On April 7, 2011 the Federal Communications Commission unanimously adopted and released the full text of its Report and Order and Order on Reconsideration, a comprehensive overhaul of its pole attachment rules. The FCC concluded that the Order advances the goal of universal broadband outlined in the FCC's 2011 National Broadband Plan.
The Order represents a win for virtually all sectors of the broadband communications and telecommunications industries. This brief analysis follows up our April 7, 2011 Client Alert, and provides background for our Tuesday, April 12, 2011 Webinar. We do not intend this analysis to be comprehensive, but we hope that these initial insights will be useful.
The Order affirms the thrust of the FCC's 2010 proposal to adjust the Section 224(e) "Telecom Rate" to produce rates generally in the same range as the Section 224(d) "Cable Rate." The Order adopts upper and lower bounds of reasonableness for Section 224(e)'s Telecom Rate formulation.
The upper bound remains the same as the prior formulation of the Telecom Rate but the Commission concludes, as it did in the Notice, that the upper bound does not achieve its policy objectives of expanding broadband and creating a level playing field for competition.
The Commission then defines a lower bound rate, which essentially zeros out capital costs in determining a telecom rate but includes administrative and pole maintenance costs. This lower bound is consistent with its 2010 proposal to remove capital costs from the pole rate because the attacher does not "cause" the original investment in the pole. Any capital costs that are "caused" by the communications attacher are generally covered by make-ready payments.
From this range of possible interpretations of costs, the Commission then defines a middle ground: the "New Just and Reasonable Telecom Rate," and states its intention is that this new rate will approximate the Cable Rate. The Commission derives this new rate by backing into the amounts that the Cable Rate formula would produce by, in essence, determining mathematically what percentages of the prior Telecom Rate (using that formulation's presumptions) would produce the Cable Rate. The Commission then applies these percentages to the old Telecom Rate.
Here is how the Commission gets there.
First, the FCC relies on presumptions about pole height and usage that result in the Cable Rate allocating to the cable operator about 7.4% of the annual cost of owning and maintaining an average pole. By contrast, the old Telecom Rate allocated a higher percentage of the same pole costs to an attacher. In urban areas (defined as Census areas with more than 50,000 people) FCC presumptions allocated 11.2% of the pole costs to the communications attacher, and in non-urban areas (defined as less than 50,000 people) FCC presumptions allocated 16.9% of the pole costs to the communications attacher. (That's because the FCC presumes fewer attachers in rural areas, so the costs were split among fewer companies, and each one gets assigned a higher presumed share.) The FCC does not change these allocations.
In order to bring these higher percentages from the old Telecom Rate closer to the Cable Rate (i.e., down to 7.4% of the pole's annual costs) the Commission includes only 66% of the utility's annual pole costs in urban areas and 44% of annual pole costs in non-urban areas. These adjustments, each multiplied by the old Telecom Rate cost allocations, achieve the Commission's purpose of reducing the allocation factors to the same levels as the Cable Rate – in both the urban and non-urban contexts: 7.4 per cent (66% x 11.2% = 7.4% and 44% x 16.9% = 7.4%)!
Where the FCC presumptions of the number of attaching parties are rebutted, however, the rate formulas will not necessarily create this neat equality of Cable Rate = New Telecom Rate. For one thing, if the shorthand Telecom Rate "44/66" formula produces a rate that is below the rate that would be derived by using 100% of the maintenance and administrative costs of an average pole (rather than 66 or 44 per cent), the Order states that the latter rate will apply.
In addition, utilities will retain an incentive to attack the allocation presumptions on which the 44/66 factors are based – the number of attachers that the formulas presume on a pole – in order to achieve a rate that is still somewhat higher than the Cable Rate.
Another complication: although the FCC clearly believes that the rate that relies on 100% of the maintenance and administrative costs of an average pole will be lower than the shorthand 44/66 rate, some pole owners undoubtedly will work to inflate maintenance and administration costs to see if they can produce a higher rate.
Although the new formulation appears to retain one of the vexatious issues in administering the Telecom Rate – determining the number of "entities" on a pole to establish the basis of the allocations in urban and non-urban areas – we expect that the Commission's new rule will substantially reduce the Telecom Rate in all cases. As a practical matter, the Cable Rate will serve as a surrogate de facto rate for many, though not all, regulated pole attachments in FCC jurisdictions.
Comingled attachments and retroactivity
The Commission did not address how it would resolve any disputes about the proper calculation of the Telecom Rate for periods prior to the date of the Order. Thus, issues related to classification of attachments as "Cable" or "Telecom," and especially issues related to commingled services (multiple services provided over the same conductor bundles), remain important. The Commission stated, in something of a double negative, it "will not consider rates for pole attachments by . . . cable operators providing commingled services to be 'just and reasonable' if they exceed the new telecom rate. This action does not disturb prior Commission decisions addressing particular scenarios regarding commingled services."
The Commission found, furthermore, that "[t]o the extent that a telecommunications carrier or cable operator provides particular services that the Commission has not expressly classified, but which ultimately are telecommunications services, the attachments would be subject to section 224(e) and the new telecom rate adopted in this order." Finally, on this important question of the applicability of the new Telecom Rate the Commission avoided judgment on pending disputes, stating that "[t]o the extent that there are disputes about the application of pre-existing law to particular scenarios regarding commingled services that were not already addressed by the Commission, we do not address them here."
Access timelines for wire-based attachers
The Commission confirmed its proposed 148-day deadline for physical access for wireline attachments structured as follows:
- Survey – A utility has 45 days to perform an engineering survey to determine whether an attachment is feasible and if make-ready is required, from the date when the utility receives a "complete application."
- Estimate – Following the survey, a utility has 14 days to provide the proposed attacher an estimate of make-ready charges.
- Acceptance – The attacher has 14 days to approve the make-ready estimate and tender payment.
- Make-Ready – The utility has 60 days (with an additional 15-day grace period) to perform required make-ready, including any work required to move other third-party attachments.
In the event that these timelines are not met, the new FCC rules allow applicants to use approved electric-qualified contractors to complete the work necessary for access. The Commission has scaled the access timelines for larger groups of applications adding an additional 60 days to the timeline for applications in a 30-day period consisting of 300 to 3,000 attachments. Utilities are also allowed to "stop the clock" for "good and sufficient cause."
It is not clear to us how much benefit communications companies will derive from these timelines. In the case of an utterly recalcitrant utility, they will certainly be helpful. But some utilities may be expected to increase the level of detail required in applications to reduce the burdens on themselves in the survey process. And by specifying time periods the Commission may have created default timeframes for activities that have often been accomplished much more quickly in the past. A time frame in excess of 120 days to attach will not be compatible with many business imperatives of communications attachers.
The Commission, furthermore, does not address issues of survey and make-ready costs, which may be aggravated where utilities resent being put under these time deadlines. Finally, the Commission does not address other continuing hot-button issues such as overlashing and resolution of existing safety code "violations" on poles to which communications companies desire to attach. The Commission did make the potentially troubling observations that (1) "electric utilities are entitled to make final determinations in case of disputes over capacity, safety, reliability, and generally applicable engineering purposes" and (2) the utility may rely on requirements that exceed the NESC.
As expected, the Order represents a major step forward for the rights of wireless providers. The Commission's rules now articulate that the attachments of wireless providers have express access rights to utility poles generally, and specifically to the pole top, and that they are entitled to the same rate treatment as wire-based attachers. The timeline for wireless attachments generally tracks the timeline for attachments in the communications space. However, utilities are allowed 90 days (plus a 15-day grace period), instead of 60 days, to actually complete required make-ready for wireless attachments – for a total of 178 days, rather than the 148-day period applicable to wire-based companies.
The Commission revisited its past interpretation of Section 224 to hold that Incumbent Local Exchange Carriers (ILECs) may rely on the statutory guarantees of just and reasonable pole attachment rates, terms, and conditions. The Commission also offered guidance on its approach to reviewing electric utility rates, terms, or conditions that an ILEC alleges are unjust and unreasonable in a pole attachment complaint. The Commission did not, however, provide that ILECs may necessarily rely on its rate formulas.
Unauthorized attachment penalties
The Commission adjusted the previous "cap" on unauthorized attachment penalties by allowing utilities to charge an additional $100 per unauthorized attachment (in addition to five years' rental) where the cable operator does not elect to participate in a pole audit. On the other hand, the Commission will apparently allow this new charge to be applied only prospectively and will require the utility to identify unauthorized attachments on a pole-by-pole basis – rather than simply comparing the number of attachments found versus the number of attachments billed for, a process used by a number of utilities in the past.
The FCC expressly rejected communications companies' requests to include compensatory damages or to establish – for itself – enforcement deadlines and formal expedited complaint-resolution procedures. The Commission did modify its complaint rules to require a much more robust pre-complaint certification standard than was in the prior rules. In particular, a putative complaining party is required to seek executive-level resolution by certified letter detailing the nature of the grievances. "A refusal by a respondent to engage in the discussion contemplated by this rule shall constitute an unreasonable practice under section 224 of the Act."
Very significantly, the Commission rejected utility pleas to discard the "sign-and-sue" rule upon which communications attachers have relied to challenge utility terms and conditions that could be considered to be interpreted as reflecting the intent of signed agreements, but which could not be justified under the Commission's mandate to ensure just and reasonable rates, terms, and conditions of attachment. In addition, the Commission will now allow communications companies to seek refunds of excessive pole fees back to the statute of limitations date, rather than only from the date of the filing of a complaint.
Judicial appeals of the Order are certain
The FCC's conclusions on a number of key issues, including its New Telecom Rate, its establishment of access and make-ready timelines, and its extension of statutory protections to ILECs are sure to be challenged by the electric utilities. We expect they may file a petition for review immediately with a federal Court of Appeals, rather than seek reconsideration before the FCC. On the other hand, there are aspects of the new rules and procedures on which the communications companies may wish to seek reconsideration or clarification, which might require resolution before any appeals by the utilities are resolved.
The benefits to the communications industry sector from the Order are very significant, if difficult to quantify. The reduction in rates now and in the future alone will amount to billions of dollars, even without considering additional facilities deployments. And although the Order applies directly only in those 30 states where FCC regulation of pole attachment applies, and only to investor-owned utilities, it will have an important impact in other states and to some cooperatives and municipal utilities. For example, the Order will help resolve issues about the Telecom Rate in Ohio and about the maximum rates permitted for cooperatives and municipal utilities in North Carolina and for municipal utilities in Texas.
On the other hand, we expect that the issues on appeal will be contentious and difficult and that the utilities will work to undermine the intent of the rules in multiple ways.