PROTECTING THE CITY'S ASSETS
FROM HIGH TECH ROBBERY

By GUY R. RANKIN
Vice President, Municipal Administrative Services, Inc.

Previous articles have focused on the traditional franchise issues such as gas, telephone, electric, and cable. However, the speed with which new technology enters the marketplace is causing yet another leak in the revenue stream, leaks which cost cities millions of dollars in lost or unpaid franchise fees or taxes.

Mobile or cellular telephone companies are proliferating like mushrooms in a dark cave. There are hundreds of mobile phone companies and hundreds of manufacturers of the units themselves. The cost of the mobile and handheld units which used to be over a thousand dollars are now so inexpensive that some merchandisers are giving them away free.

From the theoretical work in the 1940s until computer technology was sufficient to make it work was developed in the 1960s it took the Federal Communications Commission (FCC) 13 years to adopt the final rules for its use in 1981. Commercial application of Cellular Technology did not begin in the U.S.A. until 1983.

The cellular or mobile phone industry is the singular fastest growing, most profitable, new industries in the world. One trade magazine estimates the growth of cellular at better than sixty percent (60%) per year. It also noted that only two to three percent (2-3%) of the U.S. population owns a cellular phone.

One of the reasons for this high level of profitability is that they are "government protected". The Federal Communications Commission (FCC) allows "only two companies per market". Cellular phone companies are to date not regulated by the cities through the police powers of the city charter, nor have the cities begun using the "franchise" as a tool to obtain their fair share of the gross revenues generated.

Cellular technology transmits the voice signals through the airways often crisscrossing the geographical boundaries of the cities served. Additionally, most of the cellular units have a "roam" feature which allows the subscriber to move between cities and still receive and send calls through his "home" base.

The concept of Rights of Way becomes more and more complex as cities attempt to define the value of their "air space". Additionally, high technology data transmissions are now proliferating the air ways as corporations use cellular technology for computer links as well as inter office communications.

Cities must move quickly and enact ordinances that will protect them from losses due to this exploding technology. The cellular telephone has moved from a novelty item, a tool for business and now a necessary convenience in a short span of 10 years. Regulation will also help maintain quality of service offered in the city's service area as it has done in the cable television industry.

Agreements should be for specific periods with five year options for reassessment of the current technologies impact on the franchise. In the public context, even the air space is held in "trust" by the elected officials of the city. Businesses who use those Rights of Way have an obligation to pay a reasonable fee for that use. Unlike ground use of Rights of Way, where the city can simply value the area in use by applying the value of the adjacent land value, little thought has been given to valuation of the air space.

These mobile phone companies make millions of dollars in mobile billings yet the cities receive negligible amounts in revenue to help support its infrastructure. What then is the answer to this puzzling issue? One answer is a gross receipts tax, dependent on volume of gross sales and billings for airtime (equipment sales, repair and installation would be exempt). The other answer is, of course, the more traditional franchise agreement whereby "in consideration for the rights and privileges herein granted the value of such rights and privileges herein granted, the value of such rights and privileges, the administration of this ordinance by the city, the usage and interference with the Public's usage of public thoroughfares and other costs and obligations undertaken by the city herein, the company hereby agrees to pay the city during the term of this agreement a sum equal to ___ percent of the annual gross receipts as herein defined".

In conclusion, cities must remain alert to new opportunities to enhance their revenue streams. Traditional methods and attitudes are not sufficient to keep abreast of advancing shifts in technology. Technology which requires new definition in order to prevent erosion of the infrastructure through a drain in the revenue base. •

May 1992 / Illinois Municipal Review / Page 13