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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.

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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).

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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.

Photo of Sean A. StokesPhoto of Kathleen Slattery ThompsonPhoto of Liam Fulling

Just over a month ago, the FCC released its pre-production draft of its new Broadband Maps. The initial map is based on service availability data collected from broadband providers through the ongoing Broadband Data Collection (“BDC”) and reflects services available[1] as of June 30, 2022.[2]

The release of the Broadband Map initiated a process for individuals and other entities to submit challenges to the accuracy of data for single locations, both in terms of the availability of service and serviceable locations.[3] The FCC has released guidance on how to submit an Availability Challenge and how to submit a Location Challenge. Since the release of the map, the FCC has indicated that it has received thousands of individual challenges.

The Broadband Map will play a fundamental role in identifying “unserved” and “underserved” locations and, thus, how much funding each State will be eligible to receive under the $42.5 billion Broadband Equity, Access, and Deployment (“BEAD”) program established under the Infrastructure Jobs and Investment Act. The NTIA has stated that it “expects to” announce the allocations from the BEAD program by June 30, 2023.

The challenge process will remain open and ongoing in order to improve the accuracy of the Broadband Map. The NTIA, however, has announced that challenges must be submitted by a deadline of January 13, 2023, in order to be considered in the version of the map that will be used in allocating the BEAD funding.[4][5]

In the month since the first draft was released, a wide range of public and private entities have asserted that the data is inaccurate and would result in significant misallocations of broadband BEAD funding if errors are not corrected.

Several state and local government entities have raised concerns that the January 13 deadline does not provide sufficient time to submit challenges.[6] While the NTIA has acknowledged these concerns, the NTIA has not, as of yet, indicated a willingness to extend the January 13 deadline.[7] Similarly FCC Chairwoman, Jessica Rosenworcel, counseled, “[w]hile we will take a close look at any availability challenges filed at any time, because of the time frames for availability challenges set forth under the rules and the law, you will have the best opportunity for your availability challenge to be resolved ahead of NTIA’s planned funding time frame if you file it by January 13.”[8]

Should you have any questions on the BDC program, the challenge process, or their relation to BEAD funding, please do not hesitate to contact Sean Stokes (stokes@khlaw.com), Kathleen Slattery Thompson (slattery@khlaw.com), or your primary contact at Keller and Heckman LLP.

[1] A broadband service is considered “available” if a provider currently provides broadband service of at least 25/3 Mbps, or could provide such service, as part of a “standard broadband installation” within ten business days following a request.

[2] For more information on the FCC’s Broadband Data Collection, please see the rest of our BDC blog series: The FCC’s New Broadband Data Collection is About to Launch | Beyond Telecom Law Blog; The Who, What, When, and Where of the FCC’s New Broadband Data Collection | Beyond Telecom Law Blog; Overview of the FCC’s Broadband Data Collection Resources | Beyond Telecom Law Blog; Overview of the FCC’s Broadband Data Collection Bulk Fabric Challenge Process | Beyond Telecom Law Blog.

[3] State and local governments, as well as other entities, have already been able to submit “bulk” challenges to the broadband map since September 2022.

[4] https://ntia.gov/press-release/2022/biden-harris-administration-announces-timeline-national-high-speed-internet

[5] Note, the January 13 deadline relates to the date that the NTIA has established for challenges to the Broadband Map in order to be included in NTIA’s allocation of BEAD Act funding to the States. Each State will in turn be required to establish its own process under which challenges can be made to the State’s initial determination as to whether a particular location or community anchor institution within the jurisdiction of the State is eligible for such grant funds.

[6] For example, the Vermont Congressional Delegation and the Vermont Community Broadband Board have indicated that 22% of the addresses in the Vermont Public Service Department’s database are not listed on the Broadband Map. They have indicated that there is not sufficient time to make all of these corrections by the January 13 deadline and have requested a thirty day extension. https://publicservice.vermont.gov/announcements/vcbb-and-vermonts-congressional-delegation-ask-fcc-more-time-challenge-its-maps

[7] https://broadbandbreakfast.com/2022/12/ntias-alan-davidson-touts-fcc-map-expresses-worry-about-challenge-deadline/

[8] https://www.fcc.gov/about/leadership/jessica-rosenworcel#notes

Photo of Wesley K. Wright

The FCC adopted a Second Report and Order at its Open Meeting on November 17, promulgating rules requiring service providers to deliver more timely and actionable information to 911 facilities during network outages. The Commission hopes the new rules will streamline the network outage notification process and align the requirements imposed on different service providers.

Maintenance of 911 Special Facility Contact Information

The new rules require both covered 911 service providers (“C9SP”) and Originating Service Providers (“OSPs”) (i.e., cable, satellite, wireless, wireline, and interconnected VoIP providers) to gather and maintain up-to-date, accurate contact information for 911 special facilities. The providers must confirm the accuracy of this contact information at least annually. In this context, “special facilities” are entities enrolled in the TSP Program at priority Levels 1 and 2, which include major military installations, key government facilities, and public safety answering points (“PSAPs”), among others.

Harmonizing Special Facility Notifications for Covered 911 Service Providers and OSPs

The rule changes also harmonize the outage notification obligations across providers.  Under the new rules, both C9SPs and OSPs must notify 911 special facilities about outages by telephone and in writing via electronic means if the provider and 911 special facility have not agreed upon a method for notifications. This obligation previously applied only to C9SPs.

Providers must make the initial notification as soon as possible, but no later than 30 minutes after discovering the outage.  The content included in an outage notification must contain:

  • the name of the providers experiencing the outage,
  • the date and time the incident began,
  • the types of communications affected,
  • contact information at which the service provider can be reached for follow-up,
  • a statement on how the outage potentially affects the 911 facility,
  • the expected date and time of restoration,
  • the best-known cause of the outage, and
  • other pieces of identifying information.

Providers must also update 911 special facilities with additional material outage information as soon as possible after it becomes available and no later than two hours after the initial notification.

Notification When Ceasing Operations

The FCC also requires C9SPs that cease operations to notify the FCC by filing a notification no later than 60 days after the cessation of service. This notification is only required when a provider completely ceases providing covered 911 services as opposed to a situation where the provider might cease service to a particular 911 facility.

Annual 911 Certification Reporting Requirement

The FCC considered reducing the frequency by which C9SPs must file their 911 reliability certifications from annually to biennially. The Commission elected to continue requiring C9SPs to submit reliability certifications annually.

Photo of Sean A. StokesPhoto of Kathleen Slattery ThompsonPhoto of Liam Fulling

The Federal Communications Commission (“FCC” or “Commission”) completed its first Broadband Data Collection (“BDC”) on September 1, 2022.[1] The Commission is now accepting and evaluating bulk challenges to the FCC’s Broadband Serviceable Location Fabric (“Fabric”), which serves as the foundation for the FCC’s upcoming broadband data map. To ensure the most accurate broadband map possible, service providers, state and local governments, and other entities are strongly encouraged to submit data in the BDC system pointing out any mistakes found in the Fabric.

Challenge Process Background

Currently, the FCC is only considering bulk challenges to its Fabric, meaning filing entities must submit challenges or corrections based on multiple locations. The Commission will allow individuals and other entities to submit challenges to single locations once the broadband map has been published later this fall.

The FCC’s Fabric aims to map all Broadband Serviceable Locations (“BSLs”) in the country. BSLs are business or residential locations where a broadband connection has been or could be installed within ten business days of a request for service. The FCC continues to remind filing entities that the Fabric will not necessarily identify all buildings as a BSL, and therefore challenges must be predicated on FCC definitions of residential and business BSLs.[2]

As an example, one apartment building is considered a single BSL under the Commission’s definition, despite having multiple units that have or could have broadband connections. Accordingly, the FCC will not accept a challenge that attempts to include the individual units within the building as separate BSLs because the FCC considers the building itself to be the BSL, not the units. The Fabric does, however, account for multiple units within a single BSL; therefore, corrections can be made to accurately reflect the number of units and their corresponding addresses. Moreover, structures that have no apparent use for broadband (such as a shed used for storage or an abandoned building) will not be labeled as a BSL. It is important for challengers to familiarize themselves with the BSL definitions so that challenges are not rejected or missed.

The various categories of challenges are: (1) missing broadband serviceable location, (2) incorrect location primary address, (3) incorrect location unit count, (4) incorrect location building type code, (5) location not within footprint of correct building, (6) location is not broadband serviceable, and (7) additional information needed for location address. To determine whether to submit a challenge, filers can compare internal data with the Fabric data by executing a free licensing agreement with the FCC’s Fabric contractor, CostQuest Associates. For those entities that do not already have the Fabric data, more information on obtaining access to the Fabric can be found here.

How to Format a Challenge

Bulk Fabric challenges must include the name and contact information of the filing entity, the location(s) being challenged, the category of the challenge, and evidence supporting the challenge. Additionally, the challenges must include records of each challenge location in CSV format, and the data must be submitted in accordance with the Data Specifications for Bulk Fabric Challenge Data. Required data for the various Fabric challenges can be found in the Bulk Fabric Challenge Matrix and step by step guidance can be found on an FCC video tutorial on How to File Bulk Fabric Challenges in the BDC System.

In addition, the FCC’s Broadband Data Task Force held an online Technical Assistance Workshop on Wednesday, September 28, 2022, to assist entities who plan to file bulk challenges to data in the Fabric. The workshop reviewed how to open and work with the Fabric dataset and will also demonstrate possible approaches to identifying missing or mislabeled locations in the Fabric data set. A recording of the workshop will be available at the BDC Help Center within the next week.

Additional Information

The FCC encourages filers to submit challenges as soon as possible to ensure that accepted challenges are reflected in the Fabric maps used in advance of the December 31, 2022 BDC filing window. Nevertheless, there is no deadline for filing challenges and submissions will be reviewed on a rolling basis. Filers can visit the BDC Help Center to find more information and resources concerning the challenge process, including a webinar recording explaining the challenge process generally.

Should you have any questions on the BDC program or the challenge process, please do not hesitate to contact Sean Stokes (stokes@khlaw.com), Kathleen Slattery Thompson (slattery@khlaw.com), or your primary contact at Keller and Heckman LLP.

[1] For more information on the FCC’s Broadband Data Collection, please see the rest of our BDC blog series: The FCC’s New Broadband Data Collection is About to Launch | Beyond Telecom Law Blog; The Who, What, When, and Where of the FCC’s New Broadband Data Collection | Beyond Telecom Law Blog; Overview of the FCC’s Broadband Data Collection Resources | Beyond Telecom Law Blog.

[2] Establishing the Digital Opportunity Data Collection; Modernizing the FCC Form 477 Data Program, WC Docket Nos. 19-195, 11-10, Third Report and Order, 36 FCC Rcd 1126, 1175-77, para. 126 (2021) (Third Report and Order).