Fiber optic lines expose grid companies to class action lawsuits.
Arnold Tesh, CRE, FRICS, is a senior vice president with FTI Consulting Inc. in Washington, D.C. Deborah Haskell, CRE, FRICS, MAI, is a managing director with FTI Consulting.
One of the trickiest issues confronting the electric transmission industry today is the controversy over who owns the transmission corridors that traverse the United States. Property owners are banding together and filing class-action lawsuits against utility companies they perceive as having usurped property rights without compensation.
This controversy arises from changes in technology, and the debate is being driven by certain misconceptions about the laws and policies affecting utility rights of way.
Utility companies supply electricity to residential, commercial and industrial customers throughout North America using transmission corridors that connect with vast distribution networks. The companies assembled these corridors years ago by negotiating easement agreements with millions of property owners that, in effect, granted them the right to conduct business on the owner’s property. To be more precise, these agreements were designed to entitle the electric company to transmit over, under, or through someone else’s fee ownership. Once the corridors were assembled, utilities incurred substantial costs to construct electrical lines and other necessary equipment and structures on the easements to enable them to transmit electric current from the points of generation to locations for distribution.
In addition to the transmission of electricity, the easements granted the companies the right to utilize the lines for internal communication. As technologies advanced, the utility companies replaced the original lines with fiber-optic cable that has a much higher capacity for transmission. As a result, the utility companies began to use the fiber for external communications or sold the excess capacity to third-party users such as telecommunication companies. This recent expansion of easement rights has become an increasingly controversial issue.
Transmission companies now face costly and time consuming litigation that could have severe economic impacts for both the companies and the consumers they serve. What is it that the utility companies failed to foresee when they acquired the easement agreements for transmission rights of way? The answer is technological advances and the development of fiber- optic communications.
Because the quantum leaps in communications technology were unimaginable when the original easement agreements were negotiated, utility companies never anticipated the capabilities that are available today. However, the same progress that has benefited consumers also has created a financial opportunity for industrious class-action attorneys, litigation experts, and those who granted the easements or their successors.
Misconceptions about the ownership of corridor rights represent a protracted nuisance and financial threat to the electric transmission industry. But easement holders are well positioned to defend themselves in lawsuits demanding compensation for using transmission corridors for communications networks.
Orzo and Spaghetti
The basis of the complaints by the property owners derives from their belief that commercial fiber optics go beyond the rights granted by them or their predecessors to the utility companies in the original easement agreements. By and large, the terms found in these easements significantly encumber the underlying fee interests, rendering them of little productive use to the grantors. Most of these easements allow the grantor such things as grazing rights, but deny them any construction or permanent occupation of the surface, subsurface, or air within the demised easement. That being said, the grantors retained the right to say “no” to any use of the transferred property that is not incorporated into the easement agreement. It is this denial of their right to reject additional uses that could entitle plaintiffs in these cases to damages.
In the spirit of the U.S. system of justice, the harm is measured monetarily. What clouds the damage calculation is the misconception that the plaintiffs own a corridor, or a continuous stretch of property that enables one to connect critical end-points without interruption. This is quite different from what the plaintiffs actually own, which is an individual parcel that is encumbered by a transmission easement owned by the utility company. Moreover, this easement is one of thousands of contiguous easements that the utility company owns and that, coincidentally, comprise the corridor.
Simply put, who owns the orzo and who owns the spaghetti?
To illustrate this point, consider an assembled right-of-way under common ownership or control that connects Chicago and St. Louis or New York and Boston for transportation, communication, or energy purposes. Obviously, these rights-of-way, or corridors, are worth a lot more than the sum of unconnectedly owned or controlled properties between those or other major markets. Parties to these law suits should answer the following:
• Do plaintiffs have corridors?
• Does the fiber burden plaintiffs’ abutting properties?
• Are the plaintiffs damaged?|
• Has any unauthorized use of the easements unjustly enriched the defendant?
• What factors are there to consider in the measurement of individual plaintiffs’ damages?
Arguably, only the utility company that owns the transmission easement has a corridor. Individual property owners do not. Moreover, in addition to the rights-of-way, the utility company has towers, maintenance crews, specialized vehicles, and other assets essential to enable the suspension of fiber optic cable as well as maintaining and supporting its operation.
A corridor is defined as a contiguous stretch of real property—under common ownership or control—that connects strategic endpoints for a desired purpose. Highways, railroads, transmission lines, and pipelines all are examples of the types of uses that require an ability to move something from one point to another without interruption.
Because corridors are not always readily available, they often exhibit premium value. The availability of a stretch of real property, under common ownership or control, can offer a corridor user special utility without the necessary delay and expense of assembling a new corridor. This availability of assembled corridor property under the control of a single entity can be significantly more valuable than the sum of the non-assembled abutter properties adjacent to it. Furthermore, property recognized as a corridor, either due to ownership or control, is usually valued at some single consolidated unit of measure such as price per square foot or price per acre. This is because it can be marketed as a single entity.
In virtually all cases, plaintiffs’ lands are not consolidated into a single marketable property. Each plaintiff has a limited interest in the transmission right of way by virtue of the portion of the easement that encumbers the individual parcel. However, the plaintiffs do not own or control a property or property rights that enable transmission between critical end points. Nor do they share in the ownership of a corridor with a common unit value, but only own the fee interest in land that is encumbered by a transmission easement. Each plaintiff owns a distinct parcel with its own highest and best use and its own unit value. This interest does not constitute a corridor or assembled interest.
From a practical standpoint, if some event triggered the termination of electrical transmission and the utility company’s rights in the easement reverted back to the owner, the nature of the property would change. It would no longer be an assembled corridor, but would be a series of thousands of remnant parcels belonging to the plaintiffs. Most of this land would become additional unencumbered acreage available for use by the property owners. However, because of the size and configuration, the acreage generally would add marginal value to the entire property.
Finally, being next to an assembled corridor does not make each plaintiff’s holding a part of the corridor. Real estate is always next to something. The presence of the transmission corridor, assembled and maintained at great expense, makes it possible for electricity to be transmitted between points. The assemblage of the corridor easements, and not the existence of the adjacent land, makes this possible.
Metaphorically speaking, the individual easements over the plaintiffs’ properties are like grains of rice or orzo. The assembled easements owned by the utility companies produce an interest akin to a strand of spaghetti. The corridor accommodates long strands of transmission wires that allow a commercial electric enterprise. Conversely, the plaintiffs’ properties are like grains of rice or orzo, disconnected with little or no potential for a unified use.
In the remote event that the transmission easements revert to the thousands of abutting plaintiffs, it’s unlikely those same plaintiffs ever would be able to assemble a corridor. First, the continuity of the corridor would be interrupted by major ownerships, such as government entities, railroads, corporations and utility companies. It’s hard to believe these groups ever would agree to share property rights with individuals or participate in the long and costly process of assembling a corridor. There are other discontinuities including, but not limited to, streets, parks, schools and other non-private uses outside a plaintiffs’ control.
No Additional Burden
Static wire accommodating fiber-optic transmission produces no additional burden on plaintiffs’ property interests. The plaintiffs do not suffer from any encumbrance placed upon them beyond what they agreed to pursuant to the original easement.
The substitution of a ground wire with fiber and the subsequent transmission of optical communications over the substituted wire is neither noisy nor unsightly. It does not impede plaintiffs’ access to their properties, impair the properties’ visibility, or cause any drainage problems. It does not increase taxes or maintenance costs. Its presence and use does not alter, impair, or diminish the value of abutting plaintiff properties adjacent to the easements. Notably, the presence of the new static or ground wire with fiber optics does not reduce each plaintiff’s reversionary interest in the property they own. The transmission company must continue to use the easement for electric transmission purposes or lose its easement.
Assuming the transmission company did violate plaintiffs’ rights by depriving them of the opportunity to say “no” to uses that go beyond those granted in the original easements, then the appropriate remedy may be monetary damages. If plaintiffs contend unjust enrichment and it is determined that the appropriate remedy is to disgorge the defendant of any profit it may have achieved through the alleged unauthorized use of an easement, then profitability must be the basis for any assertion of damages.
The fiber-optics communication industry has been faced with tremendous competitive pressures. Meanwhile, capital outlay requirements are substantial and challenge the current and future profitability of a large segment of the industry. More than fifty percent of the fiber in this country remains dark and unused, and the utility industry rarely generates any profit or cash flow from it. For those utility companies that took an equity or earn-out interest in fiber ventures, the results have ranged from unimpressive to disastrous. To the extent profits in the form of rents or license fees exceed the transmission company’s capital and operating costs, disgorgement is an option.
Weighing Potential Damage
The ultimate decision as to whether the plaintiffs have been damaged belongs to the courts. In cases where the plaintiff’s right to say “no” to the additional use of the ground wire is found to be violated, then technically the plaintiff has been damaged. The bigger question is what is the appropriate monetary compensation? A reasonable and probative methodology for assessing the potential damage includes a few critical concepts.
First, the value of a corridor is greater than the sum of its parts. If one mile of a corridor is worth $1,000, it does not follow that each and every tenth of a mile is worth $100. Conversely, it is necessary to look at each individual parcel that makes up the assembled corridor to determine its contributory value to the whole. There is no simple way to measure damages to each and every potential party to a claim without valuing each claimant’s property separately.
Plaintiffs often argue the corridor should be valued and then allocated to the individual plaintiffs. Of course, the fallacy is that the plaintiffs would have an allocated interest in a corridor value. As explained previously, the plaintiffs do not own the rights to a corridor. Thus, it would be unfair to award them damages for a portion of something that is legally owned by another party.
Since the plaintiffs’ properties are individual and not a unified corridor, they must be analyzed separately for damages. The properties differ from each other in terms of current use, highest and best use, size, shape, topography, access, soil conditions, market, and orientation to the rights-of-way. The number and scope of the differences between the properties abutting the easements are many and significant. To determine the incremental value of the additional use within the subject transmission easement, it’s necessary to consider that the property already is encumbered and that the fiber-optic line essentially is restricted to the aerial portion of the existing infrastructure. Also, sales of easements with more than one permitted use demonstrate there are generally no significant incremental costs to the grantee as long as the burden on the adjacent property doesn’t increase.
The methodology employed for determining the market value of the alleged damage involves valuing the right that the plaintiffs were denied. A good way to do that is to consider the differential in cost for a utility company to purchase an easement allowing it the rights to electrical and commercial fiber-optic communications on its own infrastructure. Research shows that where such rights have been negotiated, there tends to be almost no difference in cost for the additional fiber-optic right.
The current class-action lawsuits against utility companies are a direct result of conflicting perceptions regarding property rights. The plaintiffs in the litigation neither have the right nor the ability to enter into the fiber-optic communications business. Defendants can bring a series of arguments against such lawsuits. Namely:
• Utility companies are the sole owners of transmission corridors that traverse the individual plaintiff’s land. Communications occur through the easement, which is not to be confused with the adjacent properties belonging to the individual plaintiffs. The corridor is the assemblage of those individual easements owned by the electric transmission company.
• Each of the individual plaintiffs did not grant and could not grant the ability to transmit electricity or communications from one critical end point to another.
• It’s not reasonable to assume that any land owner adjacent to the transmission right of way has the ability to assemble its land with hundreds, thousands, or millions of other parcels, and collectively erect an infrastructure capable of transmitting communications.
• Adjacent land owners can’t reasonably claim the loss of an opportunity when they never had it in the first place.
• When a utility wishes to expand the approved uses within its easement, unless there are additional physical or economic burdens placed on the land owner, the costs are nominal.
Capitulating to the plaintiff’s corridor argument can be unjustly expensive. Treating each plaintiff’s property as a separate non-corridor holding dramatically, and most importantly appropriately, reduces damages.