SR-062408-8B~r
c;~Yor City Council Report
Santa bionica°
City Council Meeting: June 24, 2008
Agenda Item: ~'-'
To: Mayor and City Council
From: Kathryn Vernez, Assistant to the City Manager, Community and
Government Relations
Subject: Adopt Resolution Setting Franchise Fees for Holders of State Video
Service Franchises at 3% of Gross Revenues
Recommended Action
Staff recommends that the City Council adopt a resolution to reduce the franchise fee
on cable and video service providers from five to three percent as permitted by State
law, and consistent with past practice in Santa Monica.
Executive Summary
In 2006, the California Public Utilities Commission was given the authority to grant state
video service and cable franchises pursuant to the Digital Infrastructure and Video
Competition Act of 2006, thereby removing the authority of cities to set the terms under
which video providers operate in a community. On April 24, 2007, the Council passed
an emergency ordinance to comply with the new state law. The state law sets the
franchise fee at five percent of gross revenues be paid to the City, unless a holder of a
local franchise is assessed a lower amount or unless a lower amount is adopted by the
Council. The City's emergency ordinance allows the City Council to set a lower
franchise fee by resolution. Such a resolution has not yet been passed. Historically,
Council has preferred to set the fee at 3%. In addition, the state law permits the City to
assess a fee not to exceed a 1 % of gross revenues to support public, educational or
governmental (PEG) activity which is in effect. Regardless of the franchise fee amount,
video service providers also collect the city's utility user tax (UUT). At the time the
Council passed its emergency ordinance Time Warner held a local franchise and was
assessed a franchise fee of three percent of gross revenues. Since state law requires
the state video franchise holder's franchise fee to be the same as that of the incumbent
local operator, this meant that state franchise holders operating within the city were
assessed a franchise fee of only three percent, not the maximum of five percent fee as
set by state law.
The California Public Utilities Commission now regulates all state franchises for video
service providers. The CPUC approved a franchise for Verizon on March 8, 2007. At
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that time Time Warner still operated under the city's local franchise and paid a three
percent franchise fee to the city. For as long as Time Warner continued under its local
franchise both it and Verizon were assessed the three percent franchise fee. The CPUC
approved a state franchise for Time Warner effective in January 2008. Under state law
this caused the franchise fees paid by all video service providers in the city to change to
five percent as there was no longer any holder of a local franchise.
Because of the timing of when each cable operator obtained its state franchise, there
has been some confusion as to what fees and taxes should be paid to the City. This
report seeks Council confirmation and clarification of its policy so that staff may ensure
compliance.
Discussion
The state's Digital Infrastructure and Video Competition Act of 2006 became effective
January 1, 2007. Council adopted Ordinance #2225 on April 24, 2007 to comply with
the new law, preserve certain rights, clarify the City's role in the collection of franchise
fees, and ensure the City obtain a fee equal to one percent of gross revenues for public,
educational and government (PEG) activities. That staff report and ordinance are
attached. Although the April staff report did not specifically reference it, the ordinance
stated, per state law, that cable and video service providers were obligated to pay the
City a franchise fee of 5 percent of gross revenues, unless a different amount was
adopted by Council by resolution. No lesser amount has been adopted by Council.
Regardless, at that time Time Warner was assessed a three percent franchise under its
then existing city franchise. As of January 2008, the CPUC approved a state franchise
for Time Warner. In order to maintain consistency in the franchise fee, it is
recommended that Council adopt the attached resolution setting the fee at 3 percent
which is consistent with past practice.
In the past, when local governments were able to collect franchise fees and engage in
limited rate regulation, federal law permitted the imposition of a franchise fee of no more
than five percent of the cable operator's gross annual revenues and allowed a cable
operator to itemize this cost separately on subscribers bills. Through franchise
negotiations the City previously obtained some PEG support and assessed a three
percent franchise fee. Cable operators also collected the city's utility users tax of ten
percent.
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The California Public Utilities Commission now issues state franchises for video service
providers. State franchises have taken the place of local franchises. The CPUC
approved a franchise for Verizon on March 8, 2007, less than one week after Verizon
submitted its application. At that time Time Warner still operated under the city's local
franchise and paid a three percent franchise fee to the city. For as long as Time Warner
operated under its local franchise both it and Verizon were assessed the three percent
franchise fee. The CPUC approved a franchise for Time Warner that became effective
in January 2008. Under state law this caused the franchise fee to change to five
percent as the city had not set a lower fee. The Verizon and Time Warner state
franchises include the City of Santa Monica as authorized service areas.
In conformance with state law, a number of California jurisdictions are collecting a five
percent franchise fee, a utility users tax and the 1 % PEG fee. Los Angeles, West
Hollywood and Beverly Hills do not assess a UUT on cable. Culver City has a 5%
franchise fee and 11%UUT. A franchise fee of five percent on a customer's cable bill
equates to $2.73 for Time Warner basic cable service, compared to a three percent fee,
which equates to $1.63. The majority of subscribers are not basic only subscribers.
Clarification of Fee
Of the two operators in the city, Verizon has fewer than 1,000 video service customers
and Time Warner 24,000 customers. Since January 2008, when Time Warner secured
its state franchise and no longer had a local one, Verizon has paid the city a five percent
franchise fee. However, Verizon has not collected the City's utility users tax or the one
percent PEG fee. Time Warner, which received its state franchise in January 2008, has
continued to pay only the prior three percent franchise fee but has collected the City's
utility user tax and 1 % PEG fee. Staff has been working with the providers to conform
to the new law and its related changes to business practices. The question of differing
fees and first quarter revenue receipts for 2008 has now been evaluated. Staff will work
with the service providers to clarify the required payments and payment of the required
fees or taxes. The City's exemption for the user utility tax still applies to low-income
senior and disabled individuals.
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Alternatives
If Council wishes the franchise fee to increase to five percent it need take no further
action. If Council wishes to adopt a resolution that lowers the franchise fee of five
percent of gross revenue to three percent, this action will effectuate the continuation of
the 3% fee.
Budget/Financial Impact
It is estimated that enforcement of the five percent franchise fee will result in an
additional $500,000 in ongoing revenue annually to the General Fund. This revenue
has not been calculated into the city's five year forecast nor has been allocated for any
specific purposes. Should Council wish to seta 5% fee it could do so in the future
related to the need to stabilize city revenues or counteract further instability in the state
economy. If the five percent is confirmed, staff would return to Council at mid-year to
discuss options for its use.
Prepared by:
Kathryn Vernez, Assistant to the City Manager for Intergovernmental and Community
Relations
Approved: Forwar to Council:
U~~ _ ~ hy?~z~
Kathryn Vernez P. mon Ewell
Assistant to the City Manager, C' Manager
Community and Government Relations
Attachments: Resolution
Video Service Franchise Staff Report & Ordinance
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Reference Resolution No.
10316 (CCS).