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
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):
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.