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A federal court decision last week will allow California to enforce its own net neutrality rules. As other states follow suit, the desire for a more uniform approach could lead to federal legislation clarifying the scope of FCC regulatory authority over broadband Internet access service.

On February 23, Judge John Mendez of the U.S. District Court for the Eastern District of California denied a motion by trade associations representing the Nation’s major broadband providers and wireless carriers to delay enforcement of California’s net neutrality law. This followed the U.S. Department of Justice (DoJ) February 8 decision to drop its lawsuit challenging California’s regulatory authority, in which the DoJ had argued that California’s net neutrality law is preempted by the Federal Communication Commission’s (FCC’s) Restoring Internet Freedom Order (notwithstanding that the FCC insisted in that Order that it had no regulatory authority over broadband).

California’s net neutrality law is perhaps the most comprehensive in the country, going beyond the FCC’s previous net neutrality rules (adopted in the 2015 Open Internet Order) by prohibiting the practice of “zero rating,” in which an Internet Service Provider (ISP) does not count certain allied services and applications against a user’s monthly data cap.

Now, broadband providers face the prospect of enforcement of California’s law, as well as the emergence and enforcement of net neutrality laws in other states. To date, seven states have adopted net neutrality laws (California, Colorado, Maine, New Jersey, Oregon, Vermont, and Washington), and several other states have introduced some form of net neutrality legislation in the 2021 legislative session (among them Connecticut, Kentucky, Missouri, New York, and South Carolina).

Faced with a patchwork of net neutrality rules, broadband trade associations may well conclude that a consistent set of rules is desirable. Federal legislation would likely be needed to accomplish this objective, especially if the California decision is affirmed on appeal. A federal legislative effort would almost certainly confront the larger question: what will be the FCC’s role with respect to broadband communications services? The Telecommunications Act of 1996, meanwhile, is increasingly long in the tooth.

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The 31.8% Universal Service Fund (USF) contribution factor for 1st Quarter 2021 and the ascendency of broadband to that of an essential service for our Nation’s citizens during the Covid-19 pandemic may prove to be the tipping point on USF contribution reform. The multi-year funding commitments under several USF-funded programs underscore the need for reform, as noted in recent article in Bloomberg Law.

This blog entry assumes USF programs will retain a major role in supporting broadband availability and affordability for unserved and underserved communities and individuals, including possible expansion of the E-rate program to support broadband service for students of low-income families lacking broadband connectivity. Funding from other programs such as those administered by the Rural Utilities Service (RUS) and those enacted by Congress in the Consolidated Appropriations Act of 2021, the Coronavirus Response and Relief Supplemental Appropriations Act will likely continue for the foreseeable future.

Background

In the Telecommunications Act of 1996, Congress added a standalone provision (codified at 47 USC § 254) for funding, preserving, and advancing universal service. This provision directed the FCC to adopt a universal service program grounded on several principles, including that “consumers in all regions of the Nation, including low-income consumers and those in rural, insular, and high cost areas, should have access to telecommunications and information services … that are reasonably comparable to those services provided in urban areas and that are available at rates that are reasonably comparable to rates charged for similar services in urban areas.”

The generally accepted position that information services revenues are not USF-assessable is anchored in both the rigid, definition-based structure of the Communications Act and in § 254 (d) which establishes two classes of universal service contributors: telecommunications carriers that provide interstate telecommunications services (the “mandatory contributors”) and, as determined by the FCC (exercising its “permissive authority”) other providers of interstate telecommunications.  Telecommunications carriers and other providers are obligated to contribute, “on an equitable and nondiscriminatory basis…to preserve and advance universal service.”

The current funding mechanism implemented in 2000 is an adjustable percentage of end-user revenues for interstate (and most international) telecommunications services and telecommunications.  While likely based on trends in revenue generation during the mid-1990s, the unforeseen is now reality.  Revenues from interstate (and most international) telecommunications services and telecommunications are in decline as revenues from non-assessable information services (including Internet access services) are accelerating. The quarterly adjusted contribution factor has been on an upward trajectory for 20 years.

1st Quarter 2002        6.8 %

1st Quarter 2011        15.5 %

1st Quarter 2016        18.2 %

1st Quarter 2020        21.2 %

1st Quarter 2021        31.8 %

Since 2002, the FCC initiated several proceedings looking to expand the base of USF-assessable services. The most consequential is the 2006 Report and Order and Notice of Proposed Rulemaking in which the FCC extended USF contribution obligations to providers of interconnected VoIP services, exercising its permissive authority under Section 254(d) and concluding these entities are “providers of interstate communications” for purposes of universal service. The Commission determined that interconnected VoIP was a competitive alternative to legacy wireline voice services and, among other factors, stressed that USF contribution obligations should be assessed on a technology-neutral basis. Importantly, the FCC had not (and still has not) classified interconnected VoIP as either a telecommunications service or an information service. 

The 2012 Comprehensive Review

The FCC’s 2012 Further Notice of Proposed Rulemaking provides a comprehensive review of previous USF reform efforts and constitutes the Commission’s last serious effort to reverse the trajectory of the USF contribution factor. The FNPRM elicited comments looking to resolve long-standing questions of whether certain services are USF-assessable and, most importantly, approaches for establishing a more sustainable USF funding base, including:

  • a “value-added” approach in which each underlying service provider contributes based on the revenues it obtains rather than the current retail service model in which service providers contribute based on end-user revenues
  • attributing a dollar value to the transmission component of information services and assessing USF contributions on that value
  • relying on a case-by-case approach under its Section 254 (d) permissive authority to assess end-user revenues from other services per its decision on interconnected VoIP service revenues
  • by assessments based on assigned wireless and wireline telephone numbers
  • a connections-based system with multiple tiers based on speed or capacity increments

While a voluminous record was generated, no meaningful reforms or clarifications were adopted.

The Missed Opportunity

In the 2015 Open Internet Order, the FCC established net neutrality rules for the vast preponderance of Internet access service available in the United State, referred to as Broadband Internet Access Service (BIAS). The authority to adopt these rules was grounded in the Commission’s “re-classification” of BIAS from its longstanding status as an information service to a telecommunications service, subjecting BIAS providers to regulations under Title II of the Communications Act. However, the FCC punted on whether BIAS revenues would be subject to USF contribution rules, deferring the question to a subsequent proceeding.

The deferred proceeding on USF contributions was never initiated by Chairman Tom Wheeler and, subsequently, the Commission under Chairman Ajit Pai “re-classified” BIAS as an ‘information service” in its Restoring Internet Freedom Order. Despite fundamentally different conclusions on the status of BIAS under the Communications Act, in separate decisions, the D.C. Circuit affirmed the reclassification determinations in each of these FCC decisions.

Where Do We Stand in 2021?

At the close of his tenure as Chairman of the FCC, Ajit Pai acknowledged the challenges in funding USF programs and recommended $50 billion of the C-Band Auction receipts be set aside to fund these programs for up to five years. This contrasts to the decision of former FCC Commissioner Michael O’Reilly, as Chairman of the Federal-State Joint Board, refusing in 2019 to forward to the FCC USF contribution reform concepts offered by the Joint Board’s State Members.

USTelecom recently released its “First 100 Days: Building Our Connected Future; An Open Letter to President Biden and the 117th Congress,” setting out a series of telecom and technology proposals, including extending broadband to the 17 million school-age children lacking broadband connectivity in their homes. To secure reliable USF funding, USTelecom recommends “…direct Congressional appropriations and expanding the base of financial support for universal connectivity beyond just telephone consumers to include a broader cross-section of the Internet ecosystem, including its largest companies.” In part, the proposal tracks AT&T’s blog post from last summer recommending Congress directly appropriate funds to support USF programs. Another commentator recently suggested major technology companies that benefit from widespread highspeed Internet access should be USF contributors.

The Path Forward Remains to be Determined

For meaningful USF reform, two questions need to be answered: Whether Congress or the FCC should take the lead in establishing more sustainable and predictable funding mechanisms and how should those funding mechanisms be structured? A related goal should be to maintain the USF contribution factor within 3% to 6% of net service charges. Currently, the USF contribution factor, state transaction taxes, and carrier regulatory cost recovery charges, collectively add 35% to 40% to the monthly charges for interstate private line service.

Based on the Commission’s consideration of the question over the last two decades, the prevailing view is that the Communications Act limits the FCC’s authority/discretion to establish a more reliable funding mechanism. More creative approaches other than those already considered likely will be required to connect the separate universes of “information services” on the one hand and “telecommunications services” and “telecommunications” on the other. Thus, a legislative solution appears warranted.

Assuming predictability is important, direct appropriations by Congress may not be the best approach. Proposals to shift funds budgeted for USF support to other programs to meet overall budget restraints in subsequent years is a risk that should be minimized. On the other hand, Congress can amend the Communications Act to expand the USF funding base.

An approach that focuses on transmission capabilities, whether an information service or a telecommunications service, would be more inclusive and technology neutral. Funding derived under this approach could be supplemented by an annual assessment on technology companies that benefit most directly from the widespread availability of highspeed Internet access service, as noted above. The assessment could equal a meaningful, adjustable percentage of the annual projected USF program funding requirements.

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Enacted on December 27, 2020 as part of the Consolidated Appropriations Act of 2021, the Coronavirus Response and Relief Supplemental Appropriations Act (“Act”) establishes or re-appropriates a number of significant broadband-related support programs.  Reflecting the urgency of the COVID-19 situation, the Act calls for unusually prompt implementation by the administering agencies.  For example, solicitations of applications for the Broadband Infrastructure Deployment Grants and Tribal Broadband Connectivity Grants must be issued by the Department of Commerce within 60 days of the Act’s enactment.

While the details of participation are generally not yet known, interested broadband service providers—and potential partners—should take steps immediately to explore how to make the most of one or more of these opportunities, including how to structure a potential project and present a compelling case for funding, or how to qualify for a program and verify eligible customers.

The various programs are listed below.  For a more in-depth analysis of each program, please see our recent publication.

  • Broadband Infrastructure Deployment Grants (NTIA):  $300 million grant program for broadband projects by “covered partnerships” in eligible service areas. The term “covered partnership” is defined to mean (a) a State or one or more political subdivisions, and (b) a provider of fixed broadband service.
  • Tribal Broadband Connectivity Grants (NTIA):  $1 billion grant program for broadband infrastructure deployment, broadband affordability programs, distance learning, telehealth, and broadband adoption activities on Tribal land.
  • Emergency Broadband Benefit Program (FCC):  $3.2 billion for an Emergency Broadband Benefit Program providing a reimbursement subsidy for the provision of broadband service and associated equipment to qualified households in the form of a monthly discount not to exceed $50 ($75 for an eligible household on Tribal land).
  • Connecting Minority Communities Pilot Program(NTIA):  $285 million for grants to minority institutions, organizations, and consortia to support broadband development and adoption.
  • COVID-19 Telehealth Program(FCC):  An additional $250 million to the existing FCC Telehealth Program.
  • Amendments to Secure and Trusted Networks ReimbursementProgram (“Rip and Replace”):  $1.9 billion allocated to fully fund the program.  Adopted various amendments relating to reimbursement for providers obligated to remove and replace covered communications equipment.

For more information, please contact Casey Lide, lide@khlaw.com.

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The electric cooperatives in Georgia (Georgia EMCs) Tuesday received an outstanding pole attachment ruling from the Georgia Public Service Commission, protecting Georgia EMCs and their more than  four million member-owners, but also providing hope for more fair pole attachment regulation elsewhere in the country.

With the first and only ruling of its kind in the nation, the Georgia Commission adopted a six-year, $1/pole rate for any new attachments to EMC poles located in portions of Georgia not yet served by broadband. The Commission also adopted a $27.71 rate statewide for all existing cable company attachments to EMC poles. The PSC’s decision ordering one rate for existing attachments and a discount for unserved areas is designed to promote broadband in unserved areas while avoiding unjustified subsidies in areas already served. The $27.71 statewide rate in already-served areas allocates 26.94% of annual pole costs to cable company attachers, which is about 3.5 times the unjustified 7.4% FCC Cable Rate percentage the cable industry demanded.

Equally significant, the Georgia Commission largely adopted the terms and conditions proposed by the Georgia EMCs. These favorable and fair provisions include:

  1. An “Imposition Fee” of 25% on top of actual costs when the EMC must perform work the attaching entity was supposed to do;
  2. EMCs can reclaim reserved pole space for any reason;
  3. Solutions were implemented for double-wood and failures to transfer;
  4. Joint participation required for inventories and safety inspections;
  5. Unauthorized attachment penalty of $100 plus back rent;
  6. Detailed information may be required for attachment applications;
  7. Permit required for overlashing and EMC to get reimbursed for engineering required for overlashing; and
  8. A dispute resolution process was implemented

With this forward-thinking ruling by the Georgia PSC, the electric cooperatives in Georgia stand eager and ready to partner to deploy broadband in unserved areas and are committed to investing in economic growth and prosperity in their own backyards.

Keller and Heckman is proud to be part of the team the Georgia EMCs put together. Please let us know if you have any questions about this ruling or would like to discuss.

For more information, please contact Tom Magee, magee@khlaw.com.

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This is the second entry in our series on enterprise telecommunications services agreements, providing a framework for addressing the customer’s interests and risks in enterprise telecommunications services agreements.

While each carrier’s standard agreement is different, these agreements have three core components:

  1. The carrier’s standard policies and rules applicable to its services
  2. The legal terms and conditions or master agreement
  3. The business deal

Aspects of the business deal are distributed among these components.

Standard Policies and Rules

Carriers’ standard policies and rules governing customers’ use of its services primarily reside online and are incorporated by reference into services agreements. These include the carrier’s:

  • Acceptable Use Policy (AUP)
  • Network Security Policy
  • Privacy Policy
  • Service Level Agreements (SLAs) (sometimes SLAs are provided as attachments to the master agreement)
  • Service Pricing Schedules

Carriers reserve the right to modify these documents by posting revisions online with customer’s recourse for problematic changes limited to the right to terminate the service or the agreement—a non-starter for customers. As discussed below, changes to pricing schedules are intended to be less impactful.

The AUP sets out prohibited uses or abuses of its services that a carrier believes will damage its network, violate laws, or impair use of the service by others. The scope can be very broad, addressing such matters as copyright violations, interference with carrier network operations, and limitations on how the service may be used. To minimize uncertainty, the carrier may agree that the AUP, in effect on an agreement’s effective date, controls for the life of the agreement. For violations, carriers reserve the right to terminate service. This poses an untenable risk to enterprises that largely shares the carrier’s interest in stopping any abuse.

A customer-oriented approach is to add a provision to the agreement that states, in the event of an alleged or actual potential AUP violation, the carrier shall promptly notify the customer of the abuse, providing a brief period to remedy the offending conduct or demonstrate that there was no violation. The carrier may insist on the right to suspend the affected service until the violation ceases. This approach underscores the importance of inclusion of a thoughtful precedence clause so that an agreed modification to the AUP, and to any other online document, controls in the event of a conflict.

A carrier’s privacy policy must reasonably meet the most stringent state and foreign privacy laws in which it operates, which suggests major carriers’ policies are reasonably comprehensive. However, the prospective carrier’s policy should be reviewed to determine whether major gaps or variances exist as compared to the enterprise’s privacy policy. Several carriers maintain and update network security policies and practices that may be summarized in a Network Security Policy document. This document is both high level and non-negotiable. It is provided as an assurance that the carrier is vigilant in maintaining network security.

SLAs are service-specific and vary among carriers. Whether an SLA is sufficient is a business decision. SLAs specify latency, availability, Mean Time to Repair (MTTR) other technical performance requirements, and may include customer reporting obligations, escalation procedures, and billing credits for outages. Invariably, outage credits are nominal.  As a rule, the substance of SLAs is not negotiable, but the consequences of recurring SLA violations may be addressed, as discussed below.

The rates in the service pricing schedules are the carriers’ “rack rates.” A key element of the business deal is the negotiated rates for the desired services. These are included in attachments to the master agreement. The carriers routinely agree that the negotiated rates take precedence over rates in their pricing schedules.

Terms and Conditions (Master Agreement)

The legal terms and conditions that the enterprise has adopted for its template agreements are an appropriate baseline for assessing the legal terms and conditions of the carriers’ standard agreements. Negotiated provisions in cloud services agreements or collocation agreements may be relevant as well.

The termination right in most agreements for material breach has limited value in telecommunications services agreements. Problems tend to be service- or location-specific. An unplanned transition of hundreds of locations to a replacement carrier is not an optimum outcome for many customers. However problematic the service, connectivity to enterprise locations must be maintained. Persistent, significant billing or provisioning issues may warrant termination.

On the other hand, a tiered set of remedies that include a partial termination right is likely more helpful. Recurring SLA violations could trigger a carrier to conduct a root cause analysis and provide a remediation plan or a reprovisioning obligation for the affected service or customer location(s). If the problem persists, the customer should have the option to terminate the affected service(s). The incumbent carrier should be obligated to continue to deliver the problematic service, including any access component, for at least 90 days without charge, and the incumbent should be obligated to support the transition to another carrier’s replacement service.

Carriers limit their damages to an amount equal to the affected services or the negotiated minimum commitment securing cover damages is a challenge. As with partial terminations, a realistic transition period for continued service and support in migrating to replacement services should be part of any remedy for the carrier’s material breach of the agreement.

Customer preferences on dispute resolution (litigation or arbitration) and venue should be negotiated. Mutual disclaimers on consequential damages are standard. Choice of law may be a greater concern for agreements with substantial international and foreign services. An informal billing dispute process that precedes formal dispute resolution is recommended, as carrier billing systems and processes are often problematic.

SLAs are the service warranties—implied warranties of fitness for a particular purpose and merchantability are disclaimed. An intellectual property warranty is not routinely offered to customers. The carriers’ agreements often do include an intellectual property indemnity and may include personal injury and property damage indemnities, all of which warrant review by enterprise counsel.

A confidential Information provision should encompass information relating to the customer’s traffic and usage levels, network design, and any consolidated list of enterprise locations, even if not marked “Confidential.” The customer information provided in RFPs to carriers should be included within the scope of this provision. The carrier will likely insist that the agreement and negotiated pricing be kept confidential.

A less-obvious consideration is what happens at contract expiration. For enterprises with hundreds of locations, transitions entail monetary costs and operational challenges.  Existing services must remain until replacement services are provisioned to customer locations.  Generally, installed services remain in use until orders to disconnect are placed with the lame-duck carrier, but negotiated rates routinely revert to that carrier’s standard pricing schedule rates—increasing 50% or more at contract expiration. Thus, a clause is warranted to ensure reasonable end-of-contract transition support and price stability (contract rates remain in effect) for a defined period.

The Business Deal

Negotiated rates and charges are lower than rates in carriers’ pricing schedules and, preferably, are expressed as fixed rates, rather than percentage discounts of rates in pricing schedules. Carriers acknowledged negotiated rates take precedence over rates in pricing schedules. Non-recurring charges, principally provisioning costs, are often waived if the services remain in place for a defined period.

Carriers do not push aggressively for “exclusive service provider status.”  Customer preferences for an accountable service provider (or “one throat to choke”) and the integrated nature of enterprise voice and data services, coupled with the minimum expenditure commitment (either per year or for the contract term) often deliver a satisfactory outcome for a carrier. A customer’s failure to meet their minimum commitment typically triggers a shortfall payment obligation.

There are two other noteworthy pricing related provisions: (1) as noted above, a pricing review clause that requires at least one pricing review during a three-year term that allows the customer to call upon a reputable pricing consultant to assist in keeping rates at current market levels; and (2) a “business downturn” provision. This provision mitigates the risk of a substantial shortfall payment when a customer projects they are unlikely to meet their minimum expenditure commitment due to business slow-downs or a business unit sale or divestiture.

Other relevant non-pricing provisions are a customer option for one or two one-year renewal terms, as noted above; a technology review/upgrade clause, though drafting such a provision can be a challenge; and an account team support clause to ensure regular communications between enterprise staff and responsible carrier account team members.

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This is the first entry of a two-part series on the services agreements that major enterprises enter into with telecommunications carriers to meet company-wide telecommunications requirements, providing connectivity between enterprise locations, and to cloud resources, suppliers and customers, public voice networks, and the World Wide Web. These agreements may encompass domestic services, services between the United States and other countries (international services), and services between foreign countries (foreign services), or some combination of these.

Enterprises typically acquire wireless services and wireline services under separate procurements and agreements. This series focuses on agreements for wireline voice and data services including Internet access services (“telecom services”).[1] This entry provides an overview of the procurement process and the business deal. The second entry highlights the agreement structure,  an approach for counsel to assess business and legal terms, and conditions commonly found in telecom service agreements.

The Basics of Enterprise Telecom Services Procurements

A telecom services procurement is typically initiated to migrate to new or lower cost services, a significant change in telecommunications requirements (due to a major acquisition or geographic expansion), more favorable pricing, the desire to assess the capabilities of other carriers, or a combination of these. The agreements have a 3-5 year term, typically with one or more customer renewal options.

Telecom carriers are selected based on reliability, geographic reach of their networks, diversity of services, and price. Many enterprises rely on a primary carrier, sometimes with another carrier providing redundant service between major locations or to different regions, particularly for international and foreign services. This is true whether the enterprise is a technology firm, a major retailer (online or brick and mortar), a utility holding company, or is engaged in finance, payment processing, logistics, manufacturing, transportation, or energy production or distribution.

A threshold procurement question is whether the customer will rely solely on in-house procurement staff or retain telecommunications procurement consultants to execute the procurement. Engaging telecom procurement consultants may be the prudent approach for many enterprises, as these consultants likely have a better sense of market pricing and carriers’ current offerings and business objectives. Under either approach, a well-conceived RFP demonstrates there is a risk to the incumbent service provider(s) of losing the business and an opportunity for other carriers to win new business.

The in-house procurement team or consultants review current agreements and bills to determine usage, locations, and circuit mix for developing the demand set for the enterprise’s RFP. This is true whether the customer’s current network arrangement of services will be maintained or modified, including utilizing different services. A timely, thorough RFP facilitates an apple-to-apples comparison of responses from interested carriers.

Customer’s counsel should review the RFP, particularly if prepared by a consultant. It is preferable that legal terms and conditions consistent with the Company’s interests and practices be included in the RFP. Non-disclosure agreements (NDAs) protecting a customer’s data conveyed to a consultant and, subsequently, to the carriers receiving the RFP are appropriate.

The Business Deal  

Telecommunications voice and data services, including Internet access services, are standard offerings that are available from multiple carriers. Services generally meet customer expectations. The principal variables are price, geographic reach of the carrier’s network, customer perceptions, and carrier responsiveness to shifting customer requirements.

In addition to Telecom Services, carriers offer managed services that may also be provided by  third parties. Managed services include application routing (SD-WAN), monitoring and managing customer routers, and security, such as VPNs and firewalls. Managed services may be acquired with telecom services[2]. Conferencing services, such as Microsoft Teams and Zoom, are applications enabled by Internet access services and other data services.

Carriers have developed Service Level Agreements (SLAs) for their telecom services. SLAs are routinely elicited for services included in RFPs. We discuss SLAs at greater length in Part 2 of this series.

Apart from a handful of tariffed services, rates for Telecom Services are market-based, determined principally by the efficacy of the procurement process, the customer’s service mix and projected expenditures, and the extent of perceived competition. Many agreements provide for competitive pricing reviews that occur at defined intervals during the term of the agreement. Customers often retain consultants for these pricing reviews.

The efficacy of pricing reviews is one reason telecom services agreements may remain in effect for 10 years, through multiple amendments adding services and changing rates. Another is the challenges of transitioning services from one carrier to another, particularly for enterprises having hundreds of locations throughout the United States or in multiple countries.

There are two categories of rates and charges in Telecom Services Agreements: 1) one-time, non-recurring charges, principally service provisioning charges, and 2) recurring monthly rates, either fixed monthly or variable, usage-based (voice services) rates. Customers typically prefer that charges and rates be expressed in fixed dollar amounts as opposed to percentage discounts of rates in providers’ pricing schedules. Service providers regularly require minimum customer expenditure commitments. Customers prefer aggregate expenditure commitments that are either annual or for the term of the agreement, as opposed to service-specific commitments.

Fixed rate pricing and minimum commitments are discussed further in Part 2 of this series.

___________

[1] In terms of regulation, Internet access services are classified as “information services.” In the United States and many developed countries, information services are subject to less regulation than “telecommunications services.”  Another widely used data service, known as MPLS, is sometimes treated as information services. However, these services are universally included in telecom services procurements. For enterprise customers, a major distinction between information services and telecommunications services is the extent to which the respective service types are taxed and subject to regulatory surcharges.

[2] Managed services are not addressed in this two-part series.

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The transition to the Biden Administration will impact all agencies and departments in the Federal Government. This entry provides insights into the ongoing work at the Federal Communications Commission (FCC) during its transition to a new, yet unnamed, Democratic Chair and a majority of Democratic Commissioners.

Most headline actions by the FCC are taken at its public monthly agenda meetings with discussions by the FCC Commissioners about the items being considered. Other items are decided by the FCC on circulation, where the Commissioners individually vote on items but do not discuss them at a public meeting. Importantly, many more FCC actions are decided at the Bureau and Office levels under precedent or general policy guidance and without consideration by the FCC Commissioners.

A common element in all of the FCC decision-making is the role of the FCC staff in reviewing requests for FCC action, analyzing public comments in docketed proceedings, and at a minimum drafting formal decisions, whether or not they ultimately require a vote by the FCC Commissioners. As we approach a post-election transition at the FCC, it is timely to consider how a transition affects the FCC staff and the large volume of work for which it is responsible.

The President can, at any time, designate any sitting FCC Commissioner as FCC Chair. It is expected that once President-Elect Biden is inaugurated, he will designate a sitting Democratic Commissioner as acting or possibly long-term Chair. The two current Democratic Commissioners are Jessica Rosenworcel and Geoffrey Starks. There are likely other Democrats interested in the FCC Chair position, but they would have to be nominated by the President and confirmed by the Senate for a vacant commissionership to be appointed FCC Chair.

What happens during this interim period before the Inauguration and immediately afterward as the party affiliation of the Chair and the majority party of FCC Commissioners changes?

During past transition periods, the FCC has avoided issues likely to be voted along party lines, which has meant sticking to matters on which there are not significant partisan differences. This was demonstrated by the FCC’s November 2020 meeting, at which only one item had any dissent, which was by a member of the Republican majority. Previous months’ agendas often had numerous items decided by 3-2 votes along party lines.

By Inauguration Day, past FCC Chairs from the party of the outgoing President have often resigned their positions and left the FCC even though they were not legally obligated to do so.  Ajit Pai, the current FCC Chair, recently announced that he will resign on January 20, 2021. In addition, Republican Commissioner Michael O’Rielly’s term expires with the end of the present Congress, so he must leave the FCC by early January 2021. Whether the Senate, in the little time remaining in this Congress, confirms President Trump’s nomination of Republican Nathan Simington for the opening created by  Commissioner O’Reilly’s upcoming departure will determine whether there is a 2-2 tie among FCC Commissioners or a 2-1 Democratic majority on Inauguration Day. President Biden will ultimately nominate additional Commissioners to fill any vacancies, providing Democrats a 3-2 majority for the balance of his Presidency.

Once a new Democratic Chair is in place, that person will review the senior leadership of the FCC and decide on changes. An interim-only FCC Chair is more likely tolimit management changes to key leadership positions occupied currently by political Senior Executive Service (SES) appointees. If one of the sitting Democratic Commissioners is named Chair, other than on an interim basis, broader changes in the senior FCC leadership may be announced quickly. For example, Chairman Pai announced 15 senior FCC leadership appointments shortly after his appointment as FCC Chair in 2017.

The U.S. Office of Personnel Management  accords substantial deference  to government employees who are in the SES, stating that “Members of the SES serve in key positions just below the top Presidential appointees, and are the major link between these appointees and the rest of the Federal workforce.” Most SES-level employees must be “career” civil service, with strict limits on the number of “political” appointees. SES positions are coveted for their combination of relatively high pay levels coupled with civil service employment rights and protections. Career SES staff cannot be involuntarily reassigned to different responsibilities within 120 days of a new agency head taking office. As a practical matter though, many career SES will agree to proposed reassignments by the new FCC Chair.

Generally speaking, government employees are focused on continuity of services as changes among Bureau and Office Chiefs and subordinate management positions are in progress. During transition periods, the volume of FCC actions levels off until new leadership, policies, and priorities are clearly understood by the FCC staff.  With a new Chair and Democratic majority in place, it will take some time for them to establish the direction and specifics on the wide range of pending FCC matters and to communicate their new priorities to the FCC staff.

To read more about the possible changes to the FCC resulting from the election, click here.

 

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In January 2017, newly inaugurated President Trump appointed Commissioner Ajit Pai as the Chairman of the FCC.  With a Republican majority, Chairman Pai appointed new FCC leadership and began to make policy changes on issues previously decided by a majority Democratic FCC under Chairman Thomas Wheeler.  Given the many issues were decided on party lines under Chairman Wheeler (see previous blog entry “FCC:  Live by the 3-2 Vote …”), it was inevitable that many decisions would be revisited as  Republican Commissioners assumed the  majority   The same result  is expected, again, as soon as President-Elect Biden appoints at least one new  Democratic Commissioner and a new FCC Chairman.

Among the most significant and politically charged issues decided by a 3-2 Republican majority from 2017 – 2020 was the Restoring Internet Freedom Order that re-wrote the broadband rules and policies adopted several years earlier by a 3-2 Democratic majority in the “Open Internet Order”; new rules on access to public rights of way and infrastructure for wireless deployments; ownership limits for broadcast stations; assessments regarding the degree of competition in wireless services; and various spectrum auctions.

Perhaps the subject of greatest interest to the public (judging by the huge number of comments filed in the docket) is Net Neutrality.  In 2015, the Democratic-controlled FCC classified broadband internet access service as a common carrier service under Title II of the Communications Act in the Open Internet Order, although the FCC decided to forebear from some of the burdensome aspects of common carrier regulation.  The FCC adopted three “bright-line rules”: no blocking, no throttling, and no paid prioritization.  The FCC also asserted broad authority to investigate and address future conduct by broadband providers that may “unreasonably interfere with or unreasonably disadvantage” consumer choice of lawful content, applications, services or devices, or edge providers’ ability to make  content available to consumers.

In Dec. 2017, the Republican majority FCC reclassified broadband internet access service as an information service under Title I of the Communications Act, reinstated the classification of mobile broadband internet access as a private mobile service, and transferred authority to the Federal Trade Commission to enforce the Commission’s scaled-back Transparency Rule, largely revoking the rules and policies of the Open Internet Order.

The stark difference in the two approaches to Net Neutrality indicate that once under Democratic control, the FCC likely will reverse the 2017 decision through another notice and comment rulemaking proceeding, which  could result in another round of court appeals, unless the new Congress steps in and resolves the Net Neutrality issues by amending the Communications Act.

The Democratic-controlled FCC is likely to revisit Federal restrictions on state and local authority over aspects of macro tower siting and small cells and other equipment in public rights-of-way that were adopted during the last four years.  The outgoing Republican majority repeatedly constrained state and local authorities to encourage more rapid infrastructure deployment for 5G.  While the Democratic minority shared the objective of broadband and 5G deployment, the Democratic Commissioners decried the FCC’s decisions overriding local governments’ authority over infrastructure within their boundaries.  It will be interesting to see the extent to which a new Democratic majority will readjust the balance of federal and local authority over wireless infrastructure.

On consolidation of ownership of communications facilities and services, there is a long history of Republican majorities at the FCC looking to ease restrictions and Democratic majorities less willing to do so, which affects limits on common ownership of broadcast stations.  The FCC’s decision to approve T-Mobile’s acquisition of Sprint adopted by the 3-2 Republican majority reflects decidedly different views of competition in the mobile wireless services.

The party differences on spectrum auctions are influenced by competition and consolidation issues, such as limits on the total amount of wireless spectrum held by any licensee and how rules for different spectrum auctions should be structured, including preferences or advantages to small or other specially situated bidders, such as Native Tribes.

As the particulars of proposed changes are known, they will be addressed in future editions of the Beyond Telecom Law Blog.

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Trends Impacting Wireline Procurements

The preeminence of cloud computing warrants a “fresh look” at wide-area network design, particularly for enterprises considering wide-area network procurements. Enterprises  have an important network design choice: either (i) maintain the current MPLS-based design with its uniform security policies, substantial traffic backhaul, and site-based defined routing, or (ii) migrate to one of several versions of software-defined wide-area network (SD-WAN) technology. A useful summary of SD-WAN technology with links to more detailed explanations is available here.

Proponents argue SD-WAN technology enables application-based routing with tailored security and defined redundancy at diverse enterprise locations. These proponents also maintain the technology improves connectivity to private and public clouds and application performance and allows for reductions in MPLS bandwidth.

As online conferencing and e-commerce remain on an upward trajectory, SD-WAN arguably provides enterprises with more flexibility in meeting a broader range of telecommunications requirements. Expanded use of offnet and intra-enterprise online conferencing may also reduce demand for outbound wireline and mobile voice services.

MPLS providers advance their tried and true solution. One major carrier’s preferred solution for connectivity to cloud resources is more extensive reliance on its MPLS network, emphasizing (i) the benefits of avoiding the security and reliability risks inherent in the Internet, and (ii) the carrier’s relationships with cloud providers that enable simplified access and provisioning to cloud resources. From an enterprise network management perspective, there is substantial appeal of simply establishing another MPLS node to access its cloud service providers.

SD-WAN and the Demand Set for RFPs

For planned telecom services procurements, the possible migration to an SD-WAN requires judgement in developing the demand set for an RFP. In addition to projecting usage and traffic growth or contraction on a site-by-site basis, the RFP should be based on current and projected applications, particularly cloud-based applications. A conservative approach is to maintain current MPLS capacity but reducing it as the benefits of SD-WAN technology are demonstrated. The customer should realize the cost savings of reduced MPLS capacity and not be penalized by seeking a minimum commitment level based on the cost savings of reduced MPLS network capacity. Whether an MPLS-focused carrier will agree is a different issue.

Best Practices in Telecom Services Procurements Continue to Apply

In other respects, the basics for achieving a successful telecommunications services procurement continues to apply, including a systematic approach, a realistic procurement timeline, the value of informed telecom procurement consultants, and an understanding of revenue commitments and pricing. Likewise, the challenges confronting counsel for enterprise customers in identifying and tracking the online documents incorporated in the Agreement both during negotiations and during the life of the agreement and limited remedies remain.

Two considerations related to SLAs merit note. The first pertains to SD-WANs. Separate SLAs should be in place; one for SD-WAN performance and one for the underlying transport services. Enterprises may have to push SD-WAN technology firms to establish their SLAs or explain how their tools accurately measure performance. This is true whether the SD-WAN is provided by the transport provider or a 3rd party. Network managers should know where troubles are arising.

The second pertains to high-speed Internet access SLAs. Though no longer offered on a “best efforts” basis, improvements in enterprise broadband SLAs are incremental at best. At least one leading carrier limits its SLA for latency measured between points within its network and reserves the exclusive right to determine SLA violations. It is an open question whether measuring latency for Internet access service between points within the carrier’s network is informative. Why not from the customer’s locations?

Interestingly, the Federal Communications Commission (FCC) requires broadband services providers that are recipients of USF funds to test the speed and latency of their broadband services at the downstream/upstream speeds and latency levels the providers committed to deliver. The FCC established annual testing windows and requires testing be conducted from the customer interface to an FCC-designated IXP, defined as a facility housing a public Internet gateway that has an interface to a transitive Internet Autonomous System (ASN).  The test results must be submitted to the FCC.

The overarching issue is not the amount of credits or whether credits should be paid, but rather what is the most useful measure for assessing the performance of the broadband service being delivered.

The Federal USF Contribution Factor Now Exceeding 25%

Broadly speaking, universal service contribution obligations are imposed on revenues from interstate and international (i) wireline voice services (interconnected VoIP and TDM, including standalone voice conferencing), special access services (a/k/a Business Data Services), and private line services, and (ii) wireless voice services. Intrastate service revenues are not subject to USF contribution obligations. The same international/interstate v. intrastate distinction applies to so-called “private carrier” service revenues. Unlike sales taxes and other state transaction taxes, the USF contribution obligation is imposed on the services providers, but may be (and is routinely) “passed through” to and recovered from customers.

Though no definitive ruling has been made by Universal Service Administrative Company (USAC) or the FCC, despite repeated requests, MPLS services are generally treated as information services, and not subject to USF contribution obligations. Importantly, highspeed Internet access services are also classified as information services and are not USF-assessable services.

When the Telecommunications Act of 1996 was enacted, the revenues from Internet access services and other information services were negligible – MPLS was not broadly deployed,  wireless voice and texting were the mobile services, and wireline voice, special access, and private line services generated the vast majority of carriers’ services revenues. Cable service revenues have never been subject to USF. In 2000, the USF contribution factor was under 6%. During the 3rd quarter of 2020, the contribution factor was 26.5%, and it is set to be 27.1% during the 4th quarter. The dramatic reversal reflects the transition in communications services expenditures.

As Federal universal service programs are now geared to supporting wireless and wireline broadband services to underserved communities, low-income individuals, schools and libraries, and rural healthcare institutions, the revenue requirements for these programs are on a steady, upward trajectory. The prevalent view is that Section 254 of the Communications Act must be amended to extend the contribution obligations to revenues derived from high-speed Internet access services. Were the USF revenue base expanded in this manner, the contribution factor could decline to “sales tax” levels.

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MDU developers and owners know they are on the frontline of the broadband revolution. During the pandemic, working from home with expansive use of online conferencing is the new normal. With school starting across the country, online learning will place more demands on local broadband networks. E-commerce is booming as owners can attest by virtue of resident expectations for enhanced package receiving and storage capabilities. Even as the pandemic is controlled, elevated demand for higher speeds, particularly upload speeds (as compared to prior Covid-19 demand), likely will persist. Adding fuel to this fire are overpriced cable and satellite television programming packages and the popularity of online streaming services.

Owners whose properties lack adequate broadband connectivity are in an unenviable position, whether due to unavailable robust broadband service or limited property infrastructure such as inadequate risers, pathways, or lack of spare conduit to accommodate more than one service provider. Old copper telephone wire has limited utility.  In some instances, a saving grace is that other multi-family property owners in the area likely suffer from the same lack of robust broadband options.

Many developers and owners are not ready to “cut the cord” on linear video,  as they are not yet comfortable with providing a “streaming-only” video option for residents.[1] This is particularly true among operators of retirement communities. For new developments, retrofits, and when otherwise feasible, sophisticated MDU developers and owners are inviting multiple broadband service providers to extend their networks into their communities and offer 21st century broadband services to their residents. [In many ways, this is the “next act” in the “play” that began 15-20 years ago when cable broadband offerings overwhelmed the local telephone companies that were wedded to DSL technology.]

Whether engaging with established triple-play providers or emerging broadband providers, developers and owners should frame their broadband strategies based on the following considerations:

  1. Robust broadband service (and meaningful competition) is a challenge for MDU developers and owners outside of major urban areas. Substantial cable industry consolidation has occurred in recent years.  Charter acquired Time Warner and Bright House Networks in 2016. Altice acquired Cablevision the same year.   Unfortunately, these cable operators rarely compete against each other in the same market. In urban markets the major telephone companies, AT&T and Verizon, offer competitive (typically fiber-based) triple-play services and Century Link is building out fiber-based networks in some urban areas.  To date, new broadband-focused providers are concentrated in urban areas. In many 2nd and 3rd tier markets, the video and broadband offerings of the major telcos rely on aging in-place DSL technology; thus, the sole option is the local cable operator. Only in recent years is a semblance of competition emerging in 2nd and 3rd tier markets.[2]

a. The business and legal terms and conditions of the major service providers’ standard MDU access and marketing agreements range from unreasonable and a challenge to read to those that are reasonably balanced and comprehensible.  Competitive broadband providers’ agreements tend to be balanced and readable. These providers appear focused on reducing the “friction” in implementing relationships with MDUs.

  1. Plan for the future. Properties should be constructed to support inbuilding wiring/facilities of multiple service providers (even if today there are no viable competitors to the local triple-play when the property is being built).

a. State and Federal laws and policies largely prohibit exclusive access arrangements, but exclusive of use of inside wiring by a single provider is the predominant regulatory policy and industry practice today.

  1. Beware of exclusive marketing agreements with triple-play providers or other broadband providers. These agreements may discourage competitors from extending facilities and services to a development or community.

a. Franchise cable operators typically leverage their cable franchise to provide broadband service throughout their franchise service areas.

b. Except for rural broadband services providers that are recipients of Federal USF or RUS broadband funding or similar state programs, emerging broadband providers are not obligated to extend broadband service to MDU developments.

  1. Critically evaluate bulk video service arrangements. Ten years ago, bulk linear video deals provided owners positive revenue streams while delivering a valued amenity for many prospective residents. The migration to online streaming and the rising costs of linear video programming (increasing programming fees, add-on fees, and annual price increases) are undercutting the value of bulk video arrangements in MDUs.
  2. Triple-play and broadband-only agreements should not restrict developer/owner flexibility in selecting IoT services or IoT service providers. The Internet of Things (IoT) is the integration of wireless technology, remote sensing devices, and analytics that either monitor or control property-wide or unit-specific systems such as HVAC, access, video surveillance, and electricity or water usage or both. The applications and efficacy of these applications are evolving. Whether a property’s broadband service provider(s) can best deploy and manage these systems or whether focused IoT providers can do a better job remains to be determined.
  3. Experienced consultants can bridge owners’ and developers’ knowledge gap in assessing services providers’ business offers. Excluding the largest REITs, most developers and owners do not enter into agreements with broadband providers on a continuing basis to develop a “sense of the market.” We have two thoughts regarding consultants. First, understand the roles/services the consultant will perform. Second, in our view, flat fee or hourly rate arrangements are preferable to “percentage of savings” compensation schemes. The latter can be challenging to define and can result in an unexpected case of “buyer’s remorse.”

[1] This entry is not intended to speak to the off-campus student housing segment of the MDU industry.

[2]In unserved rural markets (no broadband at 25/3 Mbps or higher or 10/1 Mbps or higher and no wireline voice), the FCC and the Rural Utility Service (RUS) of the United States Department of Agriculture are funding fiber-based and fixed wireless networks capable of providing up to 1 Gbps/500 Mbps to residential (including MDUs) and small business users. In October of this year, the FCC will make available up to $16.0 Billion over ten years for broadband deployments in unserved rural areas via a reverse auction.