Franchise fees or rent: Either way, Cox Communications Inc.'s high-speed data customers will continue to pay fees to Poway, Calif., regulators there insist.
Frustrated after months of negotiating to convince the operator to resume payment of franchise fees on Internet-service revenue, the City Council in this San Diego suburb has approved a resolution compelling payment.
Poway management analyst Patrick Foley painted the franchise fee as rent for the use of the city's rights-of-way, a concept that has been upheld in federal court. The federal Telecommunications Act also allows cities to charge "fair and reasonable" fees as compensation for the use of rights-of-way.
But Cox argued before the council that the "rent" is really a tax. Taxes on the Internet are illegal, executives noted.
The compensation dispute began last November, when Cox notified franchise authorities in the nine Western states served by the 9th U.S. Circuit Court of Appeals that the operator would no longer pay fees on revenues from cable-modem service.
The operator cited the 9th Circuit's ruling in AT&T vs. Portland, which struck down the Oregon city's attempt to compel the operator to open its data platform to competitors.
In that ruling, the court determined that Internet access is not a cable service. Since franchise fees are paid on the gross receipts from cable service, Internet customers are no longer subject to the fee, Cox informed its affected cities.
Then AT&T Broadband told franchisers it would follow Cox's lead, but last spring stepped back from that stance.
Since Cox gave notice, cities have been attempting to convince it to pay the fee until either the courts or the Federal Communications Commission clarifies the legal definition of Internet service for tax purposes.
Though talks continue, some cities other than Poway may be ready to take the next step to recover revenue. Poway's Foley estimates that his community would lose $47,000 a year if Cox does not resume payment of franchise fees from its cable modem customers.
A recent report to the San Diego City Council warned elected officials that they may be asked to soon "consider recommendations to create new licensing or franchising requirements on 'information services,' mandating that such service providers reasonably compensate the city" for their use of rights-of-way.
Telephone services would be exempt from a new fee structure.
San Diego is part of a 10-city consortium that has negotiated with Cox without progress, city cable administrator Mark Jaffee said.
Both Cox and Time Warner Cable serve the city of San Diego; both were early deployment sites for cable modems.
Time Warner continues to pay cable-modem fees. Before Cox stopped paying, San Diego collected $268,000 in 2000 in modem-based franchise fees.