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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 1 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. 2 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. 3 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 4 Reference Resolution No. 10316 (CCS).