Charter Moves Fast

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Reacting swiftly to a recent decision by federal regulators, Charter Communications Inc. has made aggressive moves to cut local governments off from cable-modem franchise-fee revenue.

Last week, Charter said that not only would it cease to make cable-modem fee payments, but in Western states it would also withhold a portion of future cable franchise fees in order to recover the modem levies it had passed through over the past 15 months.

Other cable operators are weighing their options, but none said it would follow Charter's bold lead in attempting retroactive recovery of previously paid modem fees.

The backdrop for Charter's action was a major FCC policy shift made two weeks ago.

After studying the issue for several years, the FCC ruled that cable-modem service is an information service, not a cable service. Cable operators fear they'd be legally liable were they to continue to collect fees assessed on a non-cable service.

Charter spokesman Andy Morgan confirmed the company's new franchise-fee policy, but added it would take a few weeks before that line item disappears from subscribers' bills.

Attorney Gerry Lederer of Miller & Van Eaton — whose firm represents several cities and counties —warned that Charter's move was premature and could cost the St. Louis-based MSO money if cities ultimately retain the authority to collect cable-modem fees.

"If folks want to move precipitously on this, they do so at their own peril," said Lederer, whose clients include the National Association of Telecommunications Officers and Advisors.

Some MSOs are in a holding pattern. Cox Communications Inc. and Time Warner Cable said their attorneys would mull the FCC decision before taking any action on high-speed-data franchise fees.

And although Comcast Corp. is reviewing the FCC order, company lawyers have concluded that the MSO may no longer collect or pay cable-modem franchise fees. Talks between Comcast and local officials are continuing.

AT&T Broadband is also studying the FCC's decision.

"We are reviewing the impact of last week's decision," said AT&T spokesman Jim McGann. "We are in discussions with interested parties about this issue but there's nothing to announce at this time."

Cablevision Systems Corp. appears to be unaffected by the FCC's decision.

"Cablevision took the position years ago that cable-modem service is an information service, and not subject to franchise fees," said MSO spokesman Keith Cocozza. "We have never paid franchise fees on cable-modem service revenue."

The FCC classified cable-modem service in a declaratory ruling that became effective March 15. That's when the agency also issued a separate notice of proposed rulemaking (NPRM) asking whether local franchising authorities (LFAs) retain authority to collect such fees outside of federal cable law.

TERMS IN CONTRACTS

"What they raised is whether or not it is possible legally for LFAs to tax it in any other form or under any other authority," said Washington-based cable attorney Wes Heppler of Cole, Raywid & Braverman. "Obviously, the cable industry is going to have a strong opinion that that is not the direction that LFAs ought to go in."

Franchise fees are in jeopardy because most contracts specify that they must be paid on cable services, which include video delivery, advertising and home-shopping revenue. Because the FCC has said cable-modem service is not a cable service, operators don't believe they may — or should — collect franchise fees.

The struggle between cable operators and local governments on this issue is hardly a new development, though its scope has changed in light of the FCC's decision.

In June 2000 — after a panel from the 9th U.S. Circuit Court of Appeals ruled that cable-modem service is not a cable service — some operators began to drop the fees in states within that court's jurisdiction, including California, Nevada, Idaho and Arizona.

Cox stopped collecting and paying the fee. Time Warner collects the fee, but places the money in escrow.

Adelphia Communications Corp. notified cities it would pay franchise fees on service instituted before the court issued its ruling, but not on subsequent rollouts. Because Adelphia is slowly upgrading its systems and rolling out cable modems, most of its systems do not pay the fee.

Charter recently joined those MSOs in questioning the applicability of the fee. It told some California cities it would no longer collect cable-modem franchise fees and would institute a policy to collect past payment retroactive to Jan. 1, 2001.

Attorney Bill Marticorena, a consultant to several California cities, said Charter's "self-help" move violates its local franchises, which require that changes in franchise-fee collection and payment be approved by local regulators.

The cities also want to know what Charter intends to do with the money, since it was collected from consumers specifically to pay city fees.

Charter's Morgan said no decision has been reached on the fate of the funds.

The 9th Circuit judges said cable-modem service was partly a telecommunications service and partly an information service.

MAY SEE GROUND RULES

In the NPRM, the FCC tentatively concluded that if cable operators are found to be telecommunications service providers subject to federal common-carrier regulations — in court or elsewhere — the agency would not require cable to comply with those rules.

That conclusion, if affirmed, would allow the FCC to establish national regulatory ground rules for cable-modem service.

Officially, the FCC is not saying whether withholding franchise fees on cable-modem revenue is proper at this point. An FCC spokeswoman said questions in the NPRM deal directly with the ability of LFAs to continue to collect those fees.

In the NPRM, the FCC tentatively concluded that cable-modem revenue should not be included in a cable operator's calculation of gross revenue, to which the typical 5 percent fee is applied.

Cable operators hope the FCC determines that the Internet Tax Freedom Act provides an additional check on local governments.

Under that federal law, state and local governments are barred from imposing new taxes on Internet access until Nov. 1, 2003.

Franchise fees on cable services were exempt under the tax moratorium, but with cable-modem service now classified as an information service, that exemption might be gone.

Lederer insisted that the Internet-tax ban would not extend to cities that sought to impose fees on cable-modem service that's classified as an information service.

"That would be akin to saying an office-building owner could not charge an Internet-service provider rent for being in their building, because it runs afoul of that law. Cable franchise fees are not taxes. They are rent," Lederer said.

Local franchising authorities intend to hold cable operators accountable if the FCC ultimately determines that the collection of cable-modem fees is permissible.

"Anyone rushing out to change policy based on this is smoking something," said Portland, Ore., cable director David Olson. That city's AT&T Broadband system is still in the early stages of its cable-modem rollout.

"If I can say anything charitable about the decision it's that at least it came early in the rollout," he said. "We're not reliant on that money."

Only $150,000 of the $3.1 million his city collects in franchise fees each year is attributable to data service, he said.

Today, cable-modem revenue is not a large source of municipal revenue, but the financial hit grows in proportion to high-speed-data penetration. The Yankee Group estimates that cable operators collected $2.7 billion in cable-modem revenue last year. In theory, a 5 percent fee would have generated $135 million for cities.

The National Cable & Telecommunications Association estimates that cable operators paid $2.5 billion in franchise fees last year.

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