In an opinion that slipped in under the wire of the new 15th Court of Appeals’ exclusive jurisdiction over constitutional challenges, the Austin Court of Appeals has ruled that recent legislation consolidating the franchise fees paid by telecommunications and cable providers is unconstitutional.
In the wake of the deregulation of the telecommunications industry in 1999, the Legislature enacted Chapter 283, Local Government Code, which established a uniform method for compensating cities for the use of public rights-of-way by telecommunications providers. Prior to the statute, cities charged pretty much what they wanted, and, as we recall, fought a pitched battle to preserve their authority. Having other plans, the statute gave the PUC the authority to establish the amount of the franchise fee based on “an annually, adjusted, per-access-line rate based initially on the franchise fees municipalities had received in the year immediately preceding the [statute’s] enactment” (§§ 283.051, .055). When cable providers got into the game, the 2005 Legislature added § 66.005, Utilities Code, to require each provider to pay for access for cable or video services a franchise fee of five percent of gross revenues derived from services provided in the city. Fast forward to 2017, when the Legislature set a flat $250 fee for wireless service providers for the installation in public rights-of-way the equipment (i.e., “network nodes”) necessary to connect the user’s device with the communications network [Chapter 284, Local Government Code]. Finally, in 2019, responding to the evolution of the industry, the Legislature amended Chapter 283, Local Government Code, and Chapter 66, Utilities Code, to consolidate franchise fees paid under one or the other statute. SB 1152 provides that if the same entity and its affiliated group provides telecommunications and cable services, it only has to pay one fee, the greater of the amounts it would owe under either statute.
Facing a substantial reduction in their franchise fee revenues, the cities sued the state, alleging that the Chapter 284 and SB 1152 violate the “gift clauses,” Article III, § 52(a), and Article IX, § 3, Texas Constitution. As you know, those provisions bar the legislature from authorizing, and a city or county from granting, any gift of public money to a private individual or entity. The cities argued that SB 1152 gives away public money by exempting certain entities that provide covered services from having to pay for access to the right-of-way. They argued further that Chapter 284’s flat $250 fee grossly undervalues the “market value” of a private utility’s access, as the City of Houston argued, by as much as 90%, in effect giving private parties an enormous gratuity without getting any consideration in return. The trial court granted the cities’ partial summary judgment on SB 1152, but ruled for the state on SB 1004. Everybody appealed.
In an opinion by Justice Smith, the court of appeals affirmed in part and reversed in part. According to the court, the decision turns on the application of SCOTX’s “gift clause” rulings in Texas Municipal Intergovernmental Risk Pool v. Texas Workers’ Compensation Commission, 74 S.W.3d 377 (Tex. 2002) and Borgelt v. Austin Firefighters Association, IAFF Local 975, 692 S.w.3d 283 (Tex. 2024). Modifying TML somewhat, Borgelt held that “[a] challenged expenditure satisfies § 52(a)’s Gift Clause when (1) the expenditure is not gratuitous but instead brings a public benefit; (2) the predominant objective is to accomplish a legitimate public purpose, not to provide a benefit to a private party; and (3) the government retains control over the funds to ensure that the public purpose is in fact accomplished.” 692 S.W.3d at 301.
The cities contended that charging a fee that amounts to 10-16.7% of the fair market value of a private entity’s access to a public right-of-way is tantamount to giving it away. The state countered that the Legislature decides what the value is, and it said it was $250. In the absence of authority on either side of the question, the court punted. It ruled that whether the $250 was constitutionally inadequate was a material fact that had to be decided by the trier of fact in the first instance. Relying on several attorney general opinions indicating that § 52(a) may be violated if the governmental entity “receives no or merely nominal return consideration” and that the question is one of fact, the court went that way. Having said that, the court then had to consider whether it was necessary to continue to the other two facts of the Borgelt test. Here the court read Borgelt to say that its “principles are conjunct, not disjuncts. ‘If [a challenged expenditure] meets all three principles—public benefit, public purpose, and public control—then it does not violate the gift clause’” [quoting 692 S.W.3d at 301; emphasis added]. The trial court thus erred when it granted summary judgment to the state on the adequacy of the $250 fee.
Turning to SB 1152, the court affirmed the trial court’s ruling that the statute violates the gift clause. The state argued that the Legislature merely updated the old statute in view of technological and industry changes under which the formerly separate services are now provided by a single fiber-optic cable, often by the same entity or through the entity’s affiliated companies. According to the cities, SB 1152’s exemption is based “solely on the fact that individual, association, or corporation—or an affiliate thereof, within the meaning of 171.0001, Tax Code—was subject to the other fee.” As the court rephrased it, “the real issue is whether the legislture may, under the anti-gratuity requirement of the gift clauses as interpreted by TML and Borgelt, exempt a private entity accessing a public right-of-way for private profit or commercial gain from an otherwise applicable fee for such access solely on the ground that the entity or its affiliate is subject to another fee provision.” The court concluded that the Legislature cannot simply exempt a private entity from paying the fee, as the Chapter 283 and Chapter 66 provide. As to the state’s argument that SB 1152 merely updated the statute to reflect that telecommunications companies now provide services on fiber-optic lines that only access the right-of-way one time should only have to pay one fee (an argument that makes perfect sense to us, by the way). The court agreed with the cities, however, that the Legislature didn’t pass a statute restructuring the fees as a whole, but left the separate, service-specific fees in place. By exempting an entity or its affiliates from one or the other of the service-specific fees, it concluded, the Legislature gave that fee away without cities’ receiving any consideration for it.
Obviously, this case is going up to SCOTX, which on December 17 granted the state’s motion for additional time to file its petition for review. Our guess is that SCOTX will defer to the Legislature on this one. Cities are creatures of the state, and if the Legislature wants to establish a uniform method of calculating franchise fees, it has the power to do so in any rational way that it sees fit. There is nothing arbitrary, in our view, about SB 1152 or any of the other statutes at issue. In the final analysis, the Legislature determined that this method is reasonable and that the end users of the services should not be overburdened with duplicative fees passed through to them on their bills. But, we will see.
