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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of ) ) ) The Petition of the State of Minnesota ) for a Declaratory Ruling Regarding the ) Effect of Section 253 on an Agreement ) CC Docket No. 98-1 to Install Fiber Optic Wholesale ) Transport Capacity in State Freeway ) Rights-of-Way ) ) ) MEMORANDUM OPINION AND ORDER Adopted: December 20, 1999 Released: December 23, 1999 By the Commission: TABLE OF CONTENTS Paragraph I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . 1 A. Summary . . . . . . . . . . . . . . . . . . . . . . . 1 B. Background. . . . . . . . . . . . . . . . . . . . . . 5 1. Agreement Between Minnesota and Developer. . . . 5 2. The Telecommunications Act of 1996 . . . . . . . 8 II. DISCUSSION. . . . . . . . . . . . . . . . . . . . . . . 11 A. Overview. . . . . . . . . . . . . . . . . . . . . . 11 B. Applicability/Scope of Section 253(a) . . . . . . . 12 1. The Agreement Falls Within the Scope of Section 253 13 2. The Agreement Creates a Legal Requirement. . . 16 C. Section 253(a) Analysis . . . . . . . . . . . . . . 20 1. Precedent from the Texas Preemption Order. . . 21 2. Alternative Rights-of-Way. . . . . . . . . . . 23 a. Gas, Electric, and Oil Pipeline Utility Rights-of-Way 24 b. Railroad Rights-of-Way. . . . . . . . . . 25 c. State Trunk Highway Rights-of-Way . . . . 26 d. Cost Studies. . . . . . . . . . . . . . . 30 3. Existing Fiber Capacity and the Ability to Expand It 37 4. Making the Agreement "Functionally Non-Exclusive" 39 a. Installation of Third Party Fiber . . . . 41 b. Availability of Network Capacity for Purchase or Resale 42 c. Availability of Conduit . . . . . . . . . 44 d. Nondiscrimination . . . . . . . . . . . . 46 D. Section 253(b) Analysis . . . . . . . . . . . . . . 50 1. Competitive Neutrality of the Agreement. . . . 51 2. Necessity of the Agreement . . . . . . . . . . 54 a. Public Safety . . . . . . . . . . . . . . 55 b. Universal Service . . . . . . . . . . . . 58 E. Section 253(c) Analysis . . . . . . . . . . . . . . 59 III. PETITIONS FOR PREEMPTION . . . . . . . . . . . . . . . 64 IV. ORDERING CLAUSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 I. INTRODUCTION A. Summary 1. In this Order, the Commission declines to grant a Petition for Declaratory Ruling (Petition) filed on January 5, 1998, by the State of Minnesota (State or Minnesota). Minnesota asks the Commission to find that its Agreement with ICS/UCN LLC (Developer) and Stone & Webster Engineering Corporation concerning access to certain rights-of-way is consistent with section 253 of the Telecommunications Act. The Agreement provides the Developer with exclusive physical access, for at least ten years, to longitudinal rights-of-way along Minnesota's interstate freeway system. In exchange for exclusive physical access to these rights-of-way, the Developer commits to construct 1,900 miles of fiber optic transport capacity throughout the State and to provide the State with a portion of that capacity. Minnesota plans to use these facilities to implement an intelligent transportation system and carry state government communications. 2. On January 9, 1998, the Commission issued a Public Notice seeking comment on the Petition. More than twenty states and/or state agencies submitted letters generally supporting Minnesota. The seventeen carriers that submitted comments unanimously opposed the Petition and asked the Commission to preempt the Agreement. 3. Based on the current record, we cannot endorse this Agreement as requested by Minnesota. Minnesota fails to demonstrate that the Agreement neither prohibits nor has the effect of prohibiting the provision of competitive telecommunications services by certain entities. To the contrary, the Agreement appears to have the potential to adversely affect the provision of telecommunications services by facilities-based providers, in violation of the provisions of section 253(a). As a result, the Agreement is a matter of great concern to the Commission. Indeed, the State's action, effectively granting an exclusive license to Developer, appears fundamentally inconsistent with the primary goal of the Telecommunications Act of 1996, to replace exclusivity with competition. 4. On the other hand, depending on how the Agreement is implemented, the potential competitive effects that fuel our concerns may be largely or wholly ameliorated. As discussed below, our primary concern is that the Agreement may effectively preclude carriers from providing telecommunications services by deploying their own facilities. This concern may be mitigated depending on how the Developer implements provisions in the Agreement that it make excess capacity available for lease or purchase at nondiscriminatory rates. Although we do not grant requests to preempt at this time, we will closely examine any future petitions if the Agreement is implemented in an anti-competitive manner. B. Background 1. Agreement Between Minnesota and Developer 5. In February of 1996, MnDOT issued a request for proposals for the development of telecommunications transmission capacity along State freeway rights-of-way, in exchange for exclusive physical access to such rights-of-way. In doing so, Minnesota stated that it sought to further four public policy goals: (1) development of an intelligent transportation system (ITS) using transmission capacity obtained through the Agreement; (2) extension of a fiber optic network to rural areas of the state; (3) reduction of "telecommunications costs to State government by exchanging rights-of-way access for transmission capacity;" and (4) creation of increased competition by adding another fiber optic telecommunications network in Minnesota. Minnesota decided to award one entity exclusive physical access to the freeway rights-of-way because of traffic safety concerns. This approach differed from the permit process used for access to the rights-of-way along the state trunk highways. 6. Minnesota selected Developer and entered into an Agreement granting Developer exclusive physical access to the freeway rights-of-way. As part of the Agreement, Developer plans to install fiber optic rings in three regions of Minnesota. The rings require approximately 1900 sheath miles of fiber, approximately 1000 of which will be placed on freeway rights-of-way where Developer will have exclusive physical access. Developer plans to operate its network as a carrier's carrier, providing wholesale transport capacity. The Agreement prevents the Developer from offering "telecommunications services directly or indirectly to the public," although an affiliate of the Developer may do so using Developer's network. The Agreement requires Developer to charge its affiliate "the same rates and charges as it does for similarly situated, unaffiliated, non-interested customers and users of the Network or similarly situated, unaffiliated, non-interested Collocating Customers." 7. The Agreement also requires the Developer to "collocate," i.e., install, fiber owned by third parties at the same time Developer installs its own fiber. Once Developer installs its fiber, however, the trench where the fiber was placed will remain closed for a minimum of ten years. Developer also must maintain the third party fiber it installs. In addition, Minnesota points out that Developer must make both dark and lit fiber available for lease or purchase on a nondiscriminatory basis. 2. The Telecommunications Act of 1996 8. The Telecommunications Act of 1996, as the Supreme Court recently noted, is "an unusually important legislative enactment" that has changed the landscape of telecommunications regulation. Through this comprehensive amendment to the Communications Act of 1934, Congress sought to establish "a pro-competitive, de-regulatory national policy framework designed to accelerate rapidly private sector deployment of advanced telecommunications and information technologies and services to all Americans by opening all telecommunications markets to competition." Congress rejected the historic paradigm of telecommunications services provided by government-sanctioned, heavily- regulated monopolies in favor of a new paradigm that encourages the entry, through various means, of efficient competing service providers into all telecommunications markets. 9. Among other things, the Telecommunications Act of 1996 amended the Communications Act by adding section 253, which is designed to ensure that state and/or local authorities cannot frustrate the 1996 Act's explicit goal of opening all markets to competition. Section 253 specifically authorizes the Commission to preempt state or local requirements that are contrary to section 253(a) unless they come within certain exceptions. 10. Section 253(a) provides that: No State or local statute or regulation, or other State or local legal requirement, may prohibit or have the effect of prohibiting the ability of any entity to provide any interstate or intrastate telecommunications service. Section 253(b) creates an exception to section 253(a), providing that: Nothing in this section shall affect the ability of a State to impose, on a competitively neutral basis and consistent with section 254, requirements necessary to . . . protect the public safety and welfare . . . . Section 253(c) also preserves state authority, stating that: Nothing in this section affects the authority of a State or local government to manage the public rights-of-way or to require fair and reasonable compensation from telecommunications providers, on a competitively neutral and nondiscriminatory basis, for use of public rights-of-way on a nondiscriminatory basis, if the compensation required is publicly disclosed. Section 253(d) directs the Commission to preempt the enforcement of state or local requirements that are contrary to sections 253(a) or 253(b) "to the extent necessary to correct such violation or inconsistency." II. DISCUSSION A. Overview 11. To determine whether the Agreement violates section 253 of the Act, we must first consider whether the Agreement is subject to section 253. If we find that the Agreement falls within the scope of section 253, we must determine whether the Agreement may prohibit or have the effect of prohibiting the ability of any entity to provide any telecommunications service. If the Agreement has that effect, the Commission must preempt it unless the Agreement comes within the terms of the exceptions Congress carved out in sections 253(b) and (c). Since Minnesota filed the Petition at issue, it has the burden of demonstrating that the Agreement will not contravene section 253(a), or, if it does, that the requirement falls within one of the exceptions in sections 253(b) and (c). B. Applicability/Scope of Section 253(a) 12. Despite Minnesota's argument to the contrary, we conclude that the Agreement falls within the scope of section 253(a), regardless of whether the Developer is providing a telecommunications service. We cannot agree with the assertion by the Intelligent Transportation Society of America (ITS America) that the Agreement fails to qualify as a state or local legal requirement subject to section 253(a) of the Act. 1. The Agreement Falls Within the Scope of Section 253 13. We cannot accept Minnesota's claim that the Agreement is not subject to section 253(a). Minnesota argues, based on the Commission's decision in the New England Preemption Order, that in order to fall within the scope of section 253(a), the Commission must make a threshold determination that the requirement at issue restricts the provision of a telecommunications service. The state claims that the Agreement does not have such an effect because (1) the Developer is an infrastructure provider, not a provider of telecommunications services, and (2) the Agreement prohibits the Developer from providing telecommunications services directly to the public. 14. Minnesota's focus on the purpose of the Agreement, and on what the Developer will provide, is misplaced. It is the Agreement's effect on the provision of telecommunications service that is critical, not whether the Agreement could be characterized as dealing with infrastructure development. Parties opposed to the Agreement argue that, by restricting who may deploy telecommunications infrastructure along freeway rights-of-way, the Agreement will have the effect of prohibiting certain entities from providing telecommunications services. As described below, we conclude that the Agreement may have such an effect. 15. Our conclusion here is fully consistent with the New England Preemption Order. In that order the Commission found that the provision of payphones was a telecommunications service, and that the city's restrictions prohibited a class of carriers from providing this telecommunications service contrary to section 253(a). Whether the state or local requirement affected the provision of telecommunications services was the important issue, not the purported subject matter of the restriction. We use the same analysis here -- whether the requirement has the effect of prohibiting the provision of any telecommunications service. 2. The Agreement Creates a Legal Requirement 16. Similarly, we cannot agree with ITS America's argument that the Agreement does not create a legal requirement to which section 253(a) could apply. As we understand ITS America's filing, ITS America asserts that section 253(a) would not be violated if Minnesota acquired fiber optic capacity for its own purposes. Because Minnesota could contract for fiber capacity for itself, ITS America argues that Minnesota also has the authority to contract out the management of its rights-of-way to a single entity on an exclusive basis. Therefore, ITS America argues that section 253 limits the Commission to reviewing Minnesota's procurement laws. ITS America contends that the Commission does not have the authority to "review contractual arrangements entered into between the State and private parties pursuant to the lawful exercise of its unchallenged procurement laws and procedures under section 253." Thus, according to ITS America the "only 'statute, regulation or other legal requirement' that could be subject to section 253 scrutiny, would be the state's procurement laws or a state law that permits the state or municipality to offer telecommunications services in competition with commercial telecommunications service providers." In other words, ITS America appears to be arguing that the Agreement itself does not create a legal requirement subject to section 253(a). 17. We are not persuaded by ITS America's arguments. We conclude that the Agreement does rise to the level of a "statute, regulation, or legal requirement," and that section 253(a) applies to the Agreement itself, not just the State's procurement laws. Although the Agreement is not a statute or regulation, it grants Developer exclusive physical access to certain freeway rights-of-way. Awarding Developer exclusive physical access to these rights-of-way as part of a contract legally binds the State to deny other entities permits for access to these freeway rights-of-way. Therefore, the Agreement between the Developer and the State creates a "legal requirement" that prevents the State from granting potential competitors access to these freeway rights-of-way. In light of this, we see no reason why application of section 253(a) would be limited to Minnesota's procurement statutes as opposed to the Agreement. 18. We conclude that Congress intended that the phrase, "State or local statute or regulation, or other State or local legal requirement" in section 253(a) be interpreted broadly. The fact that Congress included the term "other legal requirements" within the scope of section 253(a) recognizes that State and local barriers to entry could come from sources other than statutes and regulations. The use of this language also indicates that section 253(a) was meant to capture a broad range of state and local actions that prohibit or have the effect of prohibiting entities from providing telecommunications services. We believe that interpreting the term "legal requirement" broadly, best fulfills Congress' desire to ensure that states and localities do not thwart the development of competition. Our conclusion, that Congress intended this language to be interpreted broadly, is reinforced by the scope of section 253(d). Section 253(d) directs the Commission to preempt any statute, regulation, or legal requirement permitted or imposed by a state or local government if it contravenes sections 253(a) or (b). A more restrictive interpretation of the term "other legal requirements" easily could permit state and local restrictions on competition to escape preemption based solely on the way in which action was structured. We do not believe that Congress intended this result. 19. As discussed above, we will look at the effect of the state or local government's action to determine whether section 253 is applicable. In this case, Minnesota is not merely acquiring fiber optic capacity for its own use; it is providing a private party with exclusive physical access to the freeway rights-of-way. The fact that Developer can use its facilities along these rights-of-way to provide wholesale telecommunications capacity to others and retail telecommunications service through an affiliate, has the potential to adversely affect competitors that do not have similar access. This situation is very different from a traditional government procurement of telecommunications facilities or services. C. Section 253(a) Analysis 20. Minnesota fails to show that the Agreement does not have the potential to violate section 253(a). In particular, we are concerned that the Agreement has the potential to deprive competitors of the ability to compete on a facilities basis. As the Commission concluded in the Texas Preemption Order, such a restriction would violate section 253(a). 1. Precedent from the Texas Preemption Order 21. In the Texas Preemption Order, the Commission preempted state-imposed build- out requirements on two separate grounds. First, the Commission concluded that section 253(a) bars state or local requirements that restrict the means or facilities through which a party is able to provide service. In particular, the Commission found that new entrants must be able to choose whether to resell incumbent local exchange carrier (LEC) services, obtain incumbent LEC unbundled network elements, utilize their own facilities, or employ any combination of these three options. The Commission reached this conclusion by reading section 253(a) and the statutory definition of "telecommunications service" together. When considered together, these sections provide that no state or local requirement may prohibit or have the effect of prohibiting any entity from providing any offering of telecommunications directly to the public for a fee regardless of the facilities used. By requiring competing carriers to provide service by building their own facilities, the Texas law precluded the other forms of entry contemplated by the Act. The Commission found that other provisions of the Act supported this interpretation of section 253(a). As a second, independent basis for the decision, the Commission found that enforcement of the build-out requirements would have the effect of prohibiting certain carriers from providing any telecommunications service contrary to section 253(a) because "the substantial financial investment" required to meet the build-out requirement effectively precluded any entry at all. 22. As discussed below, our concern that the Agreement may have the effect of prohibiting facilities-based entry is premised on evidence in the record that utilizing rights-of-way other than the freeway rights-of-way to install telecommunications infrastructure is substantially more expensive than using the freeway rights-of-way. The evidence in the present record precludes us from concluding that the Agreement will not have the effect of prohibiting facilities- based competition because of the availability of alternative rights-of-way, the existence of excess fiber optic capacity, or access to Developer's capacity. We are very concerned that giving Developer exclusive physical access to rights-of-way that are inherently less costly to use has the potential to prevent facilities-based entry by certain other carriers that cannot use these rights-of- way. This would be inconsistent with section 253(a) and the Commission's decision in the Texas Preemption Order. On the other hand, the Agreement could be implemented in a manner that does not contravene section 253(a), as indicated elsewhere. 2. Alternative Rights-of-Way 23. Minnesota fails to convince us that the existence of alternative rights-of-way means that the Agreement does not have the potential to prevent certain carriers from providing facilities-based services. Minnesota argues that, although the Agreement precludes competitors from having physical access to freeway rights-of-way, carriers wishing to provide telecommunications services can construct their own fiber optic facilities using alternative rights- of-way. Parties opposing grant of the Petition claim that "there are distinct cost advantages of constructing a telecommunications network over freeway rights-of-way in Minnesota, as opposed to using other rights-of-way that are purportedly available to competitors." These commenters claim that this cost differential is substantial enough to make it infeasible for a competitor to use alternative rights-of-way to provide facilities-based services in competition with the Developer or entities using Developer's services. Evidence on the record indicates that the cost of using the alternative rights-of-way is not competitive with using of the freeway rights-of-way, to serve communities along the freeway's route. a. Gas, Electric, and Oil Pipeline Utility Rights-of-Way 24. The record does not support Minnesota's contention that utility rights-of-way offer suitable alternatives to use of the freeway rights-of-way. Minnesota claims that there are many sources of alternative rights-of-way within the state, including utilities, such as gas pipelines, oil pipelines, and electric power lines. Opponents claim that these utility rights-of-way do not provide a practical alternative to freeway rights-of-way, because: (1) other than electric utilities, they are under no legal requirement to allow telecommunications providers access to their rights- of-way; (2) utilities are potential competitors who may not want to share their rights-of-way with other telecommunications providers; (3) many pipeline companies and electric utilities lack perfected easements that would allow telecommunications uses of the property; (4) pipeline companies and electric utilities seek to minimize the risk of accidents by locating their facilities away from population centers, and, as a result, are not always the most direct route between population centers; and, (5) pipeline companies and electric utilities may also deny access to their rights-of-way for safety reasons or lack of space. Minnesota has not refuted these claims by its opponents. Therefore, we cannot find that Minnesota has demonstrated that this set of rights-of-way provides a viable, competitive alternative to the freeway rights-of-way. b. Railroad Rights-of-Way 25. There is also conflicting evidence concerning Minnesota's claim that railroad rights-of-way provide a practical alternative for facilities-based competitors. The MTA asserts that the railroads charge high fees for access to their rights-of-way. The MTA also states that railroad crews must be assigned to insure the safety of workers installing fiber optic cable. In addition, it asserts that installation of fiber optic facilities takes longer because work must be stopped when trains pass through construction areas. The MTA estimates that the cost of using railroad rights-of-ways is twice that of using the freeway rights-of-way. Minnesota counters these arguments by stating that MCI and Sprint have installed fiber in railroad rights-of-way in Minnesota and that Qwest plans to install fiber throughout the nation on railroad rights-of-way. Prior commercial use of railroad rights-of-way does not demonstrate that granting exclusive physical access to freeway rights-of-way will not have the effect of making future fiber optic construction on railroad rights-of-way economically unattractive in Minnesota. Indeed, it appears that some entities used the railroad rights-of-ways because the freeway rights-of-way were not available and it was easier to negotiate the necessary access. We conclude that Minnesota has not refuted opponents' claims that using railroad rights-of-way would be substantially more expensive than using the freeway rights-of-way to install fiber. c. State Trunk Highway Rights-of-Way 26. Based on the current record, we cannot agree with Minnesota that rights-of-way on state trunk highways provide a reasonable, competitive, alternative to the use of freeway rights-of-way for the installation of fiber optic facilities. To the contrary, the record demonstrates that freeway rights-of-way have inherent advantages over state trunk highway rights-of-way. Parties challenging the Agreement point to three factors that make it more efficient and less expensive to use the freeway rights-of-way: (1) it is less expensive and less time consuming to negotiate and obtain permission to use freeway rights-of-way; (2) freeways connect major population centers more directly than alternative rights-of-way; and, (3) it is less expensive to install fiber on freeway rights-of-way because there are fewer obstacles such as cross streets, and no other utilities in the right-of-way, for example. Each of these differences is discussed below. 27. It appears that it would be more costly and time-consuming to obtain permission to use state trunk highway rights-of-way than to obtain permission to use the freeway rights-of- way. A carrier wishing to use the state trunk highway system would need to negotiate and obtain permits from MnDOT and all of the municipalities through which the state trunk highway passes in order to install fiber in these rights-of-way. An entity using the freeway rights-of-way would only need to obtain MnDOT's approval. In this regard, we note that at least two requests for preemption filed with the Commission have involved refusals by local officials to grant franchises or rights-of-way permits required for local exchange competition. 28. It also appears, based on the present record, that it is more expensive to use the state trunk highway rights-of-way rather than the freeway rights-of-way because the distance between major population centers measured along state trunk highways is greater than the distance between the same points measured along the freeways. According to the MTA, the distance over the trunk highway routes is approximately 10 percent greater than the distance over the freeway routes. As a result, even if the price of installing fiber on both types of rights-of- way is the same per mile -- which, as discussed below, does not appear to be the case -- the cost of using state trunk highway rights-of-way would be greater because the routing of the state trunk highway is less direct than the routing of the freeways. 29. It also appears to be more expensive to install fiber optic transmission facilities along the state trunk highway system than it is to use freeway rights-of-way. Opponents of the Agreement note that freeways are controlled-access roadways with relatively little interference from cross-streets and other obstacles, such as sewer lines, electric lines, gas pipes, or other objects buried in the rights-of-way. Because there are fewer obstacles, using the freeway rights- of-way will require less engineering and planning than use of the state trunk highway rights-of- way. d. Cost Studies 30. Both Minnesota and the MTA submit cost studies to support their respective positions on the cost differential between using freeway rather than state trunk highway rights-of- way. Based on the evidence in the record, we are unable to determine whether the cost difference would prevent the provision of telecommunications services by certain entities. 31. At the outset, we cannot accept Minnesota's assertion that cost comparisons must reflect Developer's state-wide transmission network, including installation costs for both rural and urban areas. In determining whether the Agreement could have the effect of prohibiting "any entity" from providing telecommunications service, we conclude that it is appropriate to consider point-to-point cost comparisons since a competitor may wish to use the freeway rights-of-way for particular point-to-point connections. For example, a local exchange carrier may wish to use the freeway rights-of-way to connect its existing switch to facilities in another exchange in order to provide competitive local exchange service. Other carriers may only be interested in providing facilities-based services to specific areas. For such carriers, the relevant consideration in determining whether they can compete effectively in providing such service is a point-to-point comparison. Therefore, in conducting this analysis, we will compare the cost of installing capacity between specific points utilizing freeway rights-of-way versus using state trunk highway rights-of-way between the same points, and not Developer's cost of installing a fiber network in Minnesota. 32. Minnesota fails to convince us that the cost differential between using the state trunk highway rights-of-way and the freeway rights-of-way for the installation of fiber optic facilities will be insubstantial when considered in the context of the competitive telecommunications industry, and thus unlikely to adversely affect entry decisions. MTA and MFS assert that the cost of installing fiber along the freeway is approximately 30 percent less than the cost of installing fiber along the state trunk highway. Minnesota appears to concede that the cost differential for fiber installation is between 11 and 21 percent. 33. Moreover, these cost studies do not attempt to quantify all of the advantages of using the freeway rights-of-way. For example, they do not reflect the effect of the administrative costs and delays of having to obtain multiple permits from multiple localities when using the trunk highway system. We also note that using the freeway rights-of-way may improve reliability and lessen maintenance costs since fiber installed on the freeway rights-of-way is less likely to be unintentionally cut because the right-of-way is not shared with other users. For a carrier wishing to provide competitive local exchange service from a remote switch, the reliability of the connection to the remote switch could be critical. A cut in this cable could result in widespread service disruptions for its customers. 34. Minnesota also argues that the cost differential claimed by MTA shrinks to a negligible amount once the Developer's full costs are taken into account. Pursuant to the Agreement, Developer will provide the state with a variety of benefits, including at least 20 percent of the network's lit capacity as well as some dark fiber without charge. The Developer must also bear maintenance costs, provide up to $5 million worth of facilities and services for Minnesota's ITS applications and lay fiber in "less profitable" rural areas. The Developer must also pay prevailing wage rates, which competing companies do not. According to the state, when all of these costs are included, the Developer will not have a cost advantage over carriers utilizing other rights-of-way. 35. We cannot agree with this analysis. We believe the appropriate comparison must be between what it would cost an efficient carrier to provide facilities-based services using freeway rights-of-way versus state trunk highways. We do not believe that it is appropriate to include in this comparison the additional cost of the benefits that the state is able to extract from Developer only in exchange for granting exclusive physical access to these valuable freeway rights-of-way. Indeed, the state's argument that the Developer's costs should reflect these benefits is premised on the state's position that it would not permit anyone to use the freeway rights-of- way unless they agreed to provide the requested benefits. We believe such an extraction of benefits in exchange for exclusive physical access to rights-of-way is fundamentally inconsistent with the 1996 Act, which endeavors to replace exclusive monopoly rights with open competition. 36. Moreover, it would be an ironic result if a state could seek to avoid a finding of a potential section 253(a) violation through the expedient of claiming it may impose excessive requirements on users of public rights-of-way. Section 253(c) was specifically designed to avoid such a result. That section permits states and local governments to avoid preemption for section 253(a) violations when the state or local government's management of public rights-of-way are implicated, and the state requires "fair and reasonable compensation from telecommunication providers . . . for use of public rights-of-way on a nondiscriminatory basis." We do not believe that the benefits extracted in exchange for access to the freeway rights-of-way in this instance meet the "fair and reasonable compensation" standard laid out in section 253(c). 3. Existing Fiber Capacity and the Ability to Expand It 37. We also disagree with Minnesota's contention that the Agreement is consistent with section 253(a) of the Act because competitors can readily obtain fiber optic capacity on existing networks and resell it. In support of this assertion, Minnesota argues that there is excess fiber optic capacity in Minnesota, and that current capacity can be expanded. Minnesota asserts that only 15 percent of the fiber optic capacity in Minnesota is lit. Furthermore, the State argues that the most cost-effective means of increasing capacity is to upgrade the electronics on existing systems, rather than install new fiber. As a result, Minnesota argues that current competitors will not face capacity constraints and that new entrants will be able to obtain transport capacity for resale from Developer and other providers at competitive market-based prices. 38. This argument, however, only addresses the potential for entry through resale. As discussed above, we believe that section 253(a) bars state or local action that makes any of the three entry methods unavailable to competitors. Minnesota's argument that current providers can expand capacity at less cost than installing new fiber does not address the potential adverse effect of the Agreement on new entrants that wish to provide telecommunications service by constructing their own facilities. Nor would Minnesota's argument address the effect of the Agreement on an existing telecommunications service provider that wishes to expand the geographic scope of its facilities. The existence of spare fiber optic capacity merely indicates that new entrants will be able to lease fiber optic capacity from other providers for the purpose of resale, and that current facilities-based providers will be able to expand the capacity on existing routes. 4. Making the Agreement "Functionally Non-Exclusive" 39. We conclude that Minnesota has not demonstrated that the Agreement imposes requirements on the Developer that will have the effect of making the Agreement "functionally non-exclusive," i.e., that it would not "have the effect of prohibiting the ability of any entity to provide any . . . telecommunications services," and therefore would not contravene section 253(a). Minnesota argues that the Agreement is "functionally non-exclusive" because it requires the Developer to install collocated fiber for third parties and lease or sell network capacity to telecommunications providers on a nondiscriminatory basis. In light of these safeguards, Minnesota contends that the restriction on physical access to freeway rights-of-way does not prevent any entity from offering telecommunications services, and instead enhances the competitiveness of the market by making available a new source of fiber optic transport. 40. The safeguards contained in the Agreement represent a laudable effort to reduce the potential anti-competitive effects of the Agreement. As discussed above, however, section 253(a): bars state and local requirements that restrict the means or facilities through which a party is permitted to provide service, i.e., new entrants should be able to choose whether to resell incumbent LEC services, obtain incumbent LEC unbundled network elements, utilize their own facilities, or employ any combination of these three options. Nonetheless, there is some ambiguity in the safeguards contained in the Agreement. Accordingly, we are unable to determine at this time if the Agreement prevents other facilities-based providers from providing telecommunications services. a. Installation of Third Party Fiber 41. Requiring the Developer to install fiber for other carriers when it installs its own fiber, does not fully overcome the Agreement's shortcomings. The primary problem with this solution is that the opportunity to collocate fiber is very limited. In order to collocate fiber a competitor must enter into a "User Agreement" with Developer before Developer begins installing fiber. If a competitor is unable to do this before the trench is closed, that competitor will be excluded from collocating fiber in the freeway right-of-way for a period of at least ten years. During this ten year period we expect new carriers to be formed, and existing carriers to expand. Keeping the freeway rights-of-way closed for at least ten years will have a particularly adverse impact on the ability of to-be-formed, start-up, and expanding carriers to offer telecommunications services in Minnesota because they will be unable to place facilities in the most efficient rights-of-way. The ten year restriction forces new entrants to use more expensive rights-of-way, provide service through resale, or "purchase" fiber from Developer. In comments, but not the Agreement, Minnesota claims that new entrants can purchase capacity on an indefeasible right of user (IRU) basis. The Agreement, however, does not sufficiently spell out the obligations of Developer in providing capacity to interested parties. b. Availability of Network Capacity for Purchase or Resale 42. Based on the present record, we cannot conclude that the Agreement requires that Developer to sell network capacity in a manner that makes the Agreement functionally non- exclusive. Minnesota argues that sections 7.7 and 7.8 of the Agreement require the Developer to sell both lit and unlit network capacity, stating that the "unlit network capacity is similar to the bulk capacity made available on an IRU basis." It is possible that under certain circumstances, the ability of interested parties to purchase facilities on an IRU basis might be an adequate substitute for the ability to construct facilities along a particular route. The present record, however, does not demonstrate that this is the case. The language of the Agreement does not clearly state whether the Developer must sell lit or unlit capacity on an IRU basis. Even if interested parties are able to purchase capacity in Developer's network, the present record does not establish that this would be an adequate substitute for the ability to construct facilities along the freeway rights-of-way. For example, we do not know whether the Developer will charge rates, terms, and conditions that are just and reasonable. Although it is possible that the presence of collocated fiber owned by third parties or other fiber capacity in the state would serve as a competitive restraint on the prices Developer could charge for capacity, we cannot determine beforehand if this will be the case. 43. Furthermore, the record does not adequately address whether the ability to obtain fiber on an IRU-like basis is an adequate substitute for physical access to the freeway rights-of- way. Regardless of whether a competitor collocates or "purchases" fiber from Developer, it will not be able to access the facility to maintain and repair it. Several commenters argue that the ability to maintain and repair their own fiber is important to ensure quality of service and limit costs. Nevertheless, it is possible that this drawback is not significant because fiber optic cable generally requires little maintenance and the likelihood of a cable cut along this right-of-way is relatively low. Moreover, Minnesota suggests that carriers currently swap capacity on fiber optic transport networks. The present record, however, is not adequate to allow us to conclude that the ability of interested parties to collocate fiber or purchase facilities on an IRU basis is an adequate substitute for the ability to construct facilities. c. Availability of Conduit 44. The availability of conduit space, through which competitors could pull their own fiber, may also ameliorate the anticompetitive effects of limiting physical access to the freeway rights-of-way to one provider for a period of ten years. Minnesota claims that "[a]ny carrier has the opportunity to purchase access [to] either the fiber-optic in the conduit owned by [Developer] or to AT&T's conduit if they wish to pull through their own fiber cable." While we are encouraged to hear that the Developer is installing conduit in the trenches, we do not have enough information about the availability of conduit to conclude that it makes the Agreement functionally non-exclusive. If conduit space were available to competitors in a manner consistent with section 253, it would further ameliorate our concerns because it would enable competitors to pull their own fiber through the conduit at a later time. The current record however neither indicates that the Developer is required to provide conduit nor that it will have the ability to provide such conduit space. 45. The record also indicates that the Developer is installing conduit on behalf of AT&T. This suggests that empty conduit space may be available from AT&T. While this might further ameliorate our concerns, the record does not provide the rates, terms and conditions AT&T would offer for access to the conduit nor whether AT&T would even offer access to such conduit. As a result, we cannot determine, at this time, whether the availability of conduit would ameliorate the anticompetitive concerns that may have been created by the Agreement. d. Nondiscrimination 46. Minnesota fails to demonstrate that the Agreement's nondiscrimination provisions are sufficient to protect collocators and entities reselling or purchasing Developer's capacity. As commenters note, the Agreement specifically states that it does not create third party rights. As a result, parties wishing to obtain facilities or service from Developer or collocate along the freeway rights-of-way have no right to enforce the Agreement's nondiscrimination requirements. 47. In addition, it is not clear from the record whether the nondiscrimination language of the Agreement provides Minnesota with sufficient oversight powers to ensure that the rates will be fair and reasonable. The Agreement allows the Developer to raise prices so long as they are not discriminatory. Aside from claiming that the charges were discriminatory, neither Minnesota nor Developer's customers would have a basis to object to the level of charges. Thus, Developer could use its exclusive physical access to the freeway rights-of-way to extract monopoly profits from the fiber capacity it leases or "sells" on an IRU-like basis, as well as from installation and maintenance of collocated fiber. 48. Moreover, if Developer creates an affiliated retail service provider, it could effectively preclude third parties from benefitting from the less expensive rights-of-way by charging all retail customers, including its affiliate, unduly high rates. These charges would not be discriminatory since they would apply to all retail customers, however. While this would reduce the profits of its retail affiliate, Developer could offset this by the increased profits on its wholesale offering. In contrast to this, competitors would simply have lower retail profits if they used Developer's services and facilities. In this way, Developer could retain the benefits of the less expensive rights-of-way for itself and prevent competitors from benefitting from use of the least expensive rights-of-way. Again, the uncertainty over how the Developer will implement the Agreement requires us to exercise caution at this point and not approve the Agreement as consistent with section 253. 49. We conclude that Minnesota fails to demonstrate that the Agreement's nondiscrimination provisions are sufficient to protect resellers and collocators. Neither third parties nor the State would be able to ensure that the Developer does not capitalize on the monopoly powers granted it by the state. It is possible that the Developer's charges and/or other terms for the purchase of capacity will be reasonable, but, based on the present record, we cannot determine whether this will be the case. D. Section 253(b) Analysis 50. We conclude that the Agreement is not protected by section 253(b), which preserves from preemption certain state or local requirements that are "competitively neutral," and "necessary" to achieve the public interest objectives enumerated in section 253(b), even if the requirements contravene section 253(a). In particular, Minnesota has not convinced us that the Agreement is competitively neutral. We also note that Minnesota has not shown that the restrictions on physical access to the freeway rights-of-way are necessary to protect the public safety and welfare. 1. Competitive Neutrality of the Agreement 51. We cannot agree with the State's contention that the Agreement is competitively neutral as required by section 253(b) because the State followed a public procurement process in selecting the Developer. In support of its position, Minnesota argues that the requirement for competitive neutrality in section 253(b) only relates to how the requirement is imposed, not to the substantive effect of the measure. We do not believe that Congress intended to protect the imposition of requirements that are not competitively neutral in their effect on the theory that the non-neutral requirement was somehow imposed in a neutral manner. Moreover, we do not believe that this narrow interpretation is appropriate because it would undermine the primary purpose of section 253 -- ensuring that no state or locality can erect legal barriers to entry that would frustrate the 1996 Act's explicit goal of opening all telecommunications markets to competition. Therefore, we conclude that the proper inquiry is whether the effect of the Agreement will be competitively neutral. 52. We conclude that the Agreement is not competitively neutral because it grants a single entity, the Developer, exclusive physical access to the valuable freeway rights-of-way for a period of ten years with an option to renew for another ten years. This restriction on physical access is likely, as we explained above, to disadvantage future facilities-based entrants. In reaching this conclusion, we recognize that it is not necessary for a state to treat all entities in the same way for a requirement to be competitively neutral. In fact, treating differently situated entities the same can contravene the requirement for competitive neutrality. In this case, however, Minnesota has not demonstrated that there are differences in circumstances that warrant granting exclusive physical access to the freeway rights-of-way to only one party. 53. Our conclusion in this regard is supported by the decision in the Texas Preemption Order. In that Order we found that certain facilities "build out" requirements were not competitively neutral under section 253(b) because they "single[d] out [a specific class of carriers] and require[d] them to construct their own facilities or purchase access to non-incumbent network elements." We also noted that "by imposing the costs of providing facilities based service only on [certain carriers], the build-out provisions significantly affect[ed] the ability of [these carriers] to compete against other certificated carriers for customers in the local exchange market." Here the Agreement forces a specific class of carriers to use alternative rights-of-way that appear to be more costly than the freeway rights-of-way. The only significant difference is that the lack of competitive neutrality in this case is imposed by granting the Developer an advantage -- exclusive physical access to the freeway rights-of-way -- rather than imposing a disadvantage on a certain class of carriers, as was the case in the Texas Preemption Order. Furthermore, as discussed above, Minnesota has not demonstrated that the nondiscrimination provisions of the Agreement are sufficient to overcome the effect of granting one entity exclusive physical access to the freeway rights-of-way and render the Agreement competitively neutral. 2. Necessity of the Agreement 54. Our conclusion that the Agreement is not competitively neutral is dispositive on the question of whether the section 253(b) exemption applies. We nonetheless take this opportunity to raise concerns about Minnesota's claims that the Agreement is necessary to protect public safety and advance universal service objectives. a. Public Safety 55. We agree with the State's assertion that requirements protecting the traveling public and transportation workers fall within the general class of requirements potentially protected by section 253(b). Minnesota is concerned that allowing construction on the freeway rights-of-way will increase the number of accidents and fatalities on the freeway, and, as discussed above, that allowing construction more than once every ten years will increase the risk to an unacceptable level. In this instance, however, opponents of the Agreement dispute certain aspects of Minnesota's claims. 56. The record indicates that in many rural areas, the freeway right-of-way extends a considerable distance beyond the paved shoulder, permitting work to take place beyond the paved shoulder. A major highway study in the record also shows "that construction on either the 'Shoulder/Roadside' (i.e., on the shoulder or beyond the shoulder) did not increase accident rates in on (sic) any road type." According to this study, "[t]he impact of construction on shoulders or roadsides was a 4.3% decrease [in accident rates] with rural freeways, [and] a 2.2% decrease [in accident rates] with urban freeways," when compared with "normal" road conditions. As such, in areas with wide rights-of-way, the record does not show a correlation between construction work off the highway shoulder and an increase in accidents. Because the Agreement requires construction away from the paved surfaces when rights-of-way are wide enough, Minnesota's safety concerns appear to be overstated, except in areas with very narrow rights-of- way. 57. Moreover, it appears that installing fiber optic facilities has no greater safety impact than typical roadside maintenance, such as removal of refuse, mowing of grass, sign maintenance and replacement, fence repair, and/or culvert construction that occurs routinely. In fact, installing fiber is less intrusive than typical repairs which take place on the roadways such as joint repair and patching, or snow removal, which are common in cold climates like Minnesota. Therefore, based on the record before us, we are unable to determine whether it is necessary to limit installation of fiber to once every ten years on all parts of Minnesota's interstate freeway system. b. Universal Service 58. While we applaud Minnesota's efforts to bring advanced services to rural areas, we are concerned that the Agreement is not "necessary to preserve and advance universal service." Minnesota claims that one of the benefits of the Agreement is that it extends fiber optic capacity into rural areas by requiring Developer to install fiber over the entire planned network. As discussed above, however, extracting benefits from the Developer in exchange for exclusive physical access to rights-of-way is, we believe, fundamentally inconsistent with the 1996 Act. At the very least, Minnesota has not demonstrated that this method is necessary to deploy advanced services. E. Section 253(c) 59. We cannot agree with Minnesota that the Agreement is protected from preemption by section 253(c). Section 253(c) provides that "[n]othing in this section affects the authority of a State or local government to manage the public rights-of-way or to require fair and reasonable compensation from telecommunications providers, on a competitively neutral and nondiscriminatory basis, for use of public rights-of-way on a nondiscriminatory basis, if the compensation required is publicly disclosed by such government." Minnesota contends that the decision to grant exclusive physical access to Developer constitutes rights-of-way management that Congress exempted from section 253 preemption. Further, Minnesota claims that it is managing the rights-of-way in a nondiscriminatory manner because Developer is a not a telecommunications service provider. Minnesota also asserts that the compensation required is reasonable, competitively neutral and nondiscriminatory as required by section 253(c). In particular, it asserts that the open procurement process ensures that the state has not unfairly favored one provider over another. The state also argues that the nondiscrimination requirements in the Agreement and the provisions for collocation of third party fiber mitigate any anti- competitive effects of the Agreement. 60. We have serious reservations about whether the Agreement constitutes rights-of- way management for purposes of section 253(c). In particular, the legislative history of section 253(c) indicates that Congress intended to protect the states' traditional regulation of rights-of- way. The House Report states that section 253 "makes explicit a local government's continuing authority to issue construction permits regulating how and when construction is conducted on roads and other public rights-of-way." In contrast to this, Minnesota has decided not to use a permit process similar to that in effect for other state rights-of-way and instead has granted exclusive physical access to this right-of-way to a single entity in return for valuable consideration. 61. Even assuming that the Agreement constitutes rights-of-way management, Minnesota has not demonstrated that the Agreement is protected by section 253(c). Section 253 requires that both management of public rights-of-way and the requirement for compensation be competitively neutral and nondiscriminatory in order for a state or local legal requirement to be protected under section 253(c). As discussed previously in relation to section 253(b), Minnesota has not shown that the Agreement is "competitively neutral and nondiscriminatory." Therefore, even assuming that the Agreement constitutes protected rights-of-way management -- which we are not convinced, based on this record, that it does -- Minnesota has not shown that such management is competitively neutral and/or nondiscriminatory. 62. Moreover, Minnesota has not shown that the compensation required for access to the right-of-way is "fair and reasonable." The compensation appears to reflect the value of the exclusivity inherent in the Agreement, rather than fair and reasonable charges for access to the right-of-way. Nor has Minnesota shown that the Agreement provides for "use of public rights-of- way on a nondiscriminatory basis." 63. In addressing the status of the Agreement under section 253, we are responding to Minnesota's request for a declaratory ruling on the Agreement. Since we conclude that Minnesota fails to demonstrate that the Agreement will not violate section 253(a) or that it is protected by section 253(b), we must consider whether the Agreement is protected from preemption by section 253(c) in order to fully respond to Minnesota's petition. Our discussion of these issues should not be interpreted as addressing potential issues involving the Commission's jurisdiction under section 253(c). III. PETITIONS FOR PREEMPTION 64. Many of the parties opposing Minnesota's request for declaratory ruling also ask the Commission to preempt the Agreement in their filings in this proceeding. We do not resolve these requests for preemption at the present time. As our prior discussion makes clear, there are aspects of the Agreement that have the potential to contravene section 253(a), and we invite interested parties to comment on whether the Commission should preempt the Agreement pursuant to its authority under section 253(d). We believe that our consideration of any requests for preemption would be aided by supplemental information concerning the practical effect of this Agreement, and we urge parties to provide us with such information in their comments. IV. ORDERING CLAUSE 65. Accordingly, IT IS ORDERED that the Petition for Declaratory Ruling filed by the State of Minnesota IS DENIED. FEDERAL COMMUNICATIONS COMMISSION Magalie Roman Salas Secretary APPENDIX A Minnesota Petition for Declaratory Ruling CC Docket No. 98-1 List of Commenters Comments Ameritech Corporation (Ameritech) Association for Local Telecommunications Services (ALTS) GTE Service Corporation (GTE) GVNW, Inc. (GVNW) KMC Telecom Inc. and KMC Telecom II, Inc. (KMC) MCI Telecommunications Corporation (MCI) MFS Network Technologies, Inc. (MFS) Midwest Wireless Communications, L.L.C. (Midwest Wireless) Minnesota Telephone Association (MTA) National Cable Television Association (NCTA) National Telephone Cooperative Association (NTCA) New York State Telecommunications Association, Inc. (NYSTA) Nextlink Communications Inc. (Nextlink) RCN Telecom Services, Inc. (RCN) SBC Communications Inc. (SBC) Teleport Communications Group Inc. (TCG) United States Telephone Association, The Organization for the Promotion and Advancement of Small Telecommunications Companies, The Western Rural Telephone Association and The Competition Policy Institute (USTA Joint Comments) US West, Inc. (US West) Reply Comments Crown Castle International Corp. (Crown Castle Reply Comments) ICS/UNC, L.L.C. (Developer Reply Comments) Intelligent Transportation Society of America (ITS America Reply Comments) MCI Telecommunications Corporation (MCI Reply Comments) MFS Network Technologies, Inc. (MFS Reply Comments) Minnesota Telephone Association (MTA Reply Comments) Teleport Communications Group Inc. (TCG Reply Comments) Time Warner Cable (Time Warner Reply Comments) United States Telephone Association, The Organization for the Promotion and Advancement of Small Telecommunications Companies, The Western Rural Telephone Association and the Competition Policy Institute (USTA Joint Reply Comments) Universal Communication Networks, LLC U.S. Department of Transportation (US DOT Reply Comments) US West, Inc. (US West Reply Comments) Wilbur Smith Associates States, State Agencies, and other Commenters Alabama Department of Transportation American Association of State and Highway Transportation Officials (AASHTO) Arizona Department of Transportation City of Boston Commonwealth of Kentucky Transportation Cabinet Commonwealth of Virginia, Department of Transportation DPD Comprehensive Resources Planning Indiana Department of Transportation Iowa Department of Transportation Kansas Department of Transportation Kentucky Department of Transportation Massachusetts Highway Department Mississippi Department of Transportation Missouri Department of Transportation Montana Department of Transportation New Mexico State Highway and Transportation Department New York State Thruway Authority North Dakota Department of Transportation Rep. Phyllis Kahn, Rep. Jean Wagenius, and Rep. Irv Anderson, Minnesota House of Representatives State of Alaska Department of Transportation and Public Facilities State of California Department of Transportation State of Delaware Department of Transportation State of Florida Department of Transportation State of Idaho Transportation Department State of Maine Department of Transportation State of Minnesota Intergovernmental Information Systems Advisory Council State of Montana Department of Administration State of Nebraska, Department of Roads State of New Jersey Department of Transportation State of North Carolina Department of Transportation State of Oregon Department of Transportation State of Rhode Island and Providence Plantations, Department of Transportation State of Tennessee Department of Transportation State of Utah Department of Transportation State of Vermont Agency of Transportation State of Wisconsin Department of Transportation Texas Department of Transportation Washington State Department of Transportation