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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?

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