by Ron Thaniel
April 29, 2002

The Federal Communications Commission on March 15th issued a Declaratory Order finding that cable modem service offered over a cable system is an "interstate information service." As a result of this decision, the FCC found that the service is neither a telecommunications service, subject to state or federal telecommunications regulations, nor a cable service subject to local cable franchise requirements. High-speed Internet access services delivered over a cable system is cable modem service. This ruling will have a significant impact on franchise fee revenue for cities across the country.

The finding by the FCC means that the franchise fee cable companies were paying to local governments on this service has now ended. This change will have adverse affects on local government budgets. The six largest cable companies—Time Warner; AT&T; Comcast; Charter; Adelphia; and Cox—have sent letters to local franchise authorities advising that they are immediately halting payment of cable franchise fees on cable modem revenues.

The U.S. Conference of Mayors, National League of Cities, National Association of Counties and the National Association of Telecommunications Officers and Advisors have chosen to band together for the purpose of addressing this attack on local government. The Associations have created the newly formed Alliance of Local Organizations Against Preemption, ALOAP to prevent this devastating blow to local government budgets.

Through our participation in (ALOAP) The U.S. Conference of Mayors has retained legal counsel for both the appeal of the FCC's decision before the courts, and for a full and complete participation before the FCC in its rulemaking proceeding.

Specifically, the FCC made three tentative conclusions: (1) federal statutes don't provide a basis for Local Franchising Authorities (LFAs) to impose an additional franchise and, therefore, franchise fees for provision of cable modem service; (2) the provision of cable modem service shouldn't affect rights of cable operators to have access to public right'of'way; and (3) the FCC should exercise its right to forbear from imposing telecom regulation on cable modem service in the Western states where the 9th U.S. Appeals Court, San Francisco, concluded in a Portland, Ore., case that cable modem service was partly a telecom service.

Presently, many cities around the country receive up to a 5 percent franchise fee from cable television operators on the operator's gross revenues from cable services. Most of the major cable television operators include revenues from cable modem services as part of their franchise fee calculation.

The Yankee Group, an international organization specializing in the analysis of trends in market research, estimates that cable modem service generated $2.7 billion in 2001 revenues. Losing 5 percent of that would cost cities $135 million.

Having determined that cable modem service is an interstate information service; the FCC also issued a Notice of Proposed Rulemaking to address the regulatory implications of its determination.

In particular, the FCC seeks comments to examine the scope of its jurisdiction to regulate cable modem service, including whether there are any constitutional limitations on the exercise of that jurisdiction. The FCC seeks comment on the role of state and local franchising authorities in regulating cable modem service.

The FCC said revenue from cable modem service shouldn't be used in computing the franchise fee ceiling paid to cities, reducing the total franchise fee collected in many localities by 10-20 percent.

Rep. Edward Markey (MA), a key architect of the Telecommunications Act of 1996, said classifying cable modem service as an information service "defies common sense and logic É One wonders how that service gets transmitted from state to state without a telecommunications service component," Markey said.

Forming ALOAP, the U.S. Conference of Mayors in partnership with NLC, NACo, and NATOA, seeks to protect the constitutional rights of communities and cable subscribers and believes that the cable companies should not be allowed to "skip out on their rent" or relieved of paying fair rent for the use of public property.