Can a Texas city enter a telecom joint venture with a private phone company?

Plain-English summary

This opinion answered a single question: could a Texas city go into the telecommunications business by partnering with a private phone company? Senator David Sibley, who chaired the Senate Economic Development Committee, asked the Attorney General about a specific deal. On November 27, 1995, the City of San Antonio, acting through its wholly owned electric utility (the City Public Service Board), signed a twenty-five-year contract with ICG Access Services, Inc., a telecommunications provider. The two would jointly build and operate a telecommunications network, split the construction costs 50/50, divide the revenue from selling service to the public, and share other terms.

The Attorney General concluded the contract was prohibited. During the 1995 regular session, the legislature had amended section 3.251 of the Public Utility Regulatory Act of 1995 (PURA), V.T.C.S. article 1446c-0. New subsection (c) required a certificate (a certificate of convenience and necessity, a certificate of operating authority, or a service provider certificate of operating authority) before a person could provide local exchange telephone service, basic local telecommunications service, or switched access service. New subsection (d) said a municipality could not receive any such certificate, and that "a municipality or municipal electric system may not offer for sale to the public, either directly or indirectly through a telecommunications provider, a service for which a certificate is required."

The office read the San Antonio / ICG contract as exactly that kind of indirect municipal participation. It pointed to several terms taken together: the city and ICG shared construction costs; they jointly operated the network; they divided revenues from providing service and from leasing excess capacity; ICG got a "marketing fee" out of the city's gross revenues regardless of how much it actually marketed; the two shared the legal expense of defending the deal; and ICG paid the city 5% of its gross telecommunications revenues "in lieu of" franchise fees while skipping the normal franchise process. The office also relied on Senator Sibley's own floor statement introducing the amendment, in which he said cities regulate utilities and collect franchise fees, and it would not be fair "for them to be able to also enter into the business." From that, the office concluded the legislature meant to let cities grant franchises and provide rights-of-way to telecommunications utilities, not partner in the business and share its revenue. Because San Antonio proposed to let ICG bypass the normal franchise procedure and to give it more than a right-of-way (the dark fiber itself), the contract contravened section 3.251(d).

Currency note

This opinion was issued in 1996. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

This opinion construed section 3.251 of the Public Utility Regulatory Act of 1995, V.T.C.S. article 1446c-0, as it stood in 1996. PURA was later recodified into the Texas Utilities Code, and Texas telecommunications law has changed substantially since, so the article and section numbers used here no longer match current statutes. Read this page for the office's 1996 reasoning that a city could not enter a revenue-sharing telecommunications joint venture, and verify current law before relying on any specific provision.

What the opinion meant at the time

For Texas cities and municipal electric utilities: The opinion meant a city, or a municipal electric system like the City Public Service Board, could not enter a joint venture to provide telecommunications service to the public, even indirectly through a private provider, where the service was one for which a state certificate was required. As the office read section 3.251(d), a city's role was confined to granting franchises and providing rights-of-way to telecommunications utilities, not partnering in the business and sharing its revenue.

For the City of San Antonio (the specific deal): The opinion meant the twenty-five-year City Public Service Board / ICG contract crossed the line. Its shared construction costs, joint operation of the network, revenue splitting, marketing fee paid from city revenues, shared legal-defense costs, and 5%-in-lieu-of-franchise-fee terms, taken together, amounted to prohibited municipal participation and contravened section 3.251(d).

For telecommunications providers: The opinion described that a provider could not use a contract with a city to bypass the normal franchise procedure and obtain more than a right-of-way (here, the city's dark fiber), because that arrangement made the city an indirect participant in the telecommunications business the statute barred.

For lawyers: The opinion construed the 1995 addition of subsections (c) and (d) to section 3.251 of PURA (V.T.C.S. art. 1446c-0), reading the contract's cost-sharing, revenue-sharing, and marketing-fee provisions together and using the bill sponsor's floor statement to conclude the agreement was prohibited.

Common questions

Could a Texas city go into the telephone or telecommunications business in 1996?
Not as a participant, under this opinion. A 1995 amendment to the Public Utility Regulatory Act (section 3.251(d)) barred a municipality or municipal electric system from offering telecommunications service to the public, directly or indirectly through a provider, where a certificate was required. The office read the statute to let cities grant franchises and provide rights-of-way, not run the service.

What was wrong with the San Antonio / ICG deal specifically?
The office pointed to a combination of terms: the city and ICG split construction costs, jointly operated the network, divided service and excess-capacity revenues, gave ICG a marketing fee out of the city's gross revenues, shared legal-defense costs, and let ICG pay 5% of gross revenues "in lieu of" franchise fees while bypassing the normal franchise process. Together those made the city an indirect participant in the telecommunications business that section 3.251(d) prohibited.

Did the opinion ban cities from any dealings with telecom companies?
No. The opinion read the law to still allow a city to grant franchises to telecommunications utilities and to provide rights-of-way to them. What a city could not do was partner in providing the service and share in its revenue the way the San Antonio contract did.

Why did the Attorney General quote Senator Sibley's floor remarks?
The office used the sponsor's explanation of the amendment as evidence of legislative intent. Senator Sibley had told the senate that cities regulate utilities and collect franchise fees, and that it would not be fair "for them to be able to also enter into the business." The office read section 3.251(d) consistently with that purpose.

Background and statutory framework

Section 3.251 of the Public Utility Regulatory Act of 1995 (PURA), codified at V.T.C.S. article 1446c-0, governed who could provide certain telecommunications services in Texas. PURA of 1995 was enacted by S.B. 319 (74th Leg., R.S., ch. 9). The 1995 regular session also amended section 3.251, through H.B. 2128 (74th Leg., R.S., ch. 231, § 23), by adding subsections (c) and (d).

Subsection (c) required a person to hold a certificate of convenience and necessity, a certificate of operating authority, or a service provider certificate of operating authority before providing local exchange telephone service, basic local telecommunications service, or switched access service. Subsection (d) barred a municipality from receiving any such certificate, and provided that a municipality or municipal electric system may not offer for sale to the public, either directly or indirectly through a telecommunications provider, a service for which a certificate is required, or certain non-switched services connecting customer premises.

The office read subsection (d) together with the contract's terms and with Senator Sibley's floor statement introducing the amendment. From that, it concluded the legislature meant to let cities grant franchises and provide rights-of-way to telecommunications utilities, but not to participate in the business itself, so the San Antonio contract contravened section 3.251(d).

Citations

Statutory provisions discussed:

• Public Utility Regulatory Act of 1995 (PURA), V.T.C.S. art. 1446c-0, § 3.251, including subsection (c) (certificate requirement to provide local exchange, basic local, or switched access service) and subsection (d) (prohibition on a municipality or municipal electric system offering service to the public directly or indirectly through a provider)

Legislative history cited:

• S.B. 319, Act of Mar. 23, 1995, 74th Leg., R.S., ch. 9, § 1, 1995 Tex. Sess. Law Serv. 31, 75
• H.B. 2128, Act of May 16, 1995, 74th Leg., R.S., ch. 231, § 23, 1995 Tex. Sess. Law Serv. 2017, 2032
• Debate on H.B. 2128 on the Floor of the Senate, 74th Leg., R.S. (May 12, 1995) (statement of Senator Sibley)

No cases were discussed.

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/dan-morales/dm-0391
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1996/dm0391.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain — the linked PDF is authoritative.

Office of the Attorney General
State of Texas

DAN MORALES
ATTORNEY GENERAL

May 13, 1996

The Honorable David Sibley
Chair
Economic Development Committee
Texas State Senate
P.O. Box 12068
Austin, Texas 78711

Opinion No. DM-391

Re: Validity of an agreement between a municipality and a telecommunications services provider that in effect creates a joint 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 effect 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 50% of 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 be responsible for the maintenance and repair of the equipment;

3. The network will be largely located on city right-of-way. 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;

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 annually;

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 additional excess capacity to any third parties;

7. After the third year the agreement is in effect, ICG and the city will divide revenues from the portion of the network dedicated to the provision of telecommunications services to the public, specifically, to ICG'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. If the 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 one-third of the gross revenues received by the city from any such arrangement. Furthermore, ICG will receive the same marketing fee for any fiber provided by the city to third parties through its own efforts and without activity by ICG;

9. The city and ICG will 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 franchise fees, ICG agrees to pay the city 5% of its gross revenues derived from telecommunications services "totally 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 recognizes 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";

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,[1] 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, certificate of operating authority, or service provider certificate of operating authority under this Act. In addition, a municipality or municipal electric system may not offer for sale to the public, either directly or indirectly through a telecommunications provider, a service for which a certificate is required or any non-switched telecommunications service to be used to provide connections between customers' premises within the exchange or between a customer's premises and a long distance 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 telecommunications 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 construction; 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 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 franchise 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 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 countenance 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 contravenes section 3.251(d).

SUMMARY

Under the facts described, an agreement between the city of San Antonio and ICG Access Services, Inc., constitutes 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-0.

DAN MORALES
Attorney General of Texas

JORGE VEGA
First Assistant Attorney General

SARAH J. SHIRLEY
Chair, Opinion Committee

Prepared by Rick Gilpin
Assistant Attorney General

[1] S.B. 319, Act of Mar. 23, 1995, 74th Leg., R.S., ch. 9, § 1, 1995 Tex. Sess. Law Serv. 31, 75.

[2] H.B. 2128, Act of May 16, 1995, 74th Leg., R.S., ch. 231, § 23, 1995 Tex. Sess. Law Serv. 2017, 2032 (footnote and emphasis added).

[3] V.T.C.S. art. 1446c-0, § 3.251(d).

[4] Debate on H.B. 2128 on the Floor of the Senate, 74th Leg., R.S. (May 12, 1995) (statement of Senator Sibley) (transcript available from Senate Staff Services).