Putting a price on dirt: the need for better-defined limits on government fees for use of the public right-of-way under section 253 of the Telecommunications Act of 1996.

• Author: Snyder, Thomas W.

1. INTRODUCTION II. SECTION 253 AND CASES DECIDED THEREUNDER A. Enactment of Section 253 B. Initial Decisions Under Section 253 C. Eighth Circuit Decision in City of St. Louis and Ninth Circuit Decision in County of San Diego D. Analysis of City of St. Louis and County of San Diego III. THE FCC SHOULD CLEARLY CONFIRM THAT REVENUEGENERATING FEES ARE EFFECTIVELY PROHIBITIVE UNDER SECTION 253(A) AND ARE TO BE APPROPRIATELY ANALYZED UNDER SECTION 253(C) IV. THE FCC SHOULD CLARIFY THAT "FAIR AND REASONABLE COMPENSATION" UNDER SECTION 253(C) MEANS PAYMENT FOR MANAGEMENT COSTS PLUS A PROVEN ECONOMIC VALUE OF THE PROW THAT WOULD PREVAIL IN COMPETITIVE MARKETS. A. Competitive v. Monopolistic Pricing and the Concept of Economic Scarcity B. Where the PROW Is a Nonscarce Asset, It Should Be Priced Accordingly C. Scarcity Is Distinct from Negative Externalities D. Other Valuation Methods Are Economically Unsound V. CONCLUSION I. INTRODUCTION

   The ubiquitous wires and cables that carry telephone calls to friends, data to the Internet, and communications between offices generally occupy space on poles or in the dirt under streets, which is otherwise known as the public rights-of-way ("PROW"). These cables also carry "wireless" traffic, as communications generally are only wireless for the distance between towers and cell phones, smart phones, or computers. Most of the wireless backhaul and long-haul transport services are provided over cables installed at least partially in the PRow. (1)

   Local government units ("LGUs") have varied widely in their PROW management practices. Many LGUs have recognized that communications are a beneficial service and crucial for economic development, and, thus, they have allowed carriers to occupy the PROW in return for one-time permit charges or similar fees that are limited to recovering the cost of PROW management and maintenance. (2) Other LGUs have seen the opportunity for a large and continuous revenue source, and they have used their monopoly control over the PROW to extract large fees that are used to subsidize other LGU services. (3) These revenue-generating fees are often established as annual fees, typically either tied to the total linear feet of PROW occupancy or set as a percentage of a carrier's gross revenue. (4)

   In the years before 1996, when local telecommunications essentially was a monopoly industry, carriers generally tolerated revenue-generating fees as a form of indirect taxation on consumers. These carriers either passed the fees through as line items on customer bills or they absorbed the fees but added them as expenses to the rate base, and the fees were then reflected in the carriers' regulated rates. In either case, customers ultimately paid the inflated PROW charge, presumably in lieu of paying higher taxes that otherwise would be necessary to support government services.

   Although this arrangement may have been acceptable at the time, two industry-changing events have occurred that have exposed the danger in subsidizing other LGU services with revenue-generating PROW fees. The first is the dramatic increase in competition. Enabled in part by provisions within the Federal Telecommunications Act of 1996 ("FTA"), (5) which required incumbent carriers to lease access to their established networks at regulated rates, competitors have obtained large market shares in voice and Internet services. (6) To the extent that these competitive carriers have leased network facilities from the incumbent carriers, they generally have avoided directly engaging LGUs in PROW arrangements and have avoided many, if not all, of these revenue-generating fees. By continuing to charge revenue-generating fees to the incumbents, LGUs have created an uneven playing field by forcing certain carriers to pay for inflated cost inputs designed to subsidize other LGU services, while their competitors are often immune. This competitive imbalance threatens the vitality of incumbent carriers and ultimately threatens the deployment of new and advanced services.

   The second event is the explosion of broadband Internet use and its ascension to becoming an essential service. The Bush and Obama administrations have established accelerated broadband deployment as a national priority. (7) In furtherance of these goals, the FCC has established numerous policies and aspirations for broadband deployment. (8) To upgrade and build out their networks, carriers naturally need increased access to the PROW. LGUs that seek to subsidize other government services by charging revenue-generating PROW fees are a formidable obstacle to this goal.

   Congress recognized the potential for LGUs to use their monopoly power over the PROW to create competitive imbalances and to obstruct network expansion. Congress, therefore, included a provision in the FTA at 47 U.S.C. [section] 253 ("Section 253") to preempt certain LGU practices. Section 253(a) preempts any LGU requirement that "may prohibit or have the effect of prohibiting" (9) the provision of telecommunications services. Congress included at Section 253(c) a limited exception to preemption, which saves GU requirements setting "fair and reasonable compensation ... on a competitively neutral and nondiscriminatory basis...." (10) The intent of Sections 253(a) and (c) was to balance the national goals of fostering competition and encouraging deployment of advanced services with the LGU's historical management interests over the PROW--including the collection of fair and reasonable fees. (11)

   As discussed below, many LGUs unfortunately--although not surprisingly--have ignored Section 253 and pressed forward with fee structures based upon localized revenue needs rather than concepts of fairness and reasonability. Equally as unfortunate, the federal courts have inconsistently applied both Sections 253(a) and (c).

   With respect to Section 253(a), courts initially closely followed the FCC's 1997 California Payphone decision, where the FCC had defined "effect of prohibiting" as a requirement that "materially inhibits or limits the ability of any competitor or potential competitor to compete in a fair and balanced legal and regulatory environment." (12) These courts recognized that a LGU requirement that conditions use of the PROW on payment of revenue-generating fees quite naturally meets this standard. They then analyzed whether the fees were saved as "fair and reasonable compensation" under Section 253(c). (13) More recently, however, the Eighth and Ninth Circuits issued decisions in which they paid lip service to California Payphone while they errantly applied a much more stringent standard that essentially demands proof that the LGU requirement actually prohibits the provision of services. (14) Under these decisions, a carrier would need to show that the revenue-generating fees actually prevented it from providing services before the courts would analyze whether the fees were "fair and reasonable" under Section 253(c). This actual prohibition standard under Section 253(a) reduces Section 253 to a toothless standard in these circuits, imposing no practical limit and allowing LGUs to hold the PROW hostage to extract exorbitant rates.

   With respect to Section 253(c), courts have continuously struggled over the definition of "fair and reasonable compensation." Some courts have required fees to be limited to PROW management costs or at least to be related to management costs. (15) Other courts have allowed for a "fair market value" element for the PROW to be included in the fee, but they have done so without explaining what an appropriate value methodology would be other than determining the highest dollar amount that carriers are willing to pay. (16) No court has engaged in a serious economic analysis as to whether the PROW was a scarce resource that generates any value in a competitive market. The result of these inconsistent decisions has created uncertainty both for carriers and LGUs.

   The FCC now has an opportunity to end these inconsistent interpretations and restore Section 253 to its rightful role in the process of ensuring a fair field of play for all competitors. As part of the America Recovery and Reinvestment Act of 2009, Congress directed the FCC to develop a plan with the goal of ensuring that "all people of the united states [sic] have access to broadband capability...." (17) On March 16, 2010, the FCC issued its "National Broadband Plan" ("NBP"), (18) in which it set forth a comprehensive plan for accelerated broadband deployment. Among other things, the FCC acknowledged in the NBP that "[t]he cost of deploying a broadband network depends significantly on the costs that service providers incur to access conduits, ducts, poles and rights-of-way on public and private lands." (19) The FCC estimated that "[c]ollectively, the expense of obtaining permits and leasing pole attachments and rights-of-way can amount to 20% of the cost of fiber optic deployment." (20) The FCC further acknowledged that "[s]ecuring rights to [PROW] is often a difficult and time-consuming process that discourages private investment." (21) To streamline this process, the FCC stated that LGUs "should take steps to improve utilization of existing infrastructure to ensure that network providers have easier access to poles, conduits, ducts and rights-of-way." (22) The FCC recognized that "there are [already] limits to state and local policies; Section 253 of the [FTA] prohibits state and local policies that impede the provision of telecommunications services while allowing for rights-of-way management practices that are nondiscriminatory, competitively neutral, fair and reasonable." (23) The FCC also acknowledged, however, that "disputes under Section 253 have lingered for years, both before the FCC and in federal district courts." (24) Based on this proliferation of disputes, the FCC on April 7, 2011 issued a Notice of Inquiry focused on PROW issues ("PROW NOI"). (25) The PROW NOI seeks comments on...