Fee to Use Utility Poles Case

Most utility poles carry electric and telephone lines. In areas served by cable television, they also carry television cables. However, cable television companies carely own any utility poles. Instead, they pay utility companies a rental for the use of each pole on a yearly basis. The determination of the rental fee is a source of frequent disagreement between the pole owners and the cable television companies. In one situation, pile owners were arguing for a $10 annual rental fee per pole; this was the standard rate the electric and telephone companies charged each other for the use of poles.

We object to that, stated the representative of the cable television company. With two users, the $10 fee represents a rental fee for one-half the pole. This fee is too high because we only use about six inches of each 40-foot pole.

You are forgetting federal safety regulations, responded a representative of the elective company. They specify a certain distance between different types of lines on a utility pole. Television cables must be a minimum of 40 inches below power lines and 12 inches above telephone lines. If your cable is added to the pole, the total capacity is reduced because this space cannot be used for anything else. Besides, we have an investment in the poles; you dont. We should be entitled to a fair return on this investment. Furthermore, speaking of fairness, your company should pay the same rental fee that the telephone company pays us and we pay them. We do not intend to change this fee.

In response, the cable television company representative made two points. First, any fee represents incremental income to the pole owners because the cable company would pay all costs of moving existing lines. Second, because the electric and telephone companies both strive to own the same number of poles in a service area, their pole rental fees cancel themselves. Hence, the fee they charge each other is not relevant.

Context Your group has been hired as a consultant to assist the cable television company representatives in negotiating the rental fee for the utility poles. Specifically, the representatives of the cable television company need your help with the following questions:

1. Short- or Long-Term Analysis is the cable companys argument for lower rent based on a short- or long-term analysis?
2. Rental Fee compute and justify a fair and reasonable rental fee.
3. Sunk Costs what are the sunk costs? Examples?
4. Opportunity Costs what are the opportunity costs? Examples?
5. Quantitative Analysis what two financial ratios would you recommend? Why?
6. Failed Negotiations assume the negotiations fails, recommend two alternatives that the cable television company may pursue.