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The Art of “Convincing” a Utility Company to Relocate its Lines Underground—A Developer’s Tool

You are a developer that has numerous utility lines surrounding your shopping center. Besides being unsightly, the lines may also be a hindrance to a necessary or desirable road widening or other project related to access to your site. One idea that has worked in the past is to enlist the assistance of a municipality to require the utility company to relocate the overhead utility lines underground.

The question is whether the municipality, the utility company or you, the developer, will be responsible for what could be an expensive cost of such relocation. There are at least four sources that can provide guidance in answering this question together with caselaw relating to these areas of analysis:

(i) the franchise agreement and/or other agreement between the utility and the municipality;
(i) a grant of authority given by a municipality;
(iii) statutory provisions governing a municipality’s right to require the relocation of utility facilities and the common law rule relating to utility relocation;
(iv) the facts and circumstances with respect to the nature of the activity being performed by either the municipality or the developer.

1. Restrictions Pursuant to Franchise Agreement

Franchise Agreement:

Franchise Agreements in General - A utility company acquires its location in a public road by permission of the State through the grant of a franchise by the State [or by a municipality, as a subdivision of the State]. Artesian Water Co. v. State, Dept, of Highways & Transportation, 330 A.2d 432 (Del. Super. 1974). A franchise grant typically permits the utility company to use, but not hold fee title in, the land on which it places its facilities. However, as the Artesian court noted, “rights come in different sizes.” Although a utility company is permitted to use the public way because it serves a public interest, the utility company’s interest in the public way is subordinate to the public’s enjoyment of it. Artesian Water Co., supra. Courts have generally held that a utility company is permitted to locate its lines within the public right of way as a use ancillary to the principal and primary use of the right of way by the public. Nicoll v. New York & New Jersey Telephone Co., 62 N.J.L. 171, 160 A.549 (E. & A. 1899). Consequently, although there is some authority to the contrary, see Arkansas State Highway Commission v. Arkansas Power & Light Company, 235 Ark. 277, 359 S.W. 2d 441 (1962), the prevailing view in most jurisdictions is that a franchise conferred by the State on a public utility is not entitled to compensation under contract law (through the exercise of a utility company’s rights under the franchise agreement) or the law of eminent domain for any losses or expenses it may sustain in the removal and relocation of facilities. Artesian Water Co., supra.

Note, however, that even though a municipality may have superior rights to that of a franchisee, a utility company does acquire certain rights in a public street when it obtains a franchise agreement from a governmental body. For example, a utility company is protected against arbitrary action by the municipality. See Artesian Water Co., supra; and Rochester Tel. Corp. v. Village of Fairport, 446 N.Y.S. 2d 455 (N.Y.A.D. 4 Dept. 1982).

Review of specific franchise agreement - The first place to look for authority with respect to relocation of utility lines is the franchise agreement between the utility (or most likely its predecessor) and the municipality. The franchise agreement governs a particular utility company’s right to operate within the municipality. If the predecessor to the utility company entered into a franchise agreement with the municipality to provide for the running of wire and erecting of poles for electric lighting to service the residents of the municipality and generally provided for the operation of the utility system within the municipality, that would not be unusual. If there is a specific provision in the franchise granting the municipality the power to demand that the lines be relocated, there is express authority to back up a municipality’s request that a utility relocate its lines. Unfortunately for our analysis, we can assume that typically there are probably no provisions relating to the subject of relocating lines underground mentioned in franchise agreements. It is very likely that the franchise agreement was entered into many years ago and the thought of relocating lines underground may not have even been contemplated by the parties. If the original franchise agreement does not expressly permit the municipality to order underground relocation or provide for who would be responsible in the event relocation of lines is necessary, further inquiry is needed.

2. Municipal Grants of Authority to Operate Utility Services

Municipal Grants - Another source of information relating to the powers and limitations placed on utility companies may be contained in a general or specific grant to utility companies by a particular municipality. A typical municipal grant will apply to all telephone, telegraph and electric light companies. It may provide, in part, that the location of conduits in the streets shall not interfere with any sewers previously constructed, and in case it is necessary after the laying of such conduits to construct or repair sewers, the company has no right to interfere with such subsequent work but will remove its conduits to such places as shall be determined by the department in charge of the work so as not to interfere with any work that may be done by the municipality in the streets. Thus, if the road widening was performed for the purpose of facilitating the repair of sewers or to lay or repair water pipes, then it would seem that the utility may be responsible for the cost of relocation of its lines. Although this grant provides some authority for your request, it may be a good idea to seek additional authority to back up your request that a utility company pay for the underground relocation of its facilities.


3. Statutory Provisions Relating to Utility Relocation

Federal Provisions

Before reviewing the laws of your particular state, an assessment of the possible application of federal laws is recommended. For example, if the request to relocate utility lines is prompted by the initiation of a federal-aid highway project then the provisions of the Federal-Aid Highway Act of 1956 as amended, may apply. See 23 USC Section 101 et seq.

23 USC 123 (Relocation of Utility Facilities) states:

“(a) When a State shall pay for the cost of relocation of utility facilities necessitated by the construction of a project on any Federal-aid system, Federal funds may be used to reimburse the State for such cost in the same proportion as Federal funds are expended on the project. Federal funds shall not be used to reimburse the State under this section when the payment to the utility violates the law of the State or violates a legal contract between the utility and the State. Such reimbursement shall be made only after evidence satisfactory to the Secretary shall have been presented to him substantiating the fact that the State has paid such cost from its own funds with respect to Federal-aid highway projects for which Federal funds are obligated subsequent to April 16, 1958, for work, including relocation of utility facilities.

(b) The term ‘‘utility’’, for the purposes of this section, shall include publicly, privately, and cooperatively owned utilities.

(c) The term ‘‘cost of relocation’’, for the purposes of this section, shall include the entire amount paid by such utility properly attributable to such relocation after deducting therefrom any increase in the value of the new facility and any salvage value derived from the old facility.” (emphasis added)

Courts have construed this statute to apply only when a utility’s costs are compensable under state law. Potomac Electric Power Co. v. Fugate, 211 Va. 745, 180 S.E. 2d 657 (1971) as sited in Artesian Water Co., supra. Thus, an analysis of state law is necessary to determine if a State is authorized to pay for such facility relocation costs.

State Specific Laws and the Common Law

The majority of states follow the common law rule that a utility is required to relocate facilities that are located on public highways at its own expense when such relocation is necessary in the exercise of a municipality’s police power to protect the public health, safety, or convenience. New York Telephone C. v. City of New York, 466 N.Y.S. 2d 56, 95 A.D. 2d 282 (N.Y.A.D. 2 Dept. 1983); City and County of Denver v. Mountain States Telephone and Telegraph Company, 754 P. 2d 1172 (Sup. Ct. Colorado, 1988); Port Authority v. Hackensack Water Co., 41 N.J. 90, 195 A.2d 1 (1963). Absent specific legislative action, courts are reluctant to overturn the common law on costs-allocation in this area. Pine Belt Chevrolet, Inc. v. Jersey Cent. Power and Light Co., 132 N.J. 564, 626 A.2d 434, Util. L. Rep. P 26,329 (N.J. 1993).

In New Jersey, N.J.S.A. 27:7-44.9 provides a source of state legislative action relating to relocation of utility lines under certain circumstances. The statute states, in part:

“a. In addition to other powers conferred upon the Commissioner of Transportation by any other law and not in limitation thereof, the commissioner, in connection with the construction, reconstruction, maintenance or operation of any highway project, may make reasonable regulations for the installation, construction, maintenance, repair, renewal, relocation and removal of pipes, mains, conduits, cables, wires, towers, poles and other equipment and appliances, herein called ‘facilities,’ of any public utility *** in, on, along, over or under any highway project. *** The costs and expenses of such relocation or removal *** shall be ascertained and paid by the commissioner as part of the cost of the project.
b. As used in this act, ‘highway project,’ in addition to its ordinary meaning means one which is administered and contracted for by the commissioner.”

Although the court in Pine Belt stated that the above statute “clearly abrogates” the common law [by providing for the right of utility companies to be compensated for facility relocation in limited circumstances], it did not believe that abrogation to be complete. First, the court concluded that, when read in the context of N.J.S.A. 27:7-44.9, the definition of “highway project” is limited to only those projects “administered and contracted for by the commissioner.” The court made this determination because “most of those costs will be eligible for federal reimbursement. Thus, only projects administered and contracted for by the DOT commissioner were held to be eligible for state payment of utility relocation costs. Second, the court decided that the statute does not apply (and the State is not required to pay for the costs of relocating facilities) where the private-property owner contracts and pays for a road improvement that benefits the public interest in order to satisfy a condition of a Department of Transportation driveway-access permit. In those situations, it is more likely that the utility company will be responsible for the relocation costs.

The Pine Belt court held: (i) when relocation costs are incurred in conjunction with a highway project constructed and funded by the DOT, the DOT will be responsible for utility relocation costs; (ii) when relocation costs are incurred in conjunction with a highway project constructed and funded by an entity other than DOT, they fall on the utility or the developer according to common law doctrines; (iii)where the highway improvement is solely for the private-property owner’s benefit, it should assume the cost of the utility relocation; and (iv) both the common law and statutory provisions relieve private property owners of financial liability when the relocation of utility facilities is mandated by the public welfare. For example, the court held that a road-widening condition imposed by the DOT on a developer’s access permits primarily benefited the public not the developer, and viewed the imposition of that condition as a permissible exercise of DOT’s police powers to improve the safety of its highways and thereby further the public welfare. The court noted that the “liability for the costs of relocations necessitated by highway improvements … is a risk the utility companies run and a price they must pay for the privilege of locating within a public right-of-way.”

If there is no apparent specific authority to provide guidance in conclusively determining if the utility company should pay for the cost of relocation, a review of the relevant case law in your state concerning relocation of utility lines is in order. Please note, however, that the laws pertaining to the relocation of utility lines differ from state to state. It would be unwise to rely on the laws of one state and expect them to be the same in your home state without confirming this is the case. This is especially true because each state may have its own statutory provisions relating to utility relocation which a court must consider when ruling on the issue of cost allocation.

As noted above, the common law rule followed by the majority of jurisdictions is that the utility company will be responsible for paying the cost of relocating utilities if such relocation is necessitated by a project benefiting the “public welfare.” Typical municipal actions deemed to be in furtherance of the “public welfare” include the exercise of municipal authority to repair, re-grade, or realign its streets, redevelop an urban area, construct a mass transit system, or install a water and sewer system. See City and County of Denver, supra.

It is interesting to note that even if the placement of underground lines is based in part on aesthetic concerns, such concerns may constitute a “valid basis for the exercise of the police power.” (See Suffolk Outdoor Adv. Co. v. Hulse, 43 N.Y. 2d 483, 490). However, aesthetics demands [or any other municipal demands to relocate utility lines for that matter] must not be arbitrary or unreasonable. Rochester Telephone Corp. v. Village of Fairport, 446 N.Y.S. 2d 823, 455 (N.Y.A.D. 4 Dept. 1982). For instance, the court in Rochester Telephone Corp. held that a municipality must not submit the utility to unnecessary and unreasonable expense when the legitimate exercise of the police power does not require it. It further ruled that where a government acts in its enterprise capacity (where it is undertaking a proprietary function) there is a compensable taking of a property right of the utility. The court determined that when a municipality is acting in its “governmental capacity”, as where it takes land to widen a road or where it orders the relocation of all poles as an amenity for a single-family residential area, there is no taking requiring compensation of the utility.

In Consolidated Edison Company of New York, Inc. v. City of New York, 567 N.Y.S. 2d 545, 171 A.D. 2d 865 (N.Y.A.D. 2 Dept. 1991), the court held that it is well settled that “utility companies,” which have been granted the ‘privilege’ of laying their pipes and mains in the public streets *** must relocate them at their own expense ‘whenever the public health, safety or convenience requires the change to be made. The court ruled that departure from this settled principle is recognized only when the change is required in behalf of other public service corporations or in behalf of municipalities exercising a proprietary instead of a governmental function. Pursuant to this rationale, if the municipality is performing a governmental function, the utility will most likely be responsible for the cost of relocating its lines underground. In most instances, a utility company will have a tough time convincing a court that the municipality is acting in its enterprise capacity absent extremely persuasive considerations.

4. Reviewing the Nature of Activity Being Performed

Proprietary vs. governmental function:

Although there are a number of states that attempt to distinguish between proprietary and governmental functions many others reject such an analysis. See City and County of Denver v. Mountain States Telephone and Telegraph Company, 754 P. 2d 1172 (“such a distinction is unsound because it assumes that functions which were once relegated to the private sector could not later be undertaken by municipalities in support of the health, safety and welfare of its citizens”); see also Washington Township v. Ridgewood Village, 26 N.J. 578, 141 A.2d 308 (1958) (“whatever local government is authorized to do constitutes a function of the government”). Even the United States Supreme Court has weighed in on the distinction; see Garcia v. San Antonio Metro. Transit Auth., 469 U.S. 528, 105 S.Ct. 1005 (1984) (“any rule that turns on a judicial appraisal of whether a particular function traditionally falls into the “proprietary” or “government” category leads to inconsistent results”).

Moreover, in at least one jurisdiction which attempted to distinguish between governmental and proprietary functions, it conceded that making such a distinction is somewhat of a fiction. As the Court of Appeals held in New York Tel Co. v. City of Binghamton, 272 N.Y.S. 2d 359, 18 N.Y. 2d 152 (N.Y. 1966):

“The distinction between ‘governmental function’ and ‘proprietary function’ is a sort of abstraction difficult to make meaningful in a day when municipalities continually find new ways to exercise police power in their efforts to cope with the pressing needs of their citizens. … [T]he present submission requires us to determine whether or not this particular enforced removal of the telephone company’s property from this particular street was or was not subject to the unquestioned common-law rule against compensation for such expenses. The common-law rule, based on public considerations of a high order, has never been doubted or questioned and any exceptions thereto should be carved out with reluctance and for compelling considerations. … The obligation of the State to pay the cost of relocation or the value of retired facilities did not exist at common law. … In the New Rochelle opinion …written in 1930, [this Court] characterized as a departure from the common-law rule the holding that the cost of removal and relocation is not on the company when the change is required in behalf of other public service corporations or in behalf of municipalities exercising a proprietary instead of a governmental function. It would be stretching this departure or exception too far to apply it in cases … where the city is not ‘going into business’ for itself, as it does when it operates a bus line or a subway station. … We carefully pointed out that clearing, replanning and rehabilitation of substandard and unsanitary areas is a public purpose.”

Thus, even if the distinction between governmental and proprietary functions is ignored, the general rule seems to be that if a municipality claims that it is exercising its general “police powers,” and it has legitimate reasons to claim that such action is in furtherance of the general welfare of its citizens, a utility company will be hard pressed to convince a court to ignore the common law rule relating to facility relocation. Probably the overriding reason courts have been in favor of imposing such liability on utility companies is because, to do otherwise, “in addition to posing a crushing financial burden, might well discourage municipalities from undertaking activities to promote the general welfare.” New York Telephone Co. v. City of New York, 466 N.Y.S. 2d 56.

CONCLUSION

Developers, acting alone, probably do not have the leverage to convince a utility company to relocate its utility lines underground. As this article indicates, however, if a municipality can be convinced that it should use its police powers to mandate that the lines be placed underground, utility companies may have a difficult time contesting such a proposition.

If the restrictions contained in franchise agreements, statutes or express municipal grants do not clearly or adequately address the issue as to whether a utility company should bear the expense of relocation, a review of the specific facts and circumstances surrounding the relocation request is useful. Case law favors a municipalities’ position that the cost should be paid by a utility company except under very limited circumstances. Although this article only provides a general review on the subject of utility relocation, the analysis used herein was utilized in a successful manner to convince a large utility company to relocate its lines at its sole expense in response to a city’s need to widen its roads. They would not have done so voluntarily. The utility company needed to be “persuaded” by a strongly worded letter from a municipality’s Corporation Counsel that such action would avoid unnecessary litigation. Given the high cost of moving lines underground, it may well be in a municipality’s best interests to be aware of utility companies’ legal obligations with respect to the removal and relocation of utility lines. Developers may also be interested in such information as they may use this knowledge to: (a) avoid paying for such costs themselves; and (b) to persuade a municipality to seek relocation of unsightly overhead lines in areas where a municipality is widening roads or performing similar activities in contemplation or in furtherance of new development within a municipality.


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