The moral hazard of lax FCC land use oversight for advanced network infrastructure

Benjamin W. Cramer. The moral hazard of lax FCC land use oversight for advanced network infrastructure. Telecommunications Policy. 46(1). 2022. doi: 10.1016/j.telpol.2021.102232.

Abstract

This article discusses issues that arise when service providers place network equipment on publicly owned lands in the United States. Based on land use policy at the Federal Communications Commission, this paper theorizes that the use of public lands for 5G network development will create a moral hazard, as service providers may be tempted to take risks in the way they use public lands. Per economic theory the firm could behave recklessly when knowing that the costs will be borne by someone else – in this case local citizens. This is an example of the moral hazard problem in economics.

Conclusion and recommendations

This article has argued that FCC land usage regulations, covered by Section 253 in the Telecommunications Act of 1996, remove local governments as decisionmakers in land management. The result is that telecommunications firms have little incentive to use publicly owned land efficiently or equitably, and the FCC has little incentive to make sure that they do. Without these incentives, a moral hazard forms in which local citizens must accept the costs (financial or otherwise) of poor land use practices for telecom infrastructure. The FCC’s more recent enhancement of such regulations in order to speed up the 5G rollout, regardless of the interests of local governments and citizens, will create additional moral hazards that in turn will encourage firms to abuse the land that they have been permitted to build upon.

The FCC’s plans for the 5G rollout, as described for the public at the Commission website, include many promises to “speed up the process” of deployment and “make it easier for companies to invest” in network equipment (FCC, 2021(a)), which could indeed encourage cutting corners and making land use decisions without considering the longer-term consequences. There have in fact been a few successful local challenges against land use decisions made by telecom providers for 5G and other recent infrastructure. Douglas County, Colorado denied a visually unattractive tower proposed by T-Mobile and prevailed in court (Reid, 2020). The city of San Jose, California has convinced AT&T and Verizon to adapt their local 5G infrastructure plans with San Jose’s “smart city” initiative, with a focus on environmental protection and sustainability (Moss, 2018).

On the other hand, the telecommunications industry also has a history of ignoring local restrictions or regulations on land use. The present author does not wish to imply that this will happen often, and in fact it may be quite rare. However, such things have happened before in the telecommunications sector and other networked industries. For example, in 2001 MCI Worldcom started building network infrastructure on a strategic plot of public land in Indiana; due to vague local permitting processes the company was able to ignore the wishes of the local community and did not bother to get permission to build. In Peeler v. MCI Worldcom, an Indiana court charged the company with willful trespass and ordered it to remove all the equipment it had placed at the location, which cost the company millions of dollars per month until the matter was resolved. During that same period, researchers uncovered internal documents at AT&T in which the company admitted to using various public land parcels without adequate permission. The company rationalized its actions by claiming pressure to build network coverage that was demanded by the marketplace, but admitted that its legal position was “precarious” and “far from sound” (Ackerson, 2003, pp. 184–185). This behavior seems to have been inherited from telecom’s ancestor in the realm of networked industries – railroads – which in the late 1800s often built tracks across public lands without permission (because overseeing governments were often very far away or unable to enforce regulations), and used the same argument about market pressure to build first and ask questions later (Ackerson, 2003, pp. 180–181).

Those unauthorized uses of land caused various environmental or economic harms with various levels of severity, but they were all enabled by the type of moral hazard covered in this article. While telecommunications firms have other incentives to behave, especially public relations benefits, there is little guarantee that land-use horror stories will never happen during the 5G rollout, as shown by older history and current regulatory practices.

The economics literature has shown that moral hazards are more common than usual among complex corporations that are pressured by shareholders to take risks for profit purposes, and in industries dominated by natural monopolies or oligopolies (Laffont, 1995, pp. 319–320). The telecommunications industry exhibits both of these characteristics. Large corporations are also expected to make large profits in ways that conflict with risk reduction efforts in non-economic areas like environmental compliance, while the structure of such corporations reduces the ability of managers to oversee the environmental activities of workers at the level needed to prevent damage before it occurs (Gabel & Sinclair-Desgagné, 1993, pp. 229–233).

These are traditional reasons for regulatory oversight of corporations and industries, and such oversight has been lacking for the use of publicly owned lands by telecom firms. Well-designed public policy is necessary in any advanced society, especially for practices that create moral hazards and principal-agent problems (Bergman & Lane, 1990, p. 339). Oversight of corporate actors (“agents”) will discourage them from hiding information, which in turn gives them an advantage over the contractual relationship; regulators (“principals”) could level the informational playing field with incentives and rewards for behaving equitably (Hiriart & Martimort, 2004, pp. 4–5). This article also positions the FCC as a somewhat aloof player in the principal-agent problem of telecom land usage, and this increases the distance and misunderstandings between the ultimate regulator (the FCC) and the ultimate sufferers of land use inequities (citizens), with the potential intermediary (local government) largely cut out of the process. This type of fractured arrangement is known to induce additional moral hazards as well (Bergman & Lane, 1990, p. 345).

This problem can be addressed with stronger institutional oversight (Braun & Guston, 2003, p. 303). Such oversight has been found to be particularly effective in encouraging firms to manage their environmental impact by reducing their temptations to engage in risky behavior (Gabel & Sinclair-Desgagné, 1993, pp. 238–239). This article recommends that FCC regulations regarding usage of public lands for advanced network construction should acknowledge the needs of affected landowners and local communities. This can be accomplished with a replacement of Section 253 of the Telecommunications Act, or at least a softer interpretation of it. This may require Congressional action.

By requiring the needs of the network and of telecom firms to be considered first in any local land use regulation, the concerns of local governments – who are much more knowledgeable about local conditions and the interests of citizens – are frozen out of the process almost a priori. This regulatory pattern incentivizes firms to never consider any interests other than their own when they use publicly owned lands. While few well-managed firms will succumb to the temptation, history shows that some might, and the effects must be suffered by everyone else. A possible solution is to encourage more equitable viewpoints on the American telecommunications regulations that enable the discrepancies of knowledge and power embodied in the principal-agent relationship at hand, which in turn will reduce the possible moral hazard of risky land use by one party who knows that someone else will have to deal with the consequences.
https://www.sciencedirect.com/science/article/pii/S0308596121001361
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