Re: Conduit Lease/IRU Pricing

[Fletcher Kittredge <fkittredge () staff gwi net>]

A big issue you don't mention is the easement, the legal right to place
conduit. What does it mean to buy conduit if you don't have an easement on
the property to use the conduit?



On Sun, Feb 5, 2023 at 5:28 PM James Jun <james.jun () towardex com> wrote:

> On Sun, Feb 05, 2023 at 01:15:11PM -0600, Mike Hammett wrote:
> > I've been following your work on LinkedIn. Great stuff.
> >
> >
> > I'm actually in a situation where I am on both sides of the transaction.
> I've got a network I built that I've been asked pricing on and interested
> in growth opportunities. One of the opportunities I have for growth quoted
> me at roughly the cost of construction (or at least what I would budget for
> it, anyway) for a 20-year term with a reasonably annual maintenance fee.
> When I saw that, I kinda figured that if I was going to spend that kind of
> money, I'd choose a permanent cost as opposed to 20-year terms and the
> opportunity to place however many conduits I wanted as opposed to just
> getting one.
> >
>
> Thanks!
>
> Without getting into specifics of your potential project, I can only
> comment on what I've seen and can cite examples of.
>
> You mentioned 'opportunity to place however many conduits I wanted' -- are
> you talking about ability to pull your own innerducts inside an empty outer
> conduit you purchase, or are you talking about a joint trench partaking,
> where you have the opportunity to pay pro-rata share of trench construction
> to install as many conduits you want to have in the ground (subject to
> local authority approval ofcourse)?
>
>
> If it is the latter (joint trench), this is very straight forward in the
> utility industry.  It often goes like this:
>
> - Say it costs the lead company (company who is doing the project) a
> figurative (just for example of this conversation) cost of $1 million to
> install 500 feet of 24 - 4" conduits in a large boulevard.
> - Your company proposes to jump into the trench and you want 6 - 4"
> conduits for your own backbone.
> - The most common and simple cost for you is straight-up pro-rata share:
> 25% of the trench costs for 6 ducts out of 24, so you need to pay up $250K
> to get your 6 - 4" conduits.
> - If the lead company is installing smaller pull box manholes for cable
> pulls, in most cases, you will have the right of transit to use those
> manholes so you can use the very conduits you own.
> - If the lead company is installing large underground vaults, don't be
> surprised if they don't let you in it -- they'll likely require you to pay
> additional costs to install your own separate manhole, where your 6 - 4"
> conduits will break off from the main trench, and lead into your own
> dedicated 4'x4' manhole.  If this is not possible (i.e. road is full, local
> authority couldn't permit it due to conflict & heavy congestion with other
> utility lines in the area), then the lead company may also charge you a
> reasonable manhole license fee for you to use their vaults beyond the basic
> right of transit ('beyond' as in, if you need to install a splice case or
> slack coil, as opposed to your cable simply transiting thru the said
> manhole).  For example, Empire City Subawy (ECS) duct system run by Verizon
> in NYC charges a publicized rate of $314/year for each splice case in an
> ECS manhole.
>
>
> The legal definitions of what you're exactly getting for paying that $250K
> above is largely up to the lead company and the defined contract terms of
> the Joint Trench Agreement.  I've seen following cases: (a) you outright
> own the title to those 6 - 4" conduits in perpetuity; (b) you don't own the
> title, but you get an IRU or lease of 99 years to those conduits; or (c)
> you only get short-medium (5-25 years) IRU, but then it would probably have
> to be at a lower price that is more commercially reasonable to both parties.
>
> Case (a) can be common in joint trench projects that are organized by
> local authorities (i.e. b/c municipality required the street dig to be a
> joint trench), and lead company has no interest in maintaining any manholes
> or conduits, beyond the bare minimum required for their own cable.  In
> these situations, manholes (municipalities often call them 'joint
> manholes') become effectively unmanaged chaotic no-man's land, where nobody
> owns the manholes, much less maintain them.  I've seen situations where
> municipality had to step in to fix a broken manhole cover/frame, because
> nobody in the joint trench would step in to take responsibility.
>
> Cases (b) and (c) are often done by more larger telecom installations,
> where lead company is building a true joint-use infrastructure and would
> like to maintain it over long term.  These are usually part of large duct
> systems, and the lead company would typically take charge in maintaining
> the entirety of the trench and its manholes over their llifetime; as such,
> members of such joint trench systems will be separately charged maintenance
> fee as previously discussed.
>
>
> Outside of straight-forward joint trench projects, what determines "just
> and reasonable" costs in construction projects to outright own a conduit is
> largely a function of how much you (and the other party) are willing to
> bend, and how many lawyers and hardballers are going to be involved.  In
> many situations, sellers may start by wanting to make you pay for 100%+ of
> their costs of doing construction/business (typical investor/short return
> model), where you're effectively paying not only for your own conduit, but
> for their conduits as well-- sellers will call this an acceptable "cost
> recovery model".  Their position may hold true if you're the only primary
> tenant of the proposed duct system, or not, if there are other tenants also
> joining.  For the seller, it will largely come down to justifying their
> capital and operating costs and depreciation expected over time.  If the
> buyer has a good faith reason to believe that seller is attempting to make
> opportunistic profits beyond 'just and reasonable costs' not to exceed
> capital and operating expenses, it could potentially result in disputes and
> regulatory complaints.  This is one of the reasons on why a conduit
> license/recurring lease scheme is more straight-forward for duct access in
> existing systems.
>
> One commonly accepted principle to determine pricing for conduit access is
> to apply the energy utility industry's method of using Rate of Return
> formula, where owner of the system keeps to an allowed Rate of Return of
> reasonable percentage, and then plays with depreciation expenses to get
> some wiggle room in how they would compute for costs.  It's a complex topic.
>
>
> James