November 2005

There’s a revolution under way in the area of telecommunications - on cable and satellite, over broadband and "wi-fi" (wireless) Internet, and via telephone lines and cellular phones. It’s happening right now in cities throughout the nation - including yours.

This revolution is generating tremendous pressure on government to radically change state and federal laws affecting the telecom industry. How it all shakes out could dramatically affect your city’s franchise fees and utility user’s tax (UUT) revenues and its ability to ensure public access to vital information services, public safety and economic development.

Technological advances have made it possible for cable, telephone, Internet providers, electric utilities and other companies to expand the range of telecom services they can offer consumers. These new opportunities for consolidating services will displace the multiple subscrip tions many of us have for cable or satellite TV, "land-line" and/or cell phone service, and broadband and/or wireless Internet service for our home computers, laptops or personal digital assistants (handheld electronic devices, such as a Blackberry or PalmPilot, that enable the user to send and receive e-mail, access the Internet and perform other computer functions).

The companies that provide these services want your business 1 more of it or even all of it. Cable and satellite TV companies now offer high-speed Internet service, competing with the broadband service offered by telephone companies. They also want to provide telephone service through something called VoIP (voice over Internet protocol). Even electric utilities are getting into the act, offering Internet access and VoIP over electric infrastructure that’s already in place.

Vonage is one example of a new type of company offering VoIP phone service. Vonage can provide very low-cost phone service because it transmits calls over the Internet virtually for free. With this service, voice phone calls are converted to data that travel over the Internet, much like e-mail. Messages are reconverted to voice signals before being switched to the "regular" telephone network.

Phone companies are also expanding beyond their traditional services. Cell phones already offer text messaging and video transmittals. Now, phone companies such as SBC and Verizon are aggressively marketing Internet services, including video programming that would compete with cable and satellite television. Cur rently, Verizon has two cable franchises to provide video services in California and is working on more.

"Bundled services" - obtaining all or most of your telecom services from only one or two companies - has substantial appeal. It would simplify life for many people, provided that consumer protections were in place.

But who would ensure that those protections are there? Imagine depending on one company for land-line and cell phone service, video and Internet service if that company was not responsive to consumer concerns about access, billing and service issues.

How will these companies be regulated? Who will protect consumer interests? The answers are not at all clear.

For cities, the convergence of telecom technologies poses both fiscal challenges and concerns about preserving local control and protecting citizens’ interests. Two key areas of concern are cities’ ability to continue to enter into franchise agreements with service providers and to charge utility user’s taxes (UUTs) .

Governmental regulatory frameworks are outdated. Cable, telephone and Internet services now use the same infrastructure or similar delivery methods. Yet our regulatory systems make distinctions between types of service. For example, both a cable company and a land-line telephone company provide Internet service, but cable is regulated differently than telephone, which in turn is regulated differently than the Internet.

As telecom services converge, the traditional methods of categorizing services for regulatory and taxing purposes no longer make sense. In the modern digital world, all telecom services are simply bits and bytes flowing over lines and through the air. It is becoming increasingly difficult to determine whether a particular service is cable, telephone, Internet or some other service.

Local governments currently have the ability to negotiate renewable franchise agreements with video (cable) providers. These agreements require franchise fees for using public rights-of-way, but they also provide the means by which municipalities are able to mandate specific service levels; guarantee access to and funding for public, educational and governmental (PEG) access television; and secure cable providers’ support for these efforts.

Cities’ continued ability to enter into franchise agreements with service providers that include these protections and revenues is currently in question as a result of the pressure to change existing approaches to regulating telecom services.

The cable industry argues that there should be a level playing field among all video providers, including phone and Internet access companies. But while these non-cable newcomers are pushing to obtain franchise rights to the public right- of-way so that they can gain customer access and deliver video services along with their existing voice or data services, they don’t necessarily believe they should be subject to the same franchise requirements that currently apply to cable, including specific standards for service coverage. The newcomers are creating pressure on the traditional franchise agreement system to change and accommodate their needs.

For example, Verizon is advocating using public rights-of-way to lay fiber-optic cable - but only to deliver service to their existing customer areas, even if those areas are not within the boundaries of a cable company’s service territory. This could mean that some residents in a city don’t have the opportunity to benefit from the services offered by a city franchisee - a situation that could worsen the digital divide that is a serious and growing concern as telecom becomes an increasingly important tool in our everyday lives.

Utility User’s Taxes (UUT)

Another challenge for cities is the impact these changes may have on their ability to collect UUTs. The UUT was originally applied to traditional utilities such as gas, electricity, land-line telephone, cable television and, in some cities and counties, water. Telephone UUT has expanded over the last few years to include cellular providers.

Most telecommunications UUT ordinances in California are based on and use definitions from:

• The legislation enacting and governing the Federal Excise Tax (FET), which involves knowing where a telephone call originated and/or terminated; or
• The place of the customer’s primary use.

With the convergence of technologies, it’s not always easy to identify the customer’s primary place of use. Additionally, the method used for FETs is becoming irrelevant as a basis for taxation and is threatened with extinction through legislative or regulatory actions.

As a result, the definitions used in current UUT ordinances are rapidly becoming useless and no longer apply to the technology delivering the services. Further, the federal government has made it clear that it intends to repeal the FET in the next few years.

Clearly, for UUT to survive, changes must be considered in order to keep pace with these rapid and complex changes.

9-1-1 Access Fees

Another concern for local governments is how regulatory changes will impact their ability to collect 9-1-1 access fees.

The 9-1-1 access fee has been adopted by several California cities to recover the substantial costs of providing 9-1-1 emergency dispatch services. The fee is collected by the service providers and remitted to the local jurisdiction for the purpose of maintaining and improving access to and reaction from local emergency response and dispatch systems.

Telecommunication providers are lobbying for the elimination of 9-1-1 fees as well as UUTs. They argue that the telecom industry should not be treated any differently than other industries, and should therefore not be subject to unique taxes or fees; nor should they have to collect taxes and fees for the government (such as UUT and 9-1-1 fees).

The concern about continued 9-1-1 services extends beyond the local regulatory structure. There is also a 9-1-1 surcharge (separate from local 9-1-1 access fees) at the state level, which is collected to help offset costs for 9-1-1 development and interconnectivity statewide. Regulators such as the California Public Utilities Commission are struggling with whether or not to regulate all of these services and, if so, how and to what extent. They are also discussing what taxes to allow, if any.

As discussions continue at the state and federal levels over new regulatory approaches, there is still much that divides local government from the telecom industry as a whole.

Local governments are concerned about preserving local control over public rights-of-way, which pose numerous safety issues if overcrowded and not properly managed. Cities are also concerned about continuing vital local services, such as PEG and 9-1-1, and protecting an increasingly important source of revenue from franchise agreements and UUTs.

Various sectors of the telecom industry have differing, sometimes contradictory, perspectives - determined largely by their current infrastructure investments and how they can best use those to leverage market advantage. The cable industry, for example, asserts that the local franchising system works, and telephone companies that now want to provide In ternet and video service should also be subject to local franchising requirements. In contrast, the telephone companies say that their main concern is speed to market, and within this context argue that local taxes are too onerous to collect, pay and account for, and that local franchise agreements are too complex, take too much time to negotiate and need to be standardized. At the same time, their federal legislative proposals indicate a strong desire to avoid most public interest obligations in order to cut costs.

In the California Legislature the discussion increasingly focuses on the notion that, whatever methods are adopted at the local, state or federal level to collect fees or taxes, there must be a level playing field, ensuring equal access to customers, including use of the public rights-of-way.

Current discussions at the state and national levels between legislators and industry representatives are focusing on either a national or state franchise agreement that would be the same or very similar for all telecom industry members, regardless of their "base" services.

As part of this centralized franchise, one option under review - thought beneficial by the industry - is to apply and collect franchise fees at the state level, thereby completely removing franchise agreements from local control, "standardizing" the rate and centralizing the point of collection. A variation on this approach, recently adopted in Texas, is a state franchise that allows franchise fees to be collected at the local level.

Local government has several concerns with centralizing franchises in general, including:

• Possibly losing control over the "time, place and manner" of accessing and using the right-of-way, currently provided by  law;
• Probably losing some or all local franchise fees and the centralized government collection and allocation of those fees;
• Losing leverage to mandate and control local community programming and access, and to require support for PEG access facilities and equipment;
• Controlling and leveraging service "roll out" to support local goals and programs, such as economic development or redevelopment;
• Ensuring equitable service delivery within their communities; and
• Losing the authority to enforce consumer protection regulations and to require institutional networks.

One of the many options being looked at in the California Legislature is a statewide franchise "template" or agreement.

As with most complicated subjects, the devil is in the details. Any changes to the franchising system for the telecom industry have the potential to also effect changes in all other utility franchise agreements and access to rights-of-way.

Some communities - particularly those that are not attractive markets for private sector telecom providers - are finding that it makes sense to become the service provider for their residents. For example, when the City of Fontana was unable to persuade a broadband provider to come to their community, they decided that the best way to ensure that city residents and businesses had broadband access was to build their own fiber optic communications "tollway." When completed, the city will own and manage the infrastructure, charging fees to any broadband service provider that wants to offer service in their area. The city hopes another advantage of this approach may be that it helps them preserve control of the number of PEG channels they are able to require of providers, even if new national franchise rules are adopted that limit the number of PEG channels required of providers who install their own networks.

But even some cities that offer highly desirable markets for private telecom providers are interested in taking control of their own communications destiny to ensure that all residents have equal access to vital information services. For example, the City and County of San Francisco is looking for a provider that will help establish a program they call "TechConnect," a new citywide initiative that will offer universal, affordable, wireless broadband access at home and work, and promote access to affordable computer hardware, training and online content.

Cities’ efforts to become telecom providers are generally not viewed favorably by the telecom industry, however. As Congress debates national legislation on whether local governments can provide competitive broadband services to their constituents, they will take into consideration that 13 states have already passed legislation restricting future public broadband projects. They are Arkansas, Florida, Minnesota, Missouri, Nebraska, Nevada, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia and Washington.

While state legislatures and state regulatory agencies throughout the nation are grappling with these regulatory issues, the biggest obstacle could well be Congress, which has shown a strong preference over many years to protect the Internet from taxation by federal, state or local governments. Some influential congressional leaders and many telecom industry representatives are very interested in amending the 1996 Telecom Act by expanding the provisions preventing Internet sales taxation to include some aspects of the converging telecom industry, and by extending the exemptions that currently exist on satellite providers.

However, other members of Congress have shown an interest in the regulatory solutions that states are considering. If California (or any other state) can construct a regulatory scheme that makes sense for the state, it may influence congressional debates on the issue.

On the other hand, Congress could exercise its authority to entirely pre-empt state and local laws in this field. It is simply too early to predict how everything will ultimately shake out. But one thing is already clear: Local governments will have a major battle on their hands at the federal level.

League staff and city officials serving on League policy committees and subcommittees have been working for months to monitor developments at the federal and state levels and identify issues and concerns for cities. The League has been actively involved with discussions in the state Legislature and working with the National League of Cities, U.S. Conference of Mayors and other state municipal leagues.

In July 2005, the League board of directors adopted a set of principles to guide the League’s work in these telecom debates. These principles affirm a local government’s right and responsibility to protect the interests of its citizens by re quiring a franchise agreement that includes delivery of PEG access to new networks, including PEG equipment, funding and support. They also endorse the idea of a level playing field for all companies, as well as the importance of solutions that preserve state and local revenues.

The best thing for city officials to do at this point is to become educated about the telecom issue and understand how it could affect your community, including its public broadcasting opportunities and your ability to control local rights-of-way, protect much-needed local revenues and ensure that telecom services are available to all residents in a way that makes sense for them. The digital divide will only get wider if concerted efforts are not made to preserve and protect consumer choices, at the same time that the range of those choices is broadened.

The telecom issue is heating up quickly at the state and national levels. Cities should prepare themselves now and get ready to contact their legislators and congressional representatives about specific proposals, providing detailed information about how the city’s finances and services will be affected by them.

However, even as legislation is emerging in the state Capitol or Congress, telecom companies will be pressing local officials to allow access to their communities. Cities should examine their current ordinances relating to rights-of-way and franchises and how the installation of telecom infrastructure can be carried out in ways that best serve the city.

Major changes are coming. Devote time to understanding this issue and how it could affect your city’s interests - because the way you prepare and respond will have long-lasting impacts on services and revenues that affect your community’s quality of life.

What You Should Know When Telecoms Come Knocking at Your City’s Door

League Communications Principles

What’s Going On in Other States?

This article is an introduction to telecommunication issues. More information is available in the League’s Priority Focus newsletter and online at www.cacities.org/telecom. .