Memorandum

City of Lawrence

TO:	Mike Wildgen, City Manager
FROM:	David L. Corliss, Assistant City Manager & Director of Legal                                                    Services
Date:	April 21, 2005
RE:	Sunflower Broadband Cable Modem Franchise Fees

Earlier this year legal counsel for Sunflower Broadband provided a letter to the City indicating that recent federal decisions at both the administrative level (Federal Communications Commission) and court decisions supported the position that the City is no longer able to collect franchise fees from Sunflower Broadband for their cable modem services.  The FCC has ruled that cable modem services, allowing users to connect to the Internet via their cable connections, is not a cable service, but rather an information service, for purposes of the federal laws regulating cable services.  Thus, the argument that the federal law allowing for the collection of franchise fees, up to a maximum of five percent of the gross revenue, is not applicable.  Cable companies in other jurisdictions further argue they are at a competitive disadvantage because telephone company providers are allowed to provide digital subscriber lines (DSL) for Internet connections, and various laws do not allow for franchise fees from DSL services.

City staff has reviewed the information provided by Sunflower Broadband and discussed the matter with other area municipal officials. The legal arguments provided by Sunflower Broadband appear to be substantially correct, that federal law does not support the collection of franchise fees from cable modem services.  Staff was not able to find other area municipalities which have successfully collected franchise fees from cable modem services.

The City received approximately $120,000 in franchise fees from Sunflower Broadband cable modem services in 2004.  Franchise fees are a general fund revenue source.

The City’s current franchise agreements (Sunflower cable, Sunflower Telephone, SBC Telephone) provide for a franchise fee of 3.25% from Sunflower Broadband cable services, a 2% franchise fee from Sunflower Internet services, a 2% franchise fee from Sunflower Broadband Digital Telephone service, and a 2% franchise fee from SBC telephone service.  There is a federal law maximum limit on cable franchise fees of 5%, and state law maximum on telephone franchise fees of 5%. The current SBC telephone service franchise has expired, with both the City and SBC continuing to follow the terms of the expired agreement.  In discussions with Sunflower officials, they have indicated general conceptual support for franchise fee increases provided that other telephone service providers (SBC) do not have a competitive advantage concerning franchise fees.  A similar preliminary discussion with an area SBC official indicated similar support for competitive neutrality for franchise fees among similar providers.  In franchise agreement negotiations with SBC they have insisted that right-of-way management provisions be deleted from franchise agreements.  SBC has not objected to a competitively neutral right-of-way management ordinance which governs all users of City right-of-way provided that the right-of-way management regulations are reasonable and supported by State law.

The preferred course of action appears to be to draft amendments to both the Sunflower and SBC franchise agreements to place both telephone and cable franchise fees at the same percentage amount and ensure revenue neutrality (i.e. make  up the future loss of approximately $120,000 per year) to the City.   A number of technology trends should also impact this preparation, including the apparent general plateau in basic telephone service usage as cell phone service and Internet telephone service provide additional options to traditional land-line phone service.   Additionally, federal lawmakers are currently exploring alterations to telecommunications law which requiring monitoring.

Recommendation:

Direct staff to draft amendments to the three franchise agreements (Sunflower Cable, Sunflower Telephone, and SBC telephone) that achieve similar franchise fee rates and revenue neutrality for the City.  Additionally, a right-of-way management ordinance will also need to be drafted to proceed with a new SBC franchise agreement.