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Iowa Lawsuits Target Franchise Fees

Consumers in seven Iowa cities are challenging cable-franchise fees, arguing that they violate state law because the amount collected is larger than the actual cost to regulate the businesses.

Individual lawsuits have been filed in Iowa District Court against Bettendorf, Cedar Rapids, Davenport, Des Moines, Dubuque, Sioux City and Waterloo. The suits were filed Sept. 5-9.

Richard Davidson, attorney for the plaintiffs, said the suits were triggered by a May ruling by the state’s Supreme Court. The ruling was on a case -- launched by a utility user, Lisa Kragnes of Des Moines -- that affirmed that taxing agencies can only assess and recover the actual cost of regulating a utility. That suit, against gas and electric utility taxes, seeks class-action status.

In most of the country, cable-franchise fees are classified as rent -- the price paid by a commercial entity for the use of the public right of way. But Iowa’s laws are different, Davidson explained. In a utility franchise case litigated in 1917, state courts established that the people, not the cities, own the rights of way. Because it is the public’s ground, cities are not authorized to rent it out, he added.

The cities that have been sued each charge a 5% franchise fee on cable revenues -- the amount authorized by the federal Cable Act.

“That amount is vastly in excess of the cost of regulation,” he said, adding that federal policy allows for a franchise fee, but the 5% figure is a cap, not a mandate.

The cities targeted by the suits funnel the franchise-fee revenue into the general fund, where the monies are used for any purpose, not just cable-related ones.

If the suit is successful, it could shrink the taxes passed through by cable operators that attempt to compete there, including Cable One, Mediacom Communications and McLeodUSA Telecom.

Currently, Davidson added, cable operators are subject to a 5% sales tax and up to 2% in county sales taxes, in addition to franchise fees. These are passed through to customers, raising the rates they pay when compared with direct-broadcast satellite customers.

“The state’s already getting more than its share” of taxes, Davidson said.

If the individual suits are successful, Davidson will pursue class-action status on behalf of cable customers.