DAN MORALES 

ATTORSET GENERAL 

QEVfice of ttp Zlttornep Qkneral 

&ate of llfexae 

May 13,1996 

The Honorable David Sibley 

Chair 

Economic Development Committee 

Texas State Senate . 

P.O. Box 12068 

Austin,Texas 78711 

Dear Senator Sibley: 

Gpiion No. DM-39 1 

Re: Validity of an agreement between a 

municipality and a telecommunications 

services provider that in effect creates a joint 

venture between those two entities (RQ-886) 

You have requested our opinion regarding the validity of an agreement between a 

municipality and a telecommunications services provider that in &ect creates a joint 

venture. between those two entities. You indicate that, on November 27, 1995, the City of 

San Antonio, acting through its wholly owned electric utility, the City Public Service 

Board (“the city”), entered into a twenty-five year contract with ICG Access Services, Inc. 

(“ICG”), a provider of telecommunications services. The agreement provides, among 

other things: 

1. The city and ICG ’ will jointly construct and operate a 

telecommunications network, part of which will be used by the city 

for its internal requirements, and the balance of which will be used 

for the provision of telecommunications services to the public. The 

city and ICG will each pay 500/o of the cost of construction; 

2. The city will install the fiber optics and ICG will install the 

electronics necessary for the provision of telecommunications 

service. The network will be jointly operated by the city and ICG. 

The city will be responsible for the maintenance and repair of the 

fiber optics and ICG will responsible for the maintenance and repair 

of the equipment; 

3. The network will be largely located on city right-of-ivay. ICG 

will have access to secured city buildings and facilities, and may 

collocate its equipment at city substation sites; 

4. ICG will act as the city’s marketing representative with regard to 

any excess fiber capacity; 
The Honorable David Sibley - Page 2 (DM-391) 

5. ICG will not use the network to compete with the city, and the 

city will provide a list of potential business opportunities to ICG 

amlldy; 

6. The city and ICG will jointly share the costs of construction, 

divide the revenues received from the provision of telecommunications service, and share any revenues received from the lease of 

additionalexcess capacity to any third parties; 

7. After the third year the agreement is in effect, ICG and the city 

wig divide revenues from the portion of the network dedicated to the 

provision of telecommunications services to the public, specifically, 

to KG’s customers and “sublicensees,” except special access 

services. Through such revenue-sharing provisions, the city shares in 

the success of the venture in proportion to the revenues produced 

through sales by ICG to the public of telecommunications services 

provided over the network jointly paid for by the city and ICG; 

8. Ifthe city provides excess fiber capacity to third parties presented 

by ICG in its capacity as the city’s marketing representative, ICG will 

receive a “marketing fee” equal to oneAird of the gross revenues 

received by the city from any such arrangement. Furthermore, KG 

will receive the same marketing fee for any fiber provided by the city 

to third parties through its own efforts and wirhout activity by ICG, 

9. The city and ICG wig share legal expenses to defend against 

anticipated opposition to the agreement; 

10. The agreement confers on ICG the right to use the city’s rightsof-way for the provision of telecommunications services without the 

need of entering into a franchise agreement. In lieu of payment of 

fhnchise fees, KG agrees to pay the city 5% of its gross revenues 

derived from telecommunications services “tally provided” over the 

network. ICG also agrees to provide the city with up to 1000 access 

lines free of charge and, in addition, telecommunications services at 

cost; 

11. The agreement recognixes that, “but for the unique nature of the 

project contemplated by the agreement, ICG would be installing its 

own facilities and entering into a separate franchise agreement with 

the city”; 

p. 2143 
The Honorable David Sibley - Page 3 (DM-391) 

12. ICG has the right under the agreement to use designated 

portions of “primary” and “secondary” extensions to the network in 

return for payment of its share of the construction costs of such 

extensions and modifications, based on the share of usage by ICG. 

The 1995 regular session of the legislature amended section 3.251 of the Public 

Utility Regulatory Act of 1995,’ V.T.C.S. art. 1446c-0, by adding subsections (c) and (d): 

(c) A person may not provide local exchange telephone service, 

basic local telecommunications service, or switched access service 

without a certificate of convenience and necessity, a certificate of 

operating authority, or a service provider certificate of operating 

authority. 

(d) A municipality may not receive a certificate of convenience 

and necessity, certiticate of operating authority, or setvice provider 

certificate of operating authority under this Act. In addition, a 

municipality or municipal electric vstem may not offer for sale to 

the public, either directly or indirect& through a telecommunications provider, a service for which a cer@cate is required or rmy 

non-switched telecommunications service to be used to provide 

connections between customers’ premises within the exchange or 

between a customer ‘s premises and a long &stance provider serving 

the exchange.2 

In our opinion, if the agreement contains the provisions which you have set forth in your 

letter, it constitutes a degree of participation by the city in the provision of 

telecommunications services, and thus involves a “sale to the public . indirectly through 

a teleco mmunications provider, a service for which a certificate is required.“3 Specifically, 

the following provisions of the agreement, taken together, bring it within the prohibition 

of subsection (d) of section 3.251: the sharing of the costs of wnstruction; the joint 

operation of the network, the sharing of revenues derived from the provision of services 

and the lease of excess capacity to third parties; the award of a “marketing fee” to ICG 

from gross revenues received by the city regardless of ICG’s degree of participation in the 

‘S.B. 319, Act ofMar. 23,1995,74th Le& RS., ch. 9.8 1,199s Tex. Se%% Law Serv. 31.7s. 

%.B. 2128. Act of May 16, 1995, 74th Leg., RS., ch. 231, g 23, 1995 Tex. Sess. Law Serv. 

2017,2032 (footnote and emphasis added). 

3V.T.C.S. arl. 1446cXt 5 3.251(d). 

p. 2144 
The Honorable David Sibley - Page 4 (DM-391) 

marketing of services; the sharing of the costs of legal expenses necessary to defend the 

agreement; and ICG’s payment of five percent of its gross revenues to the city in lieu of 

6anchise fees. 

Furthermore, when introducing the amendment to section 3.25 1 (d) on the floor of 

the senate, you explained that the amendment would prohibit a city from entering the 

telecommunications business: 

Members, right now, cities are in the business of regulating these 

utilities. They own the rights-of-way. Franchise fees are paid to 

them. We don’t think it . . fair for them to be able to also enter into 

the business.4 

We thus believe the legislature intended to permit a municipality only to grant 

franchises to utilities that desire to provide telecommunications services and to provide 

rights of way to those utilities, and we construe section 3.251(d) accordingly. We do not 

believe that the legislature, in enacting section 3.251, intended to wuntenance a city’s 

participation to the extent that you have described here. Thus, in this situation, because 

the City of San Antonio proposes to permit ICG to bypass the normal franchise procedure 

and to provide ICG with something more than a right of way - i.e., the dark fiber itself - 

we must conclude that the proposed contract wntravenes section 3.251(d). 

SUMMARY 

Under the facts described, an agreement between the city of San 

Antonio and ICG Access Services, Inc., wnstitutes a degree of 

participation by the city in the offering of telecommunications 

services to the public that is prohibited by section 3.251 of the Public 

Utility Regulatory Act of 1995, V.T.C.S. article 1446c-O. 

DAN MORALES 

Attorney Genera) of Texas 

4Debate on H.B. 2128 on the FIoor of the Senate, 74th Leg., RS. (May 12, 1995) (s~atcmcnt of 

Senator Sibley) @anscript available from Senate Staff Services). 

p. 2145 
The Honorable David Sibley - Page 5 (DM-391) 

JORGE VEGA 

Fii Assistant Attorney General 

SARAH J. SHIRLEY 

Chair, Opiion Committee 

Prepared by Rick Gilpin 

Assistant Attorney General 

p. 2146