CABLE PRIMER: LOCAL AUTHORITY OVER CABLE SYSTEMS
HOT CABLE FRANCHISING ISSUES
Scope of Authority Over Internet [Cable Modem] Services
The cable modem
debate involves at least two distinct issues. The first issue is: what is the proper classification
of the service? The Federal Communications Commission issued a declaratory order finding that cable
modem service is not a cable service but is instead an interstate information service. Inquiry
Concerning High-Speed Access to the Internet Over Cable and Other Facilities, GN Docket No. 00-185,
CS Docket No. 02-52, (released Mar. 15, 2002). The 9th Circuit in Brand X Internet Services v.
F.C.C., 345 F.3d 1120 (9th Cir., 2003) affirmed the FCC's finding that cable modem service is not a
cable service, but reversed the FCC with respect to its finding that cable modem service is not a
telecommunications service. In the 9th Circuit's view, cable modem service is a telecommunications
service.
The Supreme Court granted a petition for certiorari filed by the cable industry and by the FCC and
the United States to address whether cable modem service is a telecommunications service or an
information service. F.C.C. v. Brand X Internet Services, 2004 WL 2153536 (December 3, 2004). The
Court denied a petition for certiorari filed by local governments. Presumably, this means that the
Court will either (a) decide cable modem service is a telecommunications service or an information
service; or (b) remand the matter back to the 9th Circuit for further consideration.
The second issue: what is the effect of the classification? The text of the Ninth Circuit?s
decision suggests that the appeals court believed cable operators providing cable modem service
should be subject to the same common carriage rules as apply to telephone companies providing
Internet services. The text may also be read to imply that cable modem service would be subject to
the same franchising, fee and tax rules that apply to other telecommunications services. The logic
of the decision ? if upheld and if the FCC does not grant other regulatory relief to the cable
industry ? would open cable networks to competitive service providers at least for purposes of the
provision of Internet service. And it would subject cable modem service to certain universal
service fund federal fees.
On the other hand, the cable industry may not be better off if cable modem service is classified as
an information service. As will be discussed in a future article, some telephone companies appear
to intend to use the ?information services? model to escape traditional telephone regulation and to
escape cable regulation when providing cable services. The traditional distinction between "cable
services" and "telecommunications services" is not sustainable if the FCC persists in creating a new
class of "information services" which require neither federal nor local authorization.
Based upon the FCC?s determination, cable operators also acted uniformly across the nation and
refused to pay franchise fees on cable modem service, even where the franchise explicitly required
such payments. The operators claimed that the franchise fee is limited to 5% of the gross revenues
derived from the operation of the cable system "to provide cable service." The operators claimed
that because the FCC declared that cable modem service is not a cable service, it would be illegal
to pay a franchise fee on cable modem service. This argument, as discussed above, is based on the
1996 change in the language of the Cable Act?s franchise fee provision. More generally, operators
have argued that localities are prohibited from imposing any requirements related in any respect to
cable modem service. In fact, as discussed above, the FCC has an ongoing rulemaking under way to
decide what effect, if any, its decision has on the authority of local governments to charge a
franchise fee on cable modem service based on state or local law requirements (as opposed to the
Cable Act?s franchise fee provision). The FCC is also considering whether localities may otherwise
regulate the provision of cable modem service, or require facilities and equipment related to the
provision of cable modem service. In addition, it is far from obvious (a) whether the 1996
amendments affect local authority to collect the full franchise fee negotiated under pre-1996
agreements, or (b) whether the 1996 amendments affect local authority to collect a fee on cable
modem service where the franchise requires a fee less than the 5% federal maximum.
Several communities brought suit against their cable franchisees in late 2002 and 2003, claiming
that fees were owed on cable modem revenues based on the franchise agreements with the City. Most
notable is a case involving the City of Chicago. Chicago cable franchises require payment of
franchise fees on cable modem services. A federal district court ruled that payment of franchise
fees on cable modem services was prohibited by federal law. City of Chicago v. AT&T Broadband,
Inc., No. 02 C 7517, 2003 WL 22057905 (N.D. Ill. Sept. 4, 2003). The district court?s decision was
vacated in City of Chicago v. Comcast Cable Holdings, L.L.C., 384 F.3d 901 (7th Cir. 2004). Chicago
had originally filed suit in state court based on the language of (what is now) the Comcast
franchise. The case was removed to the federal district court, and the district court issued its
decision on the merits. The Seventh Circuit concluded that the case should never have been heard by
the district court because it did not involve a federal question. According to the Court, the Cable
Act could be raised as a defense against the enforcement of what would otherwise be an illegal
franchise fee provision; but the source of local authority to charge the fee was state, not federal
law, and as a result the case was not in and of itself based on federal law. The case now returns
to state court, where the City will again be able to present its contract claims, and Comcast,
presumably, will again argue that the claims have been preempted. The Seventh Circuit's view of the
case is significant. If compensation for use of the rights-of-way is primarily a state claim on a
contract, then FCC preemption of the classification of the services for regulatory purposes will not
control the ultimate authority of local governments to charge franchise fees for the services.
When Must a Company Apply For a Franchise?
Several communities are now watching as telephone
companies install facilities that they intend to use to provide cable service (either as a cable
operator, or as an open video system). Some telephone companies claim to be installing the
facilities under the certificate received from the state to construct telephone lines (the companies
argue that the same facilities would be installed even if they did not plan to offer video
services). And, they argue the Cable Act does not require the telephone company to obtain a
franchise until the company actually begins to offer cable service. Under this approach, build-out
of a new telephone company network occurs without the normal protections and community planning of
the cable franchising process.
It is far from obvious that the telephone industry's position is correct. Under federal law, it is
illegal for a cable operator to provide cable service without a franchise, 47 U.S.C. ? 541(b)(1).
But that does not mean that federal law assumes franchises will issue after, rather than before
construction starts. A franchise is defined as an ?authorization? ?which authorizes the
construction or operation of a cable system.? 47 U.S.C. ? 522(9). (emphasis supplied). There is
thus a good argument that localities are entitled to require a franchise before construction begins.
Indeed, some obligations imposed on local governments under the Cable Act ? including the duty to
prevent redlining ? may be much more difficult to satisfy post-construction. Yet for now,
franchise-less construction is proceeding in many communities.
How Should Cities Regulate in a More Competitive Environment?
Cable service remains a monopoly service in most communities. However, most communities are
beginning to face questions that arise as new companies seek the opportunity to begin to provide
competitive cable services; as cable companies begin to provide advanced cable services; and as
cable companies begin to enter non-cable markets. For example, some communities have inserted
provisions in cable ordinances that allow for suspension of certain requirements once two cable
companies begin to compete head-to-head throughout the community (the franchise for Tacoma,
Washington provides an example of this approach). Some communities are beginning to focus
exclusively on rights-of-way management and related problems, establishing generic requirements that
apply to all users of the rights-of-way (for example, some cities are adopting cable franchise and
OVS ordinances simultaneously). And some communities are beginning to consider how to review and
audit franchise fee payments under circumstances where an operator may be providing a bundle of
services ? telephone, Internet and cable service ? for a consolidated price. Is the entire package
subject to a fee? Or only a portion of it?
The Cable Act allows localities to charge a franchise fee, but states that the franchise fee ?shall
not exceed 5 percent of such cable operator's gross revenues derived...from the operation of the
cable system to provide cable services.? The Act does not require fees to be based on gross revenues
derived from the provision of cable service. Theoretically, a fee could be a ?per foot? charge for
rights-of-way, or an other measure of right, so long as the amount collected by the locality does
not exceed 5% of cable service-related revenue. In Parish of Jefferson v. Cox Communications
Louisiana, LLC, No. CIV.A. 02-3344, 2003 WL 21634440 (E.D. La. Jul. 3, 2003), the franchise
agreement required fees on cable modem and telecommunications services, but also incorporated
references to changes in law. The court found the franchise agreement endorsed the FCC
reclassification of cable modem service as an information service, and thus, the cable modem
franchise fee requirement could not be enforced. Another suit was filed in the City of Rochester.
The case was removed to federal court, and then remanded back to state court for reasons similar to
those adopted by the Seventh Circuit. City of Rochester v. Time Warner Cable, 6:02-cv-06526
(W.D.N.Y. April 24, 2003). However, in a separate proceeding, Time Warner subsequently filed a
separate 42 U.S.C. ??1983 action against the City. The Rochester court federal judge then
consolidated Time Warner?s state and federal cases in federal district court. On December 22, 2003,
the district court granted Time Warner's motion for summary judgment, finding that cable modem is
not cable service, and further enjoining Rochester from collecting any fees on any service other
than Time Warner's provision of ?cable service.? Time Warner Cable v. City of Rochester, No.
6:03-cv-06257-DGL (W.D.N.Y. 2003). The latest decision in the Rochester dispute issued on November
3, 2004 is Time Warner Cable-Rochester v. City Of Rochester, 342 F.Supp.2d 143 (W.D.N.Y.,2004).
Time Warner, having brought suit under ? 1983, and having prevailed, asked the court to award
attorneys fees under ?1988. The district court concluded that attorneys fees were not available:
?Section 1983 may provide a cable company with a cause of action to enforce its rights under the
Act, but that does not automatically mean that all ? 1983 remedies-attorney's fees in particular-are
available in such an action...[I]t is not reasonable to assume that "any time Congress creates a
right that is enforceable against state or local officials or agencies, section 1983, and its
companion, section 1988, come in the door and the American rule [that parties to a lawsuit
generally pay their own attorney's fees, regardless of who prevails in the lawsuit] goes out the
window..." There is no evidence that Congress intended to make attorney's fee awards available in an
action under the Communications Act, nor would such awards help implement the Act or further its
purposes.? It is likewise much more difficult for a locality to establish and enforce effective PEG
and I-Net obligations post-construction. For example, in order to program PEG channels easily, a
physical link is often necessary between a PEG production facility and the headend of a cable
operator. Unless that link is designed as part of the initial construction plans for a telco
system, it may be much more difficult and expensive to program the PEG channels on the telco-owned
system. Until a connection is established, it is impossible to do any live programming, such as
carriage of City Council meetings.
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