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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

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