Many electric cooperatives are building or leasing fiber networks for various core operational purposes, such as supporting AMI systems, implementing demand response programs, and connecting substations. When permitted by applicable state law, some electric cooperatives are also utilizing fiber networks to provide broadband services to their communities, which often are underserved by for-profit telecommunications providers. In both cases, cooperatives typically obtain at least some of the fiber for their networks through IRU agreements with third parties that own fiber optic networks in their area.
IRU agreements grant long-term rights to use fiber-optic infrastructure and allow cooperatives to expand broadband access without constructing and maintaining their own fiber segments. IRU agreements provide dark fiber (unlit fiber). Negotiating an IRU agreement requires careful attention to ensure the cooperative’s interests are protected, and involves issues that are not typically encountered by electric cooperatives.
This blog post discusses seven essential provisions that an electric cooperative should focus on when negotiating an IRU agreement under which the cooperative will receive dark fiber. (A subsequent post will discuss points to consider when a cooperative provides dark fiber to a third party).
1. Scope of Use
The IRU agreement should clearly define the scope of use, specifying:
- The exact fibers or fiber strands being transferred.
- The geographical route of the fiber infrastructure.
- The permitted uses (e.g., residential broadband or internal operational purposes).
- The permitted users (affiliates, subsidiaries, or members of the cooperative).
Failure to specify these details can lead to disputes or re-negotiations down the road. For example, if a cooperative intended that its subsidiary could use the fiber to provide community broadband, but the agreement limits use to internal operational purposes, the cooperative may have to re-open the agreement and negotiate an amendment (and potentially an additional payment).
2. Term and Renewal Options
IRU agreements are typically long-term contracts, typically spanning 20 to 30 years, or in some cases, the useful life of the fiber. Key considerations include:
- The initial term of the agreement (typically at least 20 years).
- Renewal options, including whether the cooperative has the right to extend the term unilaterally and on what terms.
- Termination clauses, including whether termination can occur for convenience or only for cause.
For example, if an IRU agreement provides that it can only be agreed upon the mutual agreement of the parties, in such case the cooperative can’t depend on the ability to renew for planning purpose.
The cooperative should resist inclusion of any early termination rights for the provider. However, if the cooperative does agree to an early termination right, it should also include the right to receive a pro rata refund of the initial IRU payment.
3. Ownership and Maintenance Responsibilities
The agreement should clearly allocate responsibilities for maintaining the fiber covered by the IRU agreement.. This should include:
- Which party is responsible for routine maintenance and emergency repairs. Typically the party providing the fiber will maintain the fiber.
- Costs associated with maintenance.
- Some agreements require the recipient to pay a pro-rated cost for emergency maintenance based on the number of fiber strands used.
- Other agreements may require a up-front prepayment for maintenance paid together with the IRU payment.
- Specific service-level agreements (SLAs) detailing response times for outages or degradation.
- Some agreements may allow the cooperative to self-repair if maintenance is not commenced within a certain time period
- Agreements typically provide a time period during which repairs must be commenced, rather than when repairs must be completed
- Procedures for notifying the cooperative about planned maintenance or repairs.
- The agreement should specific time periods during which the provider will not perform non-essential maintenance that affects fiber use
If the cooperative owns and maintains its own fiber, it will have a stronger negotiating position as to maintenance and self-help provisions.
4. Performance Standards, Fiber Testing, and Fiber Degradation
The agreement should define performance standards and testing to ensure the fiber infrastructure meets the cooperative’s needs. These standards should include:
- Fiber and cable attributes
- Testing standards, including acceptable loss values
- Permissible testing equipment
IRU agreements typically include testing requirements to ensure that the fiber (whether newly constructed or existing) meets the specified standards.
- The agreement should give the cooperative the option to have a representative watch all testing, and should require the provider to make any necessary repairs and adjustments to cause the fiber to meet specifications.
- If the project is time sensitive, the cooperative may also want to include the right to terminate after a specified time period if requirements cannot be met.
Because fiber efficiency degrades over time, the cooperative may also want to include a provision that requires the provider, throughout the term of the agreement. to repair or replace fiber that no longer meets the fiber performance standards.
5. Cost Structure and Payment Terms
The cooperative should ensure that the cost structure aligns with the cooperative’s budget and long-term financial goals and is consistent with the cooperative’s accounting requirements. Key elements include:
- Upfront Costs: Ensure clarity on the one-time payment for the IRU rights. For example, if possible the payment should be due after testing is completed, rather than when the IRU is signed. The cooperative can then ensure the fiber complies with fiber specifications before making payment.
- Recurring Costs: Identify all ongoing maintenance or operational fees so those can be considered in the economic analysis of the contract.
- Escalation Clauses: Carefully examine clauses that provide for periodic escalation of costs, such as maintenance costs. Escalation may be based on a fixed percentage or changes in a selected CPI. Over a 20 or 30 year term, an annual escalation clause can significantly increase costs over the life of the contract
6. Underlying Rights
The provider may not own the fiber that is the subject of the IRU, and may instead be receiving the fiber from a third party through an IRU or a lease agreement. If the provider does own the fiber, its use of the fiber will be subject to the requirements of any easements, pole attachment agreements, and rights-of way that apply to the fiber.
- The cooperative should ask for information regarding the term length of any upstream fiber agreements, since the cooperative’s IRU is dependent upon such upstream agreements.
- The agreement should require the provider to cause all underlying rights, including upstream agreements, easement agreements, and pole attachment agreements, to remain in force during the term of the IRU.
- The cooperative may also to require the provider to notify the cooperative of any changes in or potential interruptions of underlying rights.
- If there is a concern about an interruption in service, the cooperative can also ask for an early termination right if service ceases because of a failure to maintain underlying rights, coupled with the right to a pro rata refund.
7. Relocation
The agreement should address what happens if the provider is either requires to or decides to relocate fibers on the fiber route. IRU agreements typically give the provider to right to relocate fiber, but in such event the provider should be required to (a) ensure any new fiber meets the fiber specifications; (b) ensure the relocation does not negatively affect performance; (c) perform relocation activities during non-peak hours; and (d) give the cooperative the maximum advance notice possible under the circumstances.
The cooperative should also carefully review provisions requiring the cooperative to assist with relocation costs. The cooperative should resist paying more than its pro rata share of costs, based on the proportion of its fiber to all fiber in the cable. The cooperative should also resist making any contribution where the provider relocates fiber for reasons other than governmental requirements.
Conclusion
Negotiating IRU agreements with telecommunications providers is becoming a common occurrence as electric cooperatives continue to increase their use of fiber optic networks. Paying careful attention to these seven critical provisions can assist cooperatives in protecting their investments, ensuring reliable service for their members, and maintaining flexibility for future services. To assist with the negotiation process, we recommend working with counsel experienced with fiber agreements.
If your cooperative has questions about this post, please call Roland Hall at (404) 406-8594.
This post is for informational purposes only and does not constitute legal advice. Viewing this content