California Appellate Court Confirms That State Law Limits Municipal Authority To Impose Fees For Telecommunications Facilities

On Dec. 19, 2003, in Williams Communications, LLC v. City of Riverside et al., the California Court of Appeals for the Fourth District reversed a lower court’s ruling that the City of Riverside was entitled to collect $750,000 in license fees as “rent” for the use of the public rights-of-way. In the first appellate decision of its kind since 1961, the Court of Appeals found Williams to be a telephone company entitled to the protections of California Public Utilities Code § 7901. In addition, in a decision of first impression, the Court ruled under Government Code § 50030 that the license fees were illegal, as “other exactions” under California’s Mitigation Fee Act, entitling Williams to a refund of the fees paid to the City.

Background

For nearly a century, California state law has allowed telephone companies to build out their networks without the need for a local franchise and without any requirement to pay franchise fees. However, municipalities have bristled under the restrictions of the state law scheme. They have tried to expand their regulatory authority with the ultimate goal of undoing the prohibitions against municipal franchise fees on telephone companies. Despite their constant efforts, during the early to middle 1900s, municipalities received a string of rebukes from the California Supreme Court, which held repeatedly that California Public Utilities Code § 7901 allows telephone companies to use the public rights-of-way without paying fees to local governments for the privilege.

In the 1990s, deregulation brought competitive telecommunications facilities, and with it a pattern of municipal efforts to control telecommunications services and to profit from the new activity. Cities began adopting “telecommunications ordinances” with local franchising and franchise fee requirements. Many cities were able to extract payments from CLECs in the form of “rent” or above-cost “license fees” as a condition of obtaining encroachment permits. The cities justified their actions claiming that Public Utilities Code § 7901 and prior court decisions were outdated in light of developing technology. Their theory was that Public Utilities Code § 7901 only applied to telecommunications services involving “voice” communications, and therefore the cities were entitled to franchise carriers whose networks also provided data, Internet access and other advanced services. It was in this environment that the dispute between Williams and Riverside developed.

In the spring of 2000, Williams applied to the City of Riverside to install a bank of conduits and fiber optic lines in the City’s public rights of way. As a condition of issuing the necessary construction permits for the project, the City required Williams to enter into a license agreement with the City and to agree to pay $1.50 per linear foot of conduit, or a total of approximately $750,000. Williams signed the license agreement and made the payment to the City under protest. Williams then constructed its network and sued the City of Riverside for recovery of the $750,000 payment on the theory that the payment was prohibited.

The trial court ruled against Williams, concluding that Public Utilities Code § 7901 did not protect Williams from the City’s demands for license fees because its lines were being used (by Williams’ customers) for some non-voice purposes, such as transmission of cable TV signals for cable companies, data services and Internet access. The Court also ruled that the Government Code § 50030, which limits the fees that any local government charges telecommunications companies to the actual costs of administrative services, did not apply. Finally, the court ruled that Williams could not recover the fees it paid under California’s Mitigation Fee Act because the license fees were a form of “rent,” not a fee.

The Decision on Appeal

The Court of Appeals reversed each of the trial court’s rulings. It first held that Williams was properly certificated as a telephone company, and thus had a franchise to use Riverside’s rights of way under Public Utilities Code § 7901 whether or not it was using its lines for Internet data transmission or any other technologically advanced purposes. The law governs certificated entities no matter what they transmit over their networks, and the City may not charge any fees or “rent” for the privilege of installing a telecommunications network in the rights-of-way.

The Court also held that California Government Code § 50030 requires that any fees imposed on Williams by Riverside must be based on the City’s costs of issuing permits. Contrary to the trial court’s holding, the fee was not “consideration for a negotiated license agreement,” but rather was imposed on Williams as a condition of obtaining the license agreement and any permits for the project. Based on the trial court’s finding that the fees charged to Williams were largely based on “the City’s bald assertion that it could charge rent or an easement or license fee” for the use of the City’s rights-of-way, the Court found that such an above-cost charge was neither legal nor justifiable.

Finally, the Court held that California’s Mitigation Fee Act entitled Williams to make the payment under protest and to recover any fees that exceeded the reasonable costs of services provided. The Mitigation Fee Act was enacted to protect developers from local agencies imposing unfair and unrelated fees to development projects under the guise of defraying costs on public facilities. This is the first time that the Mitigation Fee Act has been applied to telecommunications projects subject to local permitting requirements.

Conclusion

This case provides telecommunications carriers with a strong basis to review any license fees or rental charges imposed on them by California municipalities for the use of rights-of-way. Under Riverside and the earlier California cases it cites, fees based on a percentage of revenue, linear feet of plant, or any thing other than the costs to the local government of administering permits are prohibited. There is no validity to a separate fee or distinctions in fees for carriers that provide advanced data services. It also closed the door on the concept of cities charging “rent” on telecommunications carriers for their networks to use the rights-of-way.

Finally, on a going forward basis, the case provides guidance on how carriers should proceed when faced with a California city that refuses to issue important public right-of-way encroachment permits unless the carrier pays an illegal fee—the carrier should sign the license agreement, make the payment, object to the payment under the Mitigation Fee Act and file a timely suit to demand return of the illegal fees. Under the Mitigation Fee Act, a letter of protest must be sent within 90 days of the city's approval or imposition of the fees and if the city does not return the fees, a lawsuit must be filed within 180 days of the date the imposition of the fee.

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