North Carolina Court Orders Electric Cooperative Pole Owner to Apply FCC Cable Formula

by Davis Wright Tremaine LLP
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On May 22, 2014, the General Court of Justice of Rutherford County, North Carolina issued an important Order and Opinion interpreting a state statute governing the maximum lawful pole attachment rates that North Carolina electric membership corporations (i.e., cooperatives) may charge and ultimately rejecting a cooperative’s proposed pole attachment rates, which ranged from $15.50 to $19.65 per pole — an increase of 300% over the rates that had been in place in prior years. The Order in this case of first impression before the North Carolina courts was a strong affirmation of the formula used to derive cable television pole attachment rates that has been implemented by the Federal Communications Commission (“FCC”) (“the FCC Cable Rate Formula”), which in this case produced rates in the range of $3.00 to $4.00 per pole, and stands as a resounding victory for cable operators and other third party attachers. The Order should provide solid precedent for future disputes between attachers and any of the 25 other cooperative pole owners in North Carolina.

Background

While cooperatives are exempt from pole attachment rate regulation by the FCC, some states have adopted statutes regulating cooperatives’ maximum permissible pole rents. In 2009, the North Carolina legislature adopted N.C. Gen. Stat. § 62-350 (“the Statute”), which requires North Carolina cooperatives to allow communication service providers to attach to their poles at “just, reasonable, and non-discriminatory rates.” The Statute also directs North Carolina’s Business Courts to resolve disputes where the parties are unable to agree on a pole attachment rate.

Pursuant to the Statute, in March 2013, Rutherford Electric Membership Corporation (“REMC”) filed a complaint against Time Warner Cable (“TWC”) to have its rates terms and conditions declared lawful. TWC counter-claimed in April 2013, alleging that REMC’s pole attachment rates and certain of REMC’s terms and conditions were unjust and unreasonable in violation of the Statute, and that instead pole rates should be determined by use of the FCC Cable Rate Formula. After various pre-trial motions, the court held a four-day bench trial in September 2013, heard testimony from fact and expert witnesses for both REMC and TWC, and issued its 30-page Order last week finding in favor of TWC.

Highlights of the Order

After careful examination of the FCC Cable Rate Formula, which is referenced in the Statute and was proposed by TWC, as well as three other formulas proposed by REMC (discussed below), the court held that “the FCC Cable Rate formula offered the most credible basis for measuring the reasonableness of [REMC’s] rates.” Order at ¶ 91.  The court reasoned that “[t]he evidence presented in this case demonstrated that the FCC Cable Rate formula’s allocation method, used to determine what percentage of the fully allocated costs to assign to the attaching party, provides an economically justified means of reasonably allocating costs.” Order at ¶ 54. Moreover, the court rejected REMC’s assertion that the FCC Cable Rate Formula provides a subsidy to third-party attachers, finding that: 

[F]ar from providing any subsidy to communications providers, the FCC Cable Rate formula actually leaves the utility and its customers better off than they would be if no attachments were made to their poles. The cable operator pays… its share of the fully allocated costs of pole ownership that necessarily would exist even absent its attachment.  Order at ¶ 55. 

The court also rejected three alternative rate formulas proposed by REMC, including a formula devised by the National Rural Electric Cooperative Association (“NRECA”), referred to as the “Telecom Plus” formula. In rejecting the Telecom Plus formula, the Court noted that is “has not been adopted by any court or administrative agency as a means of establishing a maximum just and reasonable rate,” and concluded that the space allocation method set forth in the Telecom Plus formula allocated far too much space and cost to TWC’s attachments. Order at ¶¶ 67-73. The court also rejected two unique rate formulas devised by REMC’s experts, including one based on the NRECA Telecom Plus approach with additional operating costs and investments (e.g., anchors, guys, grounds and lighting arrestors) added to the usual costs and investments associated with poles (Order at ¶¶ 74-75) and one that assigned the entire 40-inch safety space to third party attachers, finding the evidence did not support the underlying assumptions that REMC does not use any part of the safety space itself and builds taller poles solely to accommodate communications attachments. Order at ¶¶ 78-80 and 82-83. 

In addition to its favorable rate analysis, the court held that (i) REMC wrongly interpreted the word “nondiscriminatory” in the Statute to mean that rates are deemed reasonable because other third-party attachers in the same class as TWC paid REMC’s rates under protest (Order at ¶ 91); and (ii) REMC’s imposition of unilateral rate increases for the years in dispute violated its statutory duty to negotiate with TWC. Order at ¶ 92. 

Ultimately, the court found REMC’s pole attachment rates, which ranged from $15.50 to $19.65 from 2010 through 2013, were unjust and unreasonable. The court ordered REMC’s pole attachment rates to be computed in accordance with the FCC Cable Rate Formula (which yields rates in the range of $3.00 – $4.00) and that REMC reimburse TWC for overpayments it made from 2010 to 2013. 

We will keep you apprised of any further developments in this important case.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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