Data Dereg Could Mean Tax Hits

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Escaping government regulation of its high-speed Internet access business might carry a price for the cable industry in the form of new taxes at local and federal levels.

In March, the Federal Communications Commission is expected to classify cable Internet as an information service. Historically, the agency has not regulated information service providers. For cable, that would mean that MSOs would not be required to carry unaffiliated Internet service providers.

Victory on the access issue, though, could result in a clash with local governments worried that cable operators might refuse to pay franchise fees on information services. Many operators today pay franchise fees on cable-modem revenue under the assumption that high-speed access is a cable service akin to video programming.

Cable is also financially exposed on another front: paying into the universal service program, a multibillion dollar subsidy pool used to keep local phone rates affordable in rural and high-cost areas.

Cable operators — to the extent that they do not offer local phone service — are not required to contribute to universal service.

DEBATE AT FCC

But if the cable-modem provision is classified as an information service, operators might have to kick some of their data revenue into the fund. Since 1998, the FCC has debated whether Internet access providers that self-provision transmission capacity should be required to contribute to universal service.

These issues have surfaced of late, most recently during a meeting between FCC officials and representatives of Cox Communications Inc., the No. 5 MSO with 6.2 million video subscribers and 555,000 high-speed data subscribers. AT&T Corp. also raised these issues with the FCC.

In a Jan. 24 letter to the FCC, Cox said it did not believe "that local governments may lawfully impose additional franchising requirements, nor demand the payment of additional franchise fees, when a franchised cable operator provides non-cable services over its cable network and the provision of those services imposes no additional burden on public rights-of-way."

The two-page letter, signed by vice president of public policy Alexandra Wilson, was sent to Catherine Bohigian, mass media adviser to FCC member Kevin Martin, a Republican appointed by President Bush who will play a pivotal role in deciding these issues.

Earlier this month, the National Association of Telecommunications Officers and Advisors, a group representing local governments, told the FCC that classification of cable Internet as an information service did not preclude it from being a cable service and, therefore, subject to local franchising.

Joe Van Eaton, a lawyer with Miller & Van Eaton, who represents NATOA, said the classification of cable Internet as an information service did not mean cable was immune from paying franchise fees on cable-modem revenue.

"The fact of the matter is, they want to place facilities in the rights of way for the purpose of providing information services," Van Eaton said. "They don't get to do that for free, just like they don't get to occupy private property for free."

Van Eaton said he disagreed that when operators offer high-speed Internet access, they are not placing any additional burden on rights of way.

"It's not something that doesn't have an impact," he said. "They may have to put in more fiber. A lot of times they will need to split nodes to provide adequate service."

The cable industry pays an estimated $2.4 billion annually in franchise fees, according to the National Cable & Telecommunications Association.

'FREEDOM ACT' CITED

Cox warned the FCC that if local governments did attempt to impose new fees and franchises on cable-provided information services, those governments would run the risk of violating the recently extended Internet Tax Freedom Act, which prohibits an "Internet access tax" or a "discriminatory tax on electronic commerce."

Van Eaton disputed that claim, saying the act distinguished between taxes and rent. Local governments view franchise fees as rent payments.

"The Internet Tax Freedom Act reaches only taxes. It does not reach rent for the use of rights of way," Van Eaton said.

In a Dec. 17 meeting with the FCC, AT&T officials mentioned that coupled with the franchise fee issue, local governments might force operators that are currently franchised only to provide cable services to sign new franchise agreements to provide information services.

"We expressed concern that these issues could all prove controversial and become bogged down in litigation, encumbering and thereby impeding the continued rollout of cable modem service," said Betsy Brady, AT&T's vice president of federal governmental affairs, in a Dec. 18 letter to the FCC.

The franchise fee issue is already a sore point between Cox and some local governments in southern California. Cox stopped paying cable-modem franchise fees after the U.S. Court of Appeals for the 9th Circuit ruled in June 2000 that cable-modem service was not a cable service.

Based on that ruling, Cox said in December 2000 that it would postpone the collection of cable-modem franchise fees in states within the 9th Circuit because the MSO feared being sued for charging fees on non-cable services.

At least three California communities — Irvine, Laguna Beach and San Clemente — are planning to sue Cox for its actions, according to the Orange County Register.

Cox also addressed the other hot-button issue with the FCC: whether cable operators that self-provide transmission facilities for Internet access must contribute to universal service.

In the letter, Cox did not take a firm stance, saying the agency "has ancillary jurisdiction to address any distortions to the [FCC's] universal programs that might arise from classifying cable Internet and other broadband services as . . . 'information services.'"

In a 1998 report to Congress, the FCC said it may be appropriate to reconsider whether information-service providers that self-provision transmission facilities should be exempt from universal service, particularly if they offer services that bear the characteristics of telecommunications services, such as Internet-protocol telephony. IP telephony is a service being considered by Time Warne Cable, Charter Communications Inc. and Comcast Corp.

MARTIN'S 'HESITANT'

Last Wednesday, the FCC's Martin said he would be reluctant to see cable operators contribute to universal service, calling it a legacy regulation that could hurt cable's investment in broadband facilities.

"I have been very hesitant to apply those kinds of legacy regulations onto the cable industry," Martin said at a technology forum sponsored by COMNET. "I think expanding those obligations into the cable industry might not be the best outcome."

In his comments, Martin did not disclose whether cable's exposure to making universal service contributions was a real option under debate at the agency.

Instead, he stressed that requiring cable to contribute to universal service to establish regulatory parity with phone companies failed to take into account that cable pays local franchise fees that other companies do not pay.

"Yes, it's true that telephone companies have to contribute to universal service on some services and others might not," Martin said. "But there [are] also different regulations that apply for [cable] at the local level — for example, they might have local franchise fees."

Under current FCC rules, cable does not pay universal service fees on cable service revenue. Though, Cox as the 12th largest local phone company in the U.S. with 454,000 customers, is required to contribute to universal service as a local phone service provider.

The agency permits cable operators to receive universal funding under the FCC program that provides subsidized Internet access to school classrooms and libraries.

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