Douglas M. McGarrah is a partner and chairman of the Administrative Law Department at Foley Hoag, a Boston-based business law firm.
With plummeting stock prices and constricted high-tech capital markets, the telecommunications industry is in the midst of a serious economic downturn. Analysts predict that telecom capital spending by competitive local exchange carriers – those new entrants into the telecommunications market spawned by the Telecommunications Act of 1996 – will decrease on a large scale in the next three years. Bankruptcies, downsizing and cutbacks in telecom infrastructure deployment are now commonplace throughout the industry.
The continued deployment of fiber optics, currently the most advanced transmission medium in terms of capacity, data security and cost compared to other broadband technologies, is seriously challenged by the economic downturn. Although many analysts warn of the overcapacity of the newly constructed fiber infrastructure, most of the existing fiber backbone lies unlit and unused as carriers seek to connect thousands of miles of backbone fiber networks to the last mile – the final segments of the network that bridge the backbone to the end-user.
Successfully navigating the last mile bottleneck has proved difficult and much more costly than industry had predicted. Today, despite the rapid fiber deployment of the past several years, less than 3 percent of businesses in the United States are served by fiber. Most are large corporate office buildings in the country’s major financial centers. Few small to mid-sized businesses have yet taken advantage of the benefits of fiber technology. A recent study concluded that more than three-quarters of U.S. companies polled identified the need for more bandwidth as a critical element in their growth strategies. In short, while broadband capacity exists, providers are far from meeting current demand. But investors are reluctant to fund additional fiber construction without some expectation of short-term return on investment.
In response to this new revenue focus, telecom providers must now concentrate on last-mile connections from the backbone to the end-user. In most instances, last-mile connections require access to public ways controlled by cities and towns. By regulating access to public ways, municipalities hold the keys to the continued deployment of the broadband build-out and, to a significant degree, the future economic growth in the region.
Within Reason
Under the Telecommunications Act of 1996, local authority to manage the use of public rights of way by telecommunications providers is preserved on a competitively neutral and non- discriminatory basis. Under Section 253 of the act, states and local governments are permitted to manage the public rights-of-way or to require fair and reasonable compensation from telecommunications providers, on a competitively neutral and nondiscriminatory basis. The preservation of local authority over the public ways is balanced under the act with the overriding interest of encouraging competition in the telecom industry: 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. These two provisions create a public-private tension: Local governments, concerned about the protection of the public ways, public safety, and the opportunity for new sources of revenue understandably seek to tailor local regulation narrowly for the protection of local interests rather than the encouragement of telecommunications development. Telecom providers, on the other hand, view the public ways as the critical lifelines for providing broadband to end-users, and the costs to build the underground infrastructure are already extremely high.
The Federal Communications Commission and the courts have yet to provide clear guidance on the split in Section 253. In recent decisions, the FCC has recognized the rights of municipalities to control traffic flow and scheduling during telecom construction and to require appropriate insurance coverage, bonding and indemnities from telecom providers. However, the FCC has also cautioned against a patchwork of burdensome municipal regulation that may undermine the state and nationwide telecommunications interests of constituents. In particular, the FCC has noted that multiple, inconsistent obligations imposed on a community-by-community basis may discourage regional or national strategies by telecommunications providers, and thus adversely affect the economics of their competitive strategies.
The courts have split on the extent of the authority of municipalities to control the use of public ways by telecom carriers. With respect to fees – a major point of contention in right-of-way access – recent decisions have held that municipalities can only recover the direct costs incurred by a telecom provider’s use of the public ways. With respect to management controls asserted by municipalities, the courts have generally allowed reasonable municipal rule.
Under Massachusetts law, telecom providers may build on the public ways, subject only to the municipality’s duty to ensure that telecom installations do not incommode (i.e. impede) the public’s use of the public ways. Within this duty is the authority to collect reasonable fees that compensate a municipality for those costs associated with administering programs that protect the public infrastructure, and the public, during new fiber construction on the streets. There is no authority in Massachusetts law authorizing the recovery of any additional fees or rent.
Controlled Climate
Given the current business climate and regulatory uncertainties for telecom, public-private partnerships between providers and municipalities will be a key to the expansion of fiber in the current economy. Certain local telecom policies in Massachusetts have been successful in balancing public safety and convenience with the controlled expansion of fiber networks. The city of Boston’s telecommunications policy, for example, has effectively regulated substantial fiber installations through Boston’s congested city streets since 1988. The major regulatory requirement of the Boston policy: a shared trench system among telecom providers and a spare, or shadow, conduit installed parallel to all new fiber builds at no cost to the city. By holding a spare conduit to future telecom providers wishing to utilize the city streets, Boston can accommodate additional competing providers while minimizing street openings and public inconvenience. This policy has been upheld by the courts, and the concept of a spare conduit requirement has been recognized by the FCC as a proper regulatory tool. And end-users are benefiting by increased utilization of broadband service.
In the recent era of skyrocketing telecom valuations and accelerated fiber build-outs of the late 1990s, numerous cash-rich providers racing to complete their fiber loops often agreed to excessive fees for the use of the public ways. Now, providers managing to survive the economic downturn are forced to closely scrutinize costs associated with deployment of fiber in each potential target community. Excessive right-of-way fees imposed by municipalities, and other regulatory hurdles such as delayed action on license applications and unreasonable engineering requirements, can add considerably to the already high cost of new fiber deployment, thereby limiting the feasibility of new fiber construction.
Municipal regulation of the public ways is clearly critical to preservation of public safety and local interests. When unreasonably applied, however, local regulations can also cripple future telecom deployment and competition by making the costly last mile bottleneck more difficult to overcome, particularly in today’s economy. In the final analysis, regulatory requirements associated with fiber build-outs in any given municipality will heavily influence the pace of broadband expansion and, in a very direct way, the pace of economic expansion.
