programming rates because franchise fee
charges are calculated separately from regulated programming rates.  Similarly, we dismiss contentions
that a pass through of franchise fee charges for the period of April 6, 1995 to July 31, 1997 would be
unfair to current subscribers who subscribed during that period and already paid the franchise fee pass
throughs calculated under the United Cable Artists gross revenues methodology for that period.  We note
that under the United Cable Artists gross revenues methodology, subscribers paid less in franchise fee
charges than subscribers of cable systems that followed the Dallas gross revenues methodology. 
Subscribers may now only be asked to pay amounts that operators would have been required to pay from
April 6, 1995 to July 31, 1997 if they had used the Dallas gross revenues methodology.  With respect
to current subscribers who did not subscribe during the period at issue, we do not agree with the City
of Denver that they should be exempt from paying a share of any underpayment of the franchise fee for
that period.  As a practical matter, new subscribers receive benefits made possible by charges levied
on previous customers (e.g., upgraded networks), and should be responsible for all properly assessed
charges and fees.

IV.     Ordering Clauses

  15.   Accordingly, IT IS ORDERED, pursuant to Section 622 of the Communications Act of
1934, 47 U.S.C.  542, and Section 1.2 of the Commission's rules, 47 C.F.R.  1.2, that cable operators
that properly followed the United Cable Artists Orders, In re United Artists Cable, 11 FCC Rcd. 18158
(1995) and In re United Artists Cable, 10 FCC Rcd. 7250 (1995) while they were in effect from April
6, 1995 to July 31, 1997 may pass through to their subscribers any underpayments of franchise fee
charges requested by their local franchising authorities as set forth in this Order and consistent with
Dallas v. FCC, 118 F.3d 393 (1997).

  16.   This action is taken by the Deputy 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



        William H. Johnson
        Deputy Chief, Cable Services Bureau