The Ninth Circuit decided Qwest v. City of Portland (2004 WL 2283287) earlier this week, approving the use of a revenue-based right-of-way fee or "privilege tax" by a number of cities in the Northwest, so long as these fees do not have the effect of prohibiting the provision of telecom services.

Under the Telecom Act, states and localities may require "fair and reasonable compensation" from telecom providers for the use of public rights-of-way. Qwest had argued that the standard under the Act should limited to the recovery of cost, citing the Ninth Circuit's City of Auburn decision as stating that "[s]ome non-tax fees charged under the franchise agreements are not based on the costs of maintaining the right-of-way, as required under the Telecom Act."

After the City of Auburn case the Oregon Court of Appeals decided US West v. City of Eugene in December 2001. There, the court found that there is nothing wrong with the imposition of a gross revenue fee. In turn, the Ninth Circuit held that City of Eugene precluded Qwest's argument on appeal in the City of Portland case. As to the curious quote on the standard of cost from the preceding paragraph, the Ninth Circuit stated: It is far from clear that the quoted language was intended to address the precise issue we now consider. . .

Ultimately, City of Portland would appear to add to an already murky area of the law. In addition to the tension between cost recovery and the possibility of preemption under the Telecom Act, state law can also weigh in and govern how local governments own and control their property. If cost recovery is too low, it may constitute a taking. At the other extreme, local governments can extract a windfall at the expense of shareholders and distort the competitive market at the physical layer. While City of Portland veers toward the latter characterization, other court decisions have held that a cost recovery approach is required. Expect the confusion and litigation to continue.