FCC Resolves Pole Complaint Against Alabama Power and Revises Pole Regulations to Improve Cable Operators' and Telecommunications Carriers' Pole Attachment Rights

On May 25, 2001, the Federal Communications Commission released companion pole attachment orders reaffirming its pole attachment regulations, and improving significant aspects of the rules for overlashed fiber and for telecommunications services offered by cable operators and competitive local exchange carriers (CLECs).

Background
The FCC’s pole attachment rules have been under siege by electric and telephone utility pole owners over the last few years. The electric utility industry in particular has been challenging virtually every aspect of the FCC’s rules from within FCC rulemaking dockets; in specific FCC-adjudicated pole attachment complaint cases; and in the Courts of Appeal, especially the 11th Circuit. In general, the electric utilities have seized upon the 1996 amendments to the Pole Act that allow cable operators and telecommunications carriers to insist upon mandatory access to utility poles (47 U.S.C. § 224(f)). Because the 11th Circuit’s earlier decision in Gulf Power I (see our advisory dated Sept. 10, 1999) found that mandatory access constituted a “taking,” utility companies have argued that the FCC may no longer rely upon its basic assumption that a ratemaking formula is compensatory if it assures recovery of actual cost plus a rate of return. Instead, the utilities urge that the FCC must award a significantly higher “just compensation” rate for all attachments and have offered various approaches to pole rental valuation. These include (supposed) appraisals of “market” value; the (claimed) costs of reproducing all of the pole plant; adjustments to the basic costs and allocations used in the pole formula; and claims that the “telecommunications” rate, which applies in FCC jurisdictions on a phased-in basis, must immediately apply to cable television attachments. Utilities and incumbent local exchange carriers (ILEC) have also sought to frustrate the upgrade of cable systems by delaying the overlashing of fiber to existing support strand.

The first of these companion decisions, Alabama Cable Telecommunications Association v. Alabama Power, arose from one of the electric utility industry’s pending constitutional challenges. The Alabama Power case arose from Alabama Power’s (APCO) unilateral termination of all pole agreements in Alabama; the increase in contract pole rentals from $7.47 to $38.81; and the demand that any operator who wished to stay on the poles must assert mandatory access under § 224(f) and sign a non-negotiable new agreement presented by APCO. On collective complaint by the cable operators in the state, the FCC’s Cable Services Bureau stayed APCO’s actions and preserved the prior attachments and pole rents until APCO negotiated in good faith within the bounds of FCC rules (see our advisory dated Sept. 11, 2000). APCO appealed to the full Commission and simultaneously petitioned for review in the 11th Circuit Court of Appeals in Atlanta. The decision Friday resolved the Commission’s internal review of the Bureau’s order. The case in the 11th Circuit has been briefed and that court is scheduled to hear oral argument in September on the merits of the Bureau’s approach and on the FCC’s claim that the court should not even hear an appeal of the Bureau’s order. (Courts of Appeal ordinarily accept briefing and hear appeals only of final orders issued after the full Commission acts on internal appeals from the Bureau.)

The second of these companion decisions is a consolidated order addressing a series of reconsideration petitions that emerged from the FCC’s rulemaking order in two pole cases: the so-called “Fee Order” in CS Docket 97-98 dealing with the basic cable pole rent formula; and the “Telecom Order” in CS Docket 97-151, dealing with the “telecommunications” rate phased in for certain attachments in the five years that began on Feb. 8, 2001.

Alabama Power pole complaint proceeding
The APCO order rejected the electric utility approach to pricing pole rentals and the constitutional theories on which that industry has hinged its appellate arguments. Specifically, the FCC held that:

• The FCC retains jurisdiction over pole complaints despite the interim ruling by the 11th Circuit that the Pole Attachment Act (§ 224) does not cover cable systems if they carry Internet services.
• The FCC has jurisdiction to enjoin the termination of pole agreements and to insist that pole owners engage in good faith negotiations within the framework of FCC rules.
• Cable operators who have obtained access to poles under pre-1996 voluntary agreements may not be arbitrarily terminated and forced to demand mandatory access to remain on the poles.
• The FCC is under no obligation to allow a utility to charge a higher pole rate pending judicial review of the FCC’s orders.
• The same constitutional standard that applies generally to utility ratemaking continues to apply to pole attachments. In particular, recovery of cost (through makeready and through rents) plus a rate of return (which is part of the rent) is sufficient to prevent confiscation and to justly compensate the utilities. The nature of the property and the need to prevent monopoly abuses has not changed. The Commission noted that the majority of State PSCs that regulate poles also follow the FCC’s approach.
• The FCC will continue to price pole attachments based on historic costs. The property, business relations, and Congressional instructions that led the FCC to adopt “forward looking” TELRIC pricing for Unbundled Network Elements (UNEs) leased by CLECs from ILECs are quite different from those governing pole attachments to utility poles. The FCC decision analogizes to cable rate regulation, where cable operators’ cost-of-service showings were based on embedded historical cost.
• Even if one were to approach pole attachments from classic “takings” law, the FCC’s current costing approach is correct. There is no “market” in monopoly poles, nor any comparable property from which to derive a “market” price. There is no non-speculative income-generating potential that may be assigned exclusively to pole space. Nor may replacement or reproduction cost be used in an environment where one may neither economically nor legally build a parallel set of pole lines. In addition, the Commission rejected the factual submission by APCO as unpersuasive and insufficient to carry the utility’s burden of proof.

This order completely rejects the legal and factual basis for utility challenges to the FCC’s approach. It will surely be challenged on appeal.

Pole rulemaking reconsideration order
The Reconsideration Order released Friday disposes of several petitions for reconsideration and improves two significant aspects of prior orders.

First, the FCC clearly held that a cable operator may overlash additional conductors to existing strand without having to obtain additional approval from or the consent of the utility pole owner. The conductors may be titled either to the cable operator or to a third party. It would be reasonable, the FCC held, for a utility to require notice, but unreasonable to require additional authorization.

Second, the FCC simplified the method for setting pole rents for “telecommunications” attachments. The telecommunications rate assigns a large portion of pole costs by apportioning them among “entities” on the pole, rather than in proportion to the amount of useable space used. The FCC has now clarified and simplified that calculation. Utilities are to set rates by representative service areas. In urbanized areas (or any service area that includes part of an urbanized area), one may presume that there are five “entities” on the pole: power, telephone, cable, CLEC, and government. An urbanized area has a population of 50,000 or greater. In non-urbanized areas, one may presume that there are three entities on the pole: power, telephone, and cable. Any party may rebut the presumption through a statistically valid survey. Any line, including one owned by an electric utility or governmental entity, counts as an “entity.” Overlashed cables do not count as additional entities. This means that if the “cable” rate is $5.00, then the urbanized “telecom” rate would be $7.56, and the non-urbanized would be $11.40. Any rate increase would be phased in over five years.

Third, the FCC reaffirmed its use of historic costs. It cogently explained that when replacement costs are actually incurred to accommodate an attachment, the attaching party pays them directly in makeready. Where replacement costs are incurred in routine replacement of pole plant, they are added to the book cost of the pole in annually refreshed cost reports on which pole rents are based.

Fourth, the FCC corrected an aberrational issue that arises when certain ILECs depreciate pole plant to negative values. In those limited cases of zero or negative rate base in the pole account, the pole owner may use “gross” calculations and a negative rate of return.

Fifth, the FCC reaffirmed, with more explanation, the specific cost accounts and useable space presumptions used in the pole formula.

Sixth, the FCC reaffirmed its conduit formula, clarifying that the formula is the same for cable and for telecommunications.

Conclusion
These decisions are significant and they will be subject to further proceedings at the FCC and in the courts. In addition, the FCC plans further rulemaking concerning wireless attachments and attachments carrying Internet, if required by Supreme Court action in a pending appeal (see our advisory dated Jan. 21, 2001).

If you would like a copy of either the APCO order (35 pages) or the Reconsideration Order (78 pages) please contact us.