In a decision that local governments promised to appeal, the Federal Communications Commission ruled last Thursday that cable operators may collect from subscribers local government fees assessed on non-video programming revenue.
The cable industry fought for the ruling after the city of Pasadena, Calif., asked the FCC to bar Charter Communications Inc. from requiring their subscribers to cover the 5-percent franchise fee on non-video programming revenue, such as advertising revenue and home-shopping commissions.
Cities claimed that cable operators that passed through the fee were making subscribers shoulder a cost for which they were not responsible. The cable industry countered by saying the cities were trying to use operators to hide the real impact of their taxation policies from consumers.
In the order, adopted unanimously by the four FCC members, the agency said cable operators can pass through the entire franchise fee amount at any time and itemize the fee on the subscriber's bill.
The itemization issue was an important victory for the cable industry, which argued that all government fees should be transparent to consumers.
"The city of Pasadena, which had insisted on assessing franchise fees on our local ad revenues, argued that the fees be hidden from customers. We disagreed with such a move and so did the FCC," said Charter executive vice president David Barford.
Even though they don't stand to lose any revenue from the FCC's decision, local governments are planning to take the FCC to court for basically misreading the law.
Nick Miller, a Washington lawyer who represents local governments, claimed that FCC rules do not permit cable operators the authority to recover all franchise fees from subscribers. He said MSOs should recover advertising and home-shopping fees from those companies.
"We'll beat [the FCC] on this. We'll take them on appeal. They are dead wrong on the rules and the law," Miller said.
Miller said the FCC's decision could distort competition in the high-speed Internet access market. If the agency decides that cable-modem service is a cable service and revenue from that service is subject to the franchise fee, cable operators may collect cable-modem franchise fees from the majority of subscribers that do not take the high-speed service.
That scenario, he said, could give cable operators an advantage over high-speed Internet access providers.
"That's a cross subsidy issue," Miller said. "That's what [cable is] looking for."
According to Miller, Cox Communications Inc., Comcast Corp. and Charter have been passing through ad and home-shopping franchise fees to subscribers, but AT&T Broadband, Adelphia Communications Corp. and Time Warner Cable have not.
The FCC is still several months away from deciding whether cable-modem service is a cable service and whether operators' revenue derived from the service is subject to the 5-percent franchise fee.
The cable industry viewed the FCC's decision last week as an opportunity for operators and local officials to sit down and decide whether it remains appropriate to expose revenue unrelated to services purchased by cable subscribers to the franchise fee.
"We hope this will lead to a constructive dialogue with local governments on how best to handle treatment of this franchise-fee collection," said David Beckwith, spokesman for the National Cable & Telecommunications Association.
On that point, FCC members Kathleen Abernathy and Kevin Martin issued a joint statement saying nothing in the decision barred local government and cable operators "from reaching an agreement through contract to change how franchise fees are calculated or passed through."
But both sides have a large philosophical bridge to cross. Local governments view the franchise fees as the rent cable companies pay to occupy city-owned rights of way, while the cable industry considers the franchise fee not as a rent that remains fixed but as a tax that grows in proportion to the commercial success of the business.
In the decision, the FCC sidestepped an issue that could surface at a later point. Under federal law, the total amount in franchise fees that can be passed through to the subscriber is capped at 5 percent.
But the FCC's decision last week, coupled with a 1997 court ruling, will result in cable subscribers finding that the amount they remit in franchise fees is greater than 5 percent of that portion of their bill attributable to programming services and equipment rentals.
In a footnote, the FCC said it would not decided whether cable operators that passed through the entire amount of franchise fee had "breached" the 5-percent cap.