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Unplanned Telecom Corridor Markets:
The Marketization Of Fiber Optic Easements By Deregulated Network Industries

by Wayne C. Lusvardi
Senior Real Estate Representative
The Metropolitan Water District of Southern California1
wlusvardi@mwdh20.com

and

Charles B. Warren, ASA
Real Estate Appraiser
Warren and Warren, San Francisco, California
cwarren@batnet.com

ABSTRACT

This paper advances the proposition that markets supplanted eminent domain compensation formulas for the acquisition of fiber optic cable easements by deregulated network industries, without predatory pricing or damaging externalities, at least for the period the dot.com and telecom industries were capitalized with equity from the stock market bubble of 1999-2001. More recent court rulings have invalidated deregulated market prices for such property rights arrived at by voluntary exchange. In so doing, the courts have unwittingly substituted one-sided landowner holdout prices with equally one-sided condemnor prices based on non-corridor property values. The predatory pricing and damaging externality arguments for the continued exercise of eminent domain and regulation of utility pole line co-location rights no longer hold in a deregulated environment. Paying incentive prices for telecommunications property rights is the magic elixir that has made deregulation work, resulting in consumer capitalization in time and cost savings as well as incalculable economic benefits. Allowing deregulated telecommunications companies the continued power of eminent domain after establishing voluntary market prices for property rights to accommodate the build-out of the “Information Superhighway” abrogates the Constitutional contract of just compensation.


 CONTENTS

  1. Introduction

  2. Historical Background

  3. Outmoded Valuation Methods Omit Market

  4. The Marketization Of Easements

  5. A Market For Telecom Property Rights

  6. Incentive Prices Are The Elixir That Make Deregulation Work

  7. Easement Pricing: From Across-The-Fence To Across-The-Board

  8. Going Prices In Up Markets Regulated Prices In Down Markets?

  9. Why Buyers Prices Reflect Market Value

  10. Outmoded Eminent Domain Law

  11. Judicial Reversal Of Deregulation

  12. Deregulatory Takings

  13. The Case For Considering Market  Vs. Eminent Domain Model

  14. Preferential Options For Markets

  15. Summary And Conclusions

    Endnotes

    References


 

I. Introduction

One of the intended but unforeseen consequences, indeed positive externalities,2 of the Telecommunications Act of 1996 is the emergence of incentive pricing for telecommunications corridors. There are now market formulas for pricing fiber optic cable easements, co-located utility pole attachment licenses, and natural gas line easements, as well as leases and licenses for wireless antenna sites.3 These new market prices may not be perfectly open and competitive, nor do they necessarily conform to our preconceived notions of how price should be obtained and applied, but neither are they products of government fiat, or monopolistic advantage, nor do they reflect landowner “hold-out” prices. While still imperfect and somewhat one-sided, such pricing mechanisms have facilitated the rapid build-out of the telecom infrastructure at a fraction of the transaction costs imposed by regulated prices or fees. And they have provided property owners with compensation equal to or in excess of eminent domain formulas based on across-the-fence (ATF) land values without discernible severance or proximity damages. These prices may be cyclical, vanishing in the more rigorous capital environment that has obtained since the Nasdaq crash of March 2000. They may resume or change in form and quantity. But markets are change. That flexibility is the advantage of market over command economies.

The courts have not reconciled the inconsistency between competitive voluntary pricing of fiber optic cable easements by the deregulated telecommunications industry with the coercive pricing of easements for deregulated natural gas and oil pipeline industries by eminent domain (Exxon vs. Hill, Louisiana Supreme Court, 2001; Exxon vs. Zwahr, Texas Supreme Court, 2002). The incoherency between such policies is all the more remarkable given that “new economy” prices are often equal to or many times more than eminent domain compensation formulas.

Neither have regulatory bodies resolved the rationale behind the imposition of fiat prices for co-located pole line utility attachments where the alternative route in public streets or rail corridors would have been costlier (U.S. Supreme Court vs. Gulf Power II, Case No. 00-843, January, 2001). The legal and regulatory systems have not answered the question: How are “new economy” technologies to replace costlier incumbent technologies if they are not allowed to compete for contested property space?

Sending even more scrambled signals has been the continued ruling by higher state courts that “easements within easements” cannot be valued as a self-contained “economic unit” for their corridor value (Exxon vs. Zwahr, 2002). Rather, state supreme courts have ruled that such easements must be valued based on their next-best use as agricultural or rural residential land despite the fact that a price had evolved for such property rights from deregulated markets and that smaller parcels exist within larger parcels (Exxon v. Zwahr). But such court rulings have neglected another well-established principle from case law, that enhancements due to prior public improvements can be considered in determining the compensation for subsequent property acquisitions (Los Angeles v. Hoe [1955] 138 CA2d 74, 291 p2d 98; People ex real Department of Transp. V. Southern Pac. Transp. Co. [1978] 84 Ca3d 315, 148 CR 535). For example, after acquiring land for public streets, it would be absurd and perhaps impossible to measure subsequent takings of property, as though no streets had ever existed (Merced Irrigation District vs. Woolstenhulme, 4C.3d 478; 93 Cal. Rptr. 833,483, P. 2d 1; and Norman E. Matteoni and Henry Veit, Condemnation Practice in California, Berkeley, California: Continuing Education of the Bar, 1990: 32).

The perpetuation of eminent domain to assure landowners payment for damages from negative externalities is no longer necessary for miniaturized and unobtrusive fiber optic easements and stealth wireless antennae sites. The negative externalities from such communications infrastructure have effectively been internalized into inconspicuous subsurface easements and indistinguishable antenna base stations. Prices for fiber optic cable easements have been commodified and marketized by the telecommunications industry at levels equal to or much greater than that provided for under eminent domain compensation formulas. Buttressing this argument is that although the courts have unequivocally rejected sellers' and owners' prices as reflections of fair market value for eminent domain purposes, buyers' “going prices” for fiber optic easements reflect market value in the economic sense.

Anachronistic eminent domain law and conventional easement valuation methods are predicated on a liability theory that no longer holds for positive easements in the deregulated marketplace. Both law and applied valuation theory are suffering from a case of regulatory lag when it comes to providing compensation for co-location property rights brought about by deregulation of telecommunications.

II. Historical Background

Markets from networks

Corridors for network industries energy, transportation, and communications have historically always adapted to new technologies. Historically, corridors were built along gently sloping routes in agricultural areas. Originally, there was a proliferation of competitive telephone pole lines. Later, residential districts surrounded such corridors and utilities were classified as natural monopolies to reduce interconnection bottlenecks and the proliferation of redundant infrastructure. Today, there are few new corridors available in urban areas other than co-utilization of existing rail, transmission line, or pipeline corridors, or use of street rights-of-ways.

The first corridors, beyond wagon roads, were the canals. Water was, and often still is, the preferred medium for bulk commercial transportation. Thus, the first transportation corridors were confined to natural watercourses and their port outlets to the sea. But man-made canals were a technologic wonder. They connected tidal waters, navigable lakes and rivers using locks to compensate for modest changes in elevation. The inland areas of New York depended on them for low-cost transportation for about half a century. They were always a public project. The takings clause was probably initiated in the hopes of the founding fathers for canal navigation. The most famous of the canals, the Erie in New York, was completed in 1825, a year before the first railroad, in Maine, which was private (Sellers, 1991, pp. 41-43). While river transportation was, and still is, a contributor to the transportation system of the central United States, river navigation before steam power was problematic. Access to the sea also limited development to the eastern coastal zone of the continent. Prior to canals and rail, hauling goods any large distance cost more than the goods were worth. Settlements distant from navigable water relied on barter and thus were outside the "market" economy. Goods without linkage to transportation networks reflected use values rather than market values. Thus, market values for many goods, and even surrounding land, were by-products of transportation corridors (Sellers, 1991, p. 5). As economic sociologist Harrison C. White has stated, markets emanate from transport and communications networks (White, 2002).

The valuation of corridors, and "corridors within corridors," has always posed a unique challenge. Prior to the proliferation of industrialized rail networks and turnpikes, entire bulk parcels of land were often purchased for roadways rather than long, narrow passageways. If corridors, such as roads for sawmills, ditches to drain swampland, or canals for barge transportation, were needed, compensation was often provided by the consequent speculative increase in property values (Royster, 1999, p.7). As late as 1860, one state, South Carolina, allowed the uncompensated taking of land to build roads as the market appreciation of land values would more than recompense landowners for any losses (Ramsey, 2002, p. 44). Thus, early law in some jurisdictions factored subsequent appreciation in land values from public projects into their compensation formulas. Eminent domain has historically omitted the benefits of a public project from the valuation process. However, the more recent legal trend is toward inclusion of consideration of any such benefits as an offset against any damages (L.A. County MTA vs. Continental Development Corp. 16 Cal. 4th 694, 941 P. 2d 804, 1997). Oddly, benefits have been considered to only accrue against landowners in a taking and not in their favor in any subsequent takings for gas pipeline easements (Exxon vs. Zwahr, Texas Supreme Court, 2002); but in their favor for equity interests within rail corridor easements (Frederick A. Uhl and Timothy Elzinga v. Thoroughbred Technology Teelcommunications Inc., U.S. District Court, Southern District of Indiana, 2001 - AKA Telecom Cubed case).

Between 1810 and 1820, in New York, over one-thousand miles of improved toll roads were built by chartered for-profit turnpike companies employing eminent domain Klein, 2002, pp. 76-102). A well-established feature of eminent domain law has been the limitation from taking private property for the purpose of simply making money unrelated to the actual service the utility provides the public (for a recent related telecom property rights case see: Amrit Patel et al vs. Southern California Water Co., California Court of Appeal, 4th Appellate District, Case No. G023360, April 16, 2002).

The first interstate transportation corridors were the railroads. Unavoidably, level or gently sloped corridors were preferred. They frequently followed rivers and the shores of other bodies of water to the extent possible. This also complemented existing water transportation. The lower passes through mountains were also preferred. Soon rail offered a speedier service and canal business became the low-cost competitor.

The first modern electronic form of communication was the telegraph. After 1855, the first telegraph lines were strung along side rail lines to track train traffic from station to station to prevent train wrecks. Once the telephone was invented, telephone companies began to proliferate independently throughout the U.S. Not coincidentally, the first competitive telephone company (AKA telco) was funded by Western Union Telegraph Company. As interconnectivity did not exist between rival companies, several telephone lines and apparatuses were required from different companies. By the 1920's, 9,000 independent telcos were in operation, although AT&T was the largest (Bates and Gregory, 1998: p. 6). Price wars and the use of interconnection barriers to system entry drove many telephone companies out of business, resulting in mergers. As a result of all this flux, and the proliferation of multiple unsightly pole lines in several communities, the Graham-Willis Act established the telephone system as a natural monopoly.

For more than a half-century, the U.S. telecommunications industry was a regulated private monopoly dominated by AT&T. This changed as technology changed. Before AT&T laid the first undersea telephone cable in 1956, its telephone service was not in great demand because the quality of voice messages was poor and capacity limited. As demand for telephone service increased, the monopoly position of AT&T became increasingly obvious and unattractive. One of the first hints of the deregulatory trend was the 1984 AT&T breakup.

As trucking deregulation created competition for the rail transport business, it also spawned new communications technologies. In the 1970's a small upstart company named MCI, formerly a trucking mobile radio communications company, launched long-distance telephone service using microwave technology for businesses without permission of the FCC (Crandall and Hausman, 2000, p. 73). Microwave is a point-to-point radio technology that can conceivably send an infinite number of telephone messages through airspace, thus eliminating the need for telephone pole rights-of-ways and spawning what might be called the death of rights-of-ways (Lusvardi, 1998, pp. 16-24). By 1984, AT&T was broken up into what are now called the Baby Bells. Later, Congress passed the 1996 Telecommunications Act that offered heretofore publicly rationed radio spectrum to competitive markets via auction. This resulted in the cellular mobile telephone services that are prevalent today. Because new wireless telephone companies no longer had to acquire expensive corridors or locate in street rights-of-ways and construct the corresponding pole lines, they were able to pass along cheaper services to customers.

In December 1982, MCI leased rights-of-way to install single-mode fiber from New York to Washington, DC, starting the shift to single mode fiber across the U.S (Hecht, 2002). The 1996 Telecommunications Deregulation Act spurred competition from many fiber optic companies for long-haul fiber routes such as Aerie, Williams, Qwest, Level 3, Broadwing, Enron Broadband, Nextlink, Global Crossing, and 360 Networks. Many of these companies utilized existing rail, road, and other corridors to co-locate their conduit. The last mile from the terminus of the long-haul fiber conduit to businesses and homes was not deemed cost-effective, in part because of the delays and barriers to entry posed by local government for use of street rights-of-ways. One-time payments for such long haul linear easement rights were more predictable as there were fewer players in the market. Easement prices were deliberately uniform as a business policy because companies had to adhere to a business pro forma. Rule-of-thumb unit prices of $1 per linear foot of fiber optic rights-of-way equated to $0.50 per square foot of land area. One-time payments for fiber easements represented found money, given that such easements did not impact the existing previous use of the land in any discernible way. As there was no discernible diminution in property value from such easements, and one-time easements payments were considerable, they could be conceived of as "positive easements." The $1 per linear foot one-time price for a fiber optic easement reflected a small fraction of the gross annual revenues of $20 per linear foot expected by merely moving one step up the telecom value scale from raw right-of-way to a dark fiber system. The annual revenues that could be derived from a foot of right-of-way (the basic asset measure) could grow exponentially from $0.25 per foot per year for raw corridor to $1,000 per foot per year for a fully subscribed fiber system (see Figure 1 below from Picchi, 2002, p. 25).

The 1996 Telecommunications Deregulation Act specifically excluded from the definition of a cable system any "facility that serves subscribers without using any public right-of-way." In response, emerging wireless enterprises such as Nokia's RoofTop service is in the process of piloting a wireless internet services for the "last mile" connection to end users that employs a mesh-networking system where each home or business acts as a relay for other users (The Economist, June 22-28, pp. 14-21).

Source: Robert H. Picchi, 2002. "Managing the Telecom Value Curve," Public Utilities Fortnightly, July 15, 2002, pp. 22-27). Permission to reproduce granted by Robert H. Picchi, Utilities International, Chicago, Illinois, and Public Utilities Reports, Inc. All rights reserved.
FIGURE 1: Fiber Optic Risk/Reward Value Curve (Annual Revenues Per Linear Foot)

FIGURE 1: Fiber Optic Risk/Reward Value Curve (Annual Revenues Per Linear Foot)

It can be argued that in Figure 1 the increment over base real estate value is enterprise value or that it reflects the new real property highest and best use. Even though enterprise value is intertwined with corridor value, it is difficult to separate them at each rung of the value scale. Fiber optic enterprises are able to move up the value scale in no small part because of their unique interconnectivity and branching capacity that is a reflection of the value of the realty as a corridor.

From markets to nuisances

With the historic extension of rail lines into formerly pristine farmlands came the classic problem of negative externalities as noted by Ronald Coase and his famous description of the social cost of externalities (1988, pp. 95-214). After the Civil War there was a shift away from raising livestock on the Great Plains and South to crop production. This was facilitated by the extension of rail. Perhaps, the first legal cases of externalities, the "stock law" (livestock fencing law) came about, not to fence animals in, but to fence grazing animals out of croplands (Kantor, 1998, pp. 17-36). Otherwise, claims for loss could not be sustained. With the dramatic change to an industrial society and expansion of the railroad network after the Civil War, it was inevitable that trains would hit wandering livestock and that train sparks would start fires in dry brush. Railroads were not required to fence their corridors or put flash guards on wheels as these were not cost-effective. Lands at the end-points of rail lines were enhanced but those in-between sometimes suffered such hazards. Possibly as a way to recoup uncompensated losses, livestock owners sometimes "salted" the tracks to attract livestock as a surefire way to collect damages. Thus, came about "moral hazards" with the economics of corridors.4

From 1830 to 1840, rail networks were small, speeds were slow, traffic was light and there was not much night time operation and no wreck claimed more than six lives (Savage, 1998, pp. 21-28). This changed in 1853 when there were 234 fatalities, including injury to the then President-elect, leading to considerable public outrage. Train fatalities remained a serious problem throughout the Civil War. The major causes of rail hazards were the fast construction of new lines by undercapitalized firms wishing to take advantage of land grants. Telegraph lines were strung along rail lines after 1855 to promote communications and avoid collisions. As there was no such thing as mobile communications, however, train delays and stalls between stations resulted in persisting head-on collisions. The first regulation of rail lines ironically came about after New York State Senator Webster Wagner, a rail car builder, who earlier blocked the formation of a state railroad commission, perished in a rear-end collision. The railroads became the first industry to be regulated by the federal government under the Interstate Commerce Act of 1887. Most of the early regulation was mainly for standardization of braking, coupling, and rail gauge, which brought about a dramatic drop in industrial injuries and fatalities. The era from 1900-1910 brought about a number of technological advances and laws that again dropped the number of industrial accidents. From 1920 to 1960 rail accidents rates improved gradually, resulting in industry self-regulation. By 1960, passenger services declined considerably due to expansion of air travel and the interstate highway system. Post-war affluence led to greater reliance on air and auto travel. The economic obsolescence of railroads resulted in declining finances, bankruptcies, and deferral of track maintenance, resulting in increasing fatalities and injuries. With the shift to reliance on freight traffic came the introduction of larger rail cars, leading to a sharp rise in derailments. Beginning in the late 1960's, there was a series of notorious accidents where tank cars with chemicals and liquefied gases ruptured, wreaking disaster on nearby residents. The late 1960's to early 1970's saw the rise of environmentalism and big government with the formation of the National Highway Traffic and Safety Administration, the Occupational Safety and Health Administration, the Occupational Safety and Health Administration, the Environmental Protection Agency (EPA), and the Nuclear Regulatory Commission.

In 1970, the number of fatalities at highway grade crossings was three times higher than they are now (Savage, 1998, p. 27). The Highway Safety Acts of 1973 and 1976, and Surface Transportation Acts of 1978 and 1982 authorized 90 percent federal funding to states for public grade-crossing flashing lights and gate improvements. From 1967 to 1990, a number of pieces of legislation were passed dealing with the transportation of hazardous materials, resulting in rules for packaging of chemicals and placarding of train cars. With increased safety regulation came a reduction in regulation. The 1976 Railroad Revitalization and Regulatory Reform Act relaxed procedures for abandonment of uneconomic branch lines. The Staggers Act of 1980 allowed the transfer of non-performing branch lines to small companies. Deregulation of small lines resulted in the revitalization of former uneconomic routes from a 2 percent average rate of return on equity to 12 percent by 1990 (Savage, 1998, p. 28).

Land use zoning to conditionally exclude obnoxious land uses came into being in 1926 with the Village of Euclid vs. Ambler Realty Company U.S. Supreme Court decision (272 U.S. 365 [1926]). With the expansion of land use zoning and environmental regulations since the 1960's, zoning became a community property right capitalized into housing values (Fischel, 2001, pp. 51-52). But older corridors from an industrializing past could not just be zoned out of existence. Obsolescent rail corridors were often rezoned from rails to trails to eliminate their nuisance value. Undergrounding became the new community standard for local electric distribution lines, although there continues to be no economically viable technology available to do such with higher-powered transmission lines. Sound walls, landscaping, and buffers later came into vogue to mitigate the physical impacts of freeways wherever possible. Negative externalities became the rationale for governmental intervention (Block, 1983, pp. 1-34).

From nuisances to co-location

Not all utilities networks can be easily transformed into a competitive system. For example, the cost of transporting water through pipes is so high that competitors are not likely to want to pay the "wheeling" costs through excess capacity on another’s pipeline system. Promoting competition on railroads is limited by scheduling problems, although sales of improved rights-of-ways with reserved rights for continued limited use sometimes occur. But three utility network systems lend themselves to competition: gas, electricity, and telecommunications (Newbery, 2001, pp. 4-5).

One of the most intriguing developments has been the co-location of fiber optic conduit within rail corridors and wireless antennas on water tanks, electric transmission towers, and government communications towers. Another more recent issue has been what to charge for “wheeling fees” for underutilized capacity in water pipelines and other network infrastructure (Offitbank, 2002: p.1).

Newer technologies have metamorphosed many types of corridors from negative encumbrances to positive revenue producing assets. As such, older formulas for eminent domain compensation, based on loss and liability, may no longer pertain in the deregulated environment. The separability of the estates (“sticks”) in the “bundle of rights” has been one of the most useful features of property. It has been understood for centuries that property is divisible. But how to value each fractional property right has been a disputed issue (Bethell, 1998, p. 19-23).

Corridors today are not as limited by topography. Topographic relief may even enhance their usefulness. While early infrastructure was invariably bound to the topography, newer miniaturization and stealth technologies can co-locate telecommunications and other utility infrastructure within existing road, rail, pipeline, and other corridors with minimal interference with the continued special use of the corridor and with negligible visual effects on surrounding properties. Modern-day electric transmission lines can be extended over mountaintops. Domestic water canals use electric power often generated by hydroelectric dams, harnessing natural flows and gravity to lift water over inclining topography and then deliver it by hydraulic gradient flow to end-users (hence the dictum: water and power are reciprocals). An example is the Colorado River Aqueduct that supplies urban Southern California.

A contentious issue with regional water agencies has been what to charge other entities for “wheeling rates” in their canals and pipelines. Compensation formulas based on full cost recovery of an entire system versus cost of the branch system have been a litigious issue. At the heart of the controversy is the quandary of the value of co-location.

Wireless communications technologies, such as microwave and cellular phones, no longer require rights-of-way in the conventional sense. The miniaturization of fiber optic cable now allows communication lines to be buried underground in a very narrow spatial envelope that can co-exist on private property without any discernible damages or negative externalities. And wireless technologies - cellular telephone, point-to-point microwave - have virtually made communications corridors invisible or stealthy. Older communications technologies often inclined toward gentle and low topographies parallel rail lines, such as telegraph lines. Today the reverse is true, as wireless communication technologies often require base stations located on natural promontories, rooftops of tall buildings, or water tanks. Radio waves can be propagated invisibly through free air space.

As rail passenger traffic declined and shifted to the interstate highway system and commercial air carriers, the trucking industry was deregulated soon after the interstate highway system was put into place, resulting in the economic obsolescence of long-distance passenger train travel (Amtrak) and the short-haul freight rail line branches. Trucks could be “co-located” with passenger cars onto highways and airplane passengers could be transported in free airspace ostensibly without having to acquire any airspace rights. At about the same time, however, private corridors were created by and for cable television operators (Hazlett and Spitzer, 1997, pp. 56-58). This was the first co-location use in the communications sector in half a century since telegraph shared pole line space with railroads. Its establishment was a struggle. Some of the elements are familiar. Municipalities wasted no time in combining forces with cable operators to select a sole licensee or franchisee whose de facto monopoly of the market was allowed in return for a percentage, typically five to ten percent, of the gross take permitted under Section 622 of the Cable Act of 1984. Only most recently have competitor cable franchises been allowed into the municipal regulated markets, possibly due to the specter of wireless internet that would not have to pay for use of rights-of-ways (The Economist, 2002, pp. 14-21).

Privatized municipal sewer and water systems have given rise to the unusual valuation problem of what to charge for “a relocatable pipeline easement” within electric transmission line corridors that have no discernible effect on the use or value of the corridor (Lusvardi, Wright, and Amspoker, 2000, pp. 250-359). Alternate route valuation methodologies have been proposed as one practical solution. However, the real estate appraisal industry has predictably opted for a percentage of land value (ATF), even though such easements have no impact on land value and the law has traditionally disallowed consideration of avoided costs (Redevelopment Agency vs. Tobriner [“Tobriner II”] 215 California Appeals Court, 3d 1099, footnote [1989]). As is elaborated below, markets have stepped into the void created by deregulation to answer the question of what a co-location right is worth.

III. Outmoded Valuation Methods Omit The Market

Initially, new transportation corridors and nearby lands were economic complements, like rivers and ports, forests and lumber mills. But the concept of private property was nurtured to further America’s founding principles of independence from the state and to provide incentives for economic development (Bethell, 1998, pp. 19-32). Law separated the Siamese twins of corridor and non-corridor properties. As such, the highest and best use of land was perceived to be its stand-alone use rather than the economic viability of the transportation technologies on which they were dependent. After the proliferation of land use zoning in the 1920’s, the vagaries of economic location were regulated as a form of property value insurance (Fischel, 2001, pp. 9-10). Accordingly, property valuation guilds developed four conventional highest and best use tests for private market property: legally permissible, physically adaptable, financially feasible, and economically most profitable (Appraisal Institute, 1992, pp. 280-282). Missing from this equation was any consideration of technology essential to the marketability and valuation of corridors. Unwittingly, real estate appraisers adopted market valuation methodologies to non-market special purpose corridors.

Corridor appraisers, mainly working for major railroads, articulated four methods for valuation of corridors: value for corridor use, across-the-fence value, liquidation value, and subjective percentage methods (Lusvardi, Wright, and Amspoker, 2000, pp. 250-259). Liquidation value acknowledged that corridors do not always sell at par with across-the-fence land values; it does not directly address the economic obsolescence of transportation technologies and corridors. The omission of any consideration of the effect of technology on corridors has been perpetuated in the professional literature of the appraisal profession up to this day. None of the conventional corridor valuation methods (Table 1, below) are relevant to the valuation of positive “corridors within corridors.” Appraisers have contrived highly subjective and one-sided percentage-of-land value techniques to appraise easements and leases (Zulaica, 2000, pp. 6-9). But these do not reflect what a willing buyer and seller with equal bargaining power would pay for such fractional rights.

TABLE 1: Conventional Valuation Methods for Transportation Corridors: The Marketization of Easements

Method Purpose Highest Use Larger Parcel Legal Interest Value Increment
Value as linear corridor Disposition or replacement Transportation Stand-alone linear corridor Fee-simple Corridor premium
Value across the fence (ATF) Disposition or replacement Excess land Assemblage parcel Fee-simple Plottage premium
Liquidation value Disposition Speculation Assemblage or stand-alone Fee-simple Below market discount
Federal rule Partial Acquisition Transportation use or ATF use Stand-alone parcel Fee-simple or dominant easement Diminution in land value
State rule Partial Acquisition Corridor use or ATF use Zone of value or Stand alone use Fee-simple or dominant easement Part taken + damages
Alternate route method Partial Acquisition Secondary corridor use Strip parcel Subordinate interest (easement) Bargained cost differential
Subjective percentage of land value method Partial acquisition Secondary use Smaller parcel or economic unit Subordinate interest (easement) Percentage of land value

IV. The Marketization Of Easements

The proposition that a “market for easements” has arisen sounds preposterous. Many would say it is an oxymoron. Others might say it is a legal and professional heresy. Under prevailing eminent domain law, easements are valued as what a property owner lost, not what a property owner can gain from a public project. Nor is there any conventional legal basis for valuing easements predicated on a share of the business enterprise that the easement serves. There are some cases where private easements are negotiated, but normally and historically this has most often occurred in agriculture.

Condemnation of easements by private property owners is sanctioned in some jurisdictions, such as Arizona, but mainly to facilitate appurtenant access easements. Legally, easements are servitudes that grant only limited use of usually a portion of a property. Under eminent domain law, there is no such thing as the “market value” of an easement. While every public project has a budget, and that budget must estimate average right-of-way costs, “easement valuation comparables” are legally impossible. Because the damage from an easement is unique to each property so burdened, it “cannot” serve as an indicator of damage to another property. And even if the foregoing were not true, evidence codes exclude the use of government agency sales as value comparables. Many of the conventional methods historically used to value corridor real estate and fractional property rights therein (“corridors within corridors”) are also beginning to look questionable. They are most certainly inconsistent and probably biased toward the seller/incumbent corridor owner.

V. A Market For Telecom Property Rights

In the past 20 years, deregulation of network industries has changed the corporate structure of transportation, utilities, energy, and telecommunications from regulated monopolies to "deregulated" enterprises (Peltzman and Winston, 2000, p.1-199). The traditional justification for regulation was that transportation providers, utilities, and communications carriers were “natural monopolies.” In earlier days, partly as a result of technology and competition, and partly through legislation, companies furnishing utility services were assigned discrete operating territories in which they were the sole provider of their particular service. This created a self-fulfilling prophecy about the monopoly situation of a regulated industry.

A recent example of deregulation, the Telecommunications Act of 1996, however, converted the publicly owned radio spectrum to private property and auctioned it to the highest bidders (Heldman, 1997). An interesting aside is that while broadcast licenses were and are valuable, they are not legally transferable. New licensees must receive their grant from the Federal Communications Commission (FCC). Now presumably, at least some portions of the radio frequency spectrum are transferable. Similarly, positive fiber optic easements, wireless cells, and microwave pathways have been created as communications passageways were transformed from public, or regulated, goods to market goods. Some of these corridors pass through private property invisibly, such as wireless, and others pass through almost undetected after installation, such as fiber optic cable. In the new competitive era, communications companies are vying for the same block of customers. For example, the FCC auctioned radio spectrum to two cellular telephone carriers in each market, thus dismantling the older service territories’ legacy of regulated monopoly.

As part of the Telecommunications Act, technologic imperatives and competition, communications carriers have been encouraged to pay market value monetary considerations for property rights associated with deployment of the new communications infrastructure. A byproduct of deregulation and the “information superhighway revolution” has been the creation of valuable telecommunications property rights. These rights are often real property, but may, through licenses, be intangible. Functionally, they are equivalent but many property owners prefer to reserve the real property rights while reaping the proffered rewards. This question of definition and categorization is likely a part of recent industry accounting problems, and will probably continue to be. Many government entities with commonly owned corridors, such as streets and public highways, where normally cable and fiber optic conduit might have been laid for a nominal fee, have attempted to redefine them as private property to exact rents from commercial enterprises. Incumbent telcos and government utilities are, however, exempt from the new deregulated regime (Rudell, 2000).

VI. Incentive Prices Are The Elixir That Make Deregulation Work

The responses of the real estate markets and the law to the shift to markets have been as follows:

  • Private and public transportation and utility corridor owners have inventoried and marketed their existing corridors for co-location of fiber optic cable.
  • Owners of tall buildings and public entities with water tanks or existing radio towers have become de facto telecommunications site managers.
  • Property owners with fee interests underlying pre-existing rail and electric transmission line easements have collectively formed limited liability corridor companies through the process of “class action” lawsuits (Uhl v. Telecom Cubed).
  • Private and public property owners with large expanses of land under one ownership that can be easily used as corridors, such as the U.S. Bureau of Land Management, Bonneville Power Administration, and Tejon Ranch in California have primed their properties for fiber optics and energy corridors.
  • Government agencies and former monopoly public utility companies have replaced the old mutual bartering system that existed prior to the creation of telecommunications deregulation with market-based pricing of radio rack space rents in their communications facilities.
  • Owners of otherwise obsolescent buildings in downtown central business districts have converted many of their underutilized buildings into “fiber hotels” or fiber optic hubs.
  • Former regulated energy companies have purchased “sky wrap” easements from fee property owners underneath their transmission line system easements to form a “corridor within a corridor” of fiber optic cable hanging on their towers.
  • Cities and counties have contemplated forming municipal telecommunications enterprises that install dry conduit in city streets for deployment of the “last mile” of the information highway.

None of these activities would have occurred by deregulation alone. Nor would they have occurred if deregulated communications carriers exercised eminent domain to acquire fiber optic easements, roof top antenna easements, or cable hanging rights on electric transmission line towers. Private and public property owners would then have no economic incentives to allow co-location of such infrastructure on their properties. Governments would exert their “greater public necessity” to resist the condemnation of their properties. Private property owners would likely consider telecommunications infrastructure, even buried cable let alone EMF generating antennas, a nuisance or potential damage to their properties. Paying market based incentive prices for telecommunications property rights is the irreplaceable magic elixir that makes deregulation work. As economist Robert D. Cooter has written (2000, p. 284):

Market exchange, which is voluntary, tends to move resources from people who value them less to people who value them more.

In other words, markets produce newer higher and better uses. Without market pricing of fractional property rights for telecommunications infrastructure the entire build out of the “information superhighway" would be short-circuited.

VII. Easement Pricing: From Across-The-Fence To Across-The-Board

Communications carriers and corridor assemblers often use flat market prices, not land-based valuations, to obtain corridor property rights for buried fiber optic cable, cable hanging easements on transmission towers, and microwave or cellular base station sites. This reflects the “law of one price” in economics, which says that identical goods will sell for identical prices. Such flat market prices for easements or rents might be called “across-the-board” prices, also called “going prices,” in contrast with “across-the-fence” land based valuations.

TABLE 2: Fiber Optic Route “Going Prices”

Source: Vicky Uhland, “The Big Fiber Pull,” ZDNet, Oct. 22, 2000 (http://www.zdnet.com/wweek/stories/main)
Williams Companies Petronet
Property Right Easement Easement
Periodic Payment One-time payment One-time payment
Geographic Routes Long-haul routes Urban routes
Rural Route Unit Price $0.50 per linear foot $0.05 per linear foot
Urban Route Unit Price $2.00 per linear foot $0.20 per linear foot

The reasons for the communications industry using a flat pricing structure are:

  • A flat price structure provides certainty of cost that can attract capital and a uniformly competitive price in the industry that does not create an undue advantage of one business over another for any one business.
  • A flat price structure prevents what is called “arbitraging” whereby easements and rents are paid at cheap prices from unknowledgeable property owners and then re-sold at full market price by “arbitrageurs.” In rural areas, land based valuations would likely be much less than “going prices” for fiber optic easements. If such easements were based on rural land values, the easement could be re-sold for a higher price by opportunists or capitalized into a higher value for the business. This might be the case where rural land is transitioned to urban land uses.
  • Flat “going prices” solve the equitability valuation problem of paying the first landowner, for example, $2 per linear foot and $10 per foot for the last property.
  • A differential flat price structure can be offered for more or less lucrative routes connecting larger or smaller markets.
  • A flat pricing structure can facilitate a business case for the economic feasibility of a business venture. If the market has to depend on capricious court awards or “land appraisal contests,” that risk will be apparent. It may be translated into lowered prices that deregulated network industries are willing to pay for property rights. If the eminent domain model spreads at the expense of flat pricing, another of the risks is lengthened project timelines. Widening a road can take several years. The technology is stable, so no problem. Laying fiber optics is placing a bet on a technology that may become obsolete before installation.

Fiber optic easements and leases that do not affect the existing use of the corridor, or result in damages that are unconnected to the value of the corridor or the land. Thus, “going prices,” or “across-the-board” prices, are believed to be appropriate compensation for fiber optic easements within existing corridors. They are also attractive to reasonable sellers, and thereby save time. However, “going prices” are expressly prohibited under Federal land appraisal standards for eminent domain. The “before and after” appraisal method in one of its manifestations is legally required (Interagency Land Acquisition Task Force, 1992, p. 57). The eminent domain process is explicitly insensitive to measuring the foregone value attributable to the creation of a new use because it excludes “project influence,” the new use of the property.

VIII. "Going Prices" In Up-Markets: Regulated Prices In Down Markets?

Will the now largely deregulated utilities go the old route of condemnation, or simply buy the corridors they want? One of the persistent reasons for the use of eminent domain in the public interest is to avoid hold-out prices by monopoly corridor property owners being passed along to the public in the form of higher utility rates. Corridors are special use properties. Some corridors are owned by railroads, some by quasi-public entities. And some are owned by government agencies.

Many corridors are public goods for which there is no provable market value because they never transact in the open market place (e.g., public roads, flood control channels, navigation servitudes, airspace for plane travel, etc.). Privately owned corridors only sell infrequently and have a limited market value to a narrow range of buyers. Corridors are one of the ultimate examples of why real estate is often termed an imperfect market in which properties are unique and illiquid. It is probably not coincidental that with the crash of dot.com businesses and stocks, the use of eminent domain has returned as evidenced by the court cases cited above. As former going prices for fiber optic easements go by the wayside with the crash of the dot.com industry, the surviving deregulated telcos can buy at the bottom of the market based on nominal land values (Turrettini, 2002, p. 186). Once the telecom and dot.com markets light up again they can reap a windfall at the expense of landowners.

To borrow a term from the “California Energy Crisis” of 2000, does eminent domain thus become more of a way to “game the system” than a means of Constitutional just compensation? Or is there an unstated rule that government will look the other way and allow deregulated telcos to pay much higher “going prices” for fiber optic easements and other property rights than is afforded under eminent domain during bull markets; and impose nominal compensation by eminent domain during bear markets?

IX. Why Buyers’ “Going Prices” Reflect Market Value

What makes corridors “special” is their use for connectivity between two geographic points, unique linear shape, and scarce availability. In built-up urban areas, co-location of utilities in transportation corridors is typically the only practical solution available for location of new corridor uses. In many cases, local municipalities force cable companies to co-locate cable in rail corridors to avoid tearing up the streets or interrupting business in a commercial district. Because corridors are scarce, corridor owners often hold a monopoly position over those who desire to use their property. Monopoly properties typically reflect highly polarized values: “hold-out” values by owners or nominal values sought by public or quasi-public secondary users through the use of condemnation. The reason for this polarization of values is that they are “one-buyer/one-seller” properties as illustrated in the following contingency table (Figure 2).

FIGURE 2: Supply and Demand Factors Comprising Monopoly Value, Hold-Out Value, Market Value

FIGURE 2: Supply and Demand Factors Comprising Monopoly Value, Hold-Out Value, Market Value

The figure does not refer to the actual number of sellers in a market but to the relationship between demand and the supply of technologically alternative corridors.

On the right-hand side of the figure (“Buyer’s Market” and “Open Market”) we have a market system. A requisite condition of market value is choice. In an open market there is sufficient choice to strike a balanced price. The lower-right quadrant (Open Market) is the pure open and competitive market model and is mostly found where land use choice is dispersed. Corridors almost never fall into this category because of their bilateral nature (one buyer/one seller).

The upper-right quadrant (Buyer’s Market) is most often found where the corridor use is in decline or has excess capacity. Revenue from the primary activity is inadequate to support the costs of all of the incumbents, so there is an attempt to diversify or divest. Selling or leasing co-location right-of-way is one option. This is a case where an "across-the-board" going price from the new corridor user might become the dominant pricing mechanism. Buyer’s market prices are generally considered to meet the legal tests of market value.

On the left side of the chart (“Monopoly Market” and “Seller’s Market”) we have a monopolistic or hostage price system. Much has been written on the dangers of monopoly pricing in the primary monopolized good. The courts have almost unanimously rejected sellers or owner’s market value as reflecting fair market value. Paradoxically however in the unique case of corridors, sometimes monopoly value reflects fair market value where full or partial replacement of a corridor is the value issue at hand. However, in the case of co-located fiber optic easements or wireless antenna sites, conceivably no replacement of corridor is required and, thus, monopoly value should not be a measure of market value.

In the theory of "just compensation" the law has typically given little weight to the notion of "value to the owner", which often translates into "holdout value". Logically, if the value to the owner at any given point in time is at par with market price, he should and would sell. Therefore, if a government wishes to compel a sale, they will be dealing with those who are either indifferent to the present market price, or place a higher value on their property.

However, where a prospective buyer has alternative routes the minimum conditions of a market can be met, and prices can be characterized as "market value" (Lusvardi, Wright, and Amspoker, 2000, pp. 250-254). For example, if a fiber optic carrier can locate conduit on one side of a road or another, there is flexibility and the minimal requirements of market value can be satisfied. Or if a regulated regional telephone carrier is prohibited from realizing higher “going prices” for telephone pole line attachments than the existing regulated rate, market value is excluded and older, obsolescent technologies may be subsidized by newer technologies. Even where an existing corridor owner has monopoly bargaining power, if an impartial valuation is conducted that simulates flexibility for the buyer, a hypothetical market value may be estimated. Thus, flat going prices paid by fiber optic carriers for easements are believed to reflect “market value” in the economic sense of the term.

Legal definitions of market value for condemnation purposes may provide that special purpose properties are entitled to a one-sided priced based on cost of land plus an assemblage factor when replacement of the right-of-way in quest is necessary. However, when replacement is not called for, such as in the case of co-located fiber optic easements that represent an innocuous “nested use” within a corridor, the “going price” for such property rights is believed to reflect market value. And as stated previously, pole line attachment rights are perhaps another case where industry going-rates would be a good proxy for market value.

The point of this discussion is that the requisite conditions of a market involve the ability of a buyer rather than a seller to choose. Corridors hardly ever fall into the category of fully open and competitive properties because of the bilateral (two-party) nature of nearly all corridor transactions where usually the corridor owner can command a monopoly price. But buyers' prices for fiber optic easements reflect market value in the economic sense of the term, or as close a proxy for it as can be obtained in the real world. As Charles E. Lindblom has aptly stated (2001, p.156):

The seller’s capacity to control prices is constrained by the availability of an alternative or substitute to which the buyer can turn. This is the key idea in understanding monopoly: availability to customers of alternatives or substitutes

In response to deregulation, the telecommunications industry invented flat, or sometimes population indexed, pricing mechanisms for fiber optic cable property rights and wireless antenna sites. Because such transactions were based on voluntary exchange with negligible damages, flat going prices are believed to meet the requisite economic tests of market value. Regulators and jurists should be cognizant that industry pricing may not always be unfair or fail to reflect market value just because there is only one buyer active in a given transaction.

X. Outmoded Eminent Domain Law?

Telecommunications carriers have the right to condemn access for fiber optic cable through private property, to run cable through risers to office and multi-family residential buildings, to erect rooftop antenna rights on tall buildings or water towers, and conceivably, to lay cable on the ocean bottom. For example, in California Public Utilities Code Section 616 provides that “a telephone corporation may condemn any property necessary for the construction and maintenance of its telephone line.” In 1990, the California Public Utilities Commission, CPUC, held that a long-distance carrier with certificates of public convenience and necessity had a right to condemn access to private property.

Deregulation of telecommunications has brought many benefits to customers, but also, some unforeseen problems. What is not broadly understood is that the newer market-driven system of pricing telecommunications property rights co-exists with eminent domain law that was originally fashioned in response to the older regulated monopoly model. Indeed, the cardinal concepts of “fair market value,” “public use,” “highest and best use for all available uses,” and “severance damages” all originally emanated from classic railroad and utility takings case law. What is less known, is that the evolution of eminent domain law from the “before and after” Federal Rule to the “Take Plus Damages” State Rule came about over the issue of how to value easements. Especially problematic were inconspicuous, innocuous, easements that have little or no effect on the use of the land on which they are located.

Technological advances, deregulation, and marketization of property rights in the telecommunications industry mean that eminent domain law itself has become problematic. Historically, antitrust laws were developed to prevent trusts or cartels from having excessive market power. For instance, democratic government would not normally conceive of giving unregulated private corporations eminent domain powers that could be used to “take", obstruct, or onerously condition open access to network industry corridors or buildings. With telecommunication deregulation, however, that is effectively what has occurred.

XI. Judicial Reversal of Deregulation?

Perplexingly, eminent domain courts may now be stepping back into the right-of- way process, ordering that market property compensation revert to the eminent domain model. There is recent contradictory case law regarding the issue of whether the market model or eminent domain model prevails in the valuation of easements for deregulated network industries (see Figure 5 Case law summary).

Gulf Power II - Pole rates must be marked-to-market (overturned).

Prior to deregulation, under the Communications Act of 1934, the Federal Communications Commission regulated the rate that utilities could charge for accommodating other utilities on their utility poles. Due to a lack of alternative routes available for cable companies, power and telephone companies could charge monopoly rents to co-locate cable on their poles. To prevent monopoly pricing of pole attachments in the “public interest,” under the 1978 Pole Act (Public Law 95-234, 92 Stat. 33) the FCC dictated fiat rates for commingling of cable on utility pole lines. Georgia Power Company attempted to unilaterally impose on Teleport Communications Group of Atlanta a pole attachment rate of $53.35 per pole, reflecting a 400% to 500% increase. In the meantime, new demands arose for pole space from new telecommunications carriers who were willing to pay a higher market rent. The old cable carriers were able to become arbitrageurs, benefiting from their below-market rates. In 1998, Gulf Power, an affiliate of Georgia Power affiliate, filed for court review asserting that regulating below-market rates for cable carriers was invalid under the Takings Clause of the 5th Amendment. The Court of Appeals ruled that the FCC lacked authority to regulate communications carriers under the Telecommunications Deregulation Act of 1996. The U.S. Supreme Court overturned the Appeals Court and ruled that the FCC had jurisdiction to set pole line attachment rates in the public interest. Apparently not addressed in the case was the issue of restricting new Internet carriers from out-bidding existing cable companies for contested space on utility poles. Would this result in forcing internet providers into a higher cost alternative in public street rights-of-way or railroad corridors which would not have been in the ostensible public interest was apparently unanswered by this ruling? This ruling favors incumbent cable companies and utilities at the potential expense of “new economy” users and thus runs counter to the competition intent of the Telecommunications Act of 1996.

Telecom Cubed Case allocating value to an equity corridor (sustained).

The cutting edge case of Thoroughbred Technology and Telecommunications (Telecom Cubed) vs. Corridor Class, LLC, awarded over 50,000 underlying property owners a share of the lease revenues from capacity in fiber optic cables over 2,522 miles. Telecom Cubed is a subsidiary of Norfolk Southern Corporation, a railroad operator. The Telecom Cubed case indicates that valuation of fiber optic easements within preexisting rail corridors no longer always adheres to the “loss/damage paradigm” contained in eminent domain law. Class action members will receive three forms of compensation: (1) a base payment of $6,000 per mile for the first three conduits in the corridor; (2) 7.5 percent or more of the revenue obtained from selling additional conduits that could total $30,000 per mile; and (3) an equity stake in a newly formed company named Class Corridor, LLC. This company will jointly own an equity corridor over class members’ lands encumbered by an easement to Telecom Cubed. The key ingredient in this case is that Telecom Cubed is judged to be a middleman or corridor assembler that resells capacity in conduit to primary communications carriers. In short, the court found that Telecom Cubed is effectively a real estate corridor business, not a communications carrier or transportation company. The rail line easements owned by Norfolk Southern thus could not be overburdened without consent of the underlying property owners who formed a collective ownership to increase their bargaining power. This case identifies a new genus of corridor rights that might be called an equity corridor in contrast to an easement or fee-owned corridor.

The Telecom Cubed case reflects compensation exacted by a court rather than voluntarily derived from markets. And a purist would argue that to receive a percentage rent is to become a part of the enterprise rather than simply provide a raw material. Nonetheless, it validates that compensation for corridor property rights are to be pegged to the new highest and best corridor use for telecommunications, not the prior use of the adjoining land “across-the-fence” for agriculture. In short, this case affirms that the “public use” and the commercial use of the property were one and the same. This is the antithesis of conventional eminent domain law that provides for payment only to compensate for losses suffered by a property, not what the owner can gain from a new publicly created use.

Exxon vs. Zwahr economic unit of easement within easement denied (sustained)

In the January 30, 2002 case of Exxon Pipeline Co. vs. Zwahr, Texas, the Texas Appeals Court reviewed the matter as to whether a new pipeline easement being placed within an existing easement was to be evaluated as a separate “economic unit” (i.e., smaller parcel). The Zwahrs owned 49 acres of land in which Koch Gateway Pipeline Company owned a 50-foot easement for a 30-inch natural gas pipeline. In 1995, Exxon began condemning a 50-foot easement alongside and within Koch’s easement. Eighty-two percent of the 1.01-acre new easement lay within the existing easement. The Zwahr’s were awarded $2,265 for the taking. But Zwahr’s expert witness testified that the new easement was a self-contained, separate economic unit and that its value should be ascertained as part of a corridor separately from the farmland owned by the Zwahr’s. The Zwahr’s were allowed to farm cotton over the surface of the buried pipeline. Texas law dictated that a presumption exists in favor of valuing the land based on its current use. Comparable sales of pipeline easements were estimated to reflect $26,398, plus $9,679 for the right to assign an area within the easement. The Zwahr’s won a $40,000 judgement from local courts. Upon appeal, it was contended that Zwahr’s expert witness relied on actual market evidence rather than the accepted “before and after” valuation methodology for utility easements. Zwahr’s attorney countered that it was disingenuous for Exxon to admit it chose the property because it was being used as a pipeline easement, but then attempt to discount that fact. The landowners were suspicious that companies were laying unauthorized fiber optic lines within easements on their land, thus overburdening the existing easement. New technology makes it possible to run fiber optic lines within the existing pipes without disturbing the ground surface, making them impossible to detect. The value dispute swung on the legal recognition of whether the pipeline corridor was a separate economic unit. This case is strange in that it is established in many other states that existing public improvements can be considered in any subsequent takings of property (Los Angeles v. Hoe [1955] 138 CA2d 74, 291 p2d 98; People ex real Department of Transp. V. Southern Pac. Transp. Co. [1978] 84 Ca3d 315, 148 CR 535). For example, it would be absurd to not consider the value enhancement of previously acquired public streets or water line hookup easements to a property on which a subsequent easement was to be acquired. This case may be appealed to the Texas Supreme Court.

Exxon vs. Hill Case Value per Acre Trumps Value per Rod (sustained).

Conversely, the recent decision of the Supreme Court of Louisiana in Exxon vs. Hill indicates that property owners are only entitled to loss in property value. The loss for easements on a per acre value was based on marginally economic agricultural uses not a value per linear rod based on the higher and better corridor use (see reversal by Supreme Court of Louisiana No. 00-C-2535, Exxon Pipeline Co., vs. George Hill, May 15, 2001). This anachronistic legal decision is not surprising when put into historic context. It is predicated on conventional eminent domain law that holds that the effects and uses of a public project cannot be considered in valuing property rights for private utilities who hold the power of eminent domain.

Legal scholar Gideon Kanner has commented on the Gulf Power II case (2001, p.1-3):

This is a weird opinion. Courts have told us that we must look to the market to determine just compensation. And here there was a market in pipeline easements evidently created and acquiesced in by pipeline companies, until Exxon decided in this case that it didn’t like it. But be all that as it may, wouldn’t all that be an issue of fact to be determined by a jury? It’s hard to imagine anything more factual than what is the custom and practice of a particular market segment in buying and selling land for its peculiar uses. The moral of this story seems to be that as long as market value works to the owner’s disadvantage, the courts have no problem with it. But when the shoe is on the other foot, it’s another story.

The Exxon vs. Hill case does not address the crucial question of whether deregulated enterprises can undo pending voluntary transactions and condemn property for a public use at a fraction of the market price that they created in the first place. Under conventional eminent domain law, neither can the preexistence of pipelines or easements lead to a conclusion that corridor use is the highest use. In conventional easement valuation, highest and best use specifically excludes project influence. In eminent domain acquisitions, the value of property is established as the loss sustained by the owner, not the potentially more profitable use for which it is taken. Nor is it the gain a property owner could realize from a holdout price.

One of the historic reasons for the exclusion of project influence is that there has been no independently measurable market price for the land under airports, reservoirs, and other public infrastructure other than by the government and public utilities. Another difficulty being that the public project may change the highest and best use in favor of the property owner. Although courts have sometimes ruled otherwise, vacant land acquired by the state highways department would not be valued for its construction rock and gravel resources, if the only demand for those minerals were from construction of the highway. Whether or not this is truly equitable, it has been the law. However, we believe that under deregulation there are compelling reasons to conclude that value for corridor use, as measured by industry-created “going prices”, should be considered as highest and best.

TABLE 3: Summary of Recent Court Cases on Valuation of Corridors within Corridors

Gulf Power II Telecom Cubed Exxon vs. Hill Exxon vs. Zwahr
Jurisdiction Florida 16 states Louisiana Texas
Court U.S. Supreme Court U.S. District Court, Southern District of Indiana State Supreme Court State Supreme Court
Type Action Appeals case Class action legal settlement Expropriation appeal Condemnation
Citation Natl. Cable Television Assoc. Inc. v Gulf Power Co.
#00-832
with FCC v. Gulf Power Co.
# 00-843
Jan 22, 2001
Frederick A. Uhl & Timothy Elzina v. Thoroughbred Technology Telecommunica-tions, Inc.
#IP-00-1202-C-B/S
Aug 30, 2001
George Hill et al v. Exxon Pipeline Co.
#00-C-2535
May 15, 2001
Exxon v. Daniel R. Zwahr,
#01-0168,
May 23, 2001
Pre-existing corridor Pole line Rail corridor Multi-pipeline Natural gas
Corporate status Power line company Corridor assembler/reseller Natural gas company Natural gas company
Highest Use Co-location Corridor use Agricultural Agricultural
Unit value measure Per pole attachment Per rod Per acre Per acre
Corridor linear miles Not stated 2,522 Not stated Not stated
No. of ownerships Not stated 50,000 1 1
Network system Cable Fiber optic equity corridor Oil pipeline Gas line
Minimum payment $5 per pole attachment $6,000 per mile (3 conduits) $17,172 $2,265
Maximum payment $38 per pole attachment $31,875 per mile (4+ conduits)   $30,000
Percentage payment Not applicable 4-7 conduits: 7.5% 8+ conduits: 11.25% Not applicable Not applicable
Other compensation: None Dark fiber: $316 per mile None None
Damages: None indicated Cable will not damage use or enjoyment of property as it will run within existing rail corridor None None

XII. Deregulatory Takings

Recently, as abundant sources of capital for telecom have dried up, some courts have stepped in to rule that the deregulated prices set for fiber optic corridor easements, pole line attachments, and for property rights involving other deregulated network industries, such as natural gas pipelines, will be re-regulated in the “public interest.” This is a sort of "deregulatory taking" theory, giving away private rather than public rights (Sidak and Spulber, 1998).

Many public utilities own their gas, telephone, power line, and cable rights-of-ways as easements within privately owned lands. To mandate that compensation for use of private land to accommodate the timely build out of telecom infrastructure at say agricultural land prices instead of industry-created “new economy prices,” makes eminent domain into an arbitrary and capricious game in which one side holds all the cards. If the deregulated utility does not like dealing an ace card (“new economy compensation”) it can always deal a joker (nominal compensation). As legal scholar Donald J. Kochan has stated, abuse of the public interest doctrine for condemnation often results in the metaphorical special interest capture of wealth from Peter to effect well-intended subsidies to Paul (Kochan, 1998, pp. 49-116).

Real property law has historically addressed condemnation, inverse condemnation, and regulatory takings issues, but not deregulatory takings issues (Sidak and Spulber, 1998). A deregulatory taking of real property is perhaps an anomaly in that, unlike physical takings or regulatory takings, it represents a physical invasion of property in which the only ostensible public interest is acquiring property rights on the cheap, as landowners would otherwise be able to sell such property rights by voluntary exchange market for considerably more compensation than buyers have willingly paid others. Deregulatory takings result from the “sale” of commoditized legislation to interest groups (Kochan, 1998, p. 91).

XIII. The Case for Considering Market vs. Eminent Domain Model

Deregulated Prices as Market Value

There is mounting market evidence and legal reasoning for not allowing the judicial usurpation of deregulated market prices by eminent domain, or the setting of fiat prices by regulatory bodies, for property rights to accommodate telecommunications infrastructure.

The strongest argument in favor is that voluntary markets are better at setting prices than regulatory bodies or arcane eminent domain “before and after” valuation formulas that invariably result in the acquisition of “positive” easements within private property with only nominal compensation. At minimum this creates the appearance, and at maximum the reality, of acquiring property rights without providing just compensation, in direct violation of the spirit and intent of the 5th Amendment to the U.S. Constitution.

Modern day telecommunications infrastructure results in negligible property value losses due to its stealth and invisible technologies. Does this mean that property owners, who sustain no discernible loss in value to their property, should be coerced to allow fiber optic easements or antenna facilities on their properties without any compensation? Deregulated network industries have created what may be called “positive easements” that cause insignificant losses but yield “found money” to property owners. As defined here, a positive easement is voluntary in nature, results in negligible damages to the remainder of a larger property, and generates a positive income stream to the landowner. Under Federal condemnation law the benefit of a governmental license has been considered inadmissible as part of the increment in value to a whole property (U.S. v. Fuller, 409 U.S. 488 [1973] as cited in Ackerman, 1994, p. 6). But should this apply to an easement acquired by voluntary exchange by a deregulated utility on private property as required under current eminent domain law?

Another inconsistency is that if a larger property was to be acquired by eminent domain for another public use, such as say a water reservoir or sewer plant, wouldn’t the condemning entity be required to pay value-added just compensation for a fiber optic easement or lease? Wouldn’t this be similar to situations where just compensation is provided for a billboard, cellular antenna site, or other revenue generating use that co-exists within a larger property? Why is compensation provided for revenue generating uses at the time of any subsequent takings, but not upon acquisition?

A further argument for the use of market pricing vis-à-vis eminent domain is that such does not reflect predatory pricing, but rather more reflects market value at least in the economic sense of the term. Market “going prices” meet the requisite economic tests of market value in that they reflect voluntary transactions in which the seller has the right to exclude and the buyer typically has the choice of an alternate route. Moreover, the seller usually realizes that such compensation is “found money” as there are negligible damages resulting from such positive easements.

From Justice Oliver Wendell Holmes to contemporary legal scholar Julius Sackman, the basis of eminent domain compensation has historically been what is called the “liability rule:” it is not what a property owner can gain, but what loss is sustained to the market value of the property that is the legal measure of just compensation (Eaton, 1995, pp. 16-21).

Fair value for purposes of the award is the loss to the owner of the easement, not the gain on the other side of the extinguishments” (Redevelopment Agency vs. Tobriner [“Tobriner II”] 215 California Appeals Court, 3d 1099, footnote [1989]).

However, the proper question emanating from new technology telecom property rights is not what the owner lost, which is inarguably negligible and immeasurable, but what would a willing buyer and seller pay for a positive easement or revenue generating lease on private property?

Another notorious inconsistency is that government agencies do not adhere to land-based eminent domain pricing formulas in granting telecommunications easement rights within own corridors but adhere to a per linear mile market price. Government has nearly universally adopted a double standard (“buy low – sell high”) when it comes to the valuation property rights within their own lands. Government does not apply the same legal valuation rules by which it acquires real property to subsequent commercial users of its properties. This is glaringly apparent in the case of underwater routes and Federal land management agencies. For example, it is possible to charge undersea cable companies $100,000 per linear mile for licenses within “navigation servitudes” for which the Uniform Appraisal Standards for Federal Land Acquisitions and case law mandate a nominal valuation (National Ocean Service, 2000). This is the same as including “project influence” which is impermissible under eminent domain law, but apparently not under government property management procedures. And most legislation mandates government to generate revenue on a competitive basis from surplus property.

By law public uses of private property have been limited to the original purposes for which they were acquired. It is a well established principle in eminent domain law that a public entity does not have the power to take property for the purpose of making money unrelated to the actual service the utility provides to the public. (see Amrit Patel v. Southern California Water Co., California Court of Appeal, 4th District, Case No. G023360, April 16, 2002). However, the recent Louisiana case cited above suggests this is a possibility, at least in certain circumstances.

In a market system transaction prices for telecom rights by a public utility exercising the right of eminent domain should be approximately the same as the market price. Under “open access” requirements, telecommunications carriers charge roughly the same market price to co-locate competitors within fully owned corridors. This “secondary market” price should, therefore, be the same offered to private property owners subject to eminent domain.

Another rationale in the argument for market pricing it that there is often the likely prospect of a private third party market demand, represented by new deregulated competitor companies, for the same property right to be acquired by condemnation.

The argument that market prices are holdout prices that harm the ultimate consumers of telecom technologies is perhaps also specious. There are functionally equivalent communications technologies that can be deployed by a communications carrier for which cheaper property rights may be available, or which can even be obtained at “no cost” (e.g., microwave may replace fiber optics; no-cost franchises in public highways can replace co-location in rail corridors). Alternative technologies place downward pressure on prices, thus countering holdout prices.

Arguably, going prices for easements serve the public interest as well as or better than eminent domain. Going prices for fiber optic conduit have facilitated the rapid build out of the Information Superhighway with low transaction costs and sufficient price transparency to create a market.

Contradictions and Unintended Consequences

There are serious legal contradictions and unintended side effects from regulatory pricing and the exercise of eminent domain in providing for compensation for telecom property rights.

First, the re-regulation of utility pole line attachment prices by the courts (Gulf Power II case) has left unresolved how “new economy” technologies are to replace costlier incumbent technologies if they are not allowed to compete for contested property space? In many cases paying a competitive higher price to attach lines, antennas, or switching equipment to utility poles is often the least costly alternative when compared with placing such facilities in public streets, in rail road corridors, on building rooftops, or erecting new pole lines. Inarguably, such least cost alternative routes best serve the public interest. Thus, the benefits of deregulation for new entrants into the telecom markets are often illusory as the old technology incumbent utilities are permitted to be free riders or beneficiaries of a regulatory fiat price system. In fact, deregulation could be perceived as a double standard that erects barriers to entry for challenger’s vis-à-vis incumbents. Is it any wonder why the telecom stock market has recently crashed given all the barriers to entry erected at nearly every level of government?

The courts have not reconciled a serious contradiction in present case law with respect to telecom property rights. A class of underlying fee owners within rail corridors is entitled to market compensation for the expansion of easement rights to accommodate fiber optic cable (Uhl v. Telecom Cubed), but fee owners of property already encumbered with oil and gas pipeline easements that form a multi-utility corridor are not (Exxon v. Hill; Exxon v. Zwahr). Whereas corridor assemblers have been deemed by the courts to effectively be real estate businesses (Uhl v. Telecom Cubed), payment of compensation to underlying equity owners based on market value for corridor use seems equitable. Corridor use is a consistent use for valuation purposes while compensation for a non-corridor use is not.

Communications carriers conceivably could acquire property under eminent domain as a blocking action to gain advantage against competitors. Reportedly, many corridor users are moving to buying out entire larger parcels in fee title so as to exclude, control, or profit by further users in a corridor (State Corporations Commission, 1998).

It would be conspicuously bad if telecommunications enterprises could now employ a “bait and switch” strategy of initially paying the higher market price for corridor property rights to gain voluntary market entry and then use eminent domain powers to fall back to lower-priced valuations excluding “project influence.” Could lease renewals for rooftop cellular antenna sites now be overturned by exercise of eminent domain for a fraction of the market rent? Would government now be willing to roll back market-priced fiber optic leases and licenses in their utility corridors and antenna rents on their own properties and accept a pittance? Would “utility-to-utility” co-location leases between telco competitors now be rolled back? Would it be replaced by the pre-existing barter method?

XIV. Preferential Options for Markets

We cannot reconcile the legal contradictions discussed in this paper. Some are presently legal inconsistencies in judicial interpretations arising from different case outcomes. Neither are such contradictions reconcilable by property valuation standards or the application of conventionally accepted valuation methodologies. Property valuation is a tool. Its application is subject to legal and professional rules established for each situation. Pricing telecommunications rights-of-way is a public policy matter as much as it is a matter for the property valuation professions. Continuing to thrash public policy conflicts out in valuation contests, anachronistic condemnation proceedings, arbitrations, or courts of equity fails to reconcile the policies at issue with 5th Amendment provisions. Legislation is an option. But as economist Robert D. Cooter, past-president of the Law and Economics Association, states, whatever policy prevails there should be a preferential option for markets over adjudications or transactions under the threat of condemnation (2001, pp. 284-285).

Whereas voluntary exchange causes mutual gain, a taking causes unilateral gain…voluntary transactions move resources from lower-to higher-valued uses, as required for efficiency, whereas involuntary transactions can move resources in the opposite direction…Channeling transactions into voluntary exchange requires protecting the owner’s rights, not merely protecting the owner’s interests. For example, most transactions must occur through markets, not takings.

XV. Summary and Conclusions

  1. Emerging case law is suffering from “regulatory lag” with regard to the use of eminent domain law by deregulated utilities (Posner, 1999, p. 60). Eminent domain law was originally meant to prevent natural monopolies and landowners from setting predatory pricing for property rights required for infrastructure that serves a public purpose. However, today the continued use of eminent domain powers by deregulated utilities does just the opposite by facilitating predatory pricing and denial of just compensation to landowners. Deregulated enterprises have established “going prices” equal to or many more times that of land values and telecommunications property rights typically result in negligible severance damages.
  2. Real estate appraisal is suffering from “market lag” with regard to the reliance on older “before and after” valuation methodologies, meant to compensate for negative values from takings, misapplied to positive easements where no discernible losses are sustained. Moreover, the market has created a commodified price for such property rights much higher than land values on which before and after compensation formulas are typically based.
  3. The argument from monopoly pricing for continued regulation of fiat pricing for pole line attachments and co-location rights no longer holds in the deregulated environment for telecommunications, as market going prices equal or greatly exceed commensurate land values and reflect fair prices set by buyers, not hostage prices set by monopolistic sellers. Moreover in most cases, pole line attachments are the least-cost alternative when compared to putting such infrastructure in streets or railroad corridors, or erecting entirely new pole line corridors.
  4. The argument from negative externalities for continued use of eminent domain to compensate landowners for damages no longer holds given the miniaturization of telecommunications infrastructure, its unobtrusiveness, and stealthiness. The numerous voluntary exchanges for fiber optic easements and wireless antenna sites also indicate that landowners do not feel the conveyance of such property rights require compensation for either severance or proximity damages.
  5. The percentage of land value appraisal methods for valuation of "easements within corridors" is overly theoretical, highly subjective, contrived, and prone to inequitably manipulated results for corridor owners over and against landowners in deregulated markets. Because deregulated natural gas pipeline and fiber optic utility companies typically are secretive about easement transaction prices, the true market price for such property rights does not always become transparent. Such transparency is essential for the operation of a market. One of the few places to discern what the telecommunications industry is willing to pay for fiber optic easements and other related property rights is from transactions on public lands where prices can be disclosed. However, with the adoption of new legislation mandating compensation for fiber optic easements based on “next best” land uses rather than industry going prices, the window into the confidential value of positive easements for build-out of the “information superhighway” may be forever foreclosed, only to be revealed from time to time upon discovery in litigation (see proposed HR 3258 Reasonable Right-of-Way Fees Act of 2001 and Public Lands Planning and Management Act of 2002). The legislative micromanagement of Federal rights-of-ways and public lands is likely to indirectly result in the continued misapplication of the old eminent domain paradigm by state public utilities commissions to the deregulated marketplace. Applying old paradigms to new network industry technologies is an endemic problem with deregulation (Duesterberg and Gordon, 1997).
  6. Markets can sometimes adjust to such nontransparent and unduly complex regulatory schemes and minimize the costs imposed by those laws (Stone, Levy and Paredes, 1996, pp. 95-128). Legalistic methodologies for the valuation of fiber optic easements that altogether omit “marked-to-market” prices can be obviated by the use of brokers and specialized real estate appraisers who are privy to otherwise closed market transaction data. This adds to transaction costs, but nonetheless, makes the market somewhat transparent. However, to date no such genuine market occupational specialization has occurred except with brokerage and appraisal practices on the side of government and public utilities as opposed to landowners. This is similar to railroad corridor and gasoline station appraisers who may be allowed access to proprietary property transaction data but are dependent on continued employment from such businesses for their livelihood. Brokers and appraisers for landowners are typically not privy to such data. And utility companies often can shroud prices paid for corridor property rights by use of confidentiality agreements and public recordation of memorandums of easements. This might be remedied by state legislation mandating full disclosure of deregulated utility easement sales prices and/or granting licensed real estate appraisers authority to access such market data.

Regulatory institutions establish and enforce the “rules of the game” of a society. The rules structure transactions and provide a framework for fair play. New technology network systems coupled with old eminent domain rules may tilt the game board so that one-sided landowner hold-out values are replaced by equally one-sided condemnor values based on non-corridor property values. A market system depends on some type of commercial law to provide the framework for non-exploitative transactions. The Fifth Amendment to the U.S. Constitution was originally and principally intended to provide protection from governmental predation. The law provides a baseline by providing a default rule, applicable unless otherwise specified by the parties. The default rule of just compensation can be contracted and litigated around by deregulated network industries by giving them the power of eminent domain and the discretion of creating a market price for the same property right which they can withhold if it fits their needs. Markets have checkmated eminent domain and regulated monopoly prices for deregulated utilities. But allowing one player to select the rules of the game as it sees in its best interest surely undermines the Constitutional contract (Cooter, 2000, pp. 359-379). A cup half full of regulated fiat prices and nominal eminent domain awards may be beneficial to consumers and resonant with populist politics, but the it may be tantamount to a cup half empty of just compensation to property owners.

Endnotes

  1. The views expressed are solely those of the authors and do not reflect those of any employer, client, associated consultants, or affiliated organizations.

  2. Externality: "The impact of one person's actions on the well-being of a bystander" (Mankiw, N. Gregory. 1998. Principles of Economics. Fort Worth, Texas: The Dryden Press. pp. 778.

  3. A corridor is a narrow continuous property forming a route connecting two or more points typically under regulated private ownership. This is in contrast to a right-of-way that is a lawful right to cross someone’s property by a specific route, usually under public ownership.

  4. Moral hazard: The danger that if a contract promises people payments on certain conditions, they will change their conduct so as to make these conditions more likely to occur (John Black, 1997. A Dictionary of Economics, New York: Oxford University Press, p. 309).

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