Cities, Courts and MSOs Grapple Over Franchise Fees

(Cable World) That’s what the open access issue has become for operators and cities in nine western U.S. states, where Cox Communications and AT&T Broadband are discontinuing the practice of collecting franchise fees from HSD customers. What started out as a fight to keep cable operators from being forced to open their networks to competitors has turned into a multi-level issue that involves redefining what high-speed Internet services are and which regulatory body is responsible for overseeing them.

The MSOs’ decision to stop collecting fees based on HSD revenues comes on the heels of an U.S. Appeals Court ruling last year that determined that high speed Internet access services are not cable services. The operators believe that the Ninth U.S. Circuit Appeals Court in San Francisco ruling means they can’t collect franchise fees on the revenues generated by those services.

Most cities in the region, however, maintain the operators still owe the cities a percentage of those revenues, given the lack of a national policy on the issue.

To be sure, the whole issue is complicated by the fact that there’s a patchwork of disparate rulings around the country. For instance, the Fourth Circuit Court of Appeals in Richmond, Va., has ruled that HSD is an Internet service, while the 11th Circuit Court of Appeals in Atlanta ruled that fast Internet service is an information service. Both rulings are under appeal. The FCC is in the middle of a Notice of Inquiry period on the issue and hasn’t ruled yet.

The Ninth Circuit Court’s murky ruling has been interpreted differently by cities and operators. But two things are certain: Hundreds of thousands of HSD customers in California, Oregon, Washington, Arizona, Montana, Idaho, Nevada, Alaska, Hawaii, Guam and the Northern Mariana Island are or will experience a decrease of up to $2.50 a month in their bills. And cities are losing or will lose millions of dollars in lost franchise fees. Cox Communications, for instance paid the city of San Diego about $270,000 in fees from HSD services alone last year, says city cable administrator Marc Jaffe.

ity regulators maintain the cable operators want to have their cake and eat it, too, by claiming HSD services are cable services.

Yet they don’t want to pay the franchise fees associated with those services, says Walnut Creek’s assistant city attorney Paul Valle-Riestra.

If HSD services are deemed a telecommunications service, he says, then cable operators must abide by the rules that govern common carriers. And cities can still negotiate a non-cable franchise with the operators that require fees of some sort since the operators are using city rights of way.

The cities aren’t as concerned about the loss of revenues today as they are with the potential loss going forward, maintains city consultant Jonathan Kramer.

"This is all about bundling," he says. "Suppose a cable operator is offering video and data services in a bundled package for say $70. The way the operator could allocate the charges could be that $65 is for the data service; and only $5 is for the cable service. Since cities can only get fees from the services deemed ‘cable’ they’d get revenues from that $5."

Cox stopped collecting the fees last November. AT&T plans to cease collecting the fees in February. Cox counts 250,000 HSD customers in the Ninth Circuit’s territory; AT&T serves about 300,000 in those states.

Neither operator is happy about the development, but executives with both MSOs say they have no other option. The Ninth Circuit’s ruling came as a result of a lawsuit AT&T filed against the city of Portland, Ore., which wanted the MSO to open its networks to competing Internet access providers much the same way telephone companies must allow competitors to use its plant. The court ruled that HSD services are not cable services and the operators say that means they can’t charge local franchise fees for something that falls under another regulatory category.

Cox insists HSD services fall under the definition of a cable service and hopes the FCC sees it that way as well.

"Were it not for the Portland case," says Cox’s VP-assistant general counsel John Spalding says, "we’d still be collecting fees from those revenues everywhere."

Not all MSOs operating within the Ninth Circuit Court’s jurisdiction have chosen to stop collecting fees generated by HSD services. Time Warner Cable, for example, is still studying the issue and continues to collect fees from HSD customers, says spokesman Mike Luftman.

Spalding says most cities understand what the MSO is doing once it explains the situation. Even the National League of Cities in a brief to the FCC last month maintains that unless HSD services are determined to be cable services by the commission, cities won’t be able to collect valuable tolls on those services. Not surprisingly, the NLC is asking the FCC to rule that high-speed data services are cable services.

But Jaffe isn’t buying it.

"As far as we’re concerned, they are responsible for those fees regardless of how they come up with the money," he says. "They may not be collecting the fees from customers, but they are still responsible for paying us them."

The city of San Diego is considering joining other municipalities to fight the operators over franchise fees. Jaffe admits, however, the group is moving cautiously because the Ninth Circuit Court’s ruling applies only in its territory.

"This decision was not made lightly or quickly," Spalding says. "We read and reread the Ninth Circuit Court’s decision, and it was clear that HSD is not a Title 6 cable service, and we could not continue collecting fees based on revenues from those services."