DAN MORALES

ATTORSET GENERAL 

# QEVfice

ofttp ZlttornepQkneral &ate ofllfexae 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 ajoint 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 ajoint venture.between those two entities. You indicate that, onNovember 27, 1995,the City of San Antonio, acting through its wholly owned electric utility, the City Public Service Board (“the city”), entered into atwenty-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 oftelecommunications services to the public. The city and ICG will each pay 500/o ofthe cost ofconstruction; 2. The city will install the fiber optics and ICG will install the electronics necessary for the provision of telecommunications service. The network will bejointly 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 ofthe 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 asthe 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 anythird parties; 7. After the third year the agreement is in effect, ICG and the city wig divide revenues from the portion ofthe 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 networkjointly paid for bythe city and ICG; 8. Ifthe city provides excess fiber capacity to third parties presented by ICG inits capacity asthe 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 andwirhout 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 oftelecommunications 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 upto 1000 access lines free of charge and, in addition, telecommunications services at cost; 11. The agreement recognixes that, “but for the unique nature ofthe project contemplated by the agreement, ICG would be installing its own facilities and entering into a separate franchise agreement with the city”;

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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 onthe share ofusage byICG. 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) Aperson 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 offerfor sale to thepublic, either directly or indirect& through a telecommunicationsprovider, aservicefor whicha cer@cate isrequired orrmy non-switched telecommunications service to be used to provide connections between customers’premises within the exchange or betweena customer ‘

s premises andalong&stanceprovider serving theexchange.2 In our opinion, ifthe 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 atelecommunications provider, a service for which acertificate isrequired.“3 Specifically, the following provisions ofthe 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 ofthe 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 bythe city regardless ofICG’s degree ofparticipation inthe

‘S.B. 319, ActofMar. 23,1995,74th Le& RS., ch. 9.8 1,199s Tex. Se%% LawServ.31.7s. %.B. 2128. Act of May 16, 1995, 74th Leg., RS., ch. 231, g23, 1995 Tex. Sess. Law Serv. 2017,2032 (footnote andemphasis added). 3V.T.C.S. arl. 1446cXt 53.251(d).

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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 3.251 (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 areinthe business ofregulating these utilities. They own the rights-of-way. Franchise fees are paid to them. We don’t think it

. .fairfor 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 ofway 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 aright ofway - i.e., the dark fiber itself - wemust 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 isprohibited by section 3.251 ofthe Public Utility Regulatory Act of 1995,V.T.C.S. article 1446c-O.

DAN MORALES Attorney Genera) ofTexas

4Debate on H.B. 2128 on the FIoorofthe Senate, 74th Leg., RS. (May 12, 1995) (s~atcmcntof Senator Sibley) @anscript availablefromSenate StaffServices).

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JORGE VEGA Fii Assistant Attorney General SARAH J. SHIRLEY Chair, Opiion Committee Prepared byRick Gilpin Assistant Attorney General

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