On May 7, 2024, the FCC released a Declaratory Ruling reclassifying “broadband Internet access service” (“BIAS”) as a “telecommunications service” subject to the jurisdiction of the FCC under Title II of the Communications Act. It was accompanied by an Order removing BIAS from most Title II regulations, and a Report and Order applying a set of Open Internet rules to BIAS providers. (For clarity, the remainder of this blog will refer to the proceeding as the “Order.”)[1]

We summarized key provisions impacting ISPs in an initial blog post on this topic earlier this month. In June, we will provide our best guesses as to what the future holds with respect to net neutrality, the upcoming election, and potential Congressional action. This post examines what some consider to be the centerpiece of the Order: the Open Internet Rules.

A Brief Net Neutrality History Lesson

In its 2015 “Open Internet Order,” the FCC adopted “bright line” net neutrality rules applicable to BIAS:  no blocking lawful content, no throttling lawful content, and no paid prioritization. The ink was barely dry on the new rules when, in January 2016, the newly GOP-led agency released the “Restoring Internet Freedom Order,” which largely converted the net neutrality rules from prohibited conduct to actions that were legal but which must be disclosed to customers. . .

To say net neutrality was a hotly-contested issue in 2015-16 is an understatement. The issue caused a 3,000% spike in the FCC’s web traffic and the agency received about 22 million comments. In August 2018, the FCC’s Inspector General concluded that the bulk of this was caused by a segment on John Oliver’s TV show.

While restoring net neutrality was identified early on as a priority for the Biden Administration, it was not until the fall of 2023, with the confirmation of Anna Gomez, that the Administration was able to secure a Democratic majority at the Commission. Following Commissioner Gomez’s confirmation, the Democrat-let FCC moved immediately to re-implement net neutrality rules.

Bright Line Rules

In the 2024 Order, the FCC reinstated several bright-line rules that:

  1. Prohibit BIAS providers from blocking lawful content, applications, services, or non-harmful devices (“No Blocking”);
  2. Prohibit BIAS providers from impairing or degrading lawful Internet traffic on the basis of content, application, service, or use of non-harmful device (“No Throttling”); and,
  3. Prohibit paid or affiliated prioritization practices (“No Paid Prioritization”).

The Order also implemented a “general conduct standard” prohibiting unreasonable interference or disadvantage in general, and adopted enhancements to transparency rules that had been narrowed by the FCC’s Restoring Internet Freedom Order” in 2017.

No Blocking

In the Order, the FCC determined that “the freedom to send and receive lawful content and to use and provide applications and services without fear of blocking continues to be essential to the Internet’s openness,” and expressed concern that BIAS providers may, in certain instances, be incentivized to block edge providers’ content. The no-blocking rule applies to transmissions of lawful content only. BIAS providers may refuse to transmit unlawful material, such as child pornography or copyright-infringing materials. The rule also entitles end users to connect, access, and use any lawful device of their choice, provided that the device does not harm the network. The no-blocking rule prohibits network practices that block a specific application or service, or any particular class of applications or services, unless it is found to be reasonable network management. Finally, this rule prohibits BIAS providers from charging edge providers a fee to avoid having edge providers’ content, services, or applications blocked from end-user customers.

No Throttling

The term “throttling” refers to conduct that is not outright blocking, but that inhibits the delivery of particular content, applications, or services, or particular classes of content, applications, or services. Under the Open Internet rules, BIAS providers are prohibited from impairing or degrading lawful Internet traffic on the basis of content, application, service, or use of non-harmful device. The no-throttling rule bans conduct that is not outright blocking, but that the FCC believes would inhibit the delivery of particular content, applications, or services, or particular classes of content, applications, or services. The rule also prohibits conduct that impairs or degrades lawful traffic to a non-harmful device or class of devices. The rule addresses instances in which a BIAS provider targets particular content, applications, services, or non-harmful devices and does not address slowing down or speeding up an end user’s connection to the Internet based on a choice clearly made by the end user. For example, a BIAS provider may offer a data plan in which a subscriber receives a set amount of data at one speed tier and any remaining data at a lower tier.

No Paid Prioritization

Finally, the FCC reinstated the prohibition on paid or affiliated prioritization practices, subject to a narrow waiver process. The term “paid prioritization” refers to the management of a broadband provider’s network to directly or indirectly favor some traffic over other traffic, including through use of techniques such as traffic shaping, prioritization, resource reservation, or other forms of preferential traffic management, either (a) in exchange for consideration (monetary or otherwise) from a third party, or (b) to benefit an affiliated entity. As with throttling, the FCC found that BIAS providers have both an incentive and the ability to engage in paid prioritization. However, the FCC may waive the ban on paid prioritization if a petitioner demonstrates that the paid prioritization practice would provide some significant public interest benefit and would not harm the open nature of the Internet. A successful waiver request would require the petitioner to provide evidence that the practice furthers competition, innovation, consumer demand, or investment, and does not harm the open nature of the Internet. This could be done by providing evidence that the practice: (i) does not materially degrade or threaten to materially degrade the BIAS of the general public; (ii) does not hinder consumer choice; (iii) does not impair competition, innovation, consumer demands, or investment; and (iv) does not impede any forms of expression, types of service, or points of view. This is an extremely high bar and waivers will not be routinely granted.

General Conduct Standard

In addition to the bright-line rules above, the FCC also reinstated a “no-unreasonable interference/disadvantage standard.” This standard allows the FCC to prohibit practices that unreasonably interfere with the ability of consumers or edge providers to select, access, and use BIAS to reach one another. This standard will operate on a case-by-case basis, applying a non-exhaustive list of factors, and is designed to evaluate other current or future BIAS provider policies or practices—not covered by the bright-line rules—and prohibit those that harm the open Internet. The FCC provided guidance to BIAS providers regarding the application of the standard and adopted a non-exhaustive list of factors that the agency will consider in its analysis. These factors include: (i) whether a practice allows end-user control and enables consumer choice; (ii) whether a practice has anticompetitive effects in the market for applications, services, content, or devices; (iii) whether a practice affects consumers’ ability to select, access, or use lawful broadband services, applications, or content; (iv) the effect a practice has on innovation, investment, or broadband deployment; (v) whether a practice threatens free expression; (vi) whether a practice is application agnostic; and (vii) whether a practice conforms to best practices and technical standards adopted by open, broadly representative, and independent Internet engineering, governance initiatives, or standards-setting organizations.

Transparency Rule

The FCC also adopted enhancements to existing transparency rules that require BIAS providers to publicly disclose accurate information regarding the network management practices, performance, and commercial terms of its broadband Internet access services sufficient for consumers to make informed choices regarding use of such services and for content, application, service, and device providers to develop, market, and maintain Internet offerings. BIAS providers must maintain the accuracy of these disclosures. When there is a material change in a provider’s disclosure of commercial terms, network practices, or performance characteristics, the provider has a duty to update the disclosure in a manner that is “timely and prominently disclosed in plain language accessible to current and prospective end users and edge providers, the Commission, and third parties who wish to monitor network management practices for potential violations of open Internet principles.”

*       *       *

These rules have been adopted, rescinded, and readopted in the past decade. And they could be rescinded yet again depending on the outcome of the 2024 Presidential election. Our next post will explore different election scenarios, likely court challenges, and prospects for Congressional action to predict what may be next.


[1] In the Matter of Safeguarding and Securing the Open Internet, WC Docket Nos. 23-320, 17-108, Declaratory Ruling, Order, Report and Order, and Order on Reconsideration, FCC 24-52, rel. May 7, 2024 (“Order”).

On May 7, 2024, the FCC released a Declaratory Ruling reclassifying “broadband Internet access service” (“BIAS”) as a “telecommunications service” subject to the jurisdiction of the FCC under Title II of the Communications Act. It was accompanied by an Order removing BIAS from most Title II regulations and a Report and Order applying a set of Open Internet rules to BIAS providers. (For clarity, the remainder of this blog will refer to the proceeding as the “Order.”)[1]

Mainstream press reports have focused primarily on the “net neutrality” part of the Order, and to be sure, the FCC’s desire to implement the Open Internet rules catalyzed the overall effort. This post, however, addresses other reasons why this re-re-reclassification[2] of broadband’s regulatory status is important for ISPs. (We will address the Open Internet rules and the future of this proceeding in subsequent posts.)

Ultimately, however, the Order is notable less for its immediate impact on ISPs than for the long-term structural change it represents. The Order – if it survives legal challenge – gives the FCC jurisdictional authority over the dominant communications medium of modern times.

Scope of Reclassification:  “Broadband Internet Access Service.”  The Order applies to “broadband Internet access service” (“BIAS”), defined as “a mass-market retail service by wire or radio that provides the capability to transmit data to and receive data from all or substantially all Internet endpoints, including any capabilities that are incidental to and enable the operation of the communications service, but excluding dial-up Internet access service.”[3]

BIAS includes “services provided over any technology platform, including but not limited to wire, terrestrial wireless (including fixed and mobile wireless services using licensed or unlicensed spectrum), and satellite.”[4]

The FCC also reinstated the classification of mobile BIAS as a commercial mobile service (i.e., within the scope of Title II), pursuant to Section 332(d)(1) of the Communications Act.[5]

BIAS does not include enterprise services,[6] and does not include private end-user networks, coffee shops, bookstores, airlines, and other businesses that acquire BIAS to provide service to patrons.[7] The Order also described a category of “non-BIAS services,” defined as “certain services offered by BIAS providers that share capacity with [BIAS] serviced over BIAS providers’ last-mile facilities,” but that is not BIAS.[8]

Providers of BIAS are directly affected by the Order in a variety of ways, as the remainder of this post describes further.

Access to Poles, Ducts, and Rights-of-Way:  Section 224.  The Order applies Section 224 of the Communications Act to BIAS providers, thus “ensur[ing] that BIAS-only providers receive the same statutory protections for pole attachments guaranteed by section 224 of the Act that providers of cable and telecommunications services receive, thereby promoting greater deployment, competition, and availability of BIAS. … BIAS-only providers will be statutorily guaranteed a right of non-discriminatory access and will also be entitled by statute to the same rates as their competitors.”[9] This includes access to poles owned by investor-owned utilities and ILECs in the 27 states with FCC jurisdiction, and likely in most of the other “non-FCC” states.

Access to Public Rights-of-Way:  Section 253.  The Order applies Section 253 of the Communications Act to BIAS providers. Section 253 provides that “no [s]tate or local statute or regulation, or other [s]tate or local legal requirement, may prohibit or have the effect of prohibiting the ability of any entity to provide any interstate or intrastate telecommunications service.”[10] Among other rights, Section 253 provides BIAS providers with non-discriminatory and competitively neutral access to the public rights-of-way.

MTE Access.  The Order notes that Section 201 of the Act enables the FCC to regulate BIAS-only providers that serve MTEs, “and thereby end unfair, unreasonable, and anticompetitive practices facing MTE residents….”[11] The Order empowers the FCC to apply to BIAS providers the same prohibitions against exclusive MTE contracts that currently apply to telecommunications carriers: “[W]e do not forbear from section 64.2500 of our rules as to BIAS providers, which prohibits common carriers from entering into certain types of agreements [e.g., exclusive access, graduated revenue sharing, and exclusive revenue sharing agreements] and requires disclosure of others [e.g., exclusive marketing agreements]. BIAS-only providers should, therefore, ensure that all MTE-related contracts entered into subsequent to the effective date of the Declaratory Ruling we adopt today are in compliance with section 64.2500. With respect to pre-existing MTE-related contracts, we temporarily waive section 64.2500 with respect to these contracts for BIAS-only providers for a period of 180 days.”[12]

Universal Service Fund Reform.  The Order generally applies the Section 254 universal service framework to BIAS,[13] but the FCC forbears – for now – from applying rules promulgated under 47 U.S.C. § 254(d) that would require federal Universal Service Fund contributions by ISPs: “[W]e believe that any decisions on whether and how to make BIAS providers contribute to USF funding are best addressed holistically in [] ongoing discussions of USF contribution reform, on a full record and with robust input from all interested parties, than in this proceeding.”[14]

ETC Designation for BIAS Providers:  High Cost and Lifeline Support.  The FCC’s USF High Cost and Lifeline support programs are limited to common carrier providers of telecommunications services that are designated as Eligible Telecommunications Carriers (“ETC”) pursuant to State utility commission standards (or the FCC, in certain circumstances). Prior to the Order, only carriers offering voice telephony service could be designated as an ETC. The Order enables BIAS providers to be designated as ETCs without a voice service requirement, allowing BIAS providers to be theoretically eligible for support under the High Cost and Lifeline programs. However, the Order stops short of designating BIAS as a “supported service” under the USF: “Rather than adjust our USF rules on a piecemeal basis, retaining existing supported universal services and, by extension, ETC eligibility standards, provides us the flexibility for holistically examining reclassification’s effects on the USF at a later time. For this reason, we decline at this time to revise our definition of supported services.”[15]

CPNI/Privacy.  The FCC does not forbear from applying the Section 222 CPNI rules to BIAS providers, but waives the rules “to the extent such rules are applicable to BIAS as telecommunications service” by virtue of the Order.[16] The challenge facing the FCC is that the CPNI rules are heavily voice-specific and not readily applied in the BIAS context. The Order indicates that the FCC will launch a proceeding in the near future to modify the CPNI rules for application to BIAS. Given the ongoing State and federal debate surrounding ISP privacy issues, this promises to be a complicated and hotly contested rulemaking.

State and Local Preemption.  Given the federal reclassification, can State utility commissions opt to require BIAS providers to obtain state certification as a telecommunications carrier, and be subject to State telecommunications regulations? The Order does not provide useful guidance on this. The FCC declined “to categorically preempt all state or local regulation affecting broadband in the absence of any specific determination that such regulation interferes with our exercise of federal regulatory authority…. While the Commission has occasionally described the Internet as ‘jurisdictionally interstate’ or ‘predominantly interstate, we cannot find it to be exclusively interstate”[17] (emphasis in original). In essence, the FCC intends to consider state and local preemption issues on a case-by-case basis.

Nevertheless, the final version of the Order did specifically address the question of whether a State can impose its own universal service program contribution obligations on BIAS providers. In keeping with the FCC’s forbearance from requiring BIAS providers to contribute to the federal Universal Service Fund, Footnote 1,476 provides, “we maintain the status quo with respect to states’ ability to impose state-level contribution obligations on the provision of BIAS for state universal service programs.”[18]

Network Slicing.  The concept of network slicing came to the forefront relatively late in the reclassification debate and could be extremely important as the Order is implemented. The Order defines network slicing as “a technique that enables mobile network operators (MNOs) to create multiple virtualized subnetworks (each known as a ‘slice’) using shared physical wireless network infrastructure and common computing resources. Network slicing is often described as a ‘logical’ segmentation of the network.” The debate involved questions of whether network slicing presented an Open Internet problem, and whether it should be classified as a BIAS or non-BIAS service.

In the Order, the FCC took a cautious approach: “Given the nascent nature of network slicing, we conclude that it is not appropriate at this time to make a categorical determination regarding all network slicing and the services delivered through the use of network slicing. We agree … that we ‘should not allow network slicing to be used to evade [the] Open Internet rules’ that we adopt.”[19]

Despite the agnosticism on network slicing, the FCC added a potentially relevant clarification in the final version of the Order in its discussion of “throttling”: “We clarify that a BIAS provider’s decision to speed up ‘on the basis of Internet content, applications, or services’ would ‘impair or degrade’ other content, applications, or services which are not given the same treatment.”[20] A “fast lane,” in other words, may present an Open Internet violation.

While the network slicing debate has tended to focus on mobile network operators, and the Order’s definition of the term “network slicing” is limited to mobile network operators, similar issues could conceivably apply to wireline services as well at some point. Indeed, the National Cable and Telecommunications Association submitted ex parte comments suggesting that NCTA does not explicitly oppose the mobile carriers’ push to allow network slicing, but rather seeks to ensure that wireline providers would receive comparable treatment.[21]

No Rate Regulation.  The Order explicitly forbears from applying sections 201 and 202 of the Act to BIAS to the extent they would permit rate regulation by the FCC.[22] While some commentators continue to insist that the Order is a stalking horse for ISP rate regulation, the FCC made clear statements in the Order indicating that rate regulation is not an objective, and the Order does not allow it.

Whether the Order acts to preempt State affordability programs (to the extent such programs are considered “rate regulation”) is an open question.

Not “Public Utility” Regulation.  Despite bringing BIAS into the same regulatory fold as telephone service, the FCC maintained that the Order is not analogous to public-utility regulation:

“First, unlike utilities such as water, electricity and gas, BIAS is a two-sided platform with broadband customers on one side of the market and edge providers on the other; therefore, the type of regulation required and the effects of those regulations will be different for BIAS than it would be for such utilities. Second, and most importantly, the rules we now adopt are carefully tailored to avoid the potential issues that commenters claim are problematic in the regulations of utilities. In particular, unlike the range of utility-style regulations that were applied to monopoly telephone service under Title II, including rate regulation, we forbear from many of these provisions and do not adopt any rate regulation, which is a hallmark of utility regulation.”[23]

The next post will cover the Report and Order implementing the new Open Internet rules, including the “bright line” rules (no blocking, no throttling, and no paid or affiliated prioritization arrangements), the “general conduct” rules, what constitutes “reasonable network management,” and the transparency rule.

***

If you have any questions about the above or require assistance, please contact a member of the Keller & Heckman Telecommunications Practice Group.


[1] In the Matter of Safeguarding and Securing the Open Internet, WC Docket Nos. 23-320, 17-108, Declaratory Ruling, Order, Report and Order, and Order on Reconsideration, FCC 24-52, rel. May 7, 2024 (“Order”).

[2] See Protecting and Promoting the Open Internet, GN Docket No. 14-28, Report and Order on Remand, Declaratory Ruling, and Order, 30 FCC Rcd 5601, 5603, para. 4 (2015) (“2015 Open Internet Order”), pet. for review denied, U.S. Telecom Ass’n v. FCC, 825 F.3d 674 (D.C. Cir. 2016); Restoring Internet Freedom, WC Docket No. 17-108, Declaratory Ruling, Report and Order, and Order, 33 FCC Rcd 311 (2017).

[3] The definition of BIAS continues: “This term also encompasses any service that the Commission finds to be providing a functional equivalent of the service described in the previous sentence or that is used to evade the protections set forth in this part.” 47 CFR § 8.1(b).

[4] Order, at ¶ 190.

[5] Order, at ¶ 25.

[6] Order, at ¶ 192.

[7] Order, at ¶ 210.

[8] The FCC has previously identified non-BIAS services as including facilities-based VoIP and IP-video offerings, connectivity bundled with e-readers, heart monitors, energy consumption sensors, and services that provide schools with curriculum-approved applications and content. Id.fn.814 citing 2015 Open Internet Order.

[9] Order, at ¶ 361.

[10] 47 U.S.C. § 253.

[11] Order, at ¶ 83.

[12] Order, at ¶ 326.

[13] Order, at ¶ 363.

[14] Order, at ¶ 366.

[15] Order, at ¶ 101.

[16] Order, at ¶ 639.

[17] Order, at ¶ 268.

[18] Order, at ¶ 364 n.1476.

[19] Order, at ¶ 203.

[20] Order, at ¶ 499.

[21] NCTA ex parte filed March 24, 2024.

[22] Order, at ¶ 323.

[23] Order, at ¶ 281.

Photo of Wesley K. WrightPhoto of Timothy A. DoughtyPhoto of Liam Fulling

Last week, the Federal Communications Commission (“FCC” or “Commission”) announced the approval of seven 6 GHz band Automated Frequency Coordination (“AFC”) systems. The approved systems include offerings from Qualcomm Incorporated, Federated Wireless, Inc., Sony Group Corporation, Comsearch, the Wi-Fi Alliance Services Corporation, the Wireless Broadband Alliance, Inc., and Broadcom Inc.

Background

In 2020, the FCC adopted a Report and Order opening portions of the 6 GHz band for expanded unlicensed operations. Under Commission rules, standard-power access points and fixed client devices are required to operate under the control of AFC systems in the 5.925-6.425 and 6.525-6.875 GHz portions of the 6 GHz band. These portions of the 6 GHz band are used by licensed fixed and temporary-fixed point-to-point microwave systems. The FCC requires AFC systems to coordinate unlicensed operations to prevent harmful interference to these incumbent links.

In 2021, the Commission requested proposals from prospective AFC operators, and in 2022, it conditionally approved thirteen entities to operate AFC systems. The following year, the FCC allowed the selected AFC systems to commence testing, which included both lab testing by an FCC-recognized accredited laboratory and an online public trial where challenges could be submitted directly to the AFC system operator. Based on the information collected during the testing period, seven AFC system operators were formally approved after demonstrating compliance with the Commission’s 6 GHz unlicensed rules.

Looking Forward

As of February 23, 2024, the seven approved AFC systems were eligible to commence commercial operations. The FCC is requiring the operators to develop a centralized means to receive and address complaints regarding harmful interference from AFC-authorized unlicensed operations by April 23, 2024, or risk losing approved status.

The FCC is also considering the application of C3Spectra Inc. to be approved as an AFC operator, and the public will have the opportunity to review and comment on their proposal until March 15, 2024. If conditionally approved, C3Spectra will be eligible to begin the testing period as described above.

Commission approval of these AFC operators opens the door to expanded spectrum access for industry players and increased wireless connectivity for consumers, driven by innovative technologies. At the same time, incumbent microwave licensees should be aware of the forthcoming increased traffic in these portions of the 6 GHz band and be quick to identify and issue complaints when harmful interference occurs.

Conclusion

As the Commission continues to expand unlicensed operations, it is important for incumbent licensees to protect their systems from interference. Microwave licensees in the 5.925-6.425 and 6.525-6.875 GHz portions of the 6 GHz band should pay close attention to the complaint procedures established by these AFC system operators in the coming months so that issues can be addressed swiftly.

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The National Telecommunications and Information Administration (“NTIA”) has adopted a “Programmatic Waiver” of its letter of credit (“LOC”) requirement for subgrantees of funding under the $42.5 billion Broadband Equity, Access and Deployment (“BEAD”) program created by the Infrastructure and Investment Job Act (“IIJA”). This is big news for small and mid-size public and private entities that might not otherwise have been able to meet the LOC requirements.

Background

The NTIA adopted the LOC requirement in its Notice of Funding Opportunity (“NOFO”), establishing regulations for allocation and administration of BEAD funding. The LOC was intended to ensure the performance of subgrantees receiving BEAD grant money from states and territories. As originally adopted, all subgrantees of BEAD funding were required to secure an irrevocable standby letter of credit in a value of no less than 25 percent of the subaward amount for the duration of the project construction.

The LOC had to be obtained from a qualified FDIC-insured bank. Typically, banks require that a LOC be collateralized by cash or a cash-equivalent. As a result, BEAD subgrantee awardees would effectively be required to have access to a large amount of capital that they could set aside throughout the grant term.

The LOC requirement quickly became a flashpoint for controversy. Many small, mid-sized, and non-traditional broadband providers – the very entities that the IIJA directed the BEAD program to include – argued that the LOC would be prohibitively expensive, particularly when coupled with a minimum 25 percent “match” requirement. The costs of the LOC and the fact that the LOC requirement may not be well-suited to achieving its goals[i] generated a concerted effort this summer and early fall to have the NTIA revisit its rules.[ii]

Programmatic Waiver

NTIA responded to these concerns by adopting a programmatic waiver modifying the LOC requirement for all subgrantees of BEAD funding. Specifically, the waiver:

  • Allows the Use of Performance Bonds. The waiver permits a subgrantee to provide a performance bond equal to 100% of the BEAD subaward amount in lieu of a letter of credit, provided that the bond is issued by a company holding a certificate of authority as an acceptable surety on federal bonds as identified in the Department of Treasury Circular 570.[iii][iv]
  • Allows Credit Unions to Issue LOCs. The NOFO requires subgrantees to obtain a LOC from a U.S. bank with a safety rating issued by Weiss of B− or better.[v] The waiver permits subgrantees to fulfill the LOC requirement (or any alternative permitted under the waiver) by utilizing any United States credit union that is insured by the National Credit Union Administration and that has a credit union safety rating issued by Weiss of B− or better.
  • Allows Eligible Entities to Reduce the Obligation Upon Completion of Milestones.  The waiver allows an Eligible Entity (a state or territory recipient of funding allocation from NTIA) to reduce the amount of the letter of credit obligation below 25% over time or reduce the amount of the performance bond below 100% over time, upon a subgrantee meeting deployment milestones specified by the state or territory.
  • Allows for an Alternative Initial LOC or Performance Bond Percentage. The NOFO requires that the initial amount of the letter of credit be 25% of the subaward (or the initial amount of the performance bond be 100% of the subaward under the option described above). The programmatic waiver allows the initial amount of the letter of credit or performance bond to be 10% of the subaward amount during the entire period of performance when an Eligible Entity issues funding on a reimbursable basis consistent with Section IV.C.1.b of the NOFO, and reimbursement is for periods of no more than six months each. Given the likelihood that Eligible Entities will extensively employ a reimbursement approach, this alternative is particularly significant.

NTIA’s programmatic waiver appears to provide much-needed relief and flexibility for potential BEAD subgrantees who might otherwise have been precluded from fully participating in the BEAD program.[vi]


[i] The NTIA LOC requirement was largely based on a LOC requirement established by the Federal Communications Commission in connection with its Rural Digital Opportunity Fund, an entirely different program.

[ii] See, for example, https://www.fiercetelecom.com/broadband/coalition-proposes-alternatives-ntias-contentious-bead-rule

[iii] See, https://www.fiscal.treasury.gov/surety-bonds/list-certified-companies.html

[iv] Where a performance bond is utilized, the requirement that the subgrantee provide an opinion letter from bankruptcy counsel affirming that the letter of credit proceeds would not be treated as property of the subgrantee’s estate under the Bankruptcy Code is waived.

[v] Weiss Ratings (formerly Weiss Research) is a financial ratings service that is often utilized to establish benchmarks in the financial and banking industry. https://weissratings.com/en/credit-unions

[vi] Note, the NTIA adopted a nearly identical LOC requirement under its Middle Mile Grant program. The LOC programmatic waiver does not apply to the NTIA Middle Mile Grant program.

Photo of Gregory E. Kunkle

Drones, or unmanned aerial vehicles (UAVs), are experiencing rapid growth throughout the world. In the United States, the FAA expects the recreational UAV fleet to reach almost 1.5 million units by 2024. Significant growth is also expected in commercial drones used for safety, delivery, and service operations, with the number of such aircraft expected to approximately double in the next year. UAVs will bring innovations across a variety of sectors, including critical infrastructure, public safety, agriculture, and delivery of consumer goods and services.

In January, the Federal Communications Commission (FCC) released a Notice of Proposed Rulemaking seeking to modernize its spectrum rules to support the growth of UAV operations. The rulemaking touches on a number of important issues regarding UAV spectrum. In particular, the proceeding highlights a little-known licensing compliance issue relevant to UAV operators.

Current VHF Radio Licensing for UAV Operators

The aeronautical VHF band (117.975 MHz -137 MHz) is used by aviation for air traffic control (ATC) and advisory communications, among other aviation-safety purposes. The FCC’s rules have long recognized the use of this band for manned flights. In fact, Section 87.18 of the FCC’s rules provides that pilots of domestic manned flights are generally automatically granted licenses for VHF aircraft radios without the need to apply to the FCC. However, the FCC’s rules require that such radio equipment be “located on board an aircraft,” which presents an obvious problem for UAV operators, which usually seek to communicate using ground-based radios.

One way that UAV operators have addressed this issue is by use of an “ATC Relay.” An ATC Relay involves an operator communicating with a UAV via an alternate channel, which is converted onboard the UAV into an aeronautical VHF channel for communication with ATC or other aircraft. Because the VHF radio is onboard the UAV, its use is consistent with the FCC’s rules. However, according to the FCC, such relay systems are still relatively nascent.

Instead, operators more commonly rely on ground-based “aircraft” radios without the use of a relay radio on the UAV. Although such stations are not authorized under the FCC’s rules, the Commission has addressed this discrepancy through the “Special Temporary Authorization” (STA) process. STAs are valid for up to 180 days (renewal is possible) and permit the pilot in command, or other personnel on the ground, to directly communicate with ATC or other aircraft via ground-based radios as though the radio were present on an aircraft. The STA application process is relatively straightforward, though the FCC does typically require a copy of the UAV operator’s Certificate of Authorization (COA) from the FAA.

A Path Forward

Clearly, case-by-case temporary authorizations for UAV communications are not ideal, given the explosive growth in the market. A better solution would be for the FCC to conform its rules to the real world. To its credit, the FCC is poised to do just that. In its Notice of Proposed Rulemaking, the FCC proposes to individually license VHF ground stations under a new category known as “Unmanned Aircraft Operator VHF Ground Station.” This type of authorization would require applicants to submit a Form 605 requesting license authority. The FCC proposes to require endorsement from the FAA, most likely in the form of a COA. Once issued, the license would authorize ground-based communications for UAV flights on all air traffic control, flight service station, aeronautical advisory station (unicom), and aeronautical multicom station channels authorized for use by aircraft. The FCC believes this process will mitigate concerns regarding the oversaturation of critical aeronautical channels as drone use grows.

Conclusion

The FCC has not announced when a final rule will be issued, although it is not uncommon for rulemaking proceedings to take a year or more. In the interim, UAV operators will want to ensure they comply with the FCC’s rules, including by securing special temporary authorization if necessary, for any ground-based use of aircraft radios. Should you have any questions, please do not hesitate to contact Greg Kunkle (kunkle@khlaw.com).

Photo of Wesley K. WrightPhoto of Timothy A. Doughty

Last week, the Federal Communications Commission (FCC or Commission) released a draft Notice of Proposed Rulemaking (NPRM) to help facilitate the nationwide transition to Next Generation 911 (NG911). The Commission will vote on this NPRM at its Open Meeting on June 8th.

Background

In October 2021, the National Association of State 911 Administrators (NASNA) filed a Petition for Rulemaking; Alternatively, Petition for Notice of Inquiry (NASNA Petition) with the FCC asking the Commission to take a more active role in regulating NG911 deployments throughout the country.

In particular, the NASNA Petition asked the Commission to update its rules to:

  1. Establish authority over origination service providers’ delivery of 911 services through IP-based emergency services networks (ESInets);
  2. Amend its rules to advance the transition to – and implementation of – NG911 services; and,
  3. Require OSPs to bear the cost of delivering NG911 calls unless the state has an alternative cost-recovery mechanism.

We summarized the NASNA Petition in greater detail in a previous blog post.

The FCC’s Draft NPRM

At a high level, the FCC’s draft NPRM addresses the concerns raised in the NASNA Petition and proposes to do three things:

  1. Require wireline, interconnected VoIP, and Internet-based Telecommunications Relay Services (TRS) providers to complete all translation and routing to deliver 911 calls, including associated location information, in the requested IP-based format to an Emergency Services IP network (ESInet) or other designated point(s) that allow emergency calls to be answered upon request of 911 authorities who have certified the capability to accept IP-based 911 communications;
  2. Require wireline, interconnected VoIP, CMRS, and Internet-based TRS providers (Originating Service Providers or OSPs) to transmit all 911 calls to destination point(s) in those networks designated by a 911 authority, including to a public safety answering point (PSAP), designated statewide default answering point, local emergency authority, ESInet, or other point(s) designated by 911 authorities that allow emergency calls to be answered, upon request of 911 authorities who have certified the capability to accept IP-based 911 communications; and,
  3. Require OSPs to cover the costs of transmitting 911 calls to the point(s) designated by a 911 authority, including any costs associated with completing the translation and routing necessary to deliver such calls and associated location information to the designated destination point(s) in the requested IP-based format.

If ultimately enacted, these rule changes would significantly alter the landscape of NG911 deployments around the country. How? I’m glad you asked!

Real World Implications

Disputes between Originating Service Providers, niche 911 service providers, and 911 authorities are on the rise, which introduces unexpected costs and delays for 911 authorities. A common point of contention between the OSPs and 911 service providers involves interconnection: where are OSPs required to interconnect to a 911 provider, and does the OSP or 911 provider foot the bill for connecting the two networks?

The FCC addressed this cost allocation issue in the limited context of wireless deployments in 2001. The FCC’s Public Safety and Homeland Security Bureau’s King County Letter – and the agency’s Order on Reconsideration –require wireless carriers to deliver their 911 traffic, at their own expense, along with associated information directly to the selective router. But the King County Letter was viewed as having limited applicability to wireless carriers only and did not resolve the issue for other OSPs. This has continued to create issues for NG911 deployments.

For example, in October 2017, the South Dakota 911 Coordination Board filed a Petition for Declaratory Ruling with the state PUC to determine the responsibility of rural carriers to interconnect with a new NG911 network that contemplated two meeting points within the state. The South Dakota PUC was asked to determine whether the Covered 911 Service Provider or the individual rural LECs were required to transport traffic between the service territories of the rural carriers and the two centralized points of interconnection on the NG911 network.

The proceeding was contentious, which added unanticipated costs and delays to the NG911 project. The FCC’s proposed rules – if ultimately enacted – would provide clarity and hopefully reduce costs and project timelines to promote efficient NG911 deployments.

Conclusion

In our previous blog post on this topic, we compared the FCC’s rulemaking process to a marathon and noted that the NASNA Petition was merely the starting line. Sticking with that analogy, the Commission’s NPRM is significant progress towards adopting new rules (let’s say we’re at the 10-mile mark of a 26-mile journey). If the NPRM is adopted in June, the FCC likely will be seeking comment on the proposed rules in the 3rd Quarter and then may be in a position to issue final rules in 2024.

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The Treasury Department has released the final version of important compliance guidance applicable to broadband projects funded through SLFRF or CPF awards. The “SLFRF and CPF Supplemental Broadband Guidance” (“Guidance”) addresses several crucial issues relating to the use of SLFRF and CPF funds for broadband projects, including the crucial distinction of ISPs acting as “contractors” vs. “subrecipients,” the treatment of “program income,” the scope of the Federal interest in grant-funded property, procurement requirements, and other issues.

The final Guidance includes several notable and very helpful modifications to the draft version issued by Treasury in late March. On March 30, we published a blog post analyzing the draft guidance in detail. Today’s blog post focuses only on the changes adopted as part of the final Guidance; for a more complete picture of the overall Guidance, readers should refer to our March 30 blog post and to the Guidance document itself.

Key changes adopted in final Guidance:

  • Broadened definition of “ISP”:

The proposed Guidance relied entirely on the term “ISP,” without qualification, definition, or elaboration. Broadband projects, however, often involve entities that build, own, or operate networks, but that may not provide retail ISP service. By relying on the term “ISP,” Treasury risked excluding a significant portion of CPF and SLFRF broadband grant recipients from the Guidance simply because retail ISP service is provided through an ISP affiliate, an ISP partner, or some other entity.

Treasury received comments pointing this out and directly addressed it as part of the final Guidance. The final Guidance still uses the term “ISP,” but includes the following key sentence: “For purposes of this guidance, the term ‘ISP’ includes subrecipients and contractors installing broadband infrastructure using SLFRF and CPF funds, and is not limited to entities that provide retail Internet access service.”

  • Revenue from fiber IRUs and leases is not “program income”:

The proposed Guidance stated that income generated by ISPs from subawards would not be considered program income and that subrecipient ISPs may use such income without restriction. In the case of ISPs treated as contractors, recipients “may agree to permit” such ISPs to retain program income (subject to certain requirements).

But the proposed Guidance did not address the treatment of income derived from leases or IRUs, which can be an important component of SLFRF and CPF broadband projects. The final Guidance squarely addresses the issue: “Treasury clarifies that income from indefeasible rights of use (IRUs) and leases relating to broadband infrastructure will not be considered program income.”

  • A “fixed amount subaward” can include an award involving a cost-sharing or match requirement, or where the recipient requires the ISP to submit evidence of costs:

As a side effect of statutory requirements within the Uniform Guidance (2 CFR Part 200), the Treasury relies heavily on the concept of a “fixed amount subaward.” Subawards that are not “fixed amount subawards” will not qualify for some of the compliance- and procurement-related benefits established in the Guidance. In the proposed Guidance, Treasury did not address whether a cost-sharing or match requirement, or cost-based subaward, could qualify as a “fixed amount subaward.”

In the final Guidance, Treasury adopts a broad interpretation of “fixed amount subaward,” so that it may include subawards that include a cost-based component or a match requirement. The final Guidance states: “Treasury further clarifies that a subaward that otherwise meets the requirements of 2 CFR 200.201(b) may be considered a fixed amount subaward even if: 1) the recipient uses its discretion to impose a cost-sharing or match requirement on the subrecipient; or 2) the recipient requires ISPs to submit evidence of costs. More specifically, subawards that provide for a maximum payment amount that is calculated based on a reasonable estimate of actual cost (see 2 CFR 200.201(b)(1)) will be considered fixed amount subawards even if the subaward agreement also provides that payments to the ISP subrecipient will be limited to actual costs after review of evidence of costs.”

  • Prior incurred costs may be reimbursable:

The final Guidance clarifies that costs incurred by an ISP prior to receiving an award “are reimbursable to the extent that they would have been allowable if incurred after the date of the federal award or subaward (for example, if an ISP purchased fiber or other broadband equipment in advance of being awarded a subaward or contract).”

  • Retroactive application:

The final Guidance clarifies that it applies retroactively. It applies “to broadband infrastructure contracts and subawards funded by SLFRF and CPF for states, territories, freely associated states, and local governments, including those entered into prior to the release of this guidance.”

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While there is no one solution to deploying affordable broadband, broadband partnerships have emerged as an attractive option in many areas of the country; indeed, in some instances, partnerships may be the only feasible option.[1] Recognizing the attractiveness of broadband partnerships, Congress and many states have sought to encourage such partnerships to help accelerate broadband deployment, adoption, and use. This includes the $42.5 billion of broadband funding soon to be allocated under the Broadband Equity, Access and Deployment (“BEAD”) program provisions of the Infrastructure Investment and Jobs Act (“IIJA”), which exhibits a preference for broadband partnerships.

A fundamental component of many broadband partnerships is the development of a network operating agreement (“NOA”) between the entity funding and/or owning the network and the broadband provider that will construct, maintain, and operate the network (on either a wholesale or retail basis). In this blog, we provide an overview of ten key issues that should be addressed in an NOA.

BACKGROUND

Broadband partnerships allow participating parties to draw upon their unique capabilities to meet the overall goals of a broadband initiative. For example, local governments, municipal utilities, and electric cooperatives often have access to broadband funding or key infrastructure, but for a variety of reasons, may not be inclined (or, in some instances, allowed) to directly provide commercial broadband services. At the same time, commercial service providers generally possess the expertise to manage, maintain, and operate a broadband network but may prefer not to invest the capital necessary to construct the network. A partnership between these entities can take advantage of each partner’s strengths and preferences.

Optimally, these partnerships will also harness the “asymmetric goals” of the parties. For example, public entities often want to exercise a measure of control to ensure that a network will remain responsive to community needs, and they may place a higher value on advancing community goals—such as economic development, educational opportunity, workforce development, and digital equity—than on maximizing profits. Private parties will, in turn, seek to meet revenue and return-on-investment targets for the project to work for them. Flexible, well-designed partnerships can and should enable each entity to meet its goals, and a well-crafted NOA, allocating the respective responsibilities, risks, and rewards, is an important part of it.

The specifics of any NOA will be dictated by the goals of the project, the relationship between the parties, applicable grant or funding compliance requirements, and applicable State and local law.  The development of the NOA will involve countless trade-offs, as the risks and responsibilities each party is willing to assume will depend on the nature and extent of the rewards it will want to receive. Based on our experience, the development of these agreements will almost always be more complicated and time-consuming than the parties anticipated. Ultimately, in order to be successful in developing a mutually beneficial NOA, the parties should keep the big-picture goals of the project in mind throughout the negotiations.

TEN KEY ISSUES FOR BROADBAND NETWORK OPERATING AGREEMENTS

A successful Network Operating Agreement will typically address the following ten core issues:

  1. Will the Network Operator Construct the Network and/or New Facilities?

When a broadband network is being constructed or substantially expanded, the network owner may select a network operator that will also take responsibility for managing the construction of the network. This arrangement can be set up as part of the NOA, but it may be a separate design and build construction agreement that the parties enter into at the same time as they enter into the NOA. (Alternately, responsibility for the construction may be undertaken as part of a wholly separate process involving a different party than the network operator.)

Construction terms will need to address the network design and capabilities; the construction plan, schedule, and budget; a process for testing and accepting the network facilities by the owner; applicable federal and/or State grant compliance requirements; performance obligations; responsibility for obtaining permits and other authorizations; and myriad other issues.

  1. What is the Relationship Between the Parties?

The NOA will need to clearly establish the relationship between the parties. Will the network operator be granted access to the network infrastructure in order to provide services on its own behalf? Or will the network operator be acting as the agent for the network owner, who will, in fact, be the service “provider”? Will it be some of each, depending on the kind of service or customer involved? Alternately, if it is an open access network or a middle mile network, will the network operator be responsible for providing wholesale services and coordinating with ISPs and others that obtain services from the network on a wholesale basis? Each approach has pros and cons and will involve distinct issues under federal, State, and local law, including applicable regulatory compliance obligations.

One important issue that gets to the heart of the matter is determining who “owns” the customer relationship in terms of services, marketing, rates, and billing. Similarly, the network owner, even if not acting as the service provider, may wish to play a role in shaping and reviewing service rates, terms, or conditions, particularly with respect to efforts to ensure that the network has affordable offerings for low-income consumers and advances digital equity initiatives.

  1. Will the Network Operator Obtain a Dark Fiber IRU or Lease?

When the network operator acts as the service provider, the NOA will need to address the mechanism by which the network operator obtains the right to provide services over the network.[2] This is often established through the grant of an indefeasible right of use (“IRU”) or lease to all, or a portion, of the network for the term of the NOA. The IRU is typically incorporated within or accompanies the NOA as an exhibit.

Any IRU or lease, as well as the NOA, should make clear that it does not transfer legal title to the network, that the network owner will at all times continue to own the network facilities, and that it shall not be sold, transferred, or encumbered by the network operator.

Similarly, if the network operator will be constructing its own network facilities that will be utilized in conjunction with the overall network, the NOA will need to specify practices relating to the demarcation between such facilities, as well as the rights and obligations concerning the use of such facilities in operating the overall network.

  1. Securing Right-of-Way and Pole Attachment Authorizations

The NOA will need to clearly identify the obligations and responsibilities of the parties in securing and maintaining all requisite authorizations from State and local authorities, local utilities, and private property owners to construct, maintain, and operate the network facilities within the public-right-of-way, on or in utility poles or conduit, and with private easements. This will need to specify in whose name such authorizations are being obtained, as well as the allocation of financial responsibility for both one-time permitting and construction authorizations and ongoing rental payments.

  1. Network Performance and Maintenance Requirements

The NOA will need to define network performance metrics and requirements and agree on mechanisms to ensure the network operator meets these requirements. This will include requirements to ensure that the network is capable of offering and supporting agreed-upon broadband service performance throughout the network service area and ensuring network security. The NOA may establish requirements to periodically “benchmark” the network’s services in order to provide a comparison with other similar networks.

The NOA will need to establish maintenance and repair requirements for both routine maintenance and emergency service restoration work. These requirements should address response, dispatch, and service restoration times.

In some instances, particularly where the network owner is an electric utility, the network owner may elect to take on the obligations of managing the outside physical plant of the network, with the network operator being responsible for maintaining the electronics and customer premise equipment.

The NOA should also address and allocate responsibility for network upgrades and periodic electronic refreshes over the term of the agreement.

  1. Compensation and Revenue Sharing

The NOA will need to establish the compensation to be paid between the parties. There is a wide range of compensation models, including flat lease payments, revenue-sharing formulae, or a combination. The specific model will depend on the needs and expectations of the parties, consistent with the overall goal of developing and sustaining a financially viable network that provides affordable services.

  1. Regulatory Compliance

The NOA must clearly allocate responsibilities for federal, State, and local regulatory compliance. This would include any and all applicable licensing, franchises, and registration, as well as ongoing regulatory compliance and reporting. As with authorizations, the NOA should address financial responsibility for such regulatory compliance, including the collection and remittance of fees imposed by government agencies on customers.

Importantly, if federal or State grant funding is involved, the parties may need to determine whether the network operator will be treated as a “subrecipient” or a “contractor” under applicable federal or State guidelines and establish grant compliance responsibilities accordingly. For example, in addition to the specific requirements of the federal agency providing the funding, nearly all federal broadband funding is subject  to an extensive body of rules located at 2 CFR Part 200, known as the “Uniform Guidance” or “Part 200.”

  1. Term; Dispute Resolution; Default; Termination

The NOA will need to address the term of the agreement and conditions of any renewal; a dispute resolution process for addressing disputes; a default process that sets out the rights of the parties in the event that either party fails to meet its obligations under the agreement; and provisions establishing the process to be followed upon termination the agreement. The termination provisions might also establish a transition process to ensure the continued seamless operation of the network upon the termination of the NOA.

  1. Insurance; Liability; Performance Bonds

The NOA will need to have adequate insurance and liability provisions to protect against damages to the network as well as claims against either of the parties related to the construction and operation of the network. In addition, some NOAs contain performance bonds or other mechanisms, such as parental guarantees, to protect against costs resulting from a network operator’s failure to perform its obligations under the agreement.

  1. Force Majeure

Force majeure clauses that excuse a party’s lack of performance resulting from an event or circumstance beyond the reasonable control of the party are relatively routine contractual clauses. But COVID-19 and its aftereffects have caused parties to rethink the specifics of their force majeure clauses. For example, the term “pandemics” now tends to be specifically listed as a force majeure event. At the same time, parties may now be less likely to treat a supply chain delay or increased inflation pressures as being force majeure events, but rather as circumstances that could reasonably be anticipated and accounted for in the development of business plans.

CONCLUSION

Broadband partnerships offer significant opportunities to materially advance national goals of facilitating the widespread availability of affordable broadband services and capabilities. The development of a thorough, fair, and balanced network operating agreement is often a critical element in ensuring that the partnership is a long-term, sustainable relationship.

Should you have any questions, please do not hesitate to contact Sean Stokes (stokes@khlaw.com), Casey Lide (lide@khlaw.com), Jim Baller (baller@khlaw.com), or your existing contact at Keller and Heckman LLP.


[1] Keller and Heckman Partners, “Broadband Partnerships: For Many Communities, A Good Option at a Good Time,” IMLA Magazine (Sep-Oct 2021), https://tinyurl.com/4umyt5a3.

[2] To the extent the network operator is acting as the agent for the network owner then the NOA will need to establish the authority and rights of the network operator to provide services over the network on behalf of the network owner.

On March 28, 2023, the Treasury Department issued and invited comments on proposed compliance guidance applicable to broadband projects funded through SLFRF[1] or CPF[2] awards (“Proposed Guidance”).

The Proposed Guidance addresses a variety of important questions relating to the use of SLFRF and CPF funds for broadband projects, including:

  • The crucial distinction between ISPs acting as “contractors” vs. “subrecipients”;
  • The proper treatment of ISP revenue as “program income”;
  • How ISPs can obtain title to grant-funded infrastructure;
  • The scope of the Federal Interest in grant-funded property;
  • Requirements for transfer of grant-funded property to a third party;
  • Procurement requirements (must a contract be put out for bid?); and
  • Audits and monitoring requirements.

If Treasury adopts the Guidance generally as proposed, it could have significant ramifications for grant-funded broadband projects around the country. Comments are due by April 11.[3]

I. The Fundamentals: Part 200 Uniform Guidance and the “Contractor”/“Subrecipient” Question

Overriding Part 200 “Uniform Guidance”.  Recipients of federal grants are generally subject to an extensive body of rules located at 2 CFR Part 200. Known as the “Uniform Guidance” or “Part 200,” it applies across federal agencies and establishes default rules applicable to federal grant recipients relating to such issues as procurement, the treatment of funded property, grants management, reporting, auditing, and a range of other grant compliance topics.

However, federal agencies are allowed to implement rules that depart from Part 200 in some respects. Treasury’s Proposed Guidance would implement various clarifications to – or exclusions from – the default Part 200 rules for at least some grant-funded broadband projects.

 ISP as “Subrecipient” vs. “Contractor”.  CPF and SLFRF grant recipients may provide subawards or contracts for the construction of eligible broadband projects. For example, a local government that receives ARPA SLFRF funds might use the funds to support a broadband development project, and might select an ISP to help implement it.

The Proposed Guidance relies heavily on the distinction between a grant recipient’s ISP being characterized as a “contractor” or as a “subrecipient.” Whether an ISP in a grant-funded project is a “subrecipient” or a “contractor” is to be determined in accordance with Part 200:  Section 200.331 provides a list of factors to consider in making the decision – and it may not always be obvious.

Under the Proposed Guidance, the compliance rules applicable to a “subrecipient” ISP and a “contractor” ISP would vary considerably:  If a recipient treats the ISP as a “subrecipient,” the recipient and ISP would be subject to the Proposed Guidance’s provisions – not the Part 200 provisions – relating to program income, cost principles, procurement, audits, and monitoring requirements (each of which are described in further detail below). If, on the other hand, a recipient treats the ISP as a “contractor,” the recipient and ISP need to follow the Part 200 rules relating to contractors, including procurement provisions and other provisions of the Proposed Guidance that may apply in a more limited way, if at all.

II. Specific Guidance

Program Income.  “Program income” refers to income generated by a grant-funded project. In a grant-funded broadband project, for example, program income may include revenue received by the ISP from the provision of broadband service to end users.

The default rule under Part 200 is that “program income must be deducted from the award amount unless the awarding agency provides otherwise.”[4] Naturally, a strict application of this rule would create serious challenges for a grant-funded broadband project.

The Proposed Guidance departs from the Part 200 default rule with respect to program income. For ISPs treated as subrecipients, the Proposed Guidance makes a very clean pronouncement:  “Income generated by ISPs from subawards will not be considered program income and ISPs may use such income without restriction.”

For ISPs treated as contractors, it is more complicated, but the outcome is likely the same:  The Proposed Guidance states that “Recipients may agree to permit” such ISPs to retain income generated by the ISP “provided that such an agreement is consistent with the state’s procurement requirements or, in the case of a local or Tribal government, is consistent with the Uniform Guidance provisions on procurement.  Such income earned by contractors is not considered program income and thus may be used by the contractor without restriction.”[5]

Cost Principles and Procurement Practices.  As the Proposed Guidance explains, “in general, [Part 200] provides that subrecipients must follow the procurement rules and cost principles in determining which costs incurred by subrecipients may be covered using the award. These requirements apply to non-federal entities as well as for-profit subrecipients.”

Since the inception of the SLFRF and CPF programs, recipients and potential recipients have raised significant questions relating to Part 200 procurement requirements and cost principles. For example, the default rules under Part 200 suggest that recipients, and in turn, all subrecipients, may not engage contractors to perform work without first putting the procurement out to bid. With many recipients and subrecipients having longstanding relationships with suppliers and service partners, this requirement promised to introduce significant additional cost and delay.

The Proposed Guidance squarely addresses these and other procurement-related issues. In short, under the Proposed Guidance, subrecipients receiving “fixed-amount subawards”[6] would not be required to apply the cost principles and procurement requirements of Part 200 at all.

Note that this determination would not apply to ISPs characterized as contractors, nor would it apply to subawards not made for a fixed amount. Recipients and subrecipients must therefore follow the procurement rules of the Uniform Guidance in the selection of ISPs acting as contractors (2 CFR 200.318) and must comply with all Part 200 grant funding requirements (2 CFR 200 Appendix II).

ISP Ownership of Grant-Funded Property and the “Federal Interest”.  Treasury proposes an alternative to the Part 200 rules relating to the ownership and treatment of property acquired or improved under a federal award. The approach set forth in the Proposed Guidance would in general apply only to broadband infrastructure installed under fixed amount subawards. (For ISPs characterized as contractors, the Proposed Guidance is unclear, and arguably contradictory, as to whether the Part 200 property provisions would apply. Treasury hopefully will clarify further in the final version.)

Before proceeding, it is worth recalling how NTIA addressed these issues under the Broadband Technology Opportunities Program (BTOP) in 2009-10. Under the BTOP rules, (a) the grant-funded property was subject to a federal property interest (the “Federal Interest”) for the duration of its statutory useful life period (in the case of fiber optic cable, 20 years); (b) recipients were required to record the Federal Interest; (c) recipients could not encumber property that was subject to the Federal Interest; and (d) recipients could not close on a transaction involving the sale of grant-funded property still subject to the Federal Interest without first obtaining a waiver from NTIA and NOAA, which could take six months or longer.

Thankfully, Treasury’s Proposed Guidance is much friendlier to grant recipients and ISP subawardees:

  • Limited Federal Interest Period.  For projects substantially completed by December 31, 2026, the Federal Interest in SLFRF- or CPF-funded broadband infrastructure would last only until December 31, 2034. Unlike Part 200 and prior funding programs (i.e., BTOP), the duration of the Federal Interest would not depend on the useful life of the asset.
  • No Lien / Recordation Required.  The Proposed Guidance states that ISPs will not be required to “record liens or other notices of record.”
  • Streamlined Consent for Transfer.  Unlike NTIA rules applicable to BTOP grants, which required recipients to submit a prescriptive and detailed petition for waiver and obtain approval from two federal agencies prior to transferring grant-funded property, Treasury has proposed a more streamlined approach. Under the Proposed Guidance, a subrecipient that has obtained title to grant-funded property may sell the property after (a) providing notice to Treasury, and (b) securing the agreement of the transferee that it acknowledges the Federal Interest and will comply with applicable requirements. Notably, the Proposed Guidance does not state that Treasury must approve a proposed transfer: if the final guidance retains a notice-only approach, ISP subrecipients will have much more flexibility to transfer grant-funded assets than under previous programs.

The Proposed Guidance clarifies issues surrounding ISP ownership of grant-funded property. It states that recipients “may provide in their agreement with an ISP (whether the ISP is treated as a subrecipient or contractor) that title to real property or equipment acquired or improved under the award vests in the ISP, subject to the condition that, for the duration of the Federal Interest Period, the ISP and any successors or transferees”[7]:

  1. Use the property for the authorized purposes of the project;
  2. Continue to provide Internet service to the service area at the initial agreed-upon standard (or better, presumably);
  3. Participate in federal low-income broadband access subsidy programs (presumably ACP, or a successor);
  4. Comply with insurance requirements in section 310;
  5. Comply with equipment use and management requirements in sections 313(c)(4) and (d) (commercial inventory controls, loss prevention procedures, etc.), “provided that such inventory controls indicate the applicable federal interest”;
  6. Maintain records of real property “that include an indication of the applicable federal interest” (note that this does not go so far as to state that a lien is required);
  7. May dispose of project property when no longer needed to operate the network (equipment upgrades, etc.), provided the upgrade provides the same level of service, “and that such upgraded property is subject to the same requirements provided in this guidance as other Project Property”;
  8. May otherwise sell project property, “only after provision of notice to Treasury that identifies the successor or transferee and after securing the agreement of the successor or transferee to comply with these requirements and the acknowledgement of the successor or transferee of the federal property interest”; and
  9. Notify the recipient and Treasury upon filing of a petition in bankruptcy with respect to the ISP or its affiliates.

Except as provided above, “property standards in 2 CFR 200.311 and 200.313, 200.314, and 200.315 shall not apply.” Note again, however, that a subaward that is not in a fixed amount must follow the property standards in 2 CFR 200.310-316.

Encumbering Project Property.  Under the Proposed Guidance, ISPs may encumber project property if Treasury receives a first lien position ensuring that, if the property was liquidated, Treasury would receive “the portion of the fair market value of the property that is equal to Treasury’s percentage contribution to the project costs.” While the Proposed Guidance does not explicitly say so, this requirement would presumably apply only in the case of project property for which the Federal Interest has not expired.

Audit Requirements.  Audit obligations for SLFRF- and CPF-funded ISPs would differ significantly depending on whether the ISP is characterized as a “contractor” or a “subrecipient,” and, for subrecipients, whether the subrecipient is a “for profit” entity or “non-federal entity”:

  • Contractor ISPs would not be subject to audit requirements under Part 200 (subpart F) with respect to funds received from the project. However, “recipients must oversee contractors to ensure that they perform in accordance with their contracts.”
  • Subrecipient ISPs:
    • Subpart F of Part 200 (“Audit Requirements”) does not apply to for-profit subrecipients. However, Treasury’s proposal may result in audit requirements applied to for-profit subrecipients via the recipient’s obligation to ensure compliance under 2 CFR 200.501(h): “[M]ethods [for recipients] to ensure compliance for Federal awards made to for-profit subrecipients may include pre-award audits, monitoring during the agreement, and post-award audits. This provision may be satisfied by the submission of an audit or other documentation that covers multiple subawards and multiple federal programs.” (emphasis in original)
    • Subrecipients that are non-federal entities – defined under Part 200 as “a State, local government, Indian tribe, Institution of Higher Education (IHE), or nonprofit organization that carries out a Federal award as a recipient or subrecipient”[8] – must “submit single audits or program-specific audits….”
      • Two additional points are worth noting with respect to audit obligations of non-federal entity subrecipients utilizing SLFRF funds: First, the SLFRF audit requirement applies only to subrecipients that have expended more than $750,000 in Federal award funds during their fiscal year.[9] Second, Treasury has adopted a streamlined “Alternative Compliance Examination Engagement” process for qualifying SLFRF recipients and subrecipients:  If a given subrecipient’s total award is at or below $10 million, and other federal awards (not including SLFRF funds) are less than $750,000 during the fiscal year, they can use the streamlined process, rather than the more cumbersome “single audit” process.

*  *  *

As a final comment, we must reiterate that the summary provided above is based on proposed guidance from Treasury, and not final guidance. Interested parties, particularly those that would be adversely affected by the proposed guidelines, should consider submitting comments to the Department of Treasury on or before April 11, 2023, via email to capitalprojectsfund@treasury.gov.

In the meantime, if we can be of assistance with respect to any of the above, please feel free to contact us.


[1] The Coronavirus State and Local Fiscal Recovery Fund, authorized under the American Rescue Plan Act.

[2] The Capital Projects Fund.

[3] Comments may be submitted to capitalprojectsfund@treasury.gov.

[4] Proposed Guidance, at p.1

[5] Note that this permission must come from the “Recipient.” In the case of a State recipient making a subaward to a subrecipient, the State would apparently need to explicitly agree to allow the contractor ISP to retain the income.

[6] The “fixed amount subaward” concept is meaningful because, according to Treasury, “[t]he Uniform Guidance permits agencies to provide an exception from the cost principles and procurement requirements in the case of fixed-amount subawards.” Proposed Decision, at 2.

[7] Proposed Decision, at p. 3 (emphasis added).

[8] 2 CFR § 200.1.

[9] U.S. Treasury Department, Coronavirus State and Local Fiscal Recovery Funds Guidance on Recipient Compliance and Reporting Responsibilities, v. 5.0, September 20, 2022, at p. 12.

Photo of Gregory E. KunklePhoto of Casey Lide

On March 9, 2023, Keller and Heckman attorneys Greg Kunkle and Casey Lide presented a webinar titled “Navigating the FCC’s Universal Service Program: Compliance Requirements for Service Providers.”

The FCC’s Universal Service Fund (USF) program is one of the most significant regulatory issues faced by service providers. The USF assessment amount is substantial and penalties for non-compliance can be severe. Providers should ensure they understand their USF obligations at every stage of their business.

The webinar provided background on USF principles and an overview of key items on the 2023 version of the FCC Form 499-A. It included a discussion of important rules regarding USF cost recovery from customers, general compliance requirements, and the FCC’s enforcement stance. The presentation also mentioned possible future areas for USF reform.

A recording of the webinar is available at the following link here.