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DAN MORALES
 ATTORSET
       GENERAL                              May 13,1996

     The Honorable David Sibley                   Gpiion No. DM-39 1
     Chair
     Economic Development Committee               Re: Validity of an agreement between a
     Texas State Senate  .                        municipality   and a telecommunications
     P.O. Box 12068                               services provider that in effect creates a joint
     Austin,Texas 78711                           venture between those two entities (RQ-886)

      Dear Senator Sibley:

              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/oof 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 telecommuni-
         cations 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 rights-
         of-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 telecommuni-
          cations 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 ‘spremises 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)   @anscriptavailable from Senate Staff Services).




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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




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