Navigating That Last Tenth of a Mile

Property rights and service choice in the new telecom market

Urbanist Article January 1, 2000

Telephone and cable customers need to brace themselves for the next big telecommunications industry battle -- one that pits office building and apartment complex owners against phone and cable providers. The issue: Access to buildings for installation of new services, and the price of that access.

Stakes in this fight are high. A coalition of new telephone companies known as competitive local exchange carriers, or CLECs, have begun marketing their phone and high-speed data services to office and apartment tenants. To deliver on those services, they want the same access to buildings and tenant customers that Pacific Bell has historically enjoyed as the local phone monopoly -- with space for their own switchboxes and utility cabinets, and the ability to run wire through risers, crawl spaces, walls and on rooftops.

Building owners contend that all of this new competition brings with it a new set of problems involving space limitations, security, work standards and certification, and compensation. As part of the telephone industry deregulation that began with the 1984 AT&T breakup, landlords now own, and are responsible for maintaining, the inside wiring in their buildings. They see this wiring as a value-added asset for which they are entitled to set standards of occupancy and receive payment for space rental and use.

Will individual building owners decide which carriers have access to their buildings at a negotiated fee and which do not? Will owners become the telecommunications "customer" in future, providing phone service to the tenant "end user" in the same way they now provide elevator service? Will they join together to provide services to tenants, either as volume resellers or by installing their own phone, Internet and cable equipment, as part of the lease? The answers to these questions hold
enormous implications for business and residential customers in years to come.

To better understand the origins of this debate, a bit of history in California: As a by-product of the AT&T breakup, the state Public Utilities Commission developed an economic formula for transferring ownership of inside wiring to property owners. Over a five-year period from 1993-98, Pacific Bell collected a special charge reflecting the "purchase of wiring and equipment it had previously installed in buildings as part of the original Bell system.

By August 1998, the wiring had been amortized under the CPUC formula and belonged to building owners. By that time, however, the Telecommunications Act of 1996 had changed the world by opening phone and cable markets to increased competition, and by auctioning spectrum for new telecom services. Commercial tenants were being offered a wide range of phone options -- local, long-distance and high-speed data -- from dozens of new state-licensed CLECs, which proceeded to
market services, dig up streets to lay conduit, and make installation calls.

Owners panicked. Were the installers roaming through their properties adequately trained? Were they insured, and screened for drugs or criminal records? Would they think to contact an owner before drilling holes, bolting unsightly antennas to the roof, running wire down exterior walls? Much of the original inside wire was uncoded, with connection records at the Pacific bell central office. Would these installers be able to decipher the wiring and hook up a new service without disconnecting other tenants?

And how much wiring and equipment could the building accommodate in the basement, walls, roof and floors? What happens when the building only has room for four providers' equipment and carrier number five knocks on the door?

A final dilemma: Much of the inside copper wiring owners had "bought" by August 1998 is fast becoming obsolete. Growth of the Internet and e-commerce, and the increased speed needed to download large computer files and programs, has pushed the limits of standard computer modems. The next frontier for increasing data transmission speeds is the high-capacity phone or cable connection.

Digital subscriber line (DSL) technology, widely launched throughout San Francisco only in the past year, boosts the capacity of copper wiring to deliver speeds in the 128 kilobytes per second to 1.5 megabytes per second range. But in some cases wiring must be reconditioned, and customers must be located within three miles of an activated central office. DSL is viewed by the industry as an interim solution to the broadband speed problem, on the way to all-fiberoptic networks and cable modems.

Within perhaps five years' time, building owners will have to make critical rewiring decisions to remain competitive in attracting tenants. rewiring is costly and complicated. It must be compatible with existing services and must be done with minimum service interruption.

Owners are taking a fresh look at their situation and at the challenges posed by the new telecom marketplace. They want to limit building access according to space constraints; receive advance notice of service orders , along with formal permission requests to do installations and repairs; approve work plans; set quality standards; require certification and bonding for installers and repairers; and collect compensation from phone companies for use of interior spaces on their properties.

They stress that few tenants have had actual difficulty getting new service installed by the carrier of their choice due to space constraints. But as phone company demands for additional space in their buildings increases, they want it kept in mind that renting space is, after all, their core business. Owners make a further distinction between building access for regulated local phone installation and repairs -- for which Pacific Bell was never charged -- and new, unregulated value-added services
(high-speed Internet access, local area and wide area networks, and so on) for which there is no clear precedent.

Phone companies appear flexible on many of the access issues, such as owner notification, work standards, certification and so on. Some telecom providers have entered into partnerships with building owners that include access fees. But a number of providers are committed to preventing any change in what they see as the historic tenant-carrier transaction -- dealing directly with the tenant, and having free access to buildings without paying fees, a percentage of revenue or other

Pacific Bell is uniquely in the middle. While it no longer owns inside wiring, it does provide nearly all of the local phone service along that "last tenth of a mile" to the customer. Building owners have an established relationship with Pac Bell, and don't feel they can raise the same security or quality of work issues, nor ask for compensation they have not historically been paid for what is considered an
"essential" service.

A recent Federal Communications Commission ruling requires Bell operating companies to share their lines with smaller competitors offering high-speed DSL service. The ruling will lower prices and ease future space demand in residential areas and in some older commercial buildings, since competing carriers will no longer have to physically provide tenants with a second line. But it is unlikely to affect demand in new or larger commercial buildings, where the access battle is currently most intense and where tenants typically want fiber connections.

Arguably, high-speed Internet and network products are increasingly "essential," particularly to business customers. Pac Bell's competitors rightly argue that they're state-certified phone companies too, and that owners must set the same access rules and charges for everyone. Cable companies have so far remained relatively unaffected by the building access dispute, since most are franchised monopolies in their communities, and system upgrades that make cable modem access possible are still months or years away. That will change, however, as DSL competition heats
up, as AT&T moves forward with its upgrade, as RCN builds out a new citywide cable network, and as satellite Internet services become fully competitive.

Both the CPUC in Sacramento, and the FCC in Washington, would like the two sides to negotiate a compromise, rather than wage a protracted fight in the courts, state legislatures and Congress. Politically, no one wants to choose between inhibiting telecom competition and interfering with individual property rights.

California's chapter of the nationwide Building Owners and Managers Association (BOMA) did meet with a coalition of phone companies last year. While some progress was made on access issues, talks broke down when the topic turned to compensation. BOMA's national organization has since taken its case to the FCC and Congress.

CPUC staff and an administrative law judge have so far tried to occupy a kind of middle ground. They acknowledge property owners' rights and concerns, and suggest they may be entitled to some reasonable form of compensation reflecting the new telecom environment. But past a certain point they caution that building owners selling services to tenants and collecting access fees from phone companies in effect become phone companies or resellers themselves, potentially subject to CPUC licensing and tariff requirements.

A two-year bill passed by the California Assembly and now before the Senate, AB 651, attempts to comprehensively address access and compensation issues by narrowly defining rights, responsibilities and procedures for owners, tenants and service providers. Intense lobbying and debate from both sides is expected to resume in January.

The simplest solution from a public interest standpoint is for building owners to put out to bid a one-time, universal fiber/coaxial wiring of their properties. Any phone, cable, open video or wireless provider could connect with it for "plug-and-play" installation and service, without sending out a truck. While not cheap, this rewiring would add value to the property and address space, access and security concerns. Costs could be recovered through rents, one-time initial connection charges or
other means. Tenants could directly order the services they want, from whomever they want. Demand for rewiring would create new business opportunities and local jobs.

Unfortunately both building owners and telcos believe the stakes are too high for a negotiated settlement. Both sides privately say they see little alternative to a court ruling in their favor. For building owners that would, mean strict access rules and a free market to charge phone and cable companies what the traffic will bear for renting space. For phone companies it means unrestricted access to buildings and tenant customers.

Absent a compromise, the fight itself may take a toll that produces no clear winner, but one significant loser -- the consumer.SPUR logo

About the Authors: 

Neils Erich is founder and co-chair of SPUR's Telecommunications Task Force.  Thanks to Neils for providing analysis of a technical but critical junction in the information superhighway.

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