.

I. FCC’s creates a “Regulatory Minefield” for Local Governments.

On October 31, 2007, the Federal Communications Commission (“FCC”) issued a Second Report and Order - MB Docket No. 05-311 (“Second Order”) - extending regulatory relief to incumbent cable operators. In the FCC’s First Report and Order (“First Order”) released in the Spring of 2007, the FCC granted competitive cable operators (new entrants): 1) the right to obtain a franchise as soon as ninety (90) days after the date of request; 2) clarification regarding build out obligations imposed by local governments; and 3) potential relief from certain in-kind franchise obligations which could impact local PEG channels, I-Nets and franchise fees. (For a complete review of the First Order go to www.municipalcommunicationslaw.com).

In its Second Order, the FCC found that provisions regarding build out and time limits for franchise negotiations were only applicable to new entrants. However FCC granted incumbent cable operators regulatory relief by issuing the following findings:

1. Certain specified costs, fees and other compensation required by local franchising authorities must be counted toward the statutory five percent (5%) cap on franchise fees.

2. Provisions interpreting PEG channels, institutional networks and mixed use networks should be applied equally to incumbents and new entrants.

At this time, the FCC has only issued a press release and the text of the Second Order has yet to be made available. As was the case with the First Order the FCC approved the Second Order on 3-2 vote. Those commissioners voting in favor issued statements generally arguing that the Second Order will create a level playing field and allow incumbents and new entrants to compete more fairly. Those commissioners dissenting argued that the Second Order will limit local government’s ability to effectively negotiate with cable operators and to maintain necessary local regulatory control.

Commissioner Adelstein stated that the FCC “has converted the entire cable franchise fees and PEG/I-Net’s support regime into a regulatory minefield for local governments that will likely impact the ability of local government to provide critical, state of the art services when it matters most.” Commissioner Copps stated “the genie is out of the bottle for now, I hope that at some point my colleagues and I will consider removing the Commission from the field of local franchise regulation - where we are not welcome and have no reason to be.”

The First Order was challenged by a variety of municipal associations and is presently awaiting oral argument before the Sixth Circuit Court of Appeals. Parties will need to wait until the FCC releases the text of the Second Order to determine whether additional challenges may be necessary (it took the FCC 75 days to release the text of the First Order). As soon as the text of the Second Order is released Moss & Barnett will prepare an additional summary for its clients and interested parties.

II. Are Franchise Fees an Illegal Tax? They may be in Iowa

According to plaintiff’s attorneys cable television subscribers in seven Iowa cities could be looking at a $50 million refund ($100 to $200 per subscriber) from cities due to the illegal collection of franchise fee payments since 2000. The cities of Des Moines, Bettendorf, Davenport, Sioux City, Waterloo, Dubuque and Cedar Rapids have all been sued by residents who are also television cable subscribers. These subscribers argue that franchise fees must correspond to the costs of regulating the franchised activity and that the imposition of franchise fees in excess of that amount constitute an illegal tax under Iowa law.

In May of 2007, a Scott County, Iowa judge ruled that the cities of Davenport and Bettendorf were illegally collecting fees and placing the money in the cities’ general revenue funds. See, Linstrum v. City of Des Moines, Iowa, 470 F.Supp. 2d 1002 (S.D. Iowa 2007). The judge held that cities are entitled to collect fees only to cover the costs to inspect, license, supervise or otherwise regulate cable and that any amount in excess represents a tax levy forbidden by state law. Shortly after this decision, on May 29, 2007 Gov. Chet Culver signed a new state cable franchise law granting cable operators and Qwest the opportunity to obtain a state-wide cable franchise. That legislation contained language that retroactively legalized franchise fees in response to the pending litigation.

On September 12, 2007, a Pope County district judge overturned that portion of the state law that legalized the imposition of franchise fees by municipalities. While the September 12, 2007 decision did not end this litigation it allows the plaintiff’s class action litigation to continue forward and, for now, eliminates a defense available to the municipalities. Most expect the issue to eventually be resolved by the Iowa Supreme Court.

III. Is IPTV a Cable Service?

According to a federal district judge in Connecticut, AT&T’s IPTV service is actually a “cable service” provided by a “cable operator” over a “cable system”. In her July 26th decision, U.S. District Judge Janet Bond Arterton provides the first written analysis addressing the question of whether video services provided using internet protocol should be regulated under Title VI of the Communications Act. Fortunately for municipalities, the Judge ruled that IPTV is a cable service subject to state and/or local regulation.

This case began in 2006 when AT&T approached the Connecticut Department of Public Utility Control (DPUC) seeking authority to provide its video services throughout the state. In Connecticut, the DPUC has historically granted cable franchises on behalf of municipalities clustered within pre-established franchise areas. AT&T argued that its internet protocol (IP) - based video service is not a cable service and no franchise obligations should be mandated. The DPUC agreed and issued a 3-2 decision concluding that IPTV did not constitute a cable service.

Incumbent cable operators and consumer groups challenged the DPUC’s decision in U.S. District Court. In the meantime, incumbent cable operators, uncertain of the outcome of the litigation, pursued a new state law that would grant incumbent cable operators the same benefits the DPUC was granting to AT&T. The “Me Too” legislation was signed by Gov. M. Jodi Rell in early July 2007. The new state legislation essentially allows incumbent operators to avoid their franchise obligations and obtain a state issued franchise as soon as a new entrant enters their franchise area.

Three weeks after the new state law became effective Judge Bond Arterton issued her decision concluding that the DPUC was wrong and IPTV should in fact be regulated as a cable service. Had the decision been issued earlier there would likely been no need for the state legislation as AT&T would have been required to obtain franchises on similar terms and conditions to those held by incumbent operators.

In light of Judge Bond Arterton’s decision AT&T submitted an application for a state video franchise under the new law. The DPUC unanimously rejected AT&T’s application agreeing with the position of State Attorney General Richard Blumenthal who argued that AT&T is a cable company without a franchise, illegally providing cable service within the State of Connecticut. AT&T then petitioned the State’s Superior Court for a declaratory ruling that the DPUC was incorrect in denying AT&T a statewide franchise and instead requiring it to receive a traditional cable television franchise. On October 31, 2007, a Connecticut Superior Court in Hartford agreed with AT&T and the next day, November 1, 2007, the DPUC granted AT&T a certificate of video franchise authority to provide its U-Verse TV service throughout the State of Connecticut.

In the end, AT&T prevailed in obtaining statewide authorization to provide competing video service in Connecticut. However, Judge Bond Atherton’s decision that AT&T’s IPTV service is in fact a cable service subject to regulation under the Cable Act remains standing as a valuable precedent for municipalities across the countries facing similar arguments from AT&T.

Brian T. Grogan is a shareholder with the Minneapolis law firm of Moss & Barnett practicing in the firm's communications and business law departments. Since 1988 Brian has worked with governmental entities throughout the country on a variety of cable, telecom, wireless and broadband communications issues. Brian recently assisted the City of Minneapolis draft its Wireless Broadband Agreement. He has also been active representing cities and their public safety departments regarding 800 MHz rebanding issues before the FCC. In his business law practice Brian focuses on fiber leasing agreements and mergers and acquisitions in the communications and technology industries. He is a frequent presenter at MATCA and NATOA and is a past chair of the Communications Law Section of the Minnesota State Bar Association.

For additional information regarding municipal communications such as franchise renewals and transfers, 800 MHz rebanding, right-of-way management, public, educational and governmental programming, municipal communications law newsletters and related matters, please visit our web site at: www.municipalcommunicationslaw.com.

Brian T. Grogan, Esq.

Moss & Barnett, A Professional Association

4800 Wells Fargo Center, 90 South Seventh Street

Minneapolis, MN 55402-4129

Telephone: (612) 877-5340 Facsimile: (612) 877-5999

Email: groganb@moss-barnett.com

The materials in this Municipal Communications Law Update have been complied from a variety of sources and address only a portion of the relevant issues contained within hundreds of pages of regulations and decisions. We have not addressed many important points that may apply to your situation. You should consult with legal counsel before taking any action on matters covered by this Municipal Communications Law Update.