Calling to Collect

The City of Denver declares war on the state legislature over a telephone bill.

The City of Denver wants voters to put an end to what it calls an unfair tax break for telecommunications companies. But to the city's surprise, at least two consumer groups are telling residents to hold the phone when they go to the polls November 4.

That's because the consumer advocates say a "yes" vote could mean higher phone bills. "Basically, people will be voting for what could be a huge tax increase, and they have no idea they are doing it," says Chuck Malick of the Colorado Public Interest Research Group, which is opposing the measure along with the American Association of Retired Persons.

Voters have no idea, Malick says, because the city has been playing down Charter Amendment 1B as a "housekeeping" measure. "That's a very clever tactic," he says, "but this is no small change. This is an attempt by the city to collect a new tax and be able to raise it at whim without having a vote of the people."

"Oh, fiddle!" responds Cathy Reynolds, the Denver city councilwoman who has spearheaded the proposal. "We are not trying to rip anybody off."

Instead, Reynolds insists that Denver is simply trying to make phone companies pay their own bills as the firms scramble for territory in the wake of government deregulation. While other utilities in the state are paying to use city rights-of-way, says Denver telecommunications director Dean Smits, phone companies are getting special treatment under a state law passed last year. "Basically, what [the law] does is provide the industry our rights-of-way rent-free," complains Smits.

On September 22 the city council passed an ordinance that openly defies that law. The ordinance allows the city to enter into agreements with telecommunications companies that want to lay lines along city rights-of-way--in direct contradiction of the state law, which exempts phone companies from negotiating with individual municipalities. That means the case will end up in court no matter what voters decide--and could set a national precedent in the brave new world of telecommunications.

Here's what Denver residents will vote on:
Charter Amendment 1B would give the city the power to charge rent to phone companies who want to dig up city streets to lay phone lines. Those companies include AT&T, MCI and, presumably, any company that wants to challenge US West's lock on local phone service by laying its own cable.

The state and federal government's deregulation of local phone service in recent years was supposed to save ratepayers millions of dollars. Instead, few companies have stepped in to challenge the stranglehold maintained by Baby Bells like US West--and according to Denver officials, the ones that have aren't paying their way.

The problem, as the city sees it, is that when new companies jump into the market for local phone service, they begin by tearing up city streets to lay new fiber-optic lines. The companies are legally obligated to patch up the streets when they're done and, under existing agreements, pay an "occupation tax" based on how many customer accounts they have. Denver collected $3.8 million in occupation taxes from phone companies last year.

But city officials say that's not enough. They want to start charging a separate fee they say will compensate taxpayers for the long-term damage to public thoroughfares, which they estimate at up to $6.9 million annually. "Every time there's a street cut, that lessens the life expectancy of that street anywhere from five to eight years," says the city's Smits. And Assistant City Attorney Andy Weber says the difference can't be made up by raising the occupation tax. That, he says, would violate Amendment 1, which limits the ability of cities to raise taxes without voter permission.

Also at issue in the charter amendment is the city's power to award franchise agreements to all utilities, including cable television and power companies. Currently, voters must approve all new franchises. But if 1B passes, that power would shift to the city council--a prospect that has city councilman Dennis Gallagher hot to defeat the measure. "The people should be able to vote on these franchise agreements," Gallagher says. "It affects peoples' lives, it affects their pocketbooks, and it affects all of this new cable-television stuff. The people should have a say."

The city has been girding for a fight over utilities since 1993, when the city council first considered charging additional fees to phone companies. But the legal landscape changed dramatically last year when the state legislature passed Senate Bill 10, which bans municipalities from charging phone firms rental fees for using rights-of-way. The bill was drafted by the Democratic leader in the Senate, Mike Feeley, who's now a candidate for governor. "We just couldn't have phone companies who are trying to create statewide phone networks held hostage by municipalities," explains Feeley.

He gives the example of a company that might want to wire Jefferson County to compete with US West for local phone service. To do so, the company would have to negotiate contracts with several different cities. "Any one of them could hold the entire deal hostage," adds Feeley, who says his law gave municipalities the right to recover from phone companies any costs associated with street work. "We were pretty liberal in what we allowed the cities to claim as expenses," he says.

But Reynolds isn't convinced. She says the city has the right to collect rent, not just recover costs, from companies who are making money off public rights-of-way. "When people use your property, you should be able to get a fee for that," Reynolds says.

That's the crux of the larger legal issue. And the Colorado court battle will likely serve as a national test case. "This is the big stone dropped in the middle of the lake," predicts Don Eberle, a Denver-based attorney for MCI. "The ripples will be felt far and wide."

MCI and its competitors argue that if cities are allowed to impose additional fees, phone companies will simply pass the costs onto customers, levying what would amount to a new tax. But Geoff Wilson, an attorney for the Colorado Municipal League, says the companies are "wrapping themselves in the mantle of consumer protection" when what they really want is to get something for nothing. He compares the phone lobby's rhetoric to past efforts by railroads to get public lands for rail lines without paying for them. "This is just the railroads, take two," Wilson says. "These are not indigent plaintiffs."

Indeed, a coalition that's been organized to defeat the charter amendment includes such phone giants as US West, MCI, AT&T and Sprint, with US West and AT&T each ponying up $25,000 for the cause. The companies have hired politically connected lobbyist Mary Buckley of Brownstein Hyatt Farber & Strickland, the big kahuna of power politics in Colorado, to coordinate the campaign.

One of the coalition's principal arguments is that if the city prevails, smaller phone companies will think twice about competing with US West. "If a smaller company is thinking about getting into Denver and Denver passes this, Denver moves down the list," says Eberle. He says MCI wants to get into every market in the state for local service, but as the largest market in Colorado, Denver makes sense as a place to start, and city officials know it. Eberle says the city is taking advantage of that position. "If you want to be the troll at the bridge," Eberle says, "Denver's a good place to be."

Meanwhile, city officials express dismay that CoPIRG, which rarely agrees with the state's phone companies on anything, has adopted the industry's party line on the issue. "I don't feel that CoPIRG, with all due respect, fully understands our position," says Smits.

But Malick says his group understands just fine. Competition, he says, is the only way phone rates will ever start to come down. And the fee at the center of the November 4 vote is just another obstacle to getting more companies in the game. Denver can manage with its current tax structure, says Malick. "Competition is never going to get started if we keep putting up these roadblocks."

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