                 IN THE COURT OF APPEALS OF TENNESSEE
                              AT JACKSON
                                 On-Brief February 17, 2004

 BELLSOUTH TELECOMMUNICATIONS, INC. v. CITY OF MEMPHIS,
                    TENNESSEE

               A Direct Appeal from the Chancery Court for Shelby County
            No. CH-01-1351-3    The Honorable D. J. Alissandratos, Chancellor



                     No. W2003-01047-COA-R3-CV - Filed July 12, 2004


        Telecommunications corporation appeals trial court’s grant of summary judgment to city,
alleging that trial court incorrectly determined that city ordinance imposing a charge of five percent
of gross revenue of the corporation was not inconsistent with T.C.A. § 65-21-103 or any other
provision of Tennessee law. We reverse.


    Tenn. R. App. P. 3; Appeal as of Right; Judgment of the Chancery Court Reversed

W. FRANK CRAWFORD , P.J., W.S., delivered the opinion of the court, in which DAVID R. FARMER ,
J. and HOLLY M. KIRBY , J., joined.

Louis F. Allen and Earle J. Schwartz of Memphis; Guy M. Hicks of Nashville; Dorian S. Denburg
of Atlanta, Georgia; John E. Muench and Robert M. Dow, Jr. of Chicago, Illinois for Appellant,
BellSouth Telecommunications, Inc.

Robert L. J. Spence, Jr. and Monika L. Johnson; Allan J. Wade and Lori Hackleman Patterson of
Memphis; Clarence A. West of Austin, Texas for Appellee, City of Memphis, Tennessee

                                             OPINION

        This case involves cross-motions for summary judgment filed by the appellant, BellSouth
Telecommunications, Inc. (“BellSouth”), and the appellee, the City of Memphis, Tennessee (“the
City”), regarding the validity and enforceability of city Ordinance No. 4404. The pertinent factual
history is summarized by the parties in their joint stipulations of fact:

               2.     In January 1879, the Tennessee General Assembly passed the
               Taxing District Act. Acts Tenn. 1879, Chapter 11, § 1....
           3.    Pursuant to the Acts of 1879, Chapter 11, Sec. 3, the State of
           Tennessee made the following grant to the Taxing District of Shelby
           County (now City of Memphis):

                    The governing authority shall have the power to
                    repair, and keep in repair, streets, sidewalks and other
                    public grounds and places [in the taxing district]; to
                    open and widen streets, to change the location [of] or
                    to close the same, and to lay off new streets and alleys
                    when necessary; and to have and exercise entire
                    control over all streets and other public property of the
                    Taxing District, as well [as] that within and without
                    the Taxing District.

           Acts Tenn. 1879, Chapter 11, Sec. 3; Memphis City Charter Sec. 481.

           4.      In 1879, the Legislative Council of the Taxing District entered
           into an agreement with Samuel T. Carnes (“Carnes”)....

           5.      In 1881, Carnes incorporated Memphis Telephone and
           Electric Co. and in 1882, Carnes assigned all of the assets of his
           telephone business to Memphis Telephone & Electric Co. In 1883,
           Cumberland Telephone & Telegraph Co. (“Cumberland”), a
           Kentucky corporation, acquired all of the assets of Memphis
           Telephone & Electric Co.

           6.      In 1884, the Tennessee General Assembly passed legislation
           which was codified at Miliken & Vertrees Tennessee Code, Chapter
           8, Section 1535 (1884)....

           7.     In 1885, the Legislature enacted Chapter 66, Acts of 1885
           (now codified at T.C.A. § 65-21-105, 106, [and] 201)....1

1
    1885 Tennessee Public Acts 66, § 1 stated:

                    Be it enacted by the General Assembly of the State of Tennessee, That
           any person or corporation organized by virtue of the laws of this State, or of any
           other State of the United States, or by virtue of the laws of the United States, for the
           purpose of transmitting intelligence by magnetic telegraph or telephone, or other
           system of transmitting intelligence the equivalent thereof, which may be hereafter
           invented or discovered, may construct, operate and maintain such telegraph,
           telephone, or other lines necessary for the speedy transmission of intelligence, along
           and over the public highways and streets of the cities and towns of this State, or
           across and under the waters, and over any lands or public works belonging to this
                                                                                                      (continued...)

                                                     -2-
                     8.     In 1891, the Tennessee General Assembly restored the name
                     “City of Memphis by Acts of 1891, Chapter 229, §§ 1-2....

                     9.      From time to time between 1885 and 1900, Cumberland
                     erected its poles and strung its wires in the City in order to expand its
                     telephone system.

                     10.   In June 1900, the Legislative Council adopted a “Conduit
                     Ordinance[.”]2

                     11.     Between 1900 and 1944, the Conduit District established by
                     the Conduit Ordinance was expanded from time to time by resolution
                     of the Legislative Council/Board of Commissioners.

                     12.     On February 25, 1902, the City passed an ordinance charging
                     telephone and telegraph companies doing business in Memphis a pole
                     rental of $3 per pole per year. In June 1902, the City filed suit against
                     Cumberland to collect this pole rental.

                     ******************************************************

                     14.     On July 16, 1903, [t]he City and Cumberland resolved the
                     1902 litigation in a settlement agreement dated July 16, 1903, signed
                     by Cumberland and the City....




         1
             (...continued)
                      State, and on and over the lands of private individuals, and upon, along, and parallel
                      to any of the railroads or turnpikes of this State, and on and over the bridges,
                      trestles, or structures of said railroads; Provided, that the ordinary use of such
                      public highways, streets, works, railroads, bridges, trestles or structures and
                      turnpikes be not thereby obstructed, or the navigation of said waters impeded, and
                      that just damages shall be paid to the owners of such lands, railroads, turnpikes, by
                      reason of the occupation of said lands, railroads and turnpikes, by said telegraph or
                      telephone corporations.

(emphasis in original).

         2
          This ordinance created a “Conduit District” wherein telephone and telegraph service providers were prohibited
from “constructing such wire lines or any of their poles or appurtenances above the ground in passing along or across
such public thoroughfares within the limits to be known as the “Conduit District”...

                                                              -3-
                   15.     In 1907, the Tennessee General Assembly enacted the Talbert
                   Bill, now codified at T.C.A. § 65-21-103.3

                   16.    In March 1913, Cumberland agreed by letter to provide
                   additional telephone equipment to the City of Memphis....

                   17.   In 1915, the City of Memphis and Cumberland entered into an
                   agreement concerning the provision of phone service to the City....

                   18.     In 1919, Cumberland agreed to purchase the exchange and
                   assets of the Memphis Telephone Co.

                   19.    In June 1926, Southern Bell Telephone Co. qualified to do
                   business in Tennessee. Cumberland Telephone & Telegraph Co.
                   conveyed all of its property and assets to Southern Bell and ceased
                   doing business.

                   20.    In July and August 1933, there was an exchange of
                   correspondence between Memphis Mayor Watkins Overton and
                   Southern Bell regarding the 1903 ordinance.




        3
            The 1907 act was codified at T.C.A. §§ 65-21-101, 103 (1993). Section 65-21-101 states:

                             65-21-101. Special powers of corporations. – Telegraph and telephone
                   corporations may construct a telegraph or telephone line and erect the necessary
                   fixtures along, or over, or under the line of any public highway, the streets of any
                   village, town, or city, across, or over, or under rivers, or any land belonging to the
                   state, or along, across, or under county roads, and also over the lands of private
                   individuals in pursuance of the general law authorizing the condemnation of the
                   easement of right of way for works of internal improvement as set forth in title 29,
                   chapter 16; provided, that the ordinary use of such public highway, streets, or
                   county road be not thereby obstructed or the navigation of such waters impeded.

Section 65-21-103 further provides:

                             65-21-103. Local regulation. – W hile any village or city within which
                   such [telegraph or telephone] line may be constructed shall have all reasonable
                   police powers to regulate the construction, maintenance, or operation of such line
                   within its limits, including the right to exact rentals for the use of its streets and to
                   limit the rates to be charged; provided, that such rentals and limitations as to rates
                   are reasonable and imposed upon all telephone and telegraph companies without
                   discrimination. No village, town, or city shall have the right to prevent the company
                   from constructing, maintaining, and operating the line within the village, town, or
                   city, so long as the line is being constructed, maintained, or operated within the
                   village, town, or city, in accordance with the reasonable police regulations.

                                                             -4-
           21.     On June 27, 1944, the Board of Commissioners of the City of
           Memphis enacted Ordinance No. 427.4 On July 5, 1944, Southern
           Bell filed its acceptance of this ordinance....

           22.  In September 1944, the Railroad and Public Utilities
           Commission approved the Ordinance.

           23.     In 1961, the Tennessee General Assembly passed Chapter 123
           of the Public Acts of Tennessee 1961, amending T.C.A. [§] 65-405.
           Acts 1961, ch. 123, § 1, codified at T.C.A. § 65-4-105(e).5




4
    Ordinance No. 427 provided, in pertinent part:

                    SECTION 1.          BE IT ORD AINED BY THE BOARD OF
           COMMISSIONERS OF THE CITY OF MEMPHIS, that the Southern Bell
           Telephone and Telegraph Company ... be and is hereby granted the privilege to
           erect, construct, maintain, and operate telephone and telegraph lines, including
           poles, conduits, cables, fixtures, electrical conductors, and other appurtenances,
           upon, along, under and over the streets, alleys and other public thoroughfares within
           the present or future corporate limits of the City of Memphis, for a period of
           eighteen (18) years, beginning July 1, 1944, and ending June 30, 1962, upon the
           terms and subject to the conditions and limitations of this ordinance.

                     SECTION 2. BE IT IS FURTHER ORDAINED, that in consideration for
           the privilege herein granted the Southern Bell Telephone and Telegraph Company
           shall pay to the City of Memphis during said period, a sum equal to four (4%) per
           cent for the first ten years of said period, and a sum equal to five (5%) per cent for
           the last eight years of said period, on all gross receipts accruing to its office or
           offices in Memphis of every kind and character, and from every source, without any
           deductions, excepting only gross receipts from interstate toll business.


5
    Tennessee Code Annotated § 65-4-105(e) (1993) states:

                     Any franchise payment or other payment for the use of public streets,
           alleys or other public places or any license, privilege, occupation or excise tax
           payment, which after February 24, 1961, may be made by a utility to a municipality
           or other political subdivision, except such taxes as are presently provided for under
           existing statutes and except such franchise payment or other payments as are
           presently exacted from the utility pursuant to the terms of any existing franchise or
           other agreement, shall, insofar as practicable, be billed pro rata to the utility
           customers receiving local service within the municipality or political subdivision
           receiving such payments, and shall not otherwise be considered by the authority in
           fixing the rates and charges of the utility.

                                                    -5-
                  24.    In February 1962, the Board of Commissioners enacted
                  Ordinance No. 954. Southern Bell filed its acceptance of this
                  ordinance....6

                  25.    In April 1962, the Public Service Commission approved the
                  ordinance.

                  26.    In 1962, the City of Memphis filed a lawsuit seeking to
                  prevent Southern Bell from passing through to its Memphis
                  customers, the fee collected pursuant to the 1962 Ordinance. That
                  lawsuit was resolved by the Sixth Circuit in Memphis v. Southern
                  Bell Tel. Co., 316 F.2d 535 (6th Cir. 1963).

                  27.     In 1966, the City of Memphis adopted Home Rule pursuant
                  to Art. 11, Sec. 9, of the Tennessee Constitution.

                  28.     South Central Bell Telephone Company was formed in 1968.
                  In May 1968, Southern Bell and South Central Bell entered into a
                  plan of reorganization under which South Central Bell would acquire
                  the assets and liabilities and conduct the business formerly carried on
                  by Southern Bell in Alabama, Kentucky, Louisiana, Mississippi and
                  Tennessee. On July 1, 1968, South Central Bell succeeded to the
                  assets, liabilities and business of Southern Bell Telephone and
                  Telegraph Company located, inter alia, in Memphis, Tennessee.

                  29.    In July 1980, the [Memphis] City Council passed Ordinance
                  No. 3037 on third and final reading.7 South Central Bell filed its
                  acceptance of Ordinance No. 3037....



         6
           Ordinance No. 954 established a franchise agreement between the City and BellSouth for the period from July
1, 1962 through June 30, 1980. The ordinance granted BellSouth the “privilege to construct, maintain and operate
telephone and telegraph lines ... upon, along, under and over the streets, alleys and other public thoroughfares within the
present or future corporate limits of the City of Memphis....” Pursuant to the ordinance, BellSouth agreed to pay to the
City “a sum equal to five percent (5%) on all gross receipts accruing to its office or offices in Memphis of every kind
and character from the telephone subscribers located within the present or future corporate limits of the City of
Memphis....”

         7
           Ordinance No. 3037 established a franchise agreement granting BellSouth “the privilege to erect, construct,
maintain, and operate telephone and telegraph lines ... upon, along, under and over the streets, alleys and other public
thoroughfares, within the present or future corporate limits of the City of Memphis....” The agreement, which extended
for a period of twenty years from July 1, 1980 through June 30, 2000, provided that BellSouth “shall pay [to] the City
of Memphis during said period a sum equal to five percent (5%) on all gross receipts of every kind and character from
the furnishing of telephone service to subscribers located within the present or future corporation limits of the City of
Memphis....”

                                                           -6-
               30.   The City and South Central Bell/BellSouth operated under the
               1980 Ordinance until it expired, after a one year extension, in 2001.

               31.     In December 1991, South Central Bell Telephone Co. changed
               its corporate name to BellSouth Telecommunications Co., Inc.

               32.    In 1996, Congress passed the Federal Telecommunications
               Act of 1996, codified at 42 U.S.C. § 251, et seq.

               33.      In 1996, the Memphis City Council passed Ordinance No.
               4404....

               34.      In May 2000, and again in June 2001, BellSouth sent two
               letters to the City of Memphis....

               35.   In July 2000, the [Memphis] City Council enacted Substitute
               Ordinance No. 4783 extending Ordinance [No.] 3037 for a term of 12
               months or until BellSouth agreed to accept Ordinance No. 4404,
               whichever was sooner....

               36.   The City has placed the revenues that it has received under
               Ordinance No. 3037 and as extended into its General Fund.

        The ordinance at the heart of the dispute in this matter, Ordinance No. 4404 (“Ordinance
4404”), mandates that a telecommunications service provider obtain or enter into a franchise
agreement with the City for the right “to construct, maintain and operate a telecommunications
system [in the public rights-of-way] ... within the City of Memphis.” Pursuant to the franchise
agreement, a telecommunications service provider is required to pay to the city as “general
compensation,” an amount equal to five percent of the corporation’s “gross revenues for each quarter
of a compensation year....” The precise language of the ordinance reads in pertinent part as follows:

               Sec. 10-78. Grant of franchise.

                       (1) No person shall acquire, construct, expand, reconstruct,
               maintain, use and operate in, along, across, on, over, through, above
               and under the public streets, alleys and rights-of-way of the city, a
               telecommunications system without first obtaining a non-exclusive,
               revocable franchise from the city. Except to the extent that the
               federal or state government acquires or assumes exclusive jurisdiction
               over the regulation of fiber optic or other telecommunications
               franchises. Grantee agrees that it shall not now or at any time after a
               franchise agreement is granted challenge the city’s right to regulate
               any grantee’s use of the public rights-of-way or to be compensated,


                                                -7-
as hereinafter provided, for the use of public rights-of-way in any
state or federal court. Accordingly, any franchise granted hereunder
shall remain in full force and effect as a binding contract between the
grantee and the city. Notwithstanding the foregoing[,] [g]rantee is not
prohibited from challenging the city’s arbitrary and capricious
exercise of its police powers in the regulation of any franchisee’s use
of the public rights-of-way hereunder.

******************************************************
      (2) Franchise grant conditions, terms.

       a.      A franchise granted hereunder ... shall be granted only
               by ordinance....

       b.      Grantee shall not provide cable services or
               operate a cable system as defined in the Cable
               Television Consumer Protection and
               Competition Act of 1992 (47 U.S.C.A. § 521,
               et seq., as amended) or as recognized by the
               FCC without first obtaining a separate cable
               franchise from the city and shall not allow the
               use of the system by a cable system that has
               not been granted a franchise by the city. Nor
               shall any provider of cable services or grantee
               of cable television service operate or provide
               a telecommunications franchise pursuant to
               t h is division, unless a sep ar at e
               telecommunications franchise is obtained
               from the city.

******************************************************

Sec. 10-79. Application of other laws....

        (2) Subject to police power. The construction, expansion,
reconstruction, excavation, use, maintenance and operation of the
system shall be subject to all lawful police regulations of the city and
performed in accordance with all ordinances, laws, resolutions and
regulations of the city for utility location and excavation in public
rights-of-way presently in effect or hereafter adopted....

        Nothing in this division shall be construed as preventing the
City of Memphis, whenever it shall be empowered by applicable state


                                  -8-
               and federal law so to do, from fixing or regulating the rates, rentals,
               charges, services, facilities and equipment of grantee or from
               exercising general supervision and regulation of, jurisdiction and
               control over, a telecommunication franchise, the grantee, and its
               property, property rights, facilities and franchises located within the
               city. It being the intention of this division, that the City of Memphis
               in no way surrenders such general powers it may now have, or may
               hereafter have or acquire.

               ******************************************************

               Sec. 10-96. General compensation to the city.

                        (1) General compensation. The city finds that the public
               streets, alleys and public rights-of-way to be used by grantee in the
               operation of its system within the boundaries of the city are valuable,
               public properties, acquired and maintained by the city at great
               expense to its taxpayers, and that the grant to grantee of the use of
               said public street, alleys and public rights-of-way is a valuable
               property right, without which the grantee would be required to invest
               substantial capital in public right-of-way costs and acquisitions; the
               grantee agrees to pay to the city as general compensation during each
               year of the franchise agreement, an amount equal to five (5) percent
               of gross revenues for each quarter of a compensation year....

               ******************************************************

       Sec. 10-98. Term of franchise.

                       (1) Term. Within thirty (30) days after adoption of an
               ordinance granting a telecommunications franchise pursuant hereto[,]
               [g]rantee shall execute an agreement accepting this franchise
               substantially in the form attached hereto as Exhibit “A” [codified as
               section 10-111]. In the event any such franchise agreement is not
               executed by a grantee within said thirty (30) days, the award of the
               telecommunications franchise shall be null and void. Upon execution
               of a franchise agreement between the city and grantee, a franchise
               shall be in full force and effect for a term and period of twenty (20)
               years, ending on the anniversary date of the franchise.

        On June 25, 2001, BellSouth filed a nine-count complaint for declaratory relief against the
City, seeking to permanently enjoin enforcement of Ordinance 4404 and to declare said ordinance
invalid. BellSouth’s complaint alleges, in pertinent part:


                                                -9-
                                          DECLARATORY RELIEF

                  15.     BELLSOUTH seeks declaratory relief because the CITY is
                  seeking to enforce Ordinance No. 4404, which BELLSOUTH
                  contends conflicts with existing state and federal law and impinges
                  BELLSOUTH’s constitutional rights. Specifically, the ordinance (a)
                  is preempted under state law, (b) is preempted under federal law, (c)
                  violates the United States and Tennessee Constitutions; and (d)
                  imposes an illegal fee that the CITY has no power to assess.

                  ******************************************************

               18. . . .By Acts 1905, Ch. 54, MEMPHIS was given the power to
               enter into franchises only with commercial railroads, street railroads,
               gas companies, electric light companies, water companies and other
               quasi-public companies. Telephone and telegraph companies were
               intentionally omitted from this list of companies to which the CITY
               could award a franchise because such companies were
               ar a ye tte t asae i efa c ie I t ecs o B L S U Hirci e issae i efa c iei 1 8 p runt At o 1 8 ,C apt r66(now
                le d nildo ttwd rnhs. nh ae f E L O T ,t eevdt ttwd rnhs n 8 5 us a to cs f 8 5 h e
codified at T.C.A. § 65-21-201, et seq. and § 65-21-107 as amended).

                  ******************************************************

                  21.      Pursuant to Tennessee Acts of 1885, Chapter 66 (now
                  codified at T.C.A. § 65-21-201, et seq. and § 65-21-105, 106),
                  BELLSOUTH (through its predecessors in interest) was granted a
                  perpetual, statewide franchise in 1885 that extends to BELLSOUTH
                  a right to construct its telephone lines along, upon, above and under
                  the roads or highways within the limits of the [S]tate of Tennessee.

                  22.     BELLSOUTH accepted the statewide franchise by
                  constructing and extending its telephone lines and facilities along,
                  upon, above and under roads and highways within the limits of the
                  State and has relied on the franchise when expending hundreds of
                  millions of dollars necessary for the infrastructure to provide high
                  quality telecommunications service...

                  23.    BELLSOUTH has, by accepting the statewide grant, obtained
                  a vested contractual and property right to construct its
                  telecommunications lines along, upon, above, under and over the
                  roads and highways within the limits of the State.

                  ******************************************************


                                                          -10-
25.     BELLSOUTH’s statewide franchise is a constitutionally
recognized and protected contract, the obligation of which is
protected from interference or impairment by the State or its political
subdivisions.

26.    Ordinance No. 4404 seeks to impose extensive regulatory
requirements and fees that go far beyond that which is permitted
under BELLSOUTH’s statewide franchise...

27.      Because, and to the extent that, Ordinance No. 4404 purports
to impose obligations on BELLSOUTH that conflict with and exceed
its obligations under its perpetual statewide franchise, the Ordinance
impairs and abrogates BELLSOUTH’s contractual rights in violation
of U.S. Const. Art. I, § 10 and Tenn. Const. Art. I, § 20. In addition,
it impairs vested property rights, thereby violating due process, U.S.
Const. amend. XIV and Tenn. Const. Art I, § 8.

******************************************************

30.     T.C.A. § 65-21-103 expressly restricts the fees that
municipalities may impose upon telephone companies pursuant to the
municipalities’ police powers. Under T.C.A. § 65-21-103, the CITY
can supervise BELLSOUTH’s conduct in the public rights-of-way
under the CITY’s police power and can recover from BELLSOUTH,
the cost of such supervision, but nothing more. Accordingly, any fee
or rental that is charged pursuant to a municipality’s police powers
must be limited to the cost to the municipality of supervising
BELLSOUTH’s use of the municipality’s rights-of-way and cannot
be based on a telephone company’s gross revenue.

        In Ordinance No. 4404, MEMPHIS purports to impose upon
BELLSOUTH a fee based on BELLSOUTH’s gross revenue that is
not related to the CITY’s cost of policing the use by BELLSOUTH
of the CITY’s rights-of-way. The gross revenue fee imposed by
Ordinance No. 4404 is unlawful because it exceeds the limited range
of police powers granted to Tennessee municipalities in regulating
telephone companies.

******************************************************

36.     The gross revenue fee imposed by Ordinance No. 4404
constitutes a tax under Tennessee law because it is not limited to the


                                 -11-
fee permitted by T.C.A. § 65-21-103, but was imposed primarily for
the purpose of raising general revenue to support the CITY’s
operations, and would generate income to MEMPHIS beyond that
necessary to compensate MEMPHIS for its police power regulation
and management of its public rights-of-way.

37.    Because the gross revenue fee imposed by Ordinance No.
4404 constitutes a tax on the privilege of operating as a public utility
to conduct a telephone and telecommunications business in
MEMPHIS it unlawfully infringes on the exclusive power of the state
to impose a privilege tax on public utilities.

******************************************************

42. Because the gross revenue fee imposed by Ordinance No. 4404
attempts to raise general revenues to support generally the CITY’s
operations, was imposed primarily for the purpose of raising general
revenue to support generally the CITY’s operations in other areas, is
not limited to the costs to the CITY of policing    BELLSOUTH’s
use of the CITY’s public rights-of-way, and would generate income
to the CITY beyond that necessary to compensate the CITY for its
police power regulation and management of its public rights-of-way,
it constitutes an unauthorized and unlawful tax.

******************************************************

47.     The Tennessee Legislature has never passed general
legislation authorizing MEMPHIS or any other municipality in the
[S]tate of Tennessee, to impose on BELLSOUTH or any other
telecommunications provider, a general use tax.

48.     Because the gross revenue fee imposed by Ordinance No.
4404 attempts to raise general revenues to support generally the
CITY’s operations, was imposed primarily for the purpose of raising
general revenue to support generally the CITY’s operations in other
areas, is not limited to the costs to the CITY of policing
BELLSOUTH’s use of the CITY’s public rights-of-way, and would
generate income to the CITY beyond that necessary to compensate
the CITY for its police power regulation and management of its
public rights-of-way, it constitutes an unauthorized and unlawful tax.

******************************************************



                                 -12-
                56.    The Ordinance imposes a third tier scheme of regulation upon
                BELLSOUTH that affects BELLSOUTH’s ability to provide the
                services it is required to provide under the Federal Communications
                Act of 1934 and the Federal Telecommunications Act of 1996,
                thereby interfering with interstate and foreign communications by
                wire and improperly constructing barriers to competition.

        The City filed an answer and counter-complaint in response, denying all causes of action and
asserting several affirmative defenses, including estoppel and waiver. The City’s counter-complaint
sought enforcement of the ordinance, ejectment of BellSouth from the City’s public rights-of-way,
and entry of a judgment ordering BellSouth to compensate the City for “underpayments from
excluding inter-exchange access fees as well as any other exclusion of revenue from its gross receipts
paid to the City,” and further directing BellSouth to “pay for its continued use and occupation of the
City’s right of way pursuant to the terms of the 1980 franchise agreement, and that the remaining
terms of the 1980 franchise agreement be enforced pending the resolution of this matter.”

        On August 24, 2001, the City filed a motion to dismiss pursuant to Tenn. R. Civ. P. 12.02
for failure to state a claim upon which relief can be granted. In April 2002, BellSouth filed an
amended complaint adding claims entitled “State Law Preemption Under the 1995 State Act” and
“Violation of BellSouth’s Federal Rights Under 42 U.S.C. § 1983 & 1988,” and amending its claim
of federal preemption under the Telecommunications Act of 1996.

       The parties filed joint stipulations of fact in late July 2002. Soon thereafter, the parties filed
cross-motions for summary judgment. A hearing was held on December 20, 2002 on the parties’
motions, joint factual stipulations, affidavits, and memoranda. On March 5, 2003, the trial court
entered an order granting the City’s motion for summary judgment and finding as follows:

                        This cause came on to be heard on December 20, 2002, upon
                the cross-motions for Summary Judgment filed by the parties, joint
                factual stipulations, affidavits, memoranda and arguments in open
                court, from all of which

                        IT APPEARS that BellSouth’s challenges to certain
                regulatory provisions in Ordinance No. 4404 have been rendered
                moot by the City’s enactment of Substitute Ordinance No. 4980,
                which deleted the following challenged provisions from the City’s
                Telecommunications Ordinance: §§ 3.1, 3.2D, 22.1, 22.2, 22.3. 22.5,
                22.7, 29, 30 and 28 (regarding transfer of franchise at fair market
                value).

                        IT FURTHER APPEARS that the parties have agreed to
                defer argument and disposition of BellSouth’s remaining challenges
                to the regulatory aspects of Ordinance No. 4404 (and/or to


                                                  -13-
               corresponding provisions of Substitute Ordinance No. 4980) until
               after the appeal of the Court’s ruling set forth in paragraph 1 below.

                        IT FURTHER APPEARS that the City has stipulated that it
               is not levying a tax and that it does not have the authority to levy a tax
               with respect to the use of the City’s Rights-of-Way by
               telecommunications providers.

                       IT FURTHER APPEARS that the issue of whether the
               amount of the fee set forth in City Ordinance No. 4404, as amended
               by Substitute Ordinance No. 4980, is reasonable is not before the
               Court; the Court, therefore makes no ruling with respect to that issue.

                       Based on the foregoing agreements and stipulations of the
               parties, affidavits, pleadings, arguments of counsel and memoranda
               of the parties, the Court finds and concludes:

                       1. That the fee imposed by Ordinance No. 4404 is not in
               conflict with T.C.A. § 65-21-103 or any other provision of Tennessee
               law.

                       2. That this decree is final as to the ruling in paragraph 1
               above, and that there is no just reason for delay in the entry of a Final
               Decree and declaration as to that ruling, and that this Final Decree be
               entered as a final judgment pursuant to Rule 54.02 of the Tennessee
               Rules of Civil Procedure, because a final adjudication with respect to
               that ruling by appellate courts of this state may obviate further
               proceedings or litigation in this matter.

                      3. That the costs of this cause are assessed against Plaintiff
               for which execution may issue.

                       IT IS SO ORDERED, ADJUDGED AND DECREED.

        BellSouth filed a timely notice of appeal of the court’s March 5, 2003 order, and presents for
review the sole issue of whether the trial court erred in granting summary judgment in favor of the
City on grounds that the “fee imposed by Ordinance No. 4404 is not in conflict with T.C.A. § 65-21-
103 or any other provision of Tennessee law.”

        A motion for summary judgment should be granted when the movant demonstrates that there
are no genuine issues of material fact and that the moving party is entitled to a judgment as a matter
of law. See Tenn. R. Civ. P. 56.04. The party moving for summary judgment bears the burden of
demonstrating that no genuine issue of material fact exists. See Bain v. Wells, 936 S.W.2d 618, 622


                                                 -14-
(Tenn. 1997). On a motion for summary judgment, the court must take the strongest legitimate view
of the evidence in favor of the nonmoving party, allow all reasonable inferences in favor of that
party, and discard all countervailing evidence. See id. In Byrd v. Hall, 847 S.W.2d 208 (Tenn.
1993), our Supreme Court stated:

               Once it is shown by the moving party that there is no genuine issue
               of material fact, the nonmoving party must then demonstrate, by
               affidavits or discovery materials, that there is a genuine, material fact
               dispute to warrant a trial. In this regard, Rule 56.05 provides that the
               nonmoving party cannot simply rely upon his pleadings but must set
               forth specific facts showing that there is a genuine issue of material
               fact for trial.

Id. at 210-11 (citations omitted) (emphasis in original).

         Summary judgment is only appropriate when the facts and the legal conclusions drawn from
the facts reasonably permit only one conclusion. See Carvell v. Bottoms, 900 S.W.2d 23, 26 (Tenn.
1995). Since only questions of law are involved, there is no presumption of correctness regarding
a trial court’s grant of summary judgment. See Bain, 936 S.W.2d at 622. Therefore, our review of
the trial court’s grant of summary judgment is de novo on the record before this Court. See Warren
v. Estate of Kirk, 954 S.W.2d 722, 723 (Tenn. 1997).


       The material facts upon which BellSouth’s complaint is based are not disputed by the parties.
Our review is therefore limited to a determination of whether the trial court erred, as a matter of law,
in concluding that the five percent fee imposed by Ordinance 4404 “is not in conflict with T.C.A.
§ 65-21-103 or any other provision of Tennessee law.”

        Proper review of this issue require us to consider, first, whether the City has the power or
right to require BellSouth to enter into a franchise agreement providing for payment of general
compensation to the city for use of the public rights-of-way. If the answer is no, no further analysis
is required and the trial court’s grant of summary judgment in favor of the City must be reversed.
However, if we determine that the City is entitled to require telecommunications service providers
such as BellSouth to enter into franchise agreements directing payment of general compensation for
use of the public rights-of-way, then we must next consider whether the fee imposed pursuant to
Ordinance 4404 is valid.

        To briefly reiterate, the Chapter 11, Section 3 of the 1879 Tennessee Acts granted the City
the following pertinent powers:

               to repair and keep in repair, streets, side-walks, and other public
               grounds and places in the taxing district; to open and widen streets,
               to change the location or close the same, and to lay off new streets


                                                 -15-
              and alleys when necessary; and to have and exercise entire control
              over all streets and other public property of the taxing district, as
              well as that within and without the taxing district. And they shall
              have power over all other affairs in the taxing districts in which the
              peace, safety or general welfare of the inhabitants is interested.

(emphasis added).

       Approximately six years later, in 1885, the Tennessee General Assembly enacted Chapter
66, Acts of 1885, now codified at T.C.A. §§§ 65-21-105 106, and 201. Section 201 states:

                      65-21-201. Rights-of-way authorized. – Any person or
              corporation organized for the purpose of transmitting intelligence by
              magnetic telegraph or telephone, or other system of transmitting
              intelligence the equivalent thereof, which may be invented or
              discovered, may construct, operate, and maintain such telegraph,
              telephone, or other lines necessary for the speedy transmission of
              intelligence, along and over the public highways and streets of cities
              and towns, or across and under the waters, and over any lands or
              public works belonging to this state, and on and over the lands of
              private individuals, and upon, along, and parallel to any of the
              railroads, and on and over the bridges, trestles, or structures of such
              railroads.

       Municipalities are endowed with proprietary and governmental powers. See Memphis Power
& Light Co. v. City of Memphis, 112 S.W.2d 817, 820 (Tenn. 1937) (quoting 43 C.J. 179-182); City
of Chattanooga v. BellSouth Telecomm., Inc., No. E1999-01573-COA-R3-CV, 2000 WL 122199
(Tenn. Ct. App. Jan. 26, 2000) (citing Bristol Tennessee Housing Auth. v. Bristol Gas Corp., 407
S.W.2d 681 (Tenn. 1966)). In Memphis Power & Light Co. v. City of Memphis, 172 Tenn. 346,
112 S.W.2d 817 (Tenn. 1937), the Tennessee Supreme Court recognized:

                              While in a general sense the functions of
                      municipal corporations are all of a public nature, it is
                      well recognized and generally established that a
                      municipal corporation acts in, or possesses, a dual
                      capacity [...] exercising correspondingly twofold
                      functions, two classes of powers, two classes of rights,
                      and two kinds of duties. In one of these dual
                      capacities, considered as an agency of the state, the
                      corporation exercises functions and powers, possesses
                      rights, and has imposed upon it duties variously
                      designated as public, legislative, political, or
                      governmental, and acting in this capacity a


                                               -16-
                       municipality acts as a sovereignty. In the other of
                       these dual capacities, not considered as an agency of
                       the state, the municipal corporation exercises
                       functions and powers, possesses rights, and has
                       imposed upon it duties variously designated as
                       private, quasi-private, proprietary, business,
                       commercial, ministerial, or merely municipal; and
                       acting in this capacity the municipality acts as a
                       private or quasi-private corporation, enjoying powers
                       and privileges conferred for its own benefit.... [T]he
                       two [classes of powers] are clearly separate and
                       distinct, and the functions of the corporation in its
                       legislative or governmental capacity should not be
                       confused with its functions in its proprietary
                       capacity....

Id. at 820 (quoting 43 C.J. 179-182).

        Control of the public streets and highways of this State resides primarily with the legislature;
however, this power may become vested in a municipality where delegated by proper legislative
authority. See City of Chattanooga v. Tennessee Elec. Power Co., 172 Tenn. 524, 112 S.W.2d 385,
388 (Tenn. 1938) (citations omitted); Lewis v. Nashville Gas & Heating Co., 162 Tenn. 268, 40
S.W.2d 409, 411 (Tenn. 1931). Where control of the streets and public rights-of-way is properly
delegated and vested in a municipality, “[t]he general rule is that a city or town holds its streets in
a proprietary and not a governmental capacity, and its duty to construct and maintain them is a
corporate duty and not a governmental function.” City of Nashville v. Brown, 157 S.W.2d 612, 615
(Tenn. Ct. App. 1941) (citing Fleming v. Memphis, 126 Tenn. 331, 337, 148 S.W. 1057, 42
L.R.A.,N.S., 493, Ann. Cas.1913D, 1306; Shepherd v. City of Chattanooga, 168 Tenn. 153, 155-
157, 76 S.W.2d 322; City of Knoxville v. Gervin, 169 Tenn. 532, 538, 89 S.W.2d 348, 103 A.L.R.
877; Boyd et ux. v. City of Knoxville, 171 Tenn. 401, 405, 104 S.W.2d 419). See also City of
Greenfield v. Butts, 582 S.W.2d 80, 83 (Tenn. Ct. App. 1979) (citations omitted).

        Chapter 11, Section 3 of the 1879 Tennessee Acts granted the City “entire control” over all
Memphis streets. In City of Memphis v. Postal Tel. Cable Co., 145 F. 602 (6th Cir. 1906), the Sixth
Circuit found that 1885 Act did not repeal the power of control of Memphis streets, stating:

               ... Again, there are certain special reasons for thinking that the
               Legislature could not have intended to displace the ‘entire control’ of
               the streets which it had committed to the city. No one doubts, we
               suppose, that the power to charge a telegraph company with a
               proportion of the cost of making and keeping in repair and policing
               a street of the city was lodged somewhere. And if so, no place was
               so appropriate for lodging it as in the city itself. It alone was obliged


                                                 -17-
               to bear the whole cost of maintenance. The share of the cost of
               maintenance for public use belonged to the city. The share due from
               the telegraph company for its special use was also due to the city, for
               the latter was carrying it, and its treasury should be reimbursed. It
               was a local matter and could be most conveniently attended to by the
               officials of the municipality who would be best informed of the
               circumstances and by all analogies the proper persons to assess and
               collect the charge. It would belong to no other public fund. It was
               therefore perfectly reasonable that the city should possess the
               authority to make and collect such a charge, and rather unreasonable
               that it should be committed to any other depositary of governmental
               authority. And there is no machinery provided by statute for the levy
               and collection of such charges by the state, and there was none when
               the Legislature passed the act of 1885. These seem to us strong
               reasons for believing that the Legislature had no intention of
               reserving to the state the power to charge the telegraph company for
               its proportion of the cost of maintaining the streets of the city of
               Memphis, but rather that it intended to leave that matter with the
               authority to which it had granted the power of control possessed by
               the state. The grant of ‘entire control’ seems even a more absolute
               delegation of power than the power ‘to regulate,’ which was held in
               St. Louis v. Western Union Tel. Co., 148 U.S. 92, 13 Sup.Ct. 485, 37
               L.Ed. 380, and 149 U.S. 465, 13 Sup. Ct. 990, 37 L.Ed. 810, to
               authorize the city of St. Louis to assess and collect a like charge for
               the use of the streets for the maintenance of the structures of a
               telegraph company. Indeed that case, if we are right in thinking that
               the Tennessee Act of 1885 did not deprive the city of the control of
               its streets in this regard, is ample authority for holding that it had
               power to levy and collect the charges in question, the reasonableness
               of them not being now disputed; and the case of Postal Telegraph
               Co. v. Baltimore, 79 Md. 502, 29 Atl. 819, 24 L.R.A. 161, affirmed
               by the Supreme Court of the United States in 156 U.S. 210, 15 Sup.
               Ct. 356, 39 L.Ed. 399, is directly in point. See also further discussion
               of the subject in Western Union Tel. Co. v. Borough of New Hope,
               187 U.S. 419, 23 Sup. Ct. 204, 47 L.Ed. 240, and Atlantic & Pacific
               Tel. Co. v. Philadelphia, 190 U.S. 160, 23 Sup. Ct. 817, 47 L.Ed.
               995, and in Western Union Tel. Co. v. Pennsylvania R.R. Co., 195
               U.S. 566, 25 Sup. Ct. 133, 49 L.Ed. 312.

Id. at 605-606 (emphasis added).

The court specifically noted that the responsibility of the companies was the relative cost to the city
and that was a matter under its public power. Although control of Memphis streets and public rights-


                                                 -18-
of-way was properly delegated to the City pursuant to Chapter 11, Section 3 of the 1879 Tennessee
Acts, this control is to be exercised with recognition of the state’s grant to the telecommunication
provider.


         In considering whether the City is entitled to require BellSouth to enter into a franchise
agreement for use of the streets and public rights-of-way, we note that Chapter 66 of the Tennessee
Acts of 1885, now codified in part at T.C.A. § 65-21-201, gave telephone and telegraph companies
a right to construct, maintain, and operate lines “along and over the public highways and streets of
cities and towns ... and on and over the lands of private individuals....” The legislature created in
telephone companies a property right in the streets and public rights-of-way via the enactment of
Chapter 66 (T.C.A. § 65-21-201) see City of Chattanooga v. Tennessee Elec. Power Co., 172 Tenn.
524, 112 S.W.2d 385, 390 (Tenn. 1938) (“A right of way upon a public street, whether granted by
act of the legislature, or ordinance of city council, or in any other valid mode, is an easement, and
as such is a property right, capable of assignment, sale, and mortgage, and entitled to all the
constitutional protection afforded other property rights and contracts”) (citations omitted).


       BellSouth asserts that the City’s ordinance is not authorized by virtue of the 1907 Act
codified as T.C.A. § 65-21-103:

                       65-21-103. Local regulation. – While any village or city
               within which such [telegraph or telephone] line may be constructed
               shall have all reasonable police powers to regulate the construction,
               maintenance, or operation of such line within its limits, including the
               right to exact rentals for the use of its streets and to limit the rates to
               be charged; provided, that such rentals and limitations as to rates are
               reasonable and imposed upon all telephone and telegraph companies
               without discrimination. No village, town, or city shall have the right
               to prevent the company from constructing, maintaining, and operating
               the line within the village, town, or city, so long as the line is being
               constructed, maintained, or operated within the village, town, or city,
               in accordance with the reasonable police regulations.

        BellSouth challenges the “reasonableness” of the five percent gross revenue charge on two
grounds, including (1) that the fee does not bear a reasonable relation to the City’s regulatory costs,
and (2) that the fee constitutes an unlawful tax.

        This Court recently considered a case somewhat analogous to the case before us. In City of
Chattanooga v. BellSouth Telecommunications, Inc., No. E1999-01573-COA-R3-CV, 2000 WL
122199 (Tenn. Ct. App. Jan. 26, 2000), the Court considered the appeal of the trial court’s judgment
in a declaratory judgment action, declaring that the city ordinance was invalid. The ordinance in
question required anyone attempting to provide telecommunication services within the City of


                                                  -19-
Chattanooga would obtain a franchise from the city and would pay a franchise fee of “five percent
of its gross revenue to the city each year.” This Court, in holding the ordinance invalid because it
was not a reasonable exercise of the city’s police powers, reversed the trial court. The Court noted
that T.C.A. § 65-21-103 permits the city to exercise a rental for the use of the right-of-way under its
governmental or police powers and that the city argued that the rental, as used in the statute, would
allow for revenue above the mere compensation. To this argument, the Court said:

                        The City's urged construction of the term "rental" to allow for
                revenue above mere "compensation", would enable the City to exact
                the same charge in its exercise of its police powers as it can in the
                exercise of its proprietary powers, thereby rendering meaningless our
                Supreme Court's decisions making the distinction. In Porter v. City
                of Paris, the Supreme Court held under the City's police powers, the
                fee imposed must "bear a reasonable relation to the thing being
                accomplished." 201 S.W.2d at 691. Recently, the Court defined
                "fee" as that which is "imposed for the purpose of regulating specific
                activity or defraying the cost of providing a service or benefit to the
                party paying the fee." City of Tullahoma v. Bedford County, 938
                S.W.2d 408 (Tenn. 1997).

                               *               *               *

                The City does have the right to be reimbursed for the added cost of
                repaving more frequently. In Porter, the Court said:

                               The fact, that the fees charged produce more
                       than the actual cost and expense of enforcement and
                       supervision, is not an adequate objection to the
                       exaction of the fees. The charge made, however, must
                       bear a reasonable relation to the thing being
                       accomplished. (Emphasis supplied).

                201 S.W.2d 688, 691. Thus, while the City may charge a fee beyond
                the mere repair of its rights-of-way, such fees must bear a reasonable
                relation to the cost to the City. There is no evidence to support the
                proposition that the 5% fee will "bear a reasonable relation" to the use
                of the rights-of-way.

Id. at *3, 4.

      We next address BellSouth’s argument that the five percent gross revenue charge is an
unlawful tax. In City of Tullahoma v. Bedford County, 938 S.W.2d 408 (Tenn. 1997), the
Tennessee Supreme Court distinguished a tax from a fee, noting:


                                                   -20-
               A tax is a revenue raising measure levied for the purpose of paying
               the government’s general debts and liabilities. Memphis Retail
               Liquor Dealers’ Ass’n v. City of Memphis, 547 S.W.2d 244, 245-46
               (Tenn. 1977). See City of Knoxville v. Lee, 159 Tenn. 619, 623, 21
               S.W.2d 628, 629-30 (1929); 16 Eugene McQuillin, The Law of
               Municipal Corporations § 44.02 (rev.3d ed. 1994). A fee is imposed
               for the purpose of regulating a specific activity or defraying the cost
               of providing a service or benefit to the party paying the fee. Memphis
               Retail Liquor Dealers’ Ass’n v. City of Memphis, 547 S.W.2d at
               246; Solid Waste Authority v. Division of Natural Resources, 195
               W.Va. 1, 462 S.E.2d 349, 353- 54 (1995); Brewster v. City of
               Pocatello, 115 Idaho 502, 768 P.2d 765, 768 (1988); Crocker v.
               Finley, 99 Ill.2d 444, 77 Ill.Dec. 97, 459 N.E.2d 1346, 1349-50
               (1984); Emerson College v. City of Boston, 391 Mass. 415, 462
               N.E.2d 1098, 1105 (1984).

Id. at 412.

It is undisputed that the City is prohibited from imposing taxes upon public utilities, including
telephone service providers. See T.C.A. §§ 67-4-401, 406.

       The franchise agreement set forth by Ordinance 4404 requires BellSouth to pay to the City,
“as general compensation during each year of the franchise agreement, an amount equal to five (5)
percent of gross revenues for each quarter of a compensation year....” The stated purpose for the
general compensation provision is set forth as follows:

                        (1) General compensation. The city finds that the public
               streets, alleys and public rights-of-way to be used by grantee in the
               operation of its system within the boundaries of the city are valuable,
               public properties, acquired and maintained by the city at great
               expense to its taxpayers, and that the grant to grantee of the use of
               said public street, alleys and public rights-of-way is a valuable
               property right, without which the grantee would be required to invest
               substantial capital in public right-of-way costs and acquisitions; the
               grantee agrees to pay to the city as general compensation during each
               year of the franchise agreement, an amount equal to five (5) percent
               of gross revenues for each quarter of a compensation year....

         We note that the City acknowledged in its answers to BellSouth’s interrogatories that it
placed revenue generated under Ordinance 3037 into a General Fund for use in funding various
critical services. The City’s response, stated in pertinent part below, further indicated that revenue
generated pursuant to any franchise agreement is placed in the City’s General Fund:



                                                -21-
               INTERROGATORY NO. 2: State whether the City can account for
               the use of the revenues that it received from BellSouth in any year in
               which Ordinance No. 3037 was in effect, including the extension
               period.

               RESPONSE: The City objects to Interrogatory No. 2 on the basis
               that it is vague, overbroad and overburdensome. Without waiving
               said objections, the City responds that the revenues received
               pursuant to any franchise agreement with any telecommunications
               provider doing business within the corporate limits of the City are
               placed in the City’s General Fund, and used to fund various public
               services, such as public works projects, police and fire protection,
               parks, libraries, youth programs, and building maintenance.

(emphasis added).

         As we previously pointed out, the Court in City of Chattanooga v. BellSouth Telecomm.,
Inc., No. E1999-01573-COA-R3-CV, 2000 WL 122199 (Tenn. Ct. App. Jan. 26, 2000) held, inter
alia, that an ordinance requiring telecommunications service providers to pay a franchise fee of five
percent of their gross revenue was not “a reasonable exercise of the City’s police powers” under
T.C.A. § 65-21-103. Id. at *4. The Court specifically rejected the City’s argument that the term
“rental,” as used in the aforementioned statue, was “not limited to the cost of regulation, but allows
generation of revenue in excess of regulation without constituting a tax.” Thus, the fee in question
could properly be termed a tax.


         Although the City of Chattanooga Court recognized that a municipality has authority to act,
either in its proprietary capacity or its governmental capacity, the court did not attempt to enunciate
that the municipality’s authority to act in light of the 1885 and 1907 Acts would be restricted to
purported municipal acts in its proprietary capacity. To the contrary, the 1885 Act merely grants to
the telecommunication providers the right to use the streets, etc., of the municipality for the purpose
of transmitting its signals. The 1907 Act delineates the authority of municipalities in dealing with
the carrier and limits the charges to what is reasonably necessary for the supervision and regulation
of its use. This Court aptly pointed out that to construe the term “rental” to allow for revenue above
mere “compensation” would enable the City to exact the same charge in its exercise of police powers
as it can in the exercise of its proprietary powers, thereby rendering meaningless our Supreme
Court’s decisions in making the distinction. City of Chattanooga at *3.

         In the instant case, the City recognizes that it has no authority to tax BellSouth, and argues
its five percent fee is a fee and not a tax. However, the record indicates that the revenue derived
from such a fee is allocated to different city functions and apparently bears no relation to the cost to
the City in supervising and regulating the use of BellSouth’s rights-of-way. The fee charged by the
City under its police power must bear a reasonable relation of the cost to the City for the use and


                                                 -22-
maintenance of the rights-of-way. On its face, the percentage of gross profits bears no relation to
the cost to the City. Therefore, some proof is necessary to establish such a relationship.

        Accordingly, we find that the ordinance enacted by the City is invalid as contrary to the state
statutes, and the judgment of the trial court is reversed. City also has argued estoppel and waiver,
but our review of the record in this case indicates that neither of these theories are applicable. Costs
of the appeal are assessed to the City of Memphis.



                                               __________________________________________
                                               W. FRANK CRAWFORD, PRESIDING JUDGE, W.S.




                                                 -23-
