August 2001

Establishment and proper administration of a franchise program will benefit the local government, the citizens, and the utility, yet franchises can be the most neglected aspect of local administration. The reasons for the problem are simple: franchise agreements may be 10, 20, 30, 50, or, in some cases, 99 years old. Technology has changed, and the original administrators are no longer there.

Local governments have the singular responsibility of ensuring that the public’s trust is secure and justified. This responsibility is partially fulfilled when the public is kept informed about the benefit of franchise agreements for future years’ infrastructure maintenance. In other words, citizens expect those who govern or administer to have the knowledge, skills, perspectives, sensitivities, political acumen, and economic focus to deal with future needs and budget shortfalls.

The explosion of technology, fiber optics, the divestiture of AT&T, EPA requirements, the drain on police and fire department resources, unemployment, increased leisure time for many, crumbling infrastructure, and the reduction of federal funds to local governments have all contributed to a financial crisis for localities. Cities and counties must formulate substantive action plans, garner their resources, and maximize their revenues while enhancing service delivery to resolve some, if not all, of the issues mentioned here. Otherwise, localities’ ability to support their infrastructure will diminish to perilous levels, which will have a deleterious effect on the nation as a whole.

A Simple Concept
Fortunately, the mechanism that cities and counties can use to enhance their revenues is already in place. The concept is simple: a utility or franchisee pays the community a percentage of its gross receipts for services sold there. This payment is the franchise fee paid by the utility for the privilege of using the locality’s rights-of-way to sell goods or services to its citizens.

In most states, a city or county is allowed to issue franchise agreements to provider utilities. Unfortunately, many localities have not exercised strong management oversight over these agreements or have signed franchise agreements that have been made worthless by exploding technology. In other cases, utility companies have drafted their own versions of a franchise agreement and seen to it that the localities simply signed on the dotted line.

Utilities also enjoy the benefit of long-term forecasts for their industries, a privilege that enables them to anticipate change and develop strategic policies to direct their franchise negotiations. Telephone and cable companies, for example, are positioning themselves to enter the lucrative markets of information services, video on demand, and interactive television.

Utilities are not, however, volunteering to include these new revenues in the bases of their franchise fees. It is incumbent upon the local government to require that these new services be included in the definition of gross receipts for new franchises. In many cases, localities have not thought about making opportunities for renegotiation—as technology changes or as demographics change—a standard part of the franchise agreement.

In the field of research and development, it should be noted that several industries have developed or are developing their own private phone systems between buildings within the city or county limits. These private systems originally were slated to provide fax and other nonvoice communications, like computer links. Private systems are providing inter-  as well as intra-company conversation, using telephone companies beyond a locality's geographical limits. In these cases, it is doubtful that the community receives any benefit whatsoever.

This is especially true of those institutions that already have such capabilities to expand or enhance their existing PBX systems. The advent of fiber optics will make these transitions even easier for the private networks. Major corporations already are creating their own private telephone systems using new fiber-optic technology, thereby circumventing the franchise fee requirement placed on the basic carrier. The net effect is a further reduction in franchise fees to be received by the locality.

Public Information
Another consideration is a public information program through which the local government gathers citizen support to establish strong franchise programs. Utilities will readily agree to a substantial franchise fee, if the city or county allows them to list the franchise fee on the customer’s monthly bill as a line item. This approach can be successful if citizens have been informed of this program.

Localities need to recognize that staying on top of the scientific and technological advances in the cable, telecommunications, electric, and gas industries is a full-time staff requirement, which involves keeping up with current technology as well as current trends in the corresponding industry.

On the state level, utilities are well financed and able to lobby and encourage the passage of bills in the legislature and in Congress, which will enhance their posture and cash flow. In Florida, for example, the legislature passed a bill that limited the municipal telephone franchise fee to 1 percent of local recurring charges. Before the utility's lobbying effort, Florida jurisdictions could receive as much as 5 percent of gross receipts from telephone franchise fees.

Several states, including Florida, Texas, and South Carolina, have placed more limitations on which revenues can be subject to franchise fees and utility taxes. In some cases, they also have changed how franchise fees can be collected. Clearly, localities need to be on guard to protect their scarce revenue sources.

Among the complex issues considered critical are these questions:

• Is there franchise authority in your state?
• Does your local government’s charter give it power to enter into franchises?
• What is the age of any existing franchise agreements?
• Have the existing franchise agreements ever been audited?
• Are you near the time for franchise expiration or renegotiation?
• Have you valued your rights-of-way?
• What franchise or utility tax provisions have you made for wireless cable and cellular telephones?
• Does your local government charter provide for the manager (at no cost to the city or county) to monitor and evaluate franchised services?

If localities wish to compete on a level playing field with utility companies, they must use their collective strength and form negotiating blocs, research technological trends, develop relationships with consultants in the franchise arena, or develop an in-house staff that can address issues as they arise.

Protection of a locality's rights-of-way is important. Franchise fees can represent up to 15 percent of the operating general fund. A sound compliance review or audit may disclose that your community has been underpaid for past years, and can enable increased revenue for the future.

In instances when a city or county has taken an aggressive lead in franchise management by protecting and valuing its rights-of-way, significant “new money” has been found—new money in the form of unpaid or underpaid franchise fees. Localities also have found new or enhanced revenue through effective contract negotiations—new revenue that is available to meet and address the needs of their communities and their constituencies, as well as to maintain their infrastructure, create jobs, and in some cases avoid layoffs.

Future franchise agreements between local governments and utilities must be structured in such a manner as to benefit both the utility and the locality. These agreements must go beyond the mere awarding of a franchise; they must be designed to take into consideration population growth or shrinkage, as well as changes in technology that may afford additional opportunities for the city or county to receive cash benefits.

Open, Active, Planned
In summary, local governments must openly, actively, and in a planned way begin to think of themselves as part of the franchise process, with a clear understanding of just how much “rent” their rights-of-way are going to produce each fiscal year and what new possibilities might present themselves.

The first step, of course, is to start off with a good franchise agreement, knowledge of the industry in question, an awareness of current trends and legal issues, and an idea of just what your jurisdiction’s rights-of-way are worth. With these basic tools, more effective franchise agreements can be drafted and implemented.