October 25, 1999

To: Policy and Finance Committee

From: City Clerk

Subject: Municipalities and Rights-of-Way: Who is In Control?

The Telecommunications Steering Committee forwarded this matter to the Policy and Finance Committee with the request that the document entitled AMunicipalities and Rights-of-Way: Who is In Control?@ be submitted to City Council for information.

Background:

The Telecommunications Steering Committee on October 25, 1999, had before it a copy of an article which appeared in the October 1999, issue of the Journal of Municipal Telecommunications entitled AMunicipalities and Rights-of-Way: Who is in Control?@ by Joseph Van Eaton, which was forwarded to the Committee by Councillor John Adams, Chair.

City Clerk

Candy Davidovits\cd

Item No. 2

Attachment

Journal of Municipal Telecommunications, Vol. 1 No. 2, October 1999

Previous Paper --- Table of Contents --- Next Paper

Municipalities and Rights-of-Way: Who is In Control?

by Joseph Van Eaton, Miller & Van Eaton, P.L.L.C.

Joseph Van Eaton specializes in representing municipalities and nonprofit groups on a broad range of communications and antitrust-related matters. He has worked with communities on cable franchise renewals, advised communities as to the effect of the Cable Communications Policy Act of 1984 on local authority to regulate rates and to enforce franchise provisions, and aided communities in conducting cable operator performance evaluations. His work has involved representation of communities in cases involving First Amendment and antitrust challenges to local franchising authorities. He filed one of the first post-Cable Act petitions which resulted in a community reregulating basic cable service rates, and has also provided advice to a number of communities investigating the feasibility of municipal ownership of cable television systems. He represented a telecommunications consumer group in a case which secured millions of dollars in refunds for customers of AT&T. He has served as a special appointee to the board of directors of the Alliance for Community Media. He is admitted to practice in the District of Columbia; the United States Courts of Appeals for the District of Columbia, Eleventh, Fifth, and Ninth Circuits; and the United States Supreme Court. He received his law degree, cum laude, from the University of Pennsylvania in 1979, and his undergraduate degree, magna cum laude, in 1975 from Syracuse University. He is a member of the Federal Communications Bar Association and the National Association of Telecommunications Officers & Advisors.

Overview

Under our federal system, states and localities have long been the entities primarily responsible for managing the use of public rights-of-way and utility easements -- and for good reason. As a practical matter, management of the rights-of-way is no simple task. A municipality, for example, must ensure that critical transportation arteries are not disrupted for long periods of time; must prevent unqualified persons from performing work around life-critical (and potentially life-threatening) systems such as gas lines and emergency communications systems; and must ensure that this scarce resource is managed so that it can be used consistent with the public trust. As new telecommunications companies have entered the market, management problems have become even more significant. The two roads outside my office window, for example, are marked for five overlapping street cuts for telecommunications companies. The roads are scarred by two cuts made in the last two week, each of which has left a significant depression in the street.

Since the passage of the Telecommunications Act of 1996, local authority to manage the rights-of-way has been under increasing legal challenge from cable companies, telephone companies and others. Some courts have interpreted the law to supersede local rights in a way that essentially requires localities to dedicate public property to private companies (an enormous real estate gift). Some courts have decided to step into role of rights-of-way manager, by effectively declaring what a community may and may not do to protect its interest in the streets. Other courts, however, have been reluctant to presume that the federal law was meant to either upset traditional state-federal-local relationships, or to grant gifts to communications companies.

Some of the differences between the results in the cases can be attributed to the way in which the cases arise, as well as to judicial (mis)perception of the marketplace. Federal law is divided into distinct titles: Title II addresses the regulation of telecommunications carriers; Title III addresses the regulation of broadcasters; and Title VI addresses the regulation of cable and open video systems. Courts confronted with rights-of-way issues arising under Title VI have tended to conclude that municipalities have broad authority to control and regulate rights-of-way. By contrast, several (but by no means all) courts addressing rights-of-way issues under Title II have concluded that municipal authority is more limited. The problem for municipalities is that the line between Title II and Title VI companies is no longer clear. Indeed, some companies are planning to install Title II and Title VI facilities at the same time. That leaves municipalities in a legal quandary, and one that has no easy way out. Companies are arguing that any benefits extended to one company must be extended to any other company. A community that acts carelessly, or on an ad hoc basis while waiting for the law to be clarified may find itself locked into a management approach that simply does not work for the long term.

This article will briefly discuss some of the more notable recent cases bearing on rights-of-way issues, and then briefly discuss issues a locality may want to consider as it considers how best to protect its interests in the changing telecommunications environment.

Examples of Recent Case Law

Title VI Cases

A key recent case is City Of Dallas, Texas v F.C.C., 165 F.3d 341 (5^th Cir. 1999). The Telecommunications Act of 1996 created a new category of cable service provider, an "open video system" ("OVS"). An OVS is subject to hybrid common carrier/cable system regulation. The law that created OVS made it clear that certain federal requirements that apply to ordinary cable systems do not apply to OVS. Among other things, federal law requires an operator of a cable system to obtain a cable franchise; that federal requirement does not apply to OVS. Because of this, the FCC concluded that the federal law gave an OVS the right to occupy city streets and rights-of-way. The FCC essentially ruled that the federal government had taken local property and given it over to OVS use. For local governments, that FCC decision raised significant Fifth and Tenth Amendment concerns. Municipalities challenged the decision, arguing that an OVS would require permission from the locality to use the streets, and would be subject to local franchising requirements. The Fifth Circuit agreed. It noted that, while, the federal law provision that requires a cable operator to obtain a franchise did not apply to an OVS, eliminating this requirement only "results in the deletion of the federal requirement that cable operators get a franchise before providing service; it does not eviscerate the ability of local authorities to impose franchise requirements, but only their obligation to do so" Importantly, the court rejected the FCC's claim that local franchising authority was limited to and derived from federal law. To similar effect is the decision of the federal district court in AT&T Corp. v. Portland, CV 99-65-PA (U.S.D.C. Or. June 3, 1999). There, the Court concluded that "Congress intended to interfere as little as possible" with local authority to regulate cable, and accordingly concluded the City had the right to promote competition by requiring AT&T to provide competitors who wished to provide Internet service access to AT&T's cable modem platform.

In applying Title VI, the courts have also recognized that localities have a right to be compensated for the value of the property used by the cable industry: "[f]ranchise fees are not a tax, however, but essentially a form of rent: the price paid to rent use of public right-of-ways." Cities of Dallas, Texas and Laredo, Texas v. FCC, 118 F. 3d 393 (5^th Cir. 1997). The Dallas franchise fee decision relied in part on an old district court case that suggested localities, acting to protect citizens, had not just a right, but a duty to obtain fair value for public property used by a private corporation. Erie Telecommunications v. Erie, 659 F.Supp. 580, 595 (W.D.Pa.1987), affirmed on other grounds, 853 F.2d 1084 (3d Cir.1988). By contrast, as the next part of this article discusses, several courts applying Title II have effectively rejected the notion that private companies should pay a fair value -- a rent -- for use of the rights-of-way, and instead have suggested that charges for use of the rights-of-way should be limited to cost.

Title II Cases

Cases involving telecommunications providers are highly dependent on state law issues. Very few states have extensive state cable requirements. Almost all states have statutes and regulations governing the provision of telephone service, and as a result, telecommunications litigation usually requires the courts to resolve complex state law questions. A key issue in many cases is whether the incumbent LEC was granted a right by the state to use public rights-of-way at no charge and without a local franchise. The answer to that question often depends on the interpretation of state laws adopted initially more than a century ago.

However, the other central issue being raised in almost all the key cases is the extent to which federal law stands as a bar to local control of rights-of-way use.

Two statutory provisions are critical to the resolution of this issue. The first is Section 253 of the Telecommunications Act, codified at 47 U.S.C. ¶ 253. The pertinent parts read as follows:

(a) In General.--No State or local statute or regulation, or other State or local legal requirement, may prohibit or have the effect of prohibiting the ability of any entity to provide any interstate or intrastate telecommunications service.

(b) State Regulatory Authority.--Nothing in this section shall affect the ability of a State to impose, on a competitively neutral basis and consistent with section 254, requirements necessary to preserve and advance universal service, protect the public safety and welfare, ensure the continued quality of telecommunications services, and safeguard the rights of consumers.

(c) State and Local Government Authority.--Nothing in this section affects the authority of a State or local government to manage the public rights-of-way or to require fair and reasonable compensation from telecommunications providers, on a competitively neutral and nondiscriminatory basis, for use of public rights-of-way on a nondiscriminatory basis, if the compensation required is publicly disclosed by such government.

(d) Preemption.--If, after notice and an opportunity for public comment, the Commission determines that a State or local government has permitted or imposed any statute, regulation, or legal requirement that violates subsection (a) or (b), the Commission shall preempt the enforcement of such statute, regulation, or legal requirement to the extent necessary to correct such violation or inconsistency.

The second provision, appears at Section 601(c) of the Telecommunications Act of 1996, and is codified at 47 U.S.C. ¶ 601(c). That provision reads as follows:

(c) FEDERAL, STATE, AND LOCAL LAW-

(1) NO IMPLIED EFFECT- This Act and the amendments made by this Act shall not be construed to modify, impair, or supersede Federal, State, or local law unless expressly so provided in such Act or amendments.

(2) STATE TAX SAVINGS PROVISION- Notwithstanding paragraph (1), nothing in this Act or the amendments made by this Act shall be construed to modify, impair, or supersede, or authorize the modification, impairment, or supersession of, any State or local law pertaining to taxation, except as provided in sections 622 and 653(c) of the Communications Act of 1934 and section 602 of this Act.

(Copies of the Telecommunications Act of 1996, as engrossed, can be found at http://thomas.loc.gov, and the text of both the Telecommunications Act of 1996 and the Communications Act of 1934, as amended can be found in the resources section at the FCC's website, www.fcc.gov.)

On its face, Section 253 doesn't prohibit localities, or states from taking any action with respect to telecommunications companies. Instead, on its face, the provision only preempts a local or state law where (a) the law "prohibits or has the effect of prohibiting" the ability of an entity to enter the market; and (b) the law falls outside the "safe harbor" exceptions created by Sections 253(b)-(c).

Given the explicit language of Section 601, courts should not imply preemption merely because a court believes a local requirement falls outside the safe harbor. Providers who raise a Section 253 claim should be required to show that a regulation actually will prohibit or may prohibit entry.

Likewise, given the explicit language of Section 253, a court should not consider whether a particular compensation or rights-of-way management provision does prohibit entry. On its face, for example, the law seems to state that a reasonable compensation provision that is nondiscriminatory and competitively neutral cannot be struck down even if it has the effect of prohibiting entry. And, because the "safe harbor" requires nondiscriminatory treatment, and does not require each provider to be treated identically, a municipality should be able to draw reasonable distinctions among providers.[1]

A few conclusions follow from these points. The statute should allow localities (subject to any state law requirements that may apply) to obtain fair value for use of the rights-of-way, using any reasonable formula. This result is consistent with constitutional requirements under the "takings clause" of the Constitution. And, finally, the statute should allow localities to decide how they will manage the rights-of-way -- whether through a franchising, licensing, permitting or other process. Section 253 does not establish any particular standard for rights-of-way management. There is good reason for this: it maximizes local discretion in controlling the rights-of-way. Implying a standard puts the courts in the position of second-guessing local rights-of-way determinations, in effect, making management of the rights-of-way a judicial matter[2].

Whether the courts will ultimately adopt such a reading of the law is a different question.

In many respects, TCG Detroit v. City of Dearborn, 16 F. Supp. 2d 785 (E.D. Mich. 1998) comes close to this reading.[3] In 1996 the City of Dearborn, Michigan, was sued by TCG, a competitive access provider (CAP) that proposed to become a competitive LEC. The suit challenged the City's attempt to require TCG to obtain a franchise and pay franchise fees of four percent of gross revenues. TCG's complaint in part was based on the fact that Ameritech refused to obtain a franchise from the City (or pay franchise fees). Ameritech claimed it had a grandfathered franchise (predating a state constitutional provision requiring all utilities to obtain local franchises) from the turn of the century. Dearborn then sued Ameritech, contending that Ameritech needed to obtain a franchise as well. On August 14, 1998, the judge issued a decision which (1) rejected TCG's claims that under Federal law it could not be required to obtain a franchise and pay a four percent franchise fee, and (2) ruled that Ameritech had a grandfathered franchise under Michigan state law to provide telephone service.

The opinion analyzed in detail the provision of ¶ 253(c) that allows municipalities to charge "fair and reasonable compensation . . . for use of the public rights of way." Significantly, the court rejected a claim that "fair and reasonable compensation" was limited solely to a city's costs, and ruled that "there is nothing inappropriate with the city charging compensation or 'rent', for the city-owned property that the Plaintiff [phone company] seeks to appropriate for its private use." The judge examined other companies' telephone franchises with the City of Dearborn (which had franchise fees of from 3% to 5% of gross revenues, plus other consideration) and upheld the 4% franchise fee to be paid by TCG. The opinion also referred to the negotiations between TCG and Dearborn, prior to the passage of the 1996 Act, where TCG had appeared willing to pay a four percent franchise fee.

The court rejected claims by TCG that the franchise fee violated the "competitively neutral and non-discriminatory" requirement of ¶ 253, even if Ameritech had free use of the City's rights-of-way. The court rejected TCG's claims that the franchise fees for all providers must be identical, ruling that the 1996 Act "clearly allows the city to account for the differences between providers and it is enough that the city imposes (or plans to impose) comparable burdens [on different providers]." Id.

TCG claimed -- without offering and factual support for its position -- that the franchise requirement could prohibit its entry into the market in violation of ¶ 253. The Court rejected this challenge and appeared to require that there be some showing that the challenged requirement actually result in a prohibition on entry.

Finally, the court ruled that Ameritech had a grandfathered statewide franchise under the statute under which Ameritech was incorporated in 1904. The ruling was based on a line of Michigan Supreme Court decisions interpreting a dissimilar turn-of-the-century rights-of-way statute applicable to electric companies. The court concluded that the City could not impose franchise fees on Ameritech, though under its police power the City retained the inherent authority to protect the public from unnecessary obstructions, inconvenience, dangers and to determine where and in what manner a phone company may erect and stretch its poles and wires.

The 1998 Dearborn decision is particularly important in making clear that the "nondiscrimination" requirement of ¶ 253(c) does not create new law or impose a new burden on local governments. As noted above, local governments have argued that the correct legal standard to apply to this term is the same standard the federal courts have always used when addressing whether a governmental action "discriminated" against the claimant. Under this standard, a governmental entity may establish different classes for differently situated entities, provided the classifications have a reasonable basis, and provided the classification is not "invidious" (for example, race-, sex- or age-based). The government may treat the different classes differently. Even within a single class, the government must provide the same process but need not guarantee the same outcome. Whether Ameritech in fact has a statewide franchise is an issue that may be revisited: the case is on appeal to the Sixth Circuit and is awaiting oral argument.[4]

To similar effect is Omnipoint Communications, Inc., v. Port Authority of New York and New Jersey, 1999 U.S. Dist. LEXIS 10534 (S.D.N.Y. July 13, 1999). The Port Authority developed a schedule of fees for use of Port Authority tunnels and space at New York's Kennedy airport. The fees reflected not only the access to the tunnels themselves, but also the fact that the Port Authority would be installing the conduits and other facilities that would be used by the carriers. Each carrier was expected to pay three fees: an entrance fee, an access fee for each particular location, and a usage fee based upon minutes of use at each location. The fees proposed by the Port Authority totaled hundreds of thousands of dollars annually. Omnipoint asked the Court to declare that the fees violated 47 U.S.C. ¶ 253, and effectively asked the Court to direct the Port Authority to provide Omnipoint access to the Port Authority facilities.

The Court noted that the term "compensation" -- the term used in Section 253 -- "has long been understood to allow local governments to charge rental fees for public property appropriated to private commercial uses... It is thus doubtful that Congress, by use of the words 'fair and reasonable compensation,' limited local governments to recovering their reasonable costs." As it happened, the Court concluded it did not need to resolve this issue definitively because of the posture of the case. However, the Court clearly did not view the Act as limiting compensation to costs.

The case is also notable for its discussion of what constitutes reasonable compensation. Omnipoint argued the fees charged would exceed its revenues from providing service in the tunnels. The Court found this insignificant. Omnipoint could always raise its rates, the Court noted. What is more, even though the rental price for the tunnels might exceed revenues from service provided directly in the tunnels, a potential customer might be more likely to choose Omnipoint as a provider because Omnipoint could offer service in the tunnels (ubiquity could give it a competitive advantage). Thus, Omnipoint might make more money overall even if few calls were actually placed from within the tunnels. "Compensation is not rendered unfair or unreasonable simply because it does not fit Omnipoint's current business plan and pricing schedule." The Court left open the possibility that Omnipoint could "armed with sufficient market analysis," show that the fees were too onerous for new market entrants (and therefore unreasonable), but the Court also made it clear that it would not find the fees too onerous based upon speculation. It also suggested that it might test reasonableness, inter alia, by reference to the amount paid by other rights-of-way users. The Court rejected Omnipoint's argument that it had to be offered the same contract as was offered to carriers who were granted access to the tunnels under contracts negotiated prior to the passage of the 1996 Telecommunications Act.

In Cablevision Of Boston, Inc., V. Public Improvement Commission Of The City Of Boston, 38 F. Supp. 2d 46 (U.S.D.C. Mass. 1999), Cablevision argued that Section 253(c) required the City to treat companies that already had conduit in the rights-of-way the same as companies seeking to install conduit. The district court rejected that notion. "Black's Law Dictionary defines 'discrimination' as 'a failure to treat all persons equally when no reasonable distinction can be found between those favored and those not favored.' Blacks Law Dictionary 420 (5th ed. 1979). It is not, however, discrimination to make distinctions based on valid considerations. The legislative history cited and quoted by the court in TCG Detroit v. City of Dearborn, 16 F. Supp. 2d 785, 792-93 (E.D. Mich. 1998), indicates that those who drafted ¶ 253 understood this principle."[5]

Several lower courts have rejected the Dearborn/Omnipoint analysis, and have instead adopted a far different reading of Section 253. According to these courts, Section 253 absolutely limits localities to managing the rights-of-way, and to recovering costs associated with use of the rights-of-way. And, according to these courts, even this management/compensation power is limited, and must be exercised so that it does not even theoretically burden entry into a market.

Bell Atlantic-Maryland, Inc. v. Prince George's County, Maryland, 1999 U.S. Dist. LEXIS 7978 (D.C. Md. May 24, 1999) is perhaps the most notable illustration of this view (the Omnipoint court rejected the Prince George's reading of the law). The Court concluded the following:

a. While the County could require Bell Atlantic to obtain a franchise, the franchising requirement could not provide the County with much discretion to grant or deny a franchise. "The court believes that any 'process for entry' that imposes burdensome requirements on telecommunications companies and vests significant discretion in local governmental decisionmakers to grant or deny permission to use the public rights-of-way 'may . . . have the effect of prohibiting' the provision of telecommunications services in violation of the {Section 253}." Note that the court found burden entirely based on speculation -- and particularly interesting speculation at that, since the plaintiff, Bell Atlantic, was already in the market, and there was no proof presented to show that Bell Atlantic could not comply with any of the conditions established by the County. The Court went on to conclude that, unless the franchising requirement was strictly limited to managing the rights-of-way in certain specified ways, the requirement fell outside the safe harbor, and therefore was unlawful. "The County's decision to grant or deny a franchise may not be left to the County's ultimate discretion, but rather may only be conditioned on a telecommunications company's agreement to comply with the County's reasonable regulations for managing the use of its rights-of-way... These various limitations on the County's authority are necessary to give effect to Congress's goal of promoting maximum competition among local telecommunications providers." Note that Section 253 does not require that the rights-of-way be managed to promote competition or in a way that a district judge may consider reasonable. That limitation was literally created by the district court. The limitation is significant, however, because it puts the district court judge in a position of second-guessing the manner in which the rights-of-way are managed.

b. The court concluded that the compensation had to be limited to actual costs to the County. It rejected the notion that the County could obtain the fair market value of the property used, suggesting that this could burden entry: "The crucial point... is that any franchise fees...must be directly related to the companies' use of the local rights-of-way, otherwise the fees constitute an unlawful economic barrier to entry under section 253(a)...For the same reason, the court also believes that local governments may not set their franchise fees above a level that is reasonably calculated to compensate them for the costs of administering their franchise programs and of maintaining and improving their public rights-of-way. Franchise fees thus may not serve as general revenue-raising measures." There is some vagueness in the Court's formulation -- at least theoretically, the cost of the rights-of-way themselves might be recoverable. Nonetheless, the Court's suggestion that charging the value of the property used is somehow a barrier to entry is a strange conclusion in a free-market economy, where market entrants in every industry are normally expected to pay fair market value for property used. It is at odds with the conclusion reached by the FCC, which found that charging fair market value for radio spectrum actually enhances development of a competitive market, and ultimately reduces costs by encouraging the most economic allocation of resources. The FCC Report to Congress on Spectrum Auctions (October, 1997). Moreover, by concluding that Congress meant to take property away from local governments for less than fair market value, the district court raised significant Constitutional takings and other issues.

c. The court concluded that the only persons using the rights-of-way, and hence the only persons subject to a rights-of-way use fee were those persons that owned facilities in the streets. The court, in other words, equated ownership and use. That is a strange construction of the English language, and has the odd effect of making regulation and compensation dependent on the way in which a business chooses to structure itself. A company could set up a firm that would own facilities in the rights-of-way, with few assets and with insufficient resources to repair damage actually caused. Money could then flow to another corporation which would provide services, and actually receive most of the income. All facilities could be dedicated to the company that received vast majority of the cash flow. Under Prince George's, however, a community would be required to ignore the fact that the facilities were built for and used by one corporation, and instead would be limited to obtaining compensation and redress for harms from the shell corporation. (What makes this particularly troubling is that the court seemed to believe that the County should not be reviewing transfers of stock in the franchisee -- thus effectively clearing the way for the type of corporate shenanigans described above).

AT&T Communications Of The Southwest, Inc., v. City Of Dallas, 8 F. Supp. 2d 582 (U.S.D.C. N.D. Tex. 1998)("Dallas I"), and AT&T Communications Of The Southwest, Inc. v. City Of Dallas, Texas, 1999 U.S. Dist. LEXIS 7227 (U.S.D.C. N.D. Tex. May 17, 1999)("Dallas II") are to similar effect. In Dallas I, the court concluded that "Dallas may require AT&T to obtain a franchise in order to use City rights-of-way for the provision of ADL. The City may not, however, condition this franchise on anything other than AT&T's agreement to comply with the City's reasonable regulations of its rights-of-way and the fees for use of those rights-of-way. Dallas does not have the authority under state or federal law to require a wide-ranging franchise application, to impose conditions on a franchise that are unrelated to the telecommunications provider's use of the City's rights-of-way, or to impose fees that are unrelated to use of the rights-of-way." In Dallas II, the district court rejected arguments that AT&T was required to show that complying with franchise requirements actually would prevent it from entering the market. Instead, the court concluded that, because AT&T would be prevented from entering the market unless it complied with the local requirement, the local requirement had a prohibitory effect, even if AT&T was perfectly capable of complying with the law. Dallas II also concluded, explicitly, that a company that purchases the exclusive right to use a facility in the rights-of-way is not using the rights-of-way -- so long as the ownership of the facility is with someone else.[6]

AT&T Communications of the Southwest v. City of Austin, 975 F. Supp. 928 (W.D. Tex. 1997)("Austin I") and AT&T Communications of the Southwest v. City of Austin, 40 F. Supp.2d 852 (W.D. Tex. 1998)("Austin II"). In Austin I, the district court issued a preliminary injunction prohibiting the City from franchising or charging a franchise fee to AT&T, which claimed that it would only be using the facilities of others, and would not be occupying the rights-of-way with its own facilities. The court reasoned that "[t]he City's interest in regulating local telephone service providers is limited by federal and state law to managing and demanding compensation for the use of the City's public rights-of-way." The Court concluded that the City's interest was not implicated in the case of AT&T, because it had no facilities in the rights of way. The decision was confirmed in Austin II. The problem with these decisions, like the Dallas decisions, is that they seem to equate "ownership" "occupancy" and "use," concepts that are not identical. Indeed, under the theory of the courts, facilities could be built exclusively for the use of a company, but that company would not be "using" the rights-of-way unless it owned the facility.

***

Even those federal courts which conclude that the franchising authority of local governments is not triggered where a provider does not itself own facilities which physically occupy the rights-of-way, recognize that municipalities do have a right to obtain compensation from providers who own facilities and physically occupy the rights-of-way. Indeed, the court in Austin II stated that "local authorities are entitled to compensation (1) for the physical intrusion of a cable operator's facilities on the public rights-of-way and (2) for the access that a franchise agreement gives the cable operator to those rights-of-way." The problem is that, given the current state of the case law, it is impossible for any municipality to judge precisely what this means.[7]

What's a Municipality To Do?

Given the state of the law, a community faced with a request from a telecommunications provider to use the rights-of-way is truly between Scylla and Charybdis. Because of the nondiscrimination provisions of Section 253, a community which decides that it will follow the Prince George's opinion, and which begins to issue franchises or permits under the theory of that case, may well find that it is unable to change course later, even if that decision is reversed and the TCG Detroit/Omnipoint line of cases is followed. By conceding the battle now, the community may be conceding the matter forever.

A community which follows a more aggressive course preserves its interests, but may face litigation now.

In some cases, communities have negotiated settlements with the telecommunications industry in an effort to arrive at a mutually acceptable formulation for compensation and rights-of-way management. But, even that course offers little sure protection: a dissatisfied company can still challenge the formula, and should that formula be struck down, there will be an immediate problem attempting to reconcile the rights of those who entered into agreements under the old formula, and those who are seeking to obtain permits under the new formula.

But, the cases may contain some important lessons:

a. Given the uncertain state of the law, it may be important for the community to retain the right to terminate permits and agreements so that the community can ensure that it will have the ability to require every similarly situated person who enters the rights-of-way to conform to uniform standards. The Omnipoint case involved existing contracts that contained such clauses, andthe ability of the Port Authority to terminate the existing contracts proved important in complying with Section 253.

b. Some courts simply do not understand why communities are making the choices that they are making, and do not appear to understand the real-world difficulties of managing the rights-of-way. A community that is considering adopting a rights-of-way ordinance may want to consider how it can create a good legislative record to support its positions. While that process may be time-consuming, it may in fact help minimize the ultimate cost or complexity of litigation.

c. This is not an issue that can be avoided or ducked. And, it is an issue that is likely to increase in complexity over time, as bandwidth requirements of business and residential users increase.

Conclusion

Industry representatives will be telling governments all about the cases that seem to limit local authority to protect and obtain fair compensation for use of the rights-of-way. Elected officials will be told that the law prohibits them from recovering fair value for use of the rights-of-way, and prohibits any regulation (even rights-of-way regulations) that adversely affect telephone companies. As this article suggests, the legal picture is muddy, but not as municipal-adverse as industry often characterizes it. Accepting the industry's point of view is not only unnecessary, it may also be dangerous -- it could result in loss of important rights. It will therefore be critical for each community to carefully analyze its legal position itself, and to develop a plan for action that protects it for the future, as well as today.

REFERENCES

1. The FCC has analyzed Section 253 in a manner similar to that suggested above. Classic Telephone, Inc. Petition for Preemption, Declaratory Ruling and Injunctive Relief, Memorandum Opinion and Order, 11 FCC Rcd 13082 (1996); In the Matter of The Public Utility Commission of Texas et. al., Petitions for Declaratory Ruling and/or Preemption of Certain Provisions of the Texas Public Utility Regulatory Act of 1995, Memorandum Opinion and Order, FCC 97-346, 1997 FCC LEXIS 5390 (1997). In the Texas decision, for example, the FCC stated that, in applying Section 253, "[W]e first determine whether the challenged law, regulation or legal requirement violates the terms of section 253(a) standing alone. If we find that it violates section 253(a) considered in isolation, we then determine whether the requirement nevertheless is permissible under section 253(b). If a law, regulation, or legal requirement otherwise impermissible under subsection (a) does not satisfy the requirements of subsection (b), we must preempt the enforcement of the requirement in accordance with section 253(d). If, however, the challenged law, regulation or requirement satisfies subsection (b), we may not preempt it under section 253, even if it otherwise would violate subsection (a) considered in isolation. In the Classic case, the FCC recognized that Cities may require franchises and what is more, deny a requested franchise: "[S]ections 253(b) and 253(c) recognize the authority of States and localities (including the Cities) to impose franchise requirements for certain purposes, and as such, these sections preserve the authority of States and localities to deny a franchise application until such time the applicant complies with these permitted legal requirements." That does not mean, however, that the FCC will properly apply the law. In several decisions, the FCC has used loose language to describe the sorts of regulations that are properly considered right-of-way management. The FCC's list of permissible regulations is quite short. This has led to some confusion in the courts as to what is properly considered a right-of-way regulation.

2. An active judiciary begets active litigation. If telecommunications companies believe that the courts will review every right-of-way regulation, to decide whether it promotes competition, then almost every regulation is sure to be challenged.

3. This does not mean that the court's decision is right in every regard.

4. At the same time that the federal case described above was proceeding, parallel litigation was wending its way through the state courts. Michigan recently passed a law that purported to limit the total fee that could be assessed for use of the rights-of-way so that the fees "shall not exceed the fixed and variable costs to the local unit of government in granting a permit and maintaining the right-of-ways, easements or public places used by a provider." In the state litigation, TCG inter alia challenged the reasonableness of the fee that Dearborn sought to impose on telecommunications providers: 4% of gross revenues. Dearborn, for its part, challenged the constitutionality of the state limitation. A lower state court rejected the City's constitutional claim, TCG Detroit v. City of Dearborn, Case No. 98-803937-CK (Cir. Ct. Wayne Cty. Mar 8, 1999). The case is now proceeding forward, and the City has recently presented evidence to justify the 4% fee under the state formula.

5. Telecommunications providers sometimes argue that a city must manage the rights of way in a "competitively neutral" and "nondiscriminatory" manner in order to fall within the protection of Section 253(c). The Cablevision case explains that this is probably not the case. The "competitively neutral" test appears to apply only to the compensation clause of Section 253.

6. In both Dallas and in Prince George's, the court reviewed compensation plans under which the telecommunications provider was required to pay a percentage of gross revenues for use of the rights-of-way. Both district courts appeared to assume that a "gross revenues" fee is unrelated to use of the rights-of-way. No evidence appears to have been presented one way or the other on this point, and the conclusion is hardly obvious. To the extent that revenues reflect customer base and capacity requirements (and hence intensity of right-of-way use), gross revenues may in fact prove to be a very good yardstick for use of the rights-of-way. Other alternatives -- based on the footage used -- are in fact somewhat difficult to apply, and may not be any better measure of use. Imagine, for example, a company that is installing new fiber every day. A footage test would require that company to update its rent payments each day; and to provide more, not less documentation as to where its facilities are located, and what those facilities are. Would one count each fiber used? Each conduit used? Each interduct used? Would one be required to charge a different fee to a company that installed excess facilities on day 1, while rewarding the company that put in a minimal amount of facilities, and had to rebuild facilities sooner? The point is not that a per-foot charge can't be devised -- the point is that, in the end, it may not be any more exact than a simpler-to-apply gross revenues test. Moreover, charging new entrants for footage used from day 1 places financial burdens on those entrants before they obtain customers. Neither the Prince George's or the Dallas court considered whether there are, in fact, better fee plans than the fee plans that were struck down.

7. The problems facing a municipality are actually even more complex than the foregoing discussion illustrates. Cable companies are arguing that they need not comply with even the sorts of franchising requirements that would be permitted under the Dallas/Prince George's cases, because they already hold a franchise to use the rights-of-way. In Florida, BellSouth attempted to place cable system facilities in the rights-of-way pursuant to their telephone franchise. Some companies claim that the facilities that they are installing are both telephone and cable facilities -- and are seeking the right to install a multi-use facility under a single authorization (one that federal law does not contemplate). Yet other companies are seeking to construct facilities that potentially are not telecommunications facilities or cable facilities under federal law. Some communities are finding that, even after adopting a uniform, non-discriminatory telecommunications ordinance, some providers are unwilling to comply, or seek special exemptions. Some communities, for example, have entered into contracts with several providers, only to find another company threatening litigation under state and federal law. The temptation to grant exemptions is tempting, but may itself generate litigation claims from those companies that were initially willing to comply with the community's requests.