FCC’s economic illiteracy on display in muni property preemption fight

29 December 2018 by Steve Blum
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Sometimes the real story is in the footnotes. That’s the case with a Federal Communications Commission denial of a request to delay enforcement of its September order that would, if upheld by federal courts, take away property rights from local governments. In the denial, the FCC tries to make its case with economic nonsense: that the market value of an asset is only determined only by its “actual and direct costs”.

The market value of anything is determined by the balance between its perceived worth to the buyer and the seller. In a competitive market, the perceived worth to the seller is based primarily on two factors: the cost to make one more of the item and the profit the seller needs to stay in business. The seller’s opinion of the value the buyer places on the item also plays a role.

The FCC’s argument focuses on a single sell-side factor, ignores everything else – including buy-side valuation – and conflates practical competition with a perfectly competitive market (a mythical beast much beloved by theoretical economists).

It’s the buy-side valuation, which is based on the buyer’s expectation of generating a return from ownership of the asset, that allows a seller to legitimately maximise profit in a normally competitive market.

In the September wireless order, the FCC said that any city or county-owned assets (e.g. light poles) that are located in the public right of way and useful to mobile broadband companies, don’t actually belong to local agencies. Instead, those assets are supposed to be made available on an open access basis, under the same cost-based terms that apply to, say, installation of a utility pole.

Over the past couple of years, Californian cities and the mobile industry – carriers and infrastructure companies – have been negotiating deals for bulk leases of street lights and other municipal assets. Some cities can command a higher price than others. In and around Silicon Valley, $1,500 per pole per year is a rate that’s often mutually agreeable. In other parts of the state, the figure can be more or, usually, less than that. The amount of revenue that a carrier expects to generate from the pole leases is a major factor.

Artificially lowering the price to $270 per year, as the FCC is attempting to do, amounts to a subsidy, extracted from a city and given to a private company that would otherwise be willing to pay more, based on its profitability expectations.

Contrary to what the FCC states, there is a competitive market for pole access. Mobile carriers can install utility poles in the public right of way, lease space on private property or share facilities with their competitors. Using existing light poles is not a requirement, it’s a cost saving measure. By negotiating a price with a city – which would not want to see more poles cluttering up the right of way or to lose out on revenue – the benefits are fairly split between the buyer and the seller.

Profit is dirty word in the public sector and euphemisms such as “surplus” or “deferred spending” are usually employed. But whatever you call it, it’s a completely legitimate – and sometimes legally required – goal for a city.