What Is Capital? Alliance for Community Media 2011 Annual Conference Tucson, Arizona July 28, 2011 A Legal Perspective Presented by: Joseph Van Eaton, Partner Best Best & Krieger, L.L.P.

What Does the Statute Say? 542(b): …the franchise fees paid by a cable operator …shall not exceed 5 percent of…gross revenues derived… from the operation of the cable system to provide cable services… 542(g)(1): …''franchise fee'' includes any tax, fee, or assessment of any kind imposed by a franchising authority… on a cable operator or…subscriber…solely because of their status as such 542(g) (2): …the term ''franchise fee'' does not include-- (B) in the case of any franchise in effect [in 1984]…payments …required by the franchise… for, or in support of the use of, public, educational, or governmental access facilities; (C) [for any franchise granted after 1984], capital costs… required by the franchise to be incurred by the cable operator… for public, educational, or governmental access facilities; Key issues defined by 47 U.S.C. Section 542 What Is Capital? A Legal Perspective

What Does the Statute Say? 1.What is a tax, fee or assessment? 2.What does it mean to impose a fee on an operator because of “its status as such?” 3.Why is the phrase, “required by the franchise” important? 4.What are capital costs? 5.What’s the significance of the “for and in support” language for pre-1984 and post-1984 franchises 6.What are PEG access “facilities”? 7.What are “costs…incurred” by the cable operator? (not answered by FCC Orders) Key Questions: What Is Capital? A Legal Perspective

Answering the Questions 1.Definition section of Cable Act 2.FCC franchising orders: –22 F.C.C.R In The Matter of Implementation of Section 621(a)(1) of the Cable Communications Policy Act of 1984 as Amended by the Cable Television Consumer Protection and Competition Act of 1992 (First Order – New Entrants) –Second Report and Order, FCC , (October 31, 2007) –Alliance for Community Media v. FCC, 529 F.3d 763 (6th Cir. 2008) 3.Briefs filed in Sixth Circuit appeal 4.Letters cited in franchising orders (see especially, City of Bowie, Maryland, 14 FCC Rcd (1999) as clarified 14 FCC Rcd 9596 (1999) Key Resources Include: What Is Capital? A Legal Perspective

Tax, Fee, Assessment and “Status as Such” A tax, fee or assessment can include “in-kind” payments unrelated to the provision of cable services (e.g., a requirement that an operator build a fire station). –First Order, ¶ 98: certain types of “in-kind” obligations, in addition to monetary payments, may be subject to the [franchise fee] cap.” Status as such: –General taxes (utility taxes) that fall on cable companies and others not a franchise fee –What about fees imposed by state law on all video service providers (California, MI, etc.) – undecided; pending. What Is Capital? A Legal Perspective

“Required by the Franchise” A settlement of past non-compliance may provide for PEG payments outside the franchise (this is why past performance review can be important) The cable operator may enter into an agreement with an NPO to provide PEG outside the franchise The cable operator may make voluntary grants outside the franchise Other? What Is Capital? A Legal Perspective

“Capital Costs” “We decline to adopt a requirement that an operator’s gross income be determined under Generally Accepted Accounting Principles….” Second Order, ¶ 23 First Order, ¶ 109: “Accordingly, payments of this type [CAPITAL cost payments], if collected only for the cost of building PEG facilities, are not subject to the 5 percent limit…Capital costs refer to those costs incurred in or associated with the construction of PEG access facilities. These costs are distinct from payments in support of the use of PEG access facilities. PEG support payments may include, but are not limited to, salaries and training. Payments made in support of PEG access facilities are considered franchise fees and are subject to the 5 percent cap.” Second Order, ¶ 11: “…payments made to support the operation of PEG access facilities are considered franchise fees and are subject to the 5 percent cap, unless they are capital costs, which are excluded from franchise fees…” What Is Capital? A Legal Perspective

“For and in Support” First Order, ¶ 109: “While Section 622(g)(2)(B) excluded from the term franchise fee any such payments made in support of PEG facilities, it only applies to any franchise in effect on the date of enactment.” What Is Capital? A Legal Perspective

“Facilities and Equipment” Cable Act definition: 47 U.S.C. § 522(16): “public, educational, or governmental access facilities means-- (A) channel capacity designated for public, educational, or governmental use; and (B) facilities and equipment for the use of such channel capacity Operators focus on First Order, ¶ 109: “construction of facilities,” but FCC denied that it intended to limit “capital” to “construction” in 6 th Circuit appeal Bowie letter (cited by FCC in its Orders) says: a franchise fee does not include any “franchise requirements for services, facilities or equipment…” What Is Capital? A Legal Perspective

Where Things Stand “What is capital” from an accounting perspective is an important part, but not only part of the analysis There remains substantial outstanding questions as to what FCC meant There are opportunities to eliminate the confusion created by the FCC Orders: –Second franchising order is under reconsideration at FCC and the FCC has been asked to clarify its rulings with respect to PEG –The CAP Act would remove the confusion created by the FCC Orders You always have the opportunity to obtain non-capital dollars through arrangements outside the franchise What Is Capital? A Legal Perspective