Proposed Utility License Fee Reform November City of Portland Revenue Bureau Office of Management and Finance

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1 Proposed Utility License Fee Reform November 2012 City of Portland Revenue Bureau Office of Management and Finance

2 Background The OMF Revenue Bureau/Office for Community Technology is analyzing a proposal to reform the Utility License Fee (ULF) to have similarly situated utilities pay the same fee based on the same revenue base. Under the existing ULF code, telecommunications utilities as currently defined are charged a different rate upon a different revenue base. The ULF imposes a utility license fee based upon the gross revenues of utilities operating within the City. This is a fee imposed on the utilities and not upon their customers. However, the utilities typically pass these fees through to their customers, whether in accordance with state administrative rules or on their own initiative. It should be anticipated that the utilities will continue to do this, as they have done so in the past. Industry Overview There are currently 213 telecommunications providers subject to the Utility License Fee, ranging from very small to very large,. Of these 200 companies, only two incumbent providers, CenturyLink and Frontier, pay 7% of local exchange services. The competitive telecommunications companies pay 5% of gross revenues. Two of the larger competitive companies are Comcast Cable and Integra Telecom. Incumbent Telecommunications Companies CenturyLink is the third largest telecommunications company in the United States. CenturyLink provides data, voice and managed services in local, national and select international markets through its fiber optic network and multiple data centers for businesses and consumers. Headquartered in Monroe, Louisiana, CenturyLink has 1,150 employees in Oregon. Frontier Communications Corporation (Frontier) is a communications company providing voice, data, internet and television services predominantly to rural areas and small and medium-sized towns and cities in the U.S. Frontier s service territory includes a small presence along Portland s eastern border with Gresham. Competitive Telecommunications Companies Comcast Cable is one of the nation's largest video, high-speed Internet and phone providers to residential and business customers headquartered in Philadelphia, Pennsylvania. Integra Telecom is one of the largest facilities-based providers of communication and networking services in the western United States. Through its Ethernet-over-copper footprint, it can deliver high-bandwidth services to more than 400,000 businesses. Figure 1. Utility License Tax: Inequitable Rate and Base Structure Service Types (1) Incumbent Telecommunications Companies Competitive Telecommunications Companies (2) CenturyLink Frontier Integra Comcast Local Exchange Switched Service (includes dial tone) 7% 7% 5% 5% Local Exchange Private Line (dedicated and point-to-point) 0% 0% 5% 5% Long Distance Service 0% 0% 5% 5% Access service 0% 0% 5% 5% Directory assistance 0% 0% 5% 5% Telecom providing cable TV 0%* 0%* 0%* 5% Telecom using VOIP or fiber 0% 0% 5% 5% Additional features such as directory listings, call waiting, 0% 0% 5% 5% caller ID Other 0% 0% 5% 5% (1) Service categories from OPUC 2011 Local Telecommunication Competition Survey ( (2) Two of many competitive local exchange providers in Portland. *Not providing this service in Portland 2

3 Projected Revenues Based on Revenue Bureau research, the proposed code amendment would generate ongoing City general fund revenue in the range of $3 million to $5 million per year (see Figure 2). Estimates are net of adjustments to current business license tax revenues and local exchange fees. The $2,000,000 range between the low and high estimate is driven by variances in the available datasets. 1 Information required to generate a more accurate point estimate is proprietary to the telecommunications companies and is thus not publicly available. Figure 2. Revenue Projections Based on Starting Date Annual Revenue Projection Low Middle High $3,000,000 $4,000,000 $5,000,000 Revenue Projections Given Starting Date of: January 1, 2012 Low Middle High FYE 6/30/13 Collections $4,500,000 $6,000,000 $7,500,000 July 1, 2012 Low Middle High FYE 6/30/13 Collections $3,000,000 $4,000,000 $5,000,000 January 1, 2013 Low Middle High FYE 6/30/13 Collections $1,500,000 $2,000,000 $2,500,000 Questions & Answers How does this change make the ULF more equitable? Instead of varying rates on wireline telecommunications providers (5% of gross revenues for competitors and 7% of local exchange for incumbent telecommunications providers), the ordinance establishes a uniform tax rate of 5% for all wireline telecommunications providers. Currently, the ULF applies a tax rate on a smaller revenue base to CenturyLink and Frontier. Under the proposal, every wireline telecommunications business in Portland will pay the same rate on the same revenue base. We're not Utilities. Utilities are monopolies - and we face competition. Does it still apply to us? Utilities used to be monopolies in the 1940 s when the Utility License Fee was first imposed. They aren t anymore; there is competition in the wireline telephone business. The existence of competition is not a reason to avoid the ULF, especially since each competitor will be paying the same fee (5%). Who does this apply to? Every telecommunications company in Portland. It is precisely because the telephone business has changed since 1942 that it is past time to update the City s out-of-date utility license fee. The revised ULF will apply to all telecommunications companies doing business in Portland with the same rate for all. How do we define utility? The amendment will update the definition of telecommunications utility to include the wireline telephone industry in its current incarnation as the telecommunications industry. The ULF remains exactly what it always was: a fee (tax) for the privilege of operating as a utility doing business in Portland. The ULF is not based upon use of the rights-of-way. How will this change impact the average customer s bill? See attached examples. Do other Oregon cities have similar utility tax structures? Eugene, Oregon has a similar ULF structure. 1 The Revenue Bureau formulated estimates based on available government and industry data. 3

4 Assumptions, Caveats and Other Considerations The Revenue Bureau and City Attorney s Office are confident that a 5% tax on all revenue of the Incumbent Telecommunications Companies would be considered legal by the courts, but there is still some risk in this area. No reduction has been made for any potential litigation costs. The implementation of this program should involve proactive measures to ensure a smooth transition for the City and the Incumbent Telecommunications Companies. Timing of implementation is an important consideration as the companies that are affected by the tax are large and there is the need for programming, etc. so they can correctly calculate, bill and remit the tax. 4

5 Sample phone bills Current sample bill with dial tone only 1 Residence Line 1 $ $ Extended Area Service 1 $ 5.03 $ Interstate Subscriber Line Charge 1 $ 6.50 $ 6.50 Total $ Federal excise tax $ Portland city tax $ 0.38 * 6 Multnomah County tax $ OR Universal Service Surcharge 4.05% $ E911 Emergency tax $ Service assistance program $ Federal Universal Service Fee $ 0.94 Total $ 4.23 Total charges $ *Based on OPUC decision that 4% is embedded into the residence line charge and any additional amounts collected by cities for franchise fees can be a separate line item. Portland assesses 7% of local exchange services for franchise fees, so the additional amount itemized on the customer's bill is at 3% Future estimated bill after code update 1 Residence Line 1 $ $ Extended Area Service 1 $ 5.03 $ Interstate Subscriber Line Charge 1 $ 6.50 $ 6.50 Total $ Federal excise tax $ Portland city tax $ 0.70 ** 6 Multnomah County tax $ OR Universal Service Surcharge 4.05% $ E911 Emergency tax $ Service assistance program $ Federal Universal Service Fee $ 0.94 Total $ 4.55 Total charges $ **Aditional 1% of residence line charge (because 4% is already embedded into the charge) and additional 5% on all other services provided beyond the residence line charge

6 Sample phone bills Current sample bill with features 1 Call Waiting ID 1 $ 0.40 $ Caller ID 1 $ 6.50 $ Call Waiting/Cancel Call Waiting 1 $ 2.12 $ Extended Area Service 1 $ 5.03 $ Residence Line 1 $ $ Interstate Subscriber Line Charge 1 $ 6.50 $ 6.50 Total $ Federal excise tax $ Portland city tax $ 0.38 * 9 Multnomah County tax $ OR Universal Service Surcharge 4.05% $ E911 Emergency tax $ Service assistance program $ Federal Universal Service Fee $ 0.94 Total $ 4.23 Total charges $ *Based on OPUC decision that 4% is embedded into the residence line charge and any additional amounts collected by cities for franchise fees can be a separate line item. Portland assesses 7% of local exchange services for franchise fees, so the additional amount itemized on the customer's bill is at 3% Future estimated bill after code update 1 Call Waiting ID 1 $ 0.40 $ Caller ID 1 $ 6.50 $ Call Waiting/Cancel Call Waiting 1 $ 2.12 $ Extended Area Service 1 $ 5.03 $ Residence Line 1 $ $ Interstate Subscriber Line Charge 1 $ 6.50 $ 6.50 Total $ Federal excise tax $ Portland city tax $ 1.15 ** 9 Multnomah County tax $ OR Universal Service Surcharge 4.05% $ E911 Emergency tax $ Service assistance program $ Federal Universal Service Fee $ 0.94 Total $ 5.00 Total charges $ **Aditional 1% of residence line charge (because 4% is already embedded into the charge) and additional 5% on all other services provided beyond the residence line charge

7 Sample phone bills Current sample bill with internet access Internet and Voice Monthly Charges Description 1 Internet-High speed internet $ Local phone Service - Residence Line $ Promotion $ (45.04) Total $ Related Monthly Charges 4 Federal Access Charge $ Repair Plan $ Non-Published Service $ Extended Area Calling $ 2.20 Total $ Usage Charges $ 3.00 Taxes, Fees & Surcharges 9 Federal Excise at 3% $ County at.2632% $ State 911 at $0.75 per access line $ Oregon Universal Service Surcharge of 6.55% $ Federal Universal Serv Fund at 17.4% $ Franchise at 3% $ 0.38 * 15 Residental Service Protection Fund at $0.12 per access line $ Oregon Puc fee as required by law $ 0.13 Total $ 4.52 Total charges $ *Based on OPUC decision that 4% is embedded into the residence line charge and any additional amounts collected by cities for franchise fees can be a separate line item. Portland assesses 7% of local exchange services for franchise fees, so the additional amount itemized on the customer's bill is at 3% Future estimated bill after code update Internet and Voice Monthly Charges Description 1 Internet-High speed internet $ Local phone Service - Residence Line $ Promotion $ (45.04) Total $ Related Monthly Charges 4 Federal Access Charge $ Repair Plan $ Non-Published Service $ Extended Area Calling $ 2.20 Total $ Usage Charges $ 3.00 Taxes, Fees & Surcharges 9 Federal Excise at 3% $ County at.2632% $ State 911 at $0.75 per access line $ Oregon Universal Service Surcharge of 6.55% $ Federal Universal Serv Fund at 17.4% $ Franchise and City taxes $ 1.04 ** 15 Residental Service Protection Fund at $0.12 per access line $ Oregon Puc fee as required by law $ 0.13 Total $ 5.18 Total charges $ **Aditional 1% of residence line charge (because 4% is already embedded into the charge) and additional 5% on all other services provided beyond the residence line charge