A Legal Perspective: Varying State Laws Govern Cooperative Expansion into Broadband

September 2018 -

The National Rural Electric Cooperative Association (NRECA) represents more than 900 consumer-owned, not-for-profit electric cooperatives, public power districts, and public utility districts in the United States. Based in Arlington, VA, NRECA oversees cooperative employee benefits plans; carries out federal government relations activities like lobbying; conducts management and director training; and spearheads communications, advocacy, and public relations initiatives. In addition, it coordinates national and regional conferences and seminars; offers member cooperatives information on tax, legal, environmental, and engineering matters; and performs economic and technical research.

Among the many considerations that involve co-op broadband initiatives, legal issues rise to the top. As with other industries, state laws can vary significantly in how – and even if – co-ops can establish broadband operations. Doran Dennis, regional vice president in CoBank’s Denver office, sat down with Ty Thompson, vice president and deputy general counsel for director and legal services, and Jessica Healy, assistant general counsel, both of the NRECA, to discuss some of the high-level legal issues that co-ops must understand before moving into broadband.

Doran Dennis: What are some of the high-level legal considerations for a cooperative when contemplating a broadband strategy?

Ty Thompson: There are essentially four different high-level legal considerations when considering a broadband project: authority to provide broadband, easements, tax considerations and antitrust laws.

Jessica Healy: Each one of these has a number of items to consider related to them.

DD: What are some of the items to contemplate related to the legal authority to provide broadband?

TT: The initial legal consideration for a cooperative is a question that arises under its state’s electric cooperative enabling act: Does the electric cooperative have the legal authority under its enabling act to directly engage in the broadband business? The answer to that question will vary depending on the state in which the co-op is located. In some states, the answer is unclear. In other states, it’s clear that you may and in yet other states it’s clear that you may not.

A second, related concern, is the legal authority under your state’s electric cooperative act to own a separate entity, like a subsidiary entity, that is engaged in the broadband business. Depending upon the business model, a cooperative may or may not be interested in engaging in a broadband business through a subsidiary. In some states, the answer to that question may be impacted by the structure of the subsidiary and whether the cooperative itself could directly engage in the broadband business. Again, answers to those questions are very state specific and really depend upon the precise words used in the particular electric cooperative act.

JH: Another legal consideration that arises under an electric cooperative act is a cooperative’s ability to provide broadband to businesses and individuals that are not electric cooperative members. Some electric cooperative acts will state that in order to be a member of the cooperative, you must use or agree to use electric energy provided by the cooperative and that the cooperative can only do business with members.

There are essentially four different high-level legal considerations when considering a broadband project: authority to provide broadband, easements, tax considerations and antitrust laws.
DD: Let’s discuss easements.

TT: The underlying issue there is a question of whether the cooperative’s electric line easements permit use of the easement for the broadband business. That sounds like an easy question. Unfortunately, the answer isn’t always easy because there are a number of variables.

One of the variables, certainly, is the type of easement and the precise language used in an easement. Individual cooperatives will have different types of easements. Some of them will be express, or written, easements. Some may have been obtained through condemnation. Some may be prescriptive easements that the cooperative has acquired through some type of adverse use over a significant number of years. So, the type of easement as well as the precise language used in the easement will impact the question of whether it authorizes the cooperative to utilize the underlying property for the broadband business.

JH: Also, state law will impact this particular consideration. States do differ significantly regarding what types of easements and easement language would permit engaging in the broadband business. In the past few years, several states have enacted statutes clarifying both the easement issue and the electriccooperative act issues that we addressed earlier.

The two primary questions regarding these issues are whether or not state law permits a broadband use for these easements and the potential damages that could result from improper use of the easements.

Some recent statutes have been enacted to clarify or limit the types of damages that the cooperative could be exposed to paying. Traditional trespass types of damages are typically fairly small. However, there is a potential for larger, punitive damages.

DD: Has there been any litigation related to the issue of easements?

JH: Yes. There is a cooperative in Missouri that constructed a fiber optic cable along its electric transmission line and used part of that fiber optic cable for its own internal communications. Its electric line easements permitted that particular use.

However, this particular electric cooperative leased out the excess capacity in that fiber optic line to its wholly owned subsidiary. The subsidiary then used that excess capacity for commercial, for-profit operations. Property owners filed a class action lawsuit against both the cooperative and the subsidiary.

The trial court originally ruled that there was a trespass in approximately half the easements and not a trespass in roughly the other half. For the trespassed half, the trial court permitted both a recovery for trespass and for unjust enrichment damages. That led to a fairly significant jury award of $79 million or so against the cooperative and the subsidiary.

That decision was appealed to the Federal Court of Appeals, which very generally said, “We affirm the trespass ruling, but we reverse the unjust enrichment damages ruling. That was not appropriate under Missouri law.” They sent it back down to the trial court and another trial was held. This time, the jury came back and awarded some $129 million in actual damages and $1.3 million in punitive damages. The trial court judge later vacated those damage amounts, generally ruling that they were against the weight of the evidence.

At this time, the parties have settled, and the trial court judge has preliminarily approved the settlement.

DD: There have been a lot of different ways cooperatives have addressed the easement issue. Some cooperatives try to get state legislation passed. Some have relied on language in their older easements. Some have tried to establish brand new easements. Is there a best practice for addressing easements?

JH: I wouldn’t say there’s a “best practice” primarily because the laws differ so much from state to state, and because the types of easements and easement language vary so much. I believe a wise strategy would be to have a state statute enacted that somehow limits or sets parameters around the potential damages in the worst-case scenario. Set some parameters or limits to define what the damages would be in the event there is a trespass. In that situation, you can more accurately assess the risk you’re dealing with.

Along those same lines, another course would be a statute saying that there is no trespass. I don’t know if that would be possible or plausible, so I’m assuming it’s not, but setting aside those state legislative approaches, clearly the best approach would be to make sure that you have easement language that would give you the right. If you’re uncertain whether you have the right, conduct a risk analysis to understand the potential monetary damages you could be facing.

Cooperatives could look to recent legislation passed in Tennessee, Arkansas, Indiana and Missouri as good samples of legislation to address these issues.

The reality is that there’s legal risk in most everything we do, but it’s important to make informed decisions regarding those risks.
DD: What are some of the tax implications associated with a broadband deployment?

TT: There are a number of issues and unanswered questions. One, for example, is if a cooperative has installed fiber optic cable and is leasing out some of that excess capacity, does that meet the statutory definition of being a qualified pole rental? That is, does it meet the statutory criteria to be considered pole attachment income?

If it does, then that income first of all, would not be considered in determining whether the cooperative complied with the 85/15 member income requirement to remain tax exempt. In addition, that income would not be subject to the unrelated business income tax.

If it does not meet the statutory criteria, that income may not be considered pole attachment income. Then there are some potentially significant questions. Is the income related to the broadband business member income, non-member income or excluded income for the purpose of calculating the 85/15 test?

Another tax consideration arises at the federal level. As a general matter, to be a cooperative under federal tax law, you must operate at cost. Generally speaking, if a cooperative operates different lines of business and unless there is significant overlap between the consumers or members utilizing those goods or service, the cooperative cannot use revenue from one business line to subsidize the other business line. Just avoiding any improper cross-subsidization is a legal consideration when contemplating entry into the broadband business.

DD: To what extent is a cooperative that is considering broadband subject to antitrust laws?

JH: In general, electric cooperatives are excluded from federal pole attachment regulation. Unless there is a specific state requirement, electric cooperatives generally have the legal ability to exclude others from attaching to their poles or other facilities.

If a cooperative does engage in the broadband business, either directly or through a subsidiary, then that may impact the cooperative’s legal ability to exclude others from attaching to its poles. Under the antitrust law essential facilities doctrine, the cooperative may have an obligation to allow competitors to attach to its poles.

Also, another doctrine under antitrust law relates to improperly tying products together. For example, the cooperative probably could not refuse to provide electric energy to a member unless the member also purchased broadband service. That could be potentially an unlawful tie-in arrangement under federal antitrust law.

DD: What piece of advice do you have for a co-op just getting started?

TT: My main recommendation would be to do all of the necessary legal due diligence in order to minimize legal risk. This is very important to do at the outset. The reality is that there’s legal risk in most everything we do, but it’s important to make informed decisions regarding those risks. Even if you’re willing to take some legal risks, just make informed decisions about those risks.

JH: I would very strongly encourage cooperatives to work with an experienced local attorney from the outset to assess and address some of these issues we have outlined.

Ty Thompson is vice president and deputy general counsel, director and member legal services, for the National Rural Electric Cooperative Association (NRECA) in Arlington, Virginia. He is part of NRECA’s Office of General Counsel. Mr. Thompson joined NRECA in 1997 and works primarily with electric cooperative tax, corporate governance and operational legal issues. Prior to joining the NRECA, Mr. Thompson practiced law at Crisp, Page, and Currin in Raleigh, N.C. where he worked extensively with electric cooperatives. A native of Raleigh, North Carolina, Mr. Thompson graduated magna cum laude in Industrial Engineering from North Carolina State University. He graduated in 1992 from the University of North Carolina School of Law in Chapel Hill.

Jessica Healy joined the NRECA as a member of the Government Relations Department in 2005. She currently serves as assistant general counsel in the Office of General Counsel, where she monitors legal issues affecting electric cooperatives; assists with NRECA corporate governance legal issues; counsels NRECA and ACRE® on political activities; manages the monthly Legal Reporting Service and legal seminars for distribution cooperative attorneys; and speaks at various seminars and meetings regarding electric cooperative legal issues. Ms. Healy received her JD from George Mason University School of Law in 2009. She is a member of the Virginia State Bar, Energy Bar Association, and Electric Cooperative Bar Association.

This interview was originally published in Broadband Partnerships: A Key to High-Speed Success for Rural Electric Co-Ops.