Big Cities Turn To FCC To Tap Cable Broadband Fees

WASHINGTON, D.C., January 9, 2024 – Some major U.S. cities are targeting a federal rule that likely stands between them and a gusher of broadband gold.

Under current Federal Communications Commission rules, cable’s broadband revenue is off limits to local taxing authorities. Cable’s pay-TV revenue, however, has traditionally been subject to a 5% fee on gross revenue, helping to support municipal balance sheets all over the country.

Several big cities are making an effort to abolish that tax barrier enshrined in the FCC’s “mixed use” rule, an effort which could end up allowing cities to tap into cable’s billions in broadband revenue. The mixed-use rule, reaffirmed by the FCC in 2019, prevents cities from adding telecommunications or information service fees on cable operators.

The FCC was upheld in court in specifically disallowing the Oregon Supreme Court’s decision in 2016 that allowed the city of Eugene “to apply a separate telecommunications license fee on revenues derived from the provision of broadband services over a franchised cable system,” according to the Davis Wright Tremaine law firm.

Cities, ‘fees’ and ‘taxes’

As matter of legal precision, cities that receive compensation for granting cable operators access to their rights of way prefer the term “fees” rather than “taxes.” That’s because the Internet Tax Freedom Act includes a ban on the taxation of internet access services.

When the FCC established the mixed-use rule, Democratic FCC Chair Jessica Rosenworcel (who was a regular Commissioner at the time) dissented, but her statement focused on areas concerning how to calculate cable franchise fees owed when a cable operator provides in-kind services, such as free or discounted cable service to public buildings.

Since gaining a one-vote majority last September, Rosenworcel has unveiled several regulations directly aimed at the cable industry, including: Net Neutrality, digital discrimination, a ban on early termination and billing cycle fees, all-in pricing mandates, retransmission consent blackout reporting requirements, and pay-TV subscriber rebates related to TV blackouts.

Revisions to the mixed-use rule that tilt in favor of cities would not exactly clash with the thrust of Rosenworcel’s cable industry policy agenda in 2024, which could be her swansong year as head of the agency.

Mixed-use rule is not a money grab, says attorney

An attorney representing several major cities insists that the mixed-use rule issue does not simply boil down to a money grab.

“I think it’s more complicated than that,” said Cheryl A. Leanza, an attorney at Best Best & Krieger in Washington. “I definitely believe our client cities are interested in making sure that they can manage their rights of way and have the opportunity to treat regulatees equally.”

Leanza’s clients include Boston, Dallas, Washington, D.C., Los Angeles, Portland, Ore., and Eugene, Ore.

Last month, NCTA – The Internet & Television Association urged the FCC to disregard requests to revamp the mixed-use rule. NCTA represents the country’s largest cable operators, including Comcast and Charter.

NCTA also stressed the FCC can’t suddenly announce that the mixed-use rule is no longer good law.

“Even if the [FCC] were to conclude that it had the authority to repeal the mixed-use rule, it would first need to conduct a notice and comment rulemaking,” NCTA said.

According to S&P Global, broadband ISPs took in $111.73 billion in 2022. Based on current market shares, cable ISPs likely divided about $75 billion of that total. Five percent of cable broadband revenue would yield $3.75 billion in franchise fees for the cities in the first year.

Cities involved in the issue argue that the mixed-use rule needs reform because it “results in regulatory arbitrage.” They note that pure broadband providers that don’t offer cable TV can be required to obtain a local franchise and pay fees.

“But a cable operator offering both cable and broadband services may not be required to pay a fee based on its broadband revenue – no matter the ratio of cable to broadband revenue,” Leanza said in a Jan. 5 letter to the FCC after meeting with aides to Democratic FCC Commissioner Anna Gomez two days earlier.

Her letter added, “FCC policy should eliminate, not promote, uneven treatment of competitors, not grant cable operators a unique, preferential advantage over broadband providers that are not cable operators.”

The cities’ reference to arbitrage is starting to diminish. A few cable TV companies are terminating cable TV service and just offering broadband. DUO Broadband in Kentucky is exiting cable at the end of year, and Colorado-based WOW! Internet, Cable & Phone is transitioning its cable TV customers to YouTube TV. Cable One in Phoenix has been engaged in a multiyear effort to shut down its cable TV business.

Last month, MyBundleTV co-founder and CEO Jason Cohen said he expects hundreds of smaller cable companies to shut down cable TV over the next 36 months.

The exact legal status of cable companies that have abandoned cable TV but continue to offer broadband Internet seems to be an open question and could become the next legal battleground between cable and cities in the fight over right-of-way fees.

Because of cord cutting, cities have seen an accompanying decline in cable franchise fee revenue. Baltimore Budget director Laura Larsen last month reported that the city’s loss of 46,000 cable subscribers since 2020 contributed to her department’s $1.3 million deficit in the first quarter of 2023.

Ted Hearn is the Editor of Policyband, a new website dedicated to comprehensive coverage of the broadband communications market. This piece was published on Policyband on January 9, 2024, and is reprinted with permission.