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AT&T Retreats from Modem-Fee Stance

Facing uniform regulatory opposition to its plan to cease franchise-fee payments for Internet-access revenue, AT&T Broadband appears to have backed away from that idea.

The operator sent letters to cities in California, Oregon and Washington that assert its belief that "federal law does not allow the voluntary payment of franchise fees" on modem service.

In those letters, MSO officials said the change in fee-payment policy would go into effect last Thursday (Feb. 15). But AT&T officials softened their hard line as the deadline day approached.

In letters obtained by Multichannel News, that date was italicized to draw extra attention. But AT&T Broadband spokesman Steve Lang said Feb. 15 "is not a hard deadline."

"No final decision has been made," he added.

Nonetheless, the company told Los Angeles officials that it will continue to pay franchise fees on modem service until the legal questions surrounding the charge are clarified.

AT&T Broadband and Cox Communications Inc. both changed their modem-fee policy because of a ruling by the 9th U.S. District Court of Appeals.

The court struck down an attempt by Portland, Ore. to force AT&T Broadband to open its high-speed data to competing Internet-service providers. In that ruling, the court determined that high-speed data delivery was not a cable service.

Given that language, operators said they could be sued for applying a cable fee to a non-cable service. Cox stopped paying franchise fees on modem service in November.

But in ruling on a case in Virginia, a federal district court declared that data service was a cable product. A third federal case-this one on pole-attachment rates-is also pending before the U.S. Supreme Court and could result in a different take on the issue.

AT&T Broadband delayed implementation of the fee shift and MSO executives scheduled meetings with local authorities in an attempt to address their concerns.

But municipal officials offered several points of disagreement with the operator's action. Most franchise documents broadly define the income included in franchise fees. That language does not exclude non-cable products, municipal lawyers claimed.

An operator also is not required to separate franchise fees into a modem-related line item. A company can bury the fee in the modem charge or decline to pass it along to consumers, local regulators said.

The letters dispatched by AT&T Broadband in late December, which set Feb. 15 as an implementation date, asked cities to volunteer to waive the charge. The note suggested municipalities would also be subject to legal challenge if they collected the fee.

Los Angeles Board of Information Technology commissioners voted on that proposal Feb. 9. The city suggested that AT&T Broadband place the modem fees in an escrow account, pending resolution of the legal definition of modem service.

AT&T declined, but executives said they will continue to pay franchise fees for data delivery.

By the end of last week, Portland, Ore., and 14 surrounding communities had not been informed about AT&T's plans for collecting franchise fees on Excite@Home Corp. service recently launched in the area.

Through the grapevine, however, both were told to watch for letters indicating that the MSO will collect the fee while settlement talks continue with the National Association of Telecommunications Officers and Advisors.

"We've been told that an AT&T letter will be forthcoming, but haven't seen it yet," said Portland director of franchising David Olson.

Olson expected a letter like those delivered to other municipalities in the 9th Circuit, contending it was "in the cities' best interests" to waive the fee or risk being dragged into potential class-action lawsuits. (Cable-modem subscribers in Virginia recently sued Excite@Home affiliate Cox Communications Inc. over paying franchise fees on the service.)

Nevertheless, AT&T already knows Portland's answer. In a letter to AT&T regional director of franchising Jeanne Benecke, the city said the company would have to provide a "legal rationale" as to why the MSO is not required to pay a fee on cable-modem service.

Countering the argument that cable modems deliver a telecommunications service not subject to local regulation, Portland noted that AT&T's franchise only allows it to deliver cable service. As a result, "AT&T is required to obtain additional local authority" before it can offer anything else.

Bruce Crest, executive director for the Metro Area Cable Communications Commission-a consortium of 14 Portland-area communities-said he believes AT&T will "soften its take-it-or-leave-it" position, rather than "unilaterally stop collecting the fee."

He also expects the MSO to repeat its predictions that legal action would be taken against the company.

"Our position will be what it's always been: We're willing to talk and negotiate, but those fees are required and must be paid," Crest said.

But because AT&T pays franchise fees on a quarterly basis, the communities represented by MACC will not be sure that they're receiving their rightful due until May.

Other cities said they have heard "through their network" that they will receive similar notice from AT&T Broadband and are waiting for the formal letter.

Should AT&T Broadband fail to concede, "We're ready to start franchise violation proceedings," said San Carlos, Calif., assistant city manager Brian Moura. That means dispatching a letter to local cable management that gives them 30 days to reverse the policy or face daily fines.

The next step is revocation, "but we usually don't even get to the fines," Moura said.