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Pole-Fee Flap Could Prove Costly to Cable

When Time Warner Cable begins to serve the majority of cable subscribers in Los Angeles after the Adelphia Communications Corp. bankruptcy is resolved, the cable operator could face $1 million in operating expenses for which it did not budget.

The added cost could be an increase in pole-attachment fees that has been sought by the local, municipally owned utility, the Los Angeles Department of Water and Power. The DWP is following the lead of other utilities seeking to extract more revenue from cable operators in recognition of the renters’ rising income from products beyond the core video offering.

Pole attachments could rise to a new rate of $30 per pole per year from $10 per pole per year.

CABLE SUBS HIT

“Our concern is any increase like that gets passed on to consumers,” said Deane Leavenworth, president of the Los Angeles Cable Operators Association and Time Warner Cable vice president of corporate relations. “It’s a new revenue source for the DWP, but it’s borne only by cable subscribers.”

Los Angeles’s utility company isn’t the only one in the country which believes cable needs to pay more to use its poles. The trade group Edison Electric Institute is pushing in Washington, D.C., for an end to rate-setting by the Federal Communications Commission with mandated negotiated agreements.

BIG COST HIKE

That could cause rates to rise from the current average of $6.63 per pole per year to the $30 to $40 range, causing a substantial rise in cable’s cost of operation. (Utility groups are playing the Hurricane Katrina card, adding in federal testimony that pole attachments increase their susceptibility to damage by ice and wind storms.)

If utility companies try to raise the attachment fees, cable is left with costs that make it harder for the industry to charge rates to subscribers that are on par with other technologies, such as direct-broadcast satellite, which pays no terrestrial property taxes or other fees (and has challenged terrestrial fees such as sales taxes in court) or upcoming telephone competitors, which own their own poles. The recurring legal bouts require funds that would otherwise be used for plant upgrades and other capital projects.

Attorneys such as Paul Glist, who litigates in this area for the cable industry, predict fees will only become more fractious in the next five years, as power companies enter the advanced services delivery realm themselves, through the deployment of high-speed Internet connections over electric lines. Attorneys are girding themselves to defend cable operators from utilities which may attempt to offer preferential pole-use rates to their own commercial broadband divisions.

The coming competition to cable from utility companies makes the hike in pole-attachment fees “even more disturbing now,” said John Spalding, Cox Communications Inc.’s vice president and assistant general counsel.

For their part, power-company representatives, such as communications director Laura Duda of Tampa Electric, said cable pays artificially low rates that don’t cover the actual rate for pole maintenance. Higher rates, reflecting market value, should be paid by cable companies to compensate utility shareholders and ratepayers for the use of their physical assets.

LONGSTANDING FIGHT

The battle over the appropriate rate for using utility poles is an old one. In the 1960s, pole-rate battles slowed cable’s deployment. As a remedy, the industry lobbied for the 1978 Pole Attachment Act, which set rates and conditions for competitors using utility company poles.

Congress designated the Federal Communications Commission as the rate-setting authority.

But that did not end the disputes. In the next 20 years, the FCC would referee 300 disputes over pole attachments and rates. Disputes arose over whether the FCC had jurisdiction over wireless technology attachments and where and how many wires can actually be affixed to a pole, as examples.

But the pitched battle now is between power companies and cable. Most cable plant is on power poles. As cable began actually deploying high-speed Internet service in the late 1990s, power companies started to review their rate structures.

“When the FCC first set rates, telephone companies were charged $40 and the rate was only $7 for cable operators, because cable was young,” said John Hutchinson, manager of public affairs for Gulf Power Co., an ongoing litigant on pole attachments. “[Cable’s] had a nice long ride.”

In the late 1990s, Gulf Power and other utilities challenged in court the rates set by the FCC as an unconstitutional taking. That dispute went all the way to the U.S. Supreme Court, which in January 2002 reaffirmed the FCC has authority to set rates, no matter what services were provided through the wire. The utilities had argued they should be allowed to charge “market rates,” a scheme the Supreme Court said ran counter to the goal of the Pole Act.

The result? According to Spaulding, his company continues to receive bills for $38 per pole per year, every six months, rather than the $6 rate set by the FCC. Cox pays the $6 rate. Gulf Power’s Hutchinson said some companies are paying the higher rate and some are putting the disputed difference in escrow.

Gulf Power has revised its legal argument, and is again challenging the attachment rate.

That dispute, along with one by sister company Alabama Power Co. is currently before the U.S. Court of Appeal for the 11th Circuit.

Spaulding could not discuss the details of the new case, citing a confidentiality agreement between the companies.

NO INCENTIVE NOT TO SUE

“We can’t seem to drive a stake through the heart of this problem,” said Glist, a partner with Cole, Raywid & Braverman, a firm specializing in telecommunications law. The problem, he explains, is that there is no penalty in the law for repeated litigation, and it’s costing cable operators millions in court and legal fees “to be right on the issue.”

Cable attorneys have argued that the proper pole rate is 7.41% of a utility’s annual cost of ownership of a pole.

But that has not stopped power companies from pursuing higher rates using different legal arguments.

For instance, Bright House Networks in Florida and Tampa Electric Co. are awaiting decision from either the FCC or a county court there on a dispute raised in January this year. Tampa Electric wants $17.67 per pole per year, retroactive to 2004.

Bright House currently pays $5.63. The utility argues Bright House violated its pole contract by launching digital phone and reselling capacity to Time Warner Cable.

Bright House declined to comment on an active lawsuit. Tampa Electric’s Duda asserted it’s “not fair to the other phone companies for one company to get another rate. It’s just not fair.”

Meanwhile, operators in Los Angeles have more time to argue against the hike. The City Council on May 17 vetoed the rate hike, but only because the panel questioned the procedures used by the DWP board to decide upon the rate amount and its approval.

The council sent the matter back for action again by the utility board, but council members made it clear that they support the rate hike and are likely to approve it when the proposal returns to them.