Cities Want Piece of Modem Pie

Cable operators and local regulators have had their share of dust-ups over the years, but the current one regarding the regulation of cable-modem service has produced a rather large mushroom cloud.

For years, cable has sought to protect its high-speed-data service from intrusive regulation. To keep the peace with cities, though, the industry agreed to fork over 5 percent of cable-modem revenue as part of an understanding that data was a "cable service" legally identical to video programming.

"Everything was copacetic," said Gerry Lederer, a lawyer with Miller & Van Eaton, a Washington, D.C., firm that represents hundreds of cities and local officials.

But, in March, the Federal Communications Commission stepped in and ruled that cable-modem service was an interstate information service.

That meant cable's brand of high-speed data was no longer a "cable service," and new rules were needed to govern the relationship between cities and cable-modem providers.


The FCC's ruling has driven a wedge between the two sides. Cable operators claimed the regulator's ruling effectively stripped cities of nearly all regulatory authority over cable-modem service. The cities countered that they have lost nothing in the decision, and decided to mount a huge offensive at the FCC to ensure that their legal arguments prevail.

"[Our] people understand that the die has been cast and there's a battle to come," said Lederer, whose firm has put together a massive municipal coalition that goes by the acronym ALOAP (Alliance of Local Organizations Against Preemption).

Not surprisingly, money is a key issue, if not the biggest one.

The National Cable & Telecommunications Association claims cities are barred from imposing franchise fees on information services. In fact, almost every major cable operator has stopped collecting and remitting franchise fees on cable-modem service revenue in the wake of the FCC's March decision.


In recent FCC filings, the NCTA has suggested that cities have received more than enough money from cable operators as compensation for use of their rights-of-way. In 1985, cable operators turned over $441.5 million in franchise fees; in 2001, the total jumped to $2.1 billion, the NCTA said.

Exempting cable-modem revenue from franchise fees "may deprive cities of the windfall that they were anticipating from new sources of cable revenue. But it does not deprive them of fair and reasonable compensation for the use of public rights-of-way," the NCTA told the FCC.

In addition to collecting modem fees, cities want the authority to impose a separate franchise requirement on cable-modem service and to oversee cable-modem privacy and customer-service policies.

A lingering question is the status of franchise fees that were collected when cable-modem service was thought to be a cable service. Are subscribers who paid the 5 percent modem fee now entitled to refunds?

Again, ALOAP maintains that the FCC should leave the refund issue for states and local governments to decide.

The cable industry's response to the cities' regulatory approach is that it would slow the deployment of broadband and ensnare cable operators in a regulatory thicket that has the potential of changing from city to city and county to county.

"You could have 13,000 different interpretations of these issues, leading to a regulatory nightmare," said NCTA spokesman Marc Osgoode Smith. "The FCC got it right, with a national, uniform paradigm."

The FCC is expected to resolve the conflict in the fall. But the agency's rulings will likely be challenged in court.

Various interests are fighting the FCC's decision to classify cable-modem service as an information service in court, including hundreds of cities.