WASHINGTON -Cox Communications Inc. has stopped collecting and paying franchise fees for Internet-over-cable service in several Western states following a federal court decision the MSO evidently views as a magnet for lawsuits under plaintiff-friendly consumer protection laws.
Cox's action drew immediate protests from the telephone industry and a national regulatory group. They charged the 6 million subscriber MSO with attempting to avoid either paying franchise fees as a cable company or contributing to the local phone-subsidy pool as a telecommunications-service provider.
Cox, the No. 5 U.S. cable operator, should not have it both ways, they said.
In June, the 9th U.S. Circuit Court of Appeals held that cable Internet access is in part a telecommunications service, effectively blocking local governments from requiring cable operators to provide access to competing Internet-service providers.
The decision-a victory for AT&T Broadband over regulators in Portland, Ore.-was not appealed.
Even though the 9th Circuit declared that cable-modem service is not a cable service, Cox did not interpret the ruling to mean that its Cox@Home product is a telecommunications service, according to assistant vice president and general counsel John Spalding.
He said the company felt uneasy about collecting cable fees-typically a 5 percent charge passed on to consumers-for a non-cable service.
Cox also adopted its fee policy because the federal courts are still determining the legal definition of cable access and because it's the subject of an ongoing Federal Communications Commission proceeding launched by Chairman William Kennard a few weeks after the Portland ruling, he added.
"We felt we had no choice but to take a wait-and-see approach.to see what the FCC and courts do," Spalding said. "Our position is that Portland said it's not a cable service and because it's not a cable service, we felt we had no choice" but to stop collecting the fees.
Cox's position was endorsed by overbuilder RCN Corp., which indicated to Los Angeles-area regulators that it would not pay franchise fees for high-speed-data delivery services, sources said.
No major cable operator has taken Cox's stance, but some are clearly thinking about it.
Around Nov. 1, Cox decided to discontinue the collection and payment of cable-modem franchise fees in California communities. The company determined that assessing a fee on revenue derived from a non-cable service could run afoul of a state unfair business practices law, according to a local California regulator.
Cox has the same policy in effect in all 9th Circuit states: California, Oregon, Washington, Arizona, Montana, Idaho, Nevada, Alaska and Hawaii.
According to an informed source, Cox has 212,000 cable modem subscribers in 9th Circuit states, most of whom pay $44.95 a month for the service. Loss of the 5 percent franchise fee would evidently cost local governments $5.7 million annually. That loss only worsens as Cox grows its business.
Cox has about 400,000 cable-modem subscribers overall. Its two largest clusters-the 600,000-subscriber Phoenix system and the 525,000-subscriber San Diego system-fall within the 9th Circuit's boundaries.
The United States Telecom Association, which lobbies on behalf of the local-phone industry, blasted Cox for allegedly using the Portland decision as a legal convenience to accomplish three goals: To block competing ISPs from its systems, cease the collection and payment of cable franchise fees and avoid paying into the fund to keep local phone service affordable.
"The [FCC] should not countenance any such, 'Heads I win, tails you lose' gaming of federal and local regulation by cable operators," the USTA said in a Nov. 29 letter to Kennard.
The trade group asked the FCC to probe Cox's fee policy and require the MSO to contribute to the universal-service phone fund on the same basis as landline and wireless phone carriers.
"If some carriers do not contribute to universal service, the obligation becomes greater for those that do," the USTA said.
In a Dec. 4 letter to Kennard, the National Association of Telecommunications Officers and Advisors (NATOA) said cable companies like Cox were attempting "to straddle regulatory worlds" and urged the FCC to warn Cox that it could face penalties for the self-assignment of its regulatory status.
"Companies obviously cannot be permitted to create their own regulatory world," NATOA executive director Libby Beaty said in the two-page letter.
Paul Glenchur, a cable analyst with Schwab Washington Research Group, said this new dispute between Cox, USTA and local governments was an inevitable development after the 9th Circuit put cable's Internet-access service beyond the reach of local cable regulators.
"This is just a logical manifestation of the Portland decision," Glenchur said. "This is a byproduct of pursuing regulations of these service as telecommunications services."
Cox began notifying its franchisees about its intent to cease fee payments for cable-modem service in early October.
According to a letter to cities in Cox's 265,000-subscriber Orange County, Calif., cluster, the MSO said it would continue to collect and remit fees derived from video programming services.
The Cox letter indicated that its decision on cable-modem fees was appropriate because the 9th Circuit's ruling changed the characterization of modem service for tax purposes.
"In light of this decision, our attorneys have advised us that we are no longer lawfully permitted to collect from our subscribers any franchise fees relating to our cable-modem Internet-access service," the Cox letter said. Its new policy took effect with the Nov. 1 billing cycle.
In the Portland case, the 9th Circuit said that cable provision of Internet access was not a cable service under federal law. Later in the opinion, the court opined that Excite@Home Corp. data-over-cable service was both an information service and a telecommunications product.
As a legal matter, Cox has decided to rely on the court's declaration that Internet access is not a cable service.
With respect to the portion of the opinion that dealt with the information service-telecommunication service dichotomy, Cox's Spalding said, "We think that part of the ruling is non-binding dicta."
Local regulators who received the letter have already met with the operator. Though they are loath to talk much about a resolution, they noted that Cox officials have given cities hope the parties can resolve the fee dispute in a way that may restore income to the municipalities.
"At this point, our attorney's negotiating with them.we're all concerned about the loss of revenue," said San Clemente, Calif., city clerk Myrna Erway.
When fee account disputes arise, cable operators typically establish an escrow account to bank the disputed funds pending resolution. But local authorities said Cox has not done so in this situation.
Nick Miller, a Washington, D.C., attorney with many municipal cable regulatory clients, said he agreed with the USTA's stance that if cable operators refuse to collect franchise fees on cable-modem revenue, they should contribute to universal service.
"Cox has clearly made a corporate decision that they are not going to pay-at least within the boundaries of the 9th Circuit," Miller said. "What our clients are saying back to them is, 'Provide us evidence that you are paying into the universal service fund.'"
Another source said Cox expressed concern that had it continued to collect cable-modem fees, the company could be sued under unfair business practices statutes.
California operators are sensitive to billing and operations issues because state has been a breeding ground for class-action lawsuits over operations, such as late-fee billing practices. Cox itself has been the target of such litigation, which resulted in a six-figure negotiated settlement in the 1990s.
Local regulators are holding their breath and waiting to see if other operators will follow Cox's example.
AT&T Broadband, which has a major cluster in greater San Francisco, is reviewing its options.
"We are looking at the issue but we haven't made an any decisions," said AT&T Broadband spokesman Steve Lang.
Sources said that at least one potential overbuilder has told California communities where it has applied for franchises that it will not bill for franchise fees on future cable-modem services.
In Santa Barbara County, regulators received the Cox letter but have heard nothing from neighboring provider Comcast Corp., a local regulator said.
Charter Communications Inc., another operator with a substantial presence in Southern California, has "no plans to make arbitrary changes to established practices," said a company spokesperson.