BROADBAND COMMUNITIES ECONOMIC DEVELOPMENT SUMMIT 2014 SEPTEMBER 16

BROADBAND COMMUNITIES ECONOMIC DEVELOPMENT SUMMIT 2014 SEPTEMBER 16, 2014 KEY LEGAL AND REGULATORY ISSUES AFFECTING COMMUNITY BROADBAND PROJECTS Sean Stokes (sstokes@baller. com) Casey Lide (casey@baller. com) The Baller Herbst Law Group, PC Washington, DC (202) 833 -5300 www. baller. com

Disclaimer This presentation does not constitute legal advice and should not be interpreted as such. For advice on federal, state or local law, please consult qualified legal counsel.

Overview Focus today: Legal and regulatory issues affecting service providers, as such: I. III. IV. V. VI. Community Broadband Federal Universal Service Program Poles & Infrastructure Access to Programming E-Rate CAF/RUS: Rural Broadband Experiments

I. Community Broadband: State Barriers To Public Entry Nixon v. Missouri Municipal League (2004): • “No State or local statute or regulation, or other State or local legal requirement, may prohibit or have the effect of prohibiting the ability of any entity to provide any interstate or intrastate telecommunications service. ” Telecom Act § 253(a) • “any entity” in § 253(a) not clear enough to preempt state barriers with regard to political subdivisions, but • Not a ruling on the merits of public entry • Municipalities have “respectable position” • FCC “minced no words” in “denouncing” MO law • Does not apply to private entities, including coops

Barriers To Public Entry State “barriers” today (not necessarily “prohibitions”): AL, AR, CA, CO, FL, LA, MI, MN, MO, NC, NE, NV, PA, SC, TN, TX, UT, VA, WI • Broad based public-private sector support has helped recast the debate away from public v private • From 2005 -2010 most efforts at barriers defeated, 2011 -2013 laws in NC and SC but defeated in GA • 2014 new efforts KS, IN, UT, but pro bill in TN

SECTION 706 -- PETITIONS • 706(b) requires the FCC to determine whether advanced telecommunications capability is being deployed to all Americans in a reasonable and timely fashion. • If not the FCC “shall take immediate action to accelerate deployment of such capability by removing barriers to infrastructure investment and by promoting competition in the telecommunications market. ” • Verizon Corp. v. Federal Communications Commission, 740 F. 3 d 623 (D. C. Cir. 2014) – Dissenting Judge raises possibility of Section 706 removing barriers to municipal broadband • FCC Chairman Wheeler makes speech stating that he will use Section 706 to remove barriers to municipal broadband • Chattanooga, TN and Wilson, NC have filed 706 petitions to preempt state barriers.

Community Broadband: Authority Issues Barriers v. Authority • Federal law encourages, but does not authorize • National Broadband Plan – encourages community broadband • Public entities must have state/local authority • State laws, interpretations, procedures differ widely • Dillion’s Rule v. Home Rule • Service-by-service (cuts both ways) • Charters, ordinances, finance laws and instruments, pole agreements, franchises, contracts, tax issues, etc.

Service Specific Regulations • Communications Act and State counterparts • Separate “silos” for telecom, cable, wireless, and “enhanced” or “information services” • Each has its own history, policies, definitions, benefits, burdens, FCC rulings, court decisions, constituencies • Convergence: Technological + Corporate + Market For authority and compliance, it’s critical to know how an activity is classified for regulatory purposes.

Business Models Range of business models extends from infrastructure provider to retail service provider, each with escalating costs/ rewards and regulatory compliance obligations • Pure infrastructure -- Poles, street lights, towers and dark fiber • Governmental entities • Private carriage • Broadband • Wholesale carriage (private or common carrier) • Video Services • Telecommunications Services • Public/Private ventures both insolate and create more challenges

Incumbent Challenges • Whatever services/model is chosen, anticipate a challenge • Cases Bristol, VA (telecom) -- Victory Bristol, VA (cable) -- Loss (but then corrective state law) Lafayette, LA – Victory Portland, OR -- Victory North Kansas City, MO -- Victory Truckee-Donner PUD, CA – Victory Chattanooga, TN -- Victory UTOPIA, UT – Settled • Anticipate anticompetitive practices

II. Federal Universal Service Program Why The Details REALLY Matter: • ~17% (!) of gross revenues • Private carriage vs. common carriage • Exemptions may be available, some depend on what your customers are doing • Counterintuitive and sometimes illogical • FCC enforcement

USP: The Basics • Providers of “interstate” and “international” “telecommunications, ” “telecommunications service, ” or “interconnected Vo. IP” may need to file reports and pay a universal service “contribution” based on % of assessable gross revenues from the provision of such services to “end users. ” • Contribution factor announced each quarter, ranging from 12% - 17%.

USP: The Basics • Based on the Forms 499 A and 499 Q, the Universal Service Administrative Company (USAC) then bills the filers for the amounts they owe, including for LNP/NANPA/TRS if provider of “telecommunication service” • Providers that project contribution obligations exceeding de minimis levels for the year in question must file quarterly Forms 499 -Q by February 1, May 1, August 1, and November 1 • Providers can pass all or a portion of their USP payments through to their customers (if contracts permit)

“Telecommunications” & “Telecommunications Service” “The term “telecommunications” means the transmission, between or among points specified by the user, of information of the user's choosing, without change in the form or content of the information as sent and received. ” “The term “telecommunications service” means the offering of telecommunications for a fee directly to the public, or to such classes of users as to be effectively available directly to the public, regardless of the facilities used. ” 47 C. F. R. 54. 5

“Telecommunications” & “Telecommunications Service” (continued) • Dark fiber, by definition, does not include the transmission of information, which is an essential part of the definition of “telecommunications” • Key implications for providers of “telecommunications service”: • Must file 499 -A when begin service, even if de minimis revenues, so potential retroactive penalties, etc. • Telecommunications Service providers not eligible for some important exemptions

Internet Access and “Information Services” • “Information services” are exempt from USP • Internet access service = “telecommunications” + “information service” • Therefore, Internet access service = exempt from USP • Internet transport may not be exempt…

Internet Access vs. Internet Transport • Internet transport = “telecommunications” • Providing only “telecommunications” or also “information service” along with it? • DNS lookup? Managing IP addresses? • Who is the “ISP, ” from the customer’s perspective?

Internet Transport • Internet transport = “telecommunications, ” BUT: • Assessable under USP only if offered on a “common carrier” basis. Internet transport provided on a private carriage basis is not subject to assessment. • An illogical relic.

Interconnected Vo. IP • Not regulated under Title II, but treated much like “telecommunications service. ” • Providers must file Form 499 -A, even if would otherwise be exempt (de minimis, etc. ) • 64. 9% “interstate” (or traffic study)

“End User” • USP contributions assessed on revenues from “end users” • “End user” is not necessarily the last purchaser in a chain of distribution. • “End user” includes purchasers of covered service (i. e. , telecom, telecom service, Vo. IP) that does not itself make USP contribution, because it is exempt or has failed to comply. • A contributing reseller is not an “end user” (more later)

“End User” (cont. ) Examples: • “Telecommunications” sold to a de minimis provider that is exempt from USP because it owes less than $10, 000 contributions. Seller must treat de minimis provider as an “end user” and count sales in USP contribution base. • “Telecommunications” sold to telephone company to provide telephone service: telco is not “end user, ” as telco must pay into USP. Special conditions discussed later. • “Telecommunications” sold to ISP that uses them to provide exempt “information service. ” ISP is an “end user, ” but sales may be exempt on other grounds (more later)

“Interstate” vs. “Intrastate” • Nature of the traffic, not just the location of the line • “End to end” principle • Internet, cable traffic inherently “interstate” • Interconnected Vo. IP: 64. 9% • “ 10 Percent Rule”: “If over 10 percent of the traffic over a … line is interstate, then the revenues and costs generated by the entire line are classified as “interstate. ” • USAC’s presumption (currently on appeal) = traffic is interstate in absence of certifications or traffic studies

Revenue from Resellers • Wholesale providers’ revenue from services sold to resellers is exempt from USP, if wholesaler collects and maintains information (specified in FCC instructions) that support “affirmative knowledge” or “reasonable expectation” that the reseller or its customers make contributions to USP. • Reseller revenue must still be reported on Form 499 -A (Block 3) (if provider needs to file) but not used to calculate contribution.

Private Carriage vs. Common Carriage Relevant Factors: • “Manner in which the provider holds itself out to the public” (advertising? ) • Does not need to be the public at large to qualify as a common carrier. See State of Iowa v. FCC; Virgin Islands Tel. Corp. • Services offered indiscriminately on same terms and conditions (like a tariff), or individually negotiated? • Small set of customers, with little/no turnover?

Private Carriage vs. Common Carriage • Remember, private carriers that provide “telecommunications” or interconnected Vo. IP are still subject to USP. • Common carrier / private carrier inquiry is relevant for Internet transport revenues.

Exemptions • De minimis exemption: • If projected contribution to the USP from end-user revenues for the coming year < $10, 000 (~$65, 000 gross revenue), a provider of “telecommunications” is exempt from USP reporting and contribution requirements. • A de minimis provider of “telecommunications service” and Vo. IP must still file Form 499 -A to comply with TRS/NANPA/LNP obligations.

Exemptions • Service to only government entities or public safety organizations: • Entirely exempt from contribution and reporting obligations. • Exemption unavailable if serve even a single nongovernmental entity (including private non-profits) • Creation of separate entities to handle exempt and nonexempt sales may be an option.

Exemptions (continued) • Service by non-profit schools, libraries, health care providers and broadcasters • All are exempt from USP reporting and contribution obligations. Not available to outside providers that serve such entities.

Exemptions (continued) • Self-service, system integrators • A provider whose only customer is itself is exempt • This includes buying cooperatives for schools, libraries, etc. • System integrators who receive no more than 5 percent of revenue from resale of telecommunications are exempt.

Enforcement • FCC’s enforcement authority • Principal and interest • Fines and forfeitures • Retroactivity • Asymmetric periods of limitation • Appeals before FCC • Options for addressing past liabilities • Recent developments • USP “Strike Force”

III. Pole Attachments: Federal Pole Attachment Regulations -- 47 U. S. C. § 224 • Regulate rates, terms and conditions of access for wired and wireless attachments to utility poles by telecommunications carriers and cable operators • Rules apply to poles, ducts, conduits and ROW owned by investor-owned (private) utilities • Rates – Two formulas: Cable only (not really); and Telecom. In 2011 the FCC revised Telecom formula to yield essentially same rate as Cable formula • Access – Prescribed timelines for access to poles • Cost causer pays

Yup Nope

What the Federal Attachment Rules Don’t Do • Federal rules don’t apply in 21 states that have “reverse” preempted the FCC and regulate at the state level. • Federal rules don’t apply to municipal or cooperatively owned utilities -- 47 U. S. C. § 224(a)(1) • Federal rules don’t provide attachment rights to standalone broadband or dark fiber services • Federal rules don’t apply to utility fiber

If they want broadband so bad why don’t the municipals just get out of the way and let us build?

…OH

Public Power Utilities • View safety, security and reliability of their electric system as top priority • View poles and conduit as a community asset • Want to encourage broadband deployment • Want (and have an obligation) on behalf of their consumer owners to obtain cost recovery • Provide access to all types of service providers – voice, video and data on similar terms and conditions

Leveraging Consumer Owned Utility Assets • Bring the utility in to the planning process early • Don’t assume that utility and municipality have identical interests • Don’t confuse access to ROW with access to assets • Allow for in-kind consideration and where possible monetize the value of such services • Don’t get tripped up by non-discrimination or level playing field clauses

IV. Access to Programming • The Basics • Retransmission Consent • The Future: New Modes, New Models, and What Is an “MVPD” Anyway?

The Basics • “Cable service”: “[T]he term “cable service” means—(A) the oneway transmission to subscribers of (i) video programming, or (ii) other programming service, and (B) subscriber interaction, if any, which is required for the selection or use of such video programming or other programming service”

The Basics • “Cable System”: • “[T]he term “cable system” means a facility, consisting of a set of closed transmission paths and associated signal generation, reception, and control equipment that is designed to provide cable service which includes video programming and which is provided to multiple subscribers within a community, but such term does not include (A) a facility that serves only to retransmit the television signals of 1 or more television broadcast stations; (B) a facility that serves subscribers without using any public right-of-way …”

The Basics • “Cable operator”: “[T]he term “cable operator” means any person or group of persons(A) who provides cable service over a cable system and directly or through one or more affiliates owns a significant interest in such cable system, or (B) who otherwise controls or is responsible for, through any arrangement, the management and operation of such a cable system”

The Basics • “Cable operator” must register with FCC • Obtain “community unit ID” (cuid), corresponding to headend • Designation triggers most program access rights and obligations under federal law.

Retransmission Consent and Must-Carry • Broadcast stations elect to be carried on local cable system(s) in one of two ways: • “Must carry”: operator must carry, station receives no $ • “Retransmission consent”: operator under no obligation to carry, but station demands $ • Three year election cycle. Election must be uniform throughout broadcast DMA.

Retransmission Consent: $$$ 2006: $215 million 2012: $2. 4 billion 2018: $6 billion. Source: SNL Kagan

Retransmission Consent • “Good Faith Negotiation” • The Plight of Small Operators: • • • Gouged for access to essential programming Subject to aggressive “channel tying” demands Less favorable terms than big MSOs, but no way to prove it due to aggressively enforced NDA terms • “Good faith negotiation” means little when parties have disparate bargaining power.

Retransmission Consent • No reasonable prognosis of meaningful FCC or Congressional action in the near term. • Some cable operators adding “broadcast TV fee” to subscriber bills

Sports • L. A. Dodgers / TWC – Sports. Net LA • $7 B, 25 year deal • Dodger games no longer on free broadcast channels. • TWC charging other operators $5+ per sub, operators aren’t buying. • ESPN: $5+ per sub • Fox Sports 1, Sports 2 . . . Cable rates have skyrocketed over the past 5 years.

The Future (? ? ? ) • New modes of video delivery, new partnerships: • “Virtual MVPD/headend”, managed service • Many announcements / partnerships, little change so far • FCC proceeding on meaning of “MVPD, ” “channel” • Not clear what a cable operator of the future will look like, nor whether it will be a “cable operator” as currently defined.

Are Cable TV’s Days Numbered? • OTT is great for nonlinear, nonscheduled programming (Netflix, etc. ) • OTT not so great for scheduled programs and events. (Internet was designed for peer-to-peer, not multicast) • Delivery of linear, high-demand video programming might be doable as a managed service, as part of a subscription involving the broadband provider. • The more things change….

V. E-Rate • The Basics: • One of four federal communications subsidy programs funded by USP, administered by Universal Service Administrative Company (USAC) • Federal subsidy (funded by USP) for the provision of “eligible services” (telecom, Internet access and other services) to schools and libraries • Subsidy of 20%-90%, based on % of students eligible for National School Lunch Program • Now, available to virtually any provider (not just “telecommunications carriers”)

E-Rate (continued) • Eligible Services: • Connectivity to eligible locations (“Category One”): • Connections to schools and libraries, including leased lit and dark fiber • Internet access, regardless of technology. • Maintenance eligible • Internal connections (“Category Two”) • Distribution of signal within schools, among campus • LAN/WLAN components, etc • Maintenance and managed services eligible

E-Rate (continued) • E-Rate Modernization Order (July 11, 2014): • Expanded support for Wi-Fi within schools • Bandwidth targets: • Schools: • Short term: 100 Mbps/1, 000 users • Longer term: 1 Gbps/1, 000 users • Libraries: • <50 k users: 100 Mbps • >50 k users: 1 Gbps • Reorganize ESL, phase out support for legacy services (i. e. , voice)

E-Rate (continued) • Leased lit fiber: • “[M]onthly charges, special construction and maintenance charges are eligible” • “When lit fiber is leased as a Category One service, the modulating electronics can be included as a part of that eligible service” • Leased dark fiber: • Within property line: maintenance and special construction costs are eligible • Beyond property line: special construction charges not eligible, maintenance eligible • Modulating electronics generally not eligible • IRU considered a lease of dark fiber. Upfront charges may need to be amortized.

E-Rate (continued) • The Process: • • • Obtain Service Provider ID (SPIN) via Form 498 Obtain Form 499 Filer ID Respond to Form 470 Request for Services and RFP, if applicable (window open November-December) • Contract with recipient, file Form 471 (March-April) • Receive Funding Commitment Decision Letter

E-Rate (continued) WARNING: Service providers and recipients should be VERY careful about communicating prior to selection. ANY service provider involvement in school’s/library’s process concerning service requirements and provider selection is taken very seriously, will jeopardize funding, and may lead to serious penalties, including retroactive payment of support.

VI. CAF/RUS: Rural Broadband Experiments • National Broadband Plan recommended transitioning Universal Service Program from telecom to broadband • The FCC created the Connect America Fund (CAF) to help make broadband available in high-cost areas • CAF Phase I (interim) and Phase II (cost model) • CAF to be incentive-based, market-driven, and may include competitive bidding to distribute unclaimed funds • In early 2014, the FCC announced rural broadband “experiments” to test interest in subsidized deployments of broadband at higher than the FCC’s minimum levels • Reached out to non-traditional entities, including municipalities and utilities • FCC received over 1, 000 expressions of interest

CAF/RUS: Rural Broadband Experiments • Rural Broadband Experiment Order adopted in July 2014. See http: //www. fcc. gov/document/rural-broadband-experiments-order • $100 million budget for experiments in unserved census blocks in “price cap” ILEC markets • Relatively modest, but lessons learned may be used for $ billions in subsequent rounds • Three categories of experiments, 2 in high-cost areas and 1 in extra high-cost areas (details next slide) • FCC will provide support in equal monthly installments over 10 years • Reverse auction – low bid wins • Auction closes October 14, 2014

CAF/RUS: Rural Broadband Experiments $100 million is the total amount available to winning bidders over ten years The FCC will distribute each winning project’s share in 120 equal monthly installments • Category 1 (Very High Performance): $75 million for projects proposing network capable of delivering 100/25 Mbps in eligible highcost areas while offering at least one service plan that provides 25 Mbps/5 Mbps to all locations within the selected census blocks ($20 M per-project cap) • Category 2 (Minimum Performance): $15 million for projects offering at least 10 Mbps/1 Mbps in high-cost areas ($7. 5 M per-project cap) • Category 3: $10 million for projects offering at least 10 Mbps/1 Mbps in extremely high-cost areas ($5 M per-project cap)

CAF/RUS: Rural Broadband Experiments • Funding is available to a wide range of entities, including utilities, government entities, coops, non-profits, etc. • FCC encourages partnerships • At least one member of a selected bidder must have or obtain Eligible Telecommunications Carrier (ETC) status from the relevant state or the FCC within 90 days of selection • Entities must comply with all applicable federal, state, and local laws • What about potential applicants from states that have barriers to community broadband initiatives? • Chattanooga/Wilson proceeding before the FCC

THE BALLER HERBST LAW GROUP, P. C. 2014 P St NW Suite 200 Washington, D. C. 20036 www. baller. com sstokes@baller. com casey@baller. com