Cities around the country are gearing up to challenge a recent FCC ruling that enables cable operators to pass along to subscribers the portion of the municipal local franchise fees they pay that is based on revenues such as home shopping and advertising sales.

At stake are some $167 million in cable industry revenues this year, according to the National Association of Telecommunications Officers and Administrators (NATOA), an organization of state and local franchise regulators that wants the ruling rescinded.

Several cities are filing appeals to the order. The Texas Coalition of Cities for Utility Issues, an association of municipal regulators statewide, has filed its appeal with the Fifth U.S. Circuit Court of Appeals in Dallas. That suit was joined by NATOA.

Libby Beaty, executive director of NATOA, and coalition attorney Nicholas Miller, said they expect more cities to either join the Texas suit or file appeals separately.

The challengers claim that forcing subscribers to pick up those costs is unfair and they should be borne instead by the users of those specific services. Cable operators in turn argue that the overall franchise fees they're required to pay are part of their cost of doing business and they're entitled to set customer rates so that they fully recover those costs.

The FCC's ruling came more than three years after the city of Pasadena, Calif., asked the commission for a clarification of the franchise-fee collection rules. Charter Communications was passing on to subscribers not only the 5% fee paid to the city based on subscription revenues but a like percentage based on nonsubscriber fees. As a result, the total franchise fee passed on to customers ended up being closer to 5.9% on top of their monthly bills, says Miller, an attorney with Miller & Van Eaton in Washington, D.C., which is representing the Texas coalition.

?In the text of their decision, the FCC determined that since the statute doesn't prohibit cable companies from collecting fees that way, it's legal,? Miller says of the FCC's Oct. 4 ruling. ?The commission does not explain why subscribers should subsidize advertisers and home shoppers [or] why regulated monopoly services should subsidize unregulated services.?

Cable companies ? multiple service operators (MSOs) ? maintain the problem is not the fault of operators passing legitimate costs along to their customers, but the fault of the cities that are levying the franchise fees in the first place. ?If they are concerned that customers are being overcharged, they don't have to force those fees on us,? AT&T Broadband spokesman Andrew Johnson says.

Comcast Corp. spokesperson Jenni Moyer agrees, noting that not all cities charge franchise fees based on nonsubscriber revenues. She says Comcast collects the additional fees only in areas that stipulate that fees be based on all revenues, not just subscriber revenues.

Both NATOA's Beaty and attorney Miller say the franchise-fee agreements include language that discusses gross revenues only. ?Gross revenues are gross revenues,? Beaty says, noting that MSOs should suck up the nonsubscriber-based fees and consider them costs of doing business.

?It was the operators that negotiated in the 1984 Cable Act to have a uniform franchise-fee structure rather than have to negotiate for the rights of way in each franchise area. No city in the country can charge more than 5% of gross revenues. Many already charge less than that,? says Beaty.

?Those costs should be borne by the operator,? she says. ?The problem with the whole thing is that the more successful an operator is, the more the subscriber has to bear the brunt of that success. To force a customer to pay for their success is unfair. This is a line item so the operators are implying they have to charge customers. But it's dishonest to tell customers that this additional fee is imposed by the city.?

City regulators also quarrel with the way those nonsubscriber franchise fees are collected. For one thing, says Beaty, there are no mechanisms in place to ensure that the money collected based on nonsubscriber revenue matches what the company owes the city in franchise fees. Operators collect the franchise fees based on projected revenues, not actual collections. In other words, there is no guarantee that subscribers won't be overcharged if those revenues fall short, she says.

NATOA and other cities are concerned that operators can overcharge customers the fee and there are little or no procedures in place for subscriber refunds or rebates, Beaty and Miller assert.

But AT&T Broadband spokesman Andrew Johnson says cities can always ask for independent audits if regulators are concerned about overcharges. Unlike other MSOs including Charter, Comcast Corp. and Cox Communications, AT&T held off passing along fees based on nonsubscriber revenues until the FCC's October ruling, Beaty says. But now that it's been given the green light, Johnson says the MSO is putting the practice into play in the cities that include nonsubscriber fees in their franchise fee rules.

In a prepared statement, Charter COO Dave Barford said, ?[The FCC's decision] reaffirms our position that cable operators have a right and obligation to itemize franchise fees to help customers better understand where their money is going.? He went on to say that he hopes ?franchising authorities heed the FCC's advice to modify their franchise agreements to discontinue assessing franchise fees on ancillary revenue streams, such as advertising.?

The Fifth Circuit will collect appeals and comments until around Dec. 4, 60 days after the FCC's ruling, Miller says. At that point, the various city petitions will be consolidated. Formal briefs should be filed some time in January or February, he says, at which point, oral arguments will likely be heard by the court sometime in late spring.

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