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).
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 ). 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 ). 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.