Local government franchise agreements: will new technology bring new revenue sources?

• Author: White, George T.

Rapid developments in fiber optic technology and the growth of personal communication services present local governments with opportunities and challenges concerning the use of public rights-of-way.

Each year utility and cable companies pay more than $1 billion in franchise fees to local governments. Utility and cable franchise agreements (telephone, electric, cable, and gas) and the fees they provide may represent up to 20 percent of a local government's general operating fund. Telephone franchise fees alone provide millions of dollars in revenue to local governments each year, as seen in Exhibit 1. These revenues are realized with nominal overhead expenses and no complicated collection processes.

The payment of a franchise fee, usually based on a percentage of the company's gross receipts for services sold in that city, is made by the utility for the privilege of using the city's rights-of-way in order to sell goods or services to the public. Nearly every state has some type of provision in place that governs local government franchise authority; however, many state franchise and other rights-of-way access laws do not include provisions for the assessment or collection of franchise fees by local governments. Franchise agreements created by such guidelines are used as regulatory tools only and are not used as a means to provide additional revenue for the city.

Need for Franchise Agreements

As local governments enter the 21st century and developments in the telecommunications industry make new franchise options available, the concept of enhancing a city's revenue stream through franchise agreements makes good sense. Local governments need to stay informed of current trends and technological advancements in the cable, telephone, and gas industries not only to be fully apprised of the many franchise opportunities available but also to collect information on ways to increase long-term revenue for the city. Two rapidly developing technologies that hold such potential - personal communication service (PCS) and fiber optics - are discussed below. Without an appreciation of the potential benefits and limitations that these technologies offer to the business and residential community, cities may not realize the potential value made available by appropriate franchise agreements.

Personal Communication Service. PCS is a new telecommunications service that will offer individuals portable, pocket-size communicators that will have one portable phone number for both home and business use. PCS will compete with cellular and land-based telecommunications service providers. The difference between PCS and cellular service is that, depending on the type of PCS system deployment, many more cells or cell sites are required in order to offer home and office portability.

Currently, most cellular communication companies use private easements to locate cell towers, and because of this, cell or tower placement is often not in public rights-of-way. Rights-of-way usage is necessary, however, for deployment of a PCS system, which requires many small cells to operate. As many as 200 to 300 cells may be necessary for a city with a population of 240,000. Usage of a large number of cells increases the probability that a portion of these cells will be located in public rights-of-way, thereby allowing local governments to assess franchise fees.

PCS deployment also may require access to utility facilities, such as poles for cell location or underground conduits. Existing utilities are considering facility agreements that would allow PCS operators to use pole space in return for services or revenues. Local governments must determine if these side agreements should be subject to city consent, which may entail permitting cell sites and issuing permit fees. Concerns about access to and congestion of rights-of-way and the possibility of new revenue for the city should prompt local governments to consider adopting a formal process to regulate PCS cell site locations in public rights-of-way. PCS operators also are approaching local governments for use of public facilities, such as water towers or existing radio towers. Local officials should review these proposals carefully and consider industry standards for compensation for use and public safety issues.

Fiber Optics. Optic fiber is made of thin strands of glass carrying pulses of light in different wavelengths. The light pulses carry highly compressed digital signals or strings of zeros and ones like computer data. These glass fibers have major advantages over the copper cable that holds together most of today's...