Cable modem service: A severed connection
When the Federal Communications Commission decided in March to classify cable modem service as an “interstate information service” instead of a “cable service,” local governments were stunned. City and county officials had been waiting for the FCC to make a decision about the classification and to finalize a debate that had been raging for at least two years; they just thought the decision would come down the other way. “We were very disappointed in the ruling, and we specifically recommended that they do something else,” says Kenneth Fellman, chair of the FCC Local State Government Advisory Committee (LSGAC) and mayor of Arvada, Colo.
That “something else” was to classify cable modem services as cable services, which are subject to the regulations and fees established by local franchise administrators (LFAs). LFAs are cities and counties that provide oversight of cable television services on behalf of local consumers under Title VI of the Communications Act. LFAs enforce customer service requirements and manage the rights of way in which the cable companies build their networks. In exchange for permission to use public rights of way for cable infrastructure, LFAs charge cable companies franchise fees (typically 5 percent) on the gross revenue of the cable services.
As a result of the FCC’s declaratory ruling, cable companies, including the six largest (New York-based Time Warner; Basking Ridge, N.J.-based AT&T; Philadelphia-based Comcast; St. Louis-based Charter; Coudersport, Pa.-based Adelphia; and Atlanta-based Cox), have decided to stop paying franchise fees on modem services — a move that many cities and counties claim violates terms of their franchise contracts. If non-payment continues, local governments stand to lose an estimated $300 million in franchise fees from cable modem services this year, according to Jeff Arnold, legislative director of the Washington, D.C.-based National Association of Counties.
Additionally, LFAs lose the authority to manage the rights of way for cable modem service providers, to enforce customer service requirements and to require uniform deployment throughout franchise areas. Likewise, state and federal agencies cannot provide that oversight because an interstate information service is not considered a telecommunications service, which those agencies manage under Title II of the Communications Act.
Along with the declaratory ruling, the FCC issued a Notice of Proposed Rulemaking that invited comments on issues affected by the ruling, including the roles of government agencies in regulating cable modem services. The FCC’s decisions regarding those comments should clear up some of the questions local governments have about the classification, but there is no way to know when those questions will be answered. “It’s really kind of up to [the FCC] as to how they want to move, and the commission is not known for its swiftness,” Fellman says. In the meantime, cities and counties face the possibility of permanently losing valuable franchise fees.
Budgets will take a hit
Loss of revenue from cable modem franchises hits hard, says Nancy Yendes, assistant city attorney for Springfield, Mo. “Since 9-11, everybody’s sales taxes are down,” she notes. “If Mediacom doesn’t pay [franchise fees], we either have to cut services or tax somebody else. What do you do? [The FCC is] cutting out part of your revenue stream.”
The ruling came at an awkward time, just as many cities and counties were approving budgets that included the franchise fees. In fact, the Kansas City, Mo., City Council approved a 2002-2003 budget that included $460,000 in fees from Time Warner. That same day, the city received a letter from the company announcing that it would stop collecting cable modem franchise fees from its customers.
“We were including an anticipated growth in the franchise fee in the budget that we approved,” says Bill Geary, assistant city attorney for the city. “Over the next 12 months, I’m sure there’s going to be some adjustment.”
Although recent telecommunications industry reports show that high-speed Internet services, including cable modem and DSL, are not growing quickly, local officials see potential for steady demand in the future. “More and more we’re beginning to be reliant on this medium for communications,” says Jane Lawton, cable administrator for Montgomery County, Md.
As a result of the FCC ruling, Montgomery County could lose several hundred thousand dollars in cable franchise revenue this year. But that amount is small compared to the amount it could make as more residents subscribe to the services. “Our jurisdiction just got cable service throughout the county this year,” Lawton says. “Our projections were 3 percent growth, and what [the local cable company] really had last month was 75 percent [growth], and in the last year, 500 percent. Based on that kind of growth, we stand to lose a lot of revenue. In terms of our own budgeting, it is a drastic impact over what we probably would have collected.”
Anticipating a permanent loss of franchise fees, Springfield, Mo., is considering starting its own cable service to compete with Middletown, N.Y.-based Mediacom, the only cable provider in town. This year, the city stands to lose $100,000 in franchise fees from the company; 40 percent of that is dedicated to the public information office that runs the government access channel, and the rest of it goes into the general fund.
The city council began investigating the possibility of providing cable service to compete with Mediacom before the FCC ruling, and the loss of revenue makes the idea more appealing. “[The council] wants to find out the lay of the land: where technology is now, where technology is going, and if there is a likelihood that we could have competition from the private sector given our size market,” Yendes says. “[The city] wants to know how our private cable company would react. What can we expect? What makes sense for Springfield? We’re in an educational phase right now.”
Locals will be closed out of the service loop
With cable modem services out from under their jurisdiction, LFAs lose the authority to impose customer service requirements on cable modem service providers. “People still call City Hall and say, ‘How come the rates keep going up for cable modem service, and how come my system was down for two weeks and I’m still getting billed?’” Fellman says.
In Montgomery County, 100 to 150 residents call each month to complain about cable television and cable modem services, and complaints about cable modems are increasing. “It used to be that cable modem complaints were 5 or 10 percent [of all complaints],” Lawton says. “Now 60 to 70 percent of the complaints are about cable modem service.”
Inability to help resolve disputes with cable companies can be frustrating for cities and counties as well as for residents. “Now when customers call City Hall and complain, we can give them a phone number in Washington for the FCC, and we can suggest that they write their Congressman,” Fellman says. “That’s a much less helpful way to respond to citizens who have concerns.”
For some cities and counties, the lack of authority to enforce customer service standards will not stop their efforts to help residents resolve cable modem service issues. For example, Kansas City receives relatively few complaints about cable services, and Geary says the city has a good relationship with its local cable management. “Quite honestly, if somebody calls me and says, ‘I can’t get my service with the cable modem,’ I’m still going to call the company and [ask], ‘What’s going on?’” he says.
Right-of-way regulation will be restricted
In addition to restricting LFAs’ authority over customer service, the FCC ruling affects local governments’ ability to manage activities in rights of way. “[A right of way is] public property, and we ought to be able to manage, control and regulate it,” Geary says. “[The FCC] looked at the end result of the technology and said, ‘It’s an information service, so if [the cable companies] want to be in the streets to [provide] an information service, you can’t regulate them.’”
Local government officials worry that, without regulation, construction and safety violations can go unresolved. “I remember sitting at the last LSGAC meeting and [asking], ‘What do you want us to do about construction violations?’” Lawton says. “It looked like the [FCC] staff we were meeting with had never thought of that. I said, ‘You know, we had 4,000 [violations] last quarter in our jurisdiction. Would you like us to send them all down here?’”
To recover some authority, many local governments can establish a new kind of franchise to regulate cable modem services in rights of way, Fellman says. “There are a lot of states now in which cities can say, ‘Well, if I’m not allowed to charge or regulate this under my existing cable franchise, then I’m going to have to make these companies get a different franchise,’” he says.
However, if all cities and counties create different franchises to manage activities in rights of way, cable companies could become mired in red tape trying to provide services across jurisdictions and in different areas of the country. “You’re going to have different regulatory frameworks in different states based upon the FCC’s classification,” Fellman notes.
Additionally, cities and counties are left with the problem of determining whether cable activities in rights of way regard cable television services or cable modem services. “It’s going to be difficult to split out what’s attributable to the video plant and what is attributable to the cable modem plant,” Lawton says. “[The cable systems] are being built with 500 new power supplies, with much larger bundles of fiber, with new pedestals, and new boxes on the telephone poles in order to provide high-speed cable modem service. So how are we going to parse that out?”
‘No requirement for universal service’
With the ruling that exempts cable modem services from LFA jurisdiction, cities and counties fear that cable companies could deploy cable modem services at will. That means problems for the digital divide, Fellman says.
“By calling it an interstate information service instead of either a cable service or a telecommunications service, the [supposition] is there’s no requirement for universal service,” he explains. “It appears that the FCC is comfortable with companies saying, ‘We’re going to serve this neighborhood, but we’re not going to serve that neighborhood.’”
If companies can determine whether and where to deploy cable modem services, they can deploy to affluent areas that likely will use the services at a higher rate, and low-income areas may not even have a choice to use the technology. “The digital divide presents itself particularly when [the companies] are first marketing services and when they believe one area is more profitable than another,” Lawton says. “They may be at liberty to roll it out any way they want to.”
A problem with authority
The FCC issued the declaratory ruling as one in a series of rulings designed to encourage the deployment of broadband technology. However, local governments argue that the reduction in franchise fees (approximately $2.20 per household per month) is not enough economic stimulus to make the service more appealing to consumers.
“I’m not sure this is going to be this huge boon to the deployment of broadband,” Geary says. “I spend $138 a month because I just get everything. Now I’m going to spend $136. [Those savings equal $24] a year. I don’t believe that’s an economic stimulus at all. Not for the people that cable modem is marketed to.”
Until the FCC can clarify the roles government agencies will play in regulating interstate information services, cities and counties will continue to lose revenue. Also, local governments will lose control of rights of way, will not be able to help residents with service problems and will not be able to ensure equal access to cable modem services for all residents.
If local governments are not going to be the agencies in charge of those functions, they want to know who will be in charge. “The fact that it was a declaratory ruling was probably premature if they hadn’t fully analyzed the impact on local governments and on themselves as the federal government,” Lawton says. “Often one would think this should be done federally, but then when one looks into it, the actual implementation of that is just not conducive at the federal level.”
The National Association of Telecommunications Officers and Advisors, the National Association of Counties, the National League of Cities and the U.S. Conference of Mayors have formed the Alliance of Local Organizations Against Preemption (ALOAP) to coordinate city and county comments as part of the Notice of Proposed Rulemaking. Comments are due June 17. ALOAP also is challenging the FCC ruling on behalf of cities and counties in the 9th Circuit Court of Appeals. For information about submitting comments or participating in the legal challenge, contact:
- NLC, Juan Otero (202) 626-3022
- USCM, Ron Thaniel (202) 861-6711
- NACo, Jeff Arnold (202) 942-4286
- NATOA, Libby Beaty (703) 506-3275
