This guest post by BC Law Professor and Associate Dean of Academic Affairs Daniel Lyons first appeared in the AEIdeas Blog.

Broadband has been a bright spot in America’s grim inflationary landscape. While consumer prices rose 4.9 percent last year, two recent reports show that consumer broadband prices fell, both in absolute terms and cost per gigabyte. But where many see a victory, some cities sense an opportunity. Stung by declining cable franchise fees, local governments are pushing to tax broadband. This effort faces severe regulatory headwinds, but if successful could erode consumer gains and drive broadband prices higher.

America’s municipalities were among the biggest hidden beneficiaries of the cable television revolution. The Cable Act prohibits companies from offering cable service in a municipality without a franchise. Cities typically grant these franchises subject to a fee of five percent of cable revenue generated in the city—meaning that $5 of every $100 on your cable bill typically goes into town coffers. These franchise fees reflected a significant windfall to local government—New York City mayor John Lindsay described it as discovering oil beneath the streets of Manhattan. In 2016, near cable’s peak, NCTA estimated that these fees reached $3.5 billion.

But consumer cord-cutting is rapidly causing the cable oil field to dry up. To fill the budgetary gap, cities such as Portland, Oregon (which has some history with unsuccessful telecom power grabs) want to assess monthly broadband use. Unfortunately for them, Congress anticipated this move: in 1998, concerned that regulatory costs might impede broadband buildout, the federal government passed the Internet Tax Freedom Act (ITFA), which prohibits state and local governments from levying taxes on Internet access. So to avoid the IFTA, these cities seek broadband “fees” not “taxes”ostensibly  for use of the public rights-of-way to deliver broadband service.

Two potential obstacles lie in their path. The first is the Federal Communications Commission’s Mixed-Use Rule, which states:

A franchising authority may not regulate the provision of any services other than cable services offered over the cable system of a cable operator.

In other words, if a company offers both cable and broadband service over its network, the city may only extract a franchise fee on cable revenue. The Mixed-Use Rule protects against cities collecting twice for the use of the right-of-way. In light of the FCC’s recent decision to reclassify broadband as a Title II service, it is also a reasonable interpretation of the Cable Act, which expressly states that the franchising power cannot be used to regulate Title II telecommunications services. Several cities have asked the FCC to repeal the Mixed-Use Rule, arguing that it creates an unlevel playing field between cable/broadband and standalone broadband providers—which in places like Portland, are subject to rights-of-way fees based on broadband revenue. 

Of course, if Portland were truly concerned about competitive parity, it could reduce or eliminate right-of-way fees on those providers, which would be in the spirit of the ITFA. 

But these rights-of-way fees raise another potential obstacle: Section 253. Section 253(a) preempts local action that may “have the effect of prohibiting the ability of any entity to provide…telecommunications service.” Section 253(c) allows localities to charge telecommunications providers for using the public rights-of-way, but only for “fair and reasonable compensation.” 

One might also ask whether a right-of-way fee based on a percentage of revenue should be considered “fair and reasonable compensation.” In the 2018 small cell order, the FCC interpreted this phrase to mean “fees that represent a reasonable approximation of actual and direct costs incurred by the government.” This would seemingly preclude market-based charges such as a percentage of revenue, which is not tied to the actual costs imposed by the company’s use of the right-of-way (such as street repair or paving).

While, as the FCC acknowledged, some courts have permitted broader market-based rights-of-way fees, the small cell order’s approach makes sense. Cable franchise fees are conceptually different than telecommunications right-of-way fees. Municipalities are gatekeepers of the cable industry: within the Cable Act’s boundaries, the local franchise authority can withhold a franchise, or grant subject to conditions such as a revenue-sharing fee. But Section 253 was designed to preempt state and local gatekeeping of telecommunications service. Textually, Section 253(c) charges should relate to actual “use of public rights-of-way.” Moreover, although the term is not unambiguous, the best reading of “compensation” in this context is to make the municipality whole for the effects of the company’s use.

Perhaps most importantly, this municipal power grab would be bad policy. Portland estimates that broadband franchise fees would net $3.75 billion for municipalities. But because franchise fees are passed through, it’s effectively a $3.75 billion increase in residential broadband rates. Much has been made of the demise of the Affordable Connectivity Program and the need to safeguard broadband affordability. This proposal would harm consumers and risks exacerbating the low-income digital divide.

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Daniel Lyons is a BC Law Professor and Associate Dean of Academic Affairs . He posts regularly at AEIdeas. Image courtesy of Adobe/AEI.