Franchise Agreement Basics
Overview
In the government context, a “franchise” is a contract right to use the public right-of-way (ROW), most commonly to construct, expand and maintain underground facilities for public utility service. The general ROW use rights in franchises are legally distinct from other property rights such as easements and leases, which more commonly extend rights or obligations to specific individual properties. A granted utility franchise may give rights that cross over (or under) properties that are also subject to easement or lease rights.
Basic Franchise Authority
Government authority to grant franchise rights is vested in the state, which has delegated franchising authority to localities through legislation such as:
- MISSING – first-class city franchise authority
- RCW 35.23.440(37) – second-class city franchise authority
- RCW 35A.47.040 – code city franchise authority
- RCW 35.27.370(12) – town franchise authority
- Chapter 35.99 RCW – telecommunications franchises
- Chapter 36.55 RCW – franchises on road and bridges (counties)
Local governments can refuse to grant utility requests for franchises, but granted franchises are legal contracts binding on both parties. While local governments can require privately owned utilities to obtain a franchise before occupying the ROW, they importantly cannot force a utility to accept proposed franchise terms. Instead, governments can condition a franchise on the terms, conditions, and limitations they see fit, leaving a utility franchise applicant free to either accept or reject the offered franchise terms.
Franchise Fees and Limitations
Drafting, negotiating, approving, and overseeing a franchise takes agency staff time and resources. Local governments often seek to impose franchise fees upon franchisees to offset these costs. While cities and counties are generally permitted to impose franchise fees, there are legal limitations to be aware of at the state and federal level.
At the state level:
- RCW 35.21.860(1) allows cities to charge franchise fees to light and power businesses, gas distribution franchisees and telephone businesses, but only to the extent that the fees recover the city’s actual administrative expenses that are directly related to receiving and approving such franchises. This limitation means that cities may need to forecast and document their administrative expenses in approving these franchises. Notably, the case of King County v. King County Water Districts specifically noted that the fee restrictions in RCW 35.21.860 apply only to city franchises, and not to those granted by counties;
- RCW 35.99.040(2)(c) requires cities to comply with the federal telecommunications act in setting telecommunications franchise fees.
At the federal level:
- 47 U.S.C. §253: local government telecommunications franchise fees must be fair, competitively neutral, nondiscriminatory, and reasonable, and must be publicly disclosed.
- 47 U.S.C. §542(b): local government franchise fees on cable TV providers cannot exceed 5% of the franchisee’s gross revenues in a 12-month period.
Franchise Adoption — Required Ordinance and Adoption Procedure
Franchises have the legal status of contracts, but local governments adopt them through legislation. For example, procedures for city adoption of a negotiated franchise are outlined in RCW 35.23.251 (see RCW 35A.47.040 for code cities) and note the following:
- The city council cannot pass a franchise ordinance or resolution until at least five days after its initial consideration of it.
- The city council can only pass a franchise ordinance or resolution at a regular meeting.
- A franchise ordinance or resolution must be submitted to the city attorney before passage.
- At least five councilmembers must vote in favor of passing the franchise ordinance or resolution.
RCW 35.27.330 outlines similar procedures for town franchises, and county road and bridge franchise adoption procedures are set forth in RCW 36.55.060.
Franchise Renewal
When a franchise is nearing the end of its term, the parties should take the opportunity to examine what changes should be made. The renewal of some franchises should be started long before expiration. A thoughtful and deliberate process of renegotiation can lead to far better results than waiting to the last minute, as there might be other pressing issues that keep the franchise from getting the attention it deserves.
Common Franchise Contract Components
The terms of a granted franchise can vary depending on the type of utility involved, the proposed ROW use, any history between the franchisee and the local government, and other factors.
Common franchise negotiated terms include a set of definitions, scope of franchisee ROW use, insurance, bond, and indemnity requirements, and more, as explored below.
A Set of Working Definitions
These working definitions should cover terms used to regulate and govern the franchise, such as:
- Right-of-way (ROW): The types of properties that a franchisee will be able to use under the franchise (streets, sidewalks, alleys, etc.)
- Franchise area: The geographical area in which the ROW is located.
- Facilities and services: The types of facilities a franchisee can install, maintain, or use within the ROW (conduit, transmission lines, pipelines, etc.)
A franchise agreement establishes its own agreed-upon terms and definitions or may adopt definitions by reference from state law, local codes, or other sources.
Defined Scope of ROW Use
Franchises often address how expansive or restrictive a franchisee’s ROW use will be under the franchise terms. For example, will the franchise allow the franchisee to only use existing utility facilities in the ROW, or will it also allow it to place, modify, relocate, or remove these types of facilities?
Franchise Exclusivity, Location Preference, and Subordination of Rights
In accordance with RCW 35.23.380 (for cities) and RCW 36.55.060 (for counties), many franchises indicate that they do not give the franchisee exclusive rights, allowing the franchising authority to offer franchise rights to multiple utilities concurrently.
A franchise may also indicate that prior existing franchises in a ROW will be given a preference regarding the location of facilities in order to regulate and prevent potential disputes between franchisees and the local government.
By law, franchise contract rights are also subordinate to a local government’s police power to enforce general laws. Franchise terms can reflect and reinforce this legal principle.
Insurance, Bond, and Indemnity Requirements
Franchise insurance and indemnity provisions are important to protect the local government and third parties from damage and loss resulting from acts of franchisees or their agents or subcontractors. By their very nature, some utility services (those involving pollutants or potentially hazardous substances) pose higher risks than others. Insurance and indemnity protections are also especially important if franchisee rights include an ability to undertake construction work or other higher risk activities in a ROW.
State laws permit franchising authorities to require bonds from franchisees. For example, RCW 35.23.251 (RCW 35A.47.040 for code cities) permits cities to require bonds from franchisees set in reasonable amounts to ensure their faithful performance and adherence to franchise terms.
Identification and Regulation of Franchisee Subcontractors
Franchisees commonly exercise their franchise rights through subcontractors. Agencies can propose requirements that franchisees identify and get local approval of any franchisee subcontractors that will work in the ROW. These requirements help to ensure that franchisee subcontractors are qualified and legally able to work in the ROW, have obtained all required permits, are insured to cover losses and damage, and can be contacted if an emergency occurs.
Permit Requirements for Franchisee Activities
While franchises grant broad, general rights to use city or county ROW, a franchisee’s specific acts under those granted rights often contemplate work that requires a locally issued permit. For example, franchises that give utilities the right to install, relocate, or remove utility facilities in a right-of-way may require ROW construction work like trench digging or road repaving.
Franchises should adopt local construction permit codes and procedures for permit applications, plan review, and approval of such work. Public agencies granting franchises should also consider the coordination required between different agency departments or divisions to ensure efficient processing and oversight of the franchise.
Relocating, Abandoning, or Removing Franchisee Facilities
Franchises are typically granted for a specific number of years. If a utility’s franchise expires and is not renewed, what happens to the utility’s facilities installed in the ROW?
Local governments can consider adding franchise provisions that require franchisees to relocate or remove facilities upon expiration or termination of the franchise (or if facility removal or relocation otherwise becomes necessary during the franchise term).
Description of How ROW Vacations Can Affect Local Franchises
Cities and counties can legally vacate their public interest in a ROW. Doing so transfers ownership and control of the vacated ROW to private parties.
Franchises often provide that if the local government intends to later vacate a ROW that includes utility facilities installed through the franchise, it will reserve a utility easement in the vacated ROW pursuant to RCW 35.79.030 (for cities) or RCW 36.87.140 (for counties). This ensures that the franchisee’s rights to occupy and use the ROW to provide utility services to the community will continue even after vacation. A review of existing utility franchises is, accordingly, a prudent step in a local government’s decision to vacate a ROW.
Emergencies and Notice Requirements
Damage to utility facilities that are installed and operating within a franchised ROW (such as pipelines, wiring, conduit, etc.) can lead to emergencies, “after hours” ones in particular).
Utility facility damage can cause leaks of polluting or hazardous substances, damage to a local government’s property, disruption of utility service, and other issues. It is important that franchises include provisions for emergency notice between a local government and the franchisee should unexpected emergencies arise. These provisions can indicate the person(s) to be notified of an emergency, an agreed-upon communication method, and procedures for changing emergency contact information.
Franchise Assignments or Transfers
Franchisees may want to assign or transfer their franchise rights to another entity, such as a company that purchases the franchise or a subsidiary that the franchisee creates.
Franchise transfers and assignments can be beneficial in some cases. For example, if a franchisee intends to cease its utility operations, assigning or transferring the franchise rights to another provider may avoid utility service disruptions to the community. However, since an assignee or transferee is a new franchisee potentially unfamiliar to the city or county, the franchise should require local review and approval of any such transfer. Common provisions indicate that a local government will not "unreasonably withhold” such consent.
Franchise Term, Extensions, and “Month-to-Month” Status
Abrupt franchise termination (even terminations occurring on an anticipated franchise expiration date) can cause utility service disruptions and other complications for local communities. To avoid these issues, many franchises include clauses that allow the franchise to continue after termination on a “month-to-month” status, so that franchise operations can continue until the local government and franchisee negotiate a new franchise agreement or permit the parties to extend the term of a franchise for specified periods. Importantly, however, RCW 36.55.060 limits county road and bridge franchises to 50-year terms.
Franchises and Construction Delay Claims
In addition to the ROW construction activities directly contemplated in a franchise agreement (such as work to install franchisee facilities), some franchise construction work becomes necessary due to construction projects undertaken by the local government. For example, a road widening project may necessitate franchisees to move their underground facilities to accommodate the project. Accordingly, franchises often include franchisee requirements to relocate facilities at the local government’s request.
If this request is made to accommodate a local government construction project, and the utility’s facility relocation delays that project, the local government could face construction delay claims from its contractor. See Scoccolo Const., Inc. ex. rel. Curb One, Inc. v. City of Renton (holding that city franchisees relocating their facilities at the city’s request “acted for” the city for purposes of RCW 4.24.360). Indemnity provisions in local government franchises should be expansive enough to address this issue with franchisees.
