What is a cable franchise, and how do I renew it?

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What is a cable franchise?

A cable franchise is an agreement between a local franchising authority (“LFA”) (e.g., a city, county, municipality, etc.) and a cable operator (e.g, Comcast, Cox, etc.) that allows the cable operator to provide television services (i.e., cable services) in the city, county, municipality etc. In exchange, cable operators will be often be required to provide assurances regarding service quality and network build-out, support for institutional networks and access channels, and a small percentage of revenue generated by the cable operator.[i] A cable franchise often lasts between five and fifteen years, depending on applicable state law, giving local franchising authorities an opportunity to periodically examine a cable franchise and renegotiate terms and conditions that may not be best serving a community’s present and future cable-related needs.[ii] For example, if a cable operator was continually constructing new cable facilities in the public right-of-way without first obtaining any necessary permits, furnishing inadequate support for access television programming, or providing insufficient customer service protections, these could be issues that a LFA could seek to have addressed in franchise renewal.

How is a cable franchise renewed?

A cable franchise can be renewed in one of two ways: (1) by following a statutory process referred to as “formal renewal,” or (2) through a more traditional contract negotiation process referred to as “informal renewal.”

How does formal renewal of a cable franchise work?

To commence the formal renewal process, a cable operator must submit a request for formal renewal to a LFA (e.g., “a reservation of rights”). This request must be submitted at least thirty (30), but no more than thirty-six (36), months before a cable franchise expires.[iii] Failure to timely submit this request will prevent a cable operator from utilizing the formal renewal process.[iv]

If a request for formal renewal is timely submitted, a LFA must thereafter conduct a review of: (a) the cable operator’s financial, technical, and legal qualifications, (b) the cable operator’s past performance, and (c) the current and future needs of the LFA (e.g., a needs assessment). This process can take up to twelve (12) months to complete. The LFA must then issue a request for renewal proposals (“RFRP”) to the cable operator.[v]

Within four (4) months of receiving a franchise renewal proposal from the cable operator, the LFA must then provide public notice of the proposal and determine whether to accept it.[vi] If the proposal is accepted, the franchise renewal process is complete. If the proposal is not accepted, the LFA must make a “preliminary assessment that the franchise should not be renewed.” As the statutory language plainly states, this is a preliminary decision and not a final appealable decision of the LFA.[vii]  If the LFA makes such a preliminary assessment, the LFA must then commence an administrative proceeding to determine whether the franchise should be renewed. [viii] Only the following issues may be considered at the administrative proceeding:

(A) the cable operator has substantially complied with the material terms of the existing franchise and with applicable law;

(B) the quality of the operator’s service, including signal quality, response to consumer complaints, and billing practices, but without regard to the mix or quality of cable services or other services provided over the system, has been reasonable in light of community needs;

(C) the operator has the financial, legal, and technical ability to provide the services, facilities, and equipment as set forth in the operator’s proposal; and

(D) the operator’s proposal is reasonable to meet the future cable-related community needs and interests, taking into account the cost of meeting such needs and interests.[ix]

It is important to note that a decision to deny a renewal proposal is not appealable to a court until after the conclusion of an administrative proceeding.[x]

How does informal renewal of a cable franchise work?

In informal renewal, a LFA and cable provider will often negotiate a cable franchise entirely outside of the formal process. Although informal and formal renewal are separate processes, they can occur simultaneously.[xi] Often, a cable operator will submit a proper, timely request for formal renewal, but the cable franchise will ultimately be renewed through informal means.

Informal renewal is only informal in the sense that there is a less strict statutory process that must be followed. To properly prepare for informal renewal, a LFA should still review the cable operator’s past performance under the current cable franchise, conduct a thorough needs assessment, and develop a negotiating strategy to address any of the LFA’s unmet needs. There are no issues that can be addressed in formal renewal that cannot be addressed in informal renewal.

Although a cable operator may submit a renewal proposal at any time in informal renewal, as a practical matter, the parties will first reach an agreement on the terms and conditions of a cable franchise before a LFA will allow for public participation.[xii] Typically, a LFA will make an agreed upon cable franchise available for public comment at a public hearing. After allowing for public participation, a LFA can take final action on a cable franchise (e.g., grant or deny the cable franchise).[xiii]

Conclusion

Cable franchise renewal is a unique opportunity for local franchising authorities to address the cable-related needs of their communities. It is important for local franchising authorities to understand these needs from a financial, technical, and legal point-of-view, regardless of whether a formal or informal renewal process is used. This article is intended to provide an overview of the process that is required for renewal of a cable franchise.

[i] A franchise fee is limited to no more than five-percent of a cable operator’s gross revenues. 47 U.S.C. § 542(b) (1996).

[ii] See, e.g., Minn. Stat. § 238.084, subd. 1(c) (2004) (limiting a franchise term to fifteen years).

[iii] 47 U.S.C. § 546(a)(1) (1992).

[iv] 47 U.S.C. § 546(a)(2)(A).

[v] 47 U.S.C. § 546(b).

[vi] 47 U.S.C. § 546(c).

[vii] 47 U.S.C. § 546 (c)(1).

[viii] 47 U.S.C. § 546(c)(1).

[ix] 47 U.S.C. § 546(c)(1)(A-D).

[x] 47 U.S.C. § 546(e)(1). It is important to note that a preliminary assessment of nonrenewal is not a “final decision” within the meaning of the statute.

[xi] See 47 U.S.C. § 546(h) (“The denial of a renewal pursuant to this subsection shall not affect action on a renewal proposal that is submitted in accordance with subsections (a) through (g).”).

[xii] 47 U.S.C. § 546(h) (“A LFA may, after affording the public adequate notice and opportunity for comment, grant or deny such proposal at any time.”)

[xiii] Id.

 

This Week in Telecom – Weeks Ending 2.25.18 and 3.4.18

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Below is a smattering of telecommunications stories from the past two weeks.  Some are trendy, some are interesting, and some are just weird.  This is by no means an exhaustive account of the past two weeks in telecommunications.  It is simply what I personally found interesting from the wide array of telecommunications news.

Disclaimer – The views expressed in this summary are my own and not necessarily those of Bradley Berkland Hagen & Herbst, LLC.

I.     Universal Service 

Federal Communications Commission (“FCC”) Wireline Competition Bureau (“WCB”) Announces Funding Year 2018 E-Rate Cap – On February 20, 2018, the FCC WCB released a Public Notice regarding the E-Rate funding cap for Funding Year 2018. According to the Public Notice, the funding cap is set at $4,062,030,726 and represents a 1.8% inflation-adjusted increase from the Funding Year 2017 cap. The FCC’s Public Notice can be accessed at Public Notice (DA 18-163).  

II.    Open Internet/Net Neutrality 

Chairman Pai Responds to Congressional Request to Delay Vote on Restoring Internet Freedom Order – On February 8 and 9, 2018, respectively, Chairman Pai sent response letters to Representative Colleen Hanabusa (D-Hawaii) and Senator Richard Blumenthal (D-Conn.), et al., explaining the reasons he did not delay the December 14, 2017 vote on the Restoring Internet Freedom Order (“Order”). Despite claims that the proceeding was marred by fraudulent comments, Chairman Pai maintained that the Order amply addressed the rulemaking record, and the draft Order was released over three weeks prior to the vote, allowing the public ample opportunity to review and submit feedback. The letter to Representative Hanabusa can be accessed at Hanabusa Letter and the letter to Senator Blumenthal, et al., can be accessed at Blumenthal Letter. 

Restoring Internet Freedom Order Published in Federal Register – On February 22, 2018, the FCC published in the Federal Register the Restoring Internet Freedom Declaratory Ruling, Report and Order, and Order (“Order”). The Order is effective April 23, 2018, with the exception of amendatory instructions 2,3,5,6, and 8. The delayed items will become effective only after the FCC publishes a subsequent Federal Register announcement providing their applicable effective date(s). The FCC said in the February 22, 2018 Federal Register announcement that the Order “will also be effective upon the date announced in that same document.” The Federal Register announcement can be accessed at Federal Register Announcement. 

Commissioners Clyburn and Rosenworcel Release Statements on Publication of Net Neutrality Repeal Order – On February 22, 2018, Commissioners Clyburn and Rosenworcel issued statements on the publication of what they called the “Net Neutrality Repeal Order.” Commissioner Clyburn decried the repeal of net neutrality stating “[t]oday it is official: the FCC majority has taken the next step in handing the keys to the internet over to billion-dollar broadband providers by publishing the Destroying Internet Freedom Order in the Federal Register.” However, Commissioner Clyburn also expressed optimism that, ultimately, “robust net neutrality protections will prevail with the American public!” Commissioner Rosenworcel described the repeal of net neutrality as “a study in just what’s wrong with Washington.” Commissioner Rosenworcel asserted that in repealing net neutrality, the FCC “turned a blind eye to all kinds of corruption in our public record—from Russian intervention to fake comments to stolen identities in our files” and stated that “[a]s a result of the mess the agency created, broadband providers will now have the power to block websites, throttle services, and censor online content.” Commissioner Clyburn’s statement can be accessed at Clyburn Statement and Commissioner Rosenworcel’s statement can be accessed at Rosenworcel Statement. 

Petitions for Review of Restoring Internet Freedom Order Filed Shortly After Order’s Publication in the Federal Register – At least three entities recently filed petitions for review of the Restoring Internet Freedom Order (“Order”). The National Hispanic Media Coalition, NTCH, Inc., and the Benton Foundation filed their petitions in the D.C. Circuit on February 23, 26, and 27, 2018, respectively. The petitions seek review on the basis that the Order is arbitrary and capricious, an abuse of discretion, not supported by substantial evidence, and otherwise contrary to law. The petitions ask the Court to hold unlawful, vacate, enjoin, and set aside those portions of the Order reclassifying broadband Internet access service as an information service not subject to the protections of Title II of the Communications Act. The applicable Case Nos. are: (1) National Hispanic Media Coalition – Case No. 18-1056; (2) NTCH, Inc. – Case No. 18-1061; and (3) the Benton Foundation – Case No. 18-1062.

III.  Emerging Communications Technologies 

FCC Issues Notice of Public Rulemaking on Emerging Communications Technologies – On February 22, 2018, the FCC approved a Notice of Public Rulemaking (NPRM) that seeks to flesh out the FCC’s authority under Section 7 of the Communications Act (“Act”) to assess emerging communications technologies. Section 7 of the Act was passed by Congress in 1983 and requires timely action by the FCC to encourage the provision of new technologies and services to the public. Specifically, Section 7 of the Act requires the FCC to respond within one year to applications proposing new technologies or services. “The NPRM proposes rules for Commission evaluation of petitions or applications proposing new technologies and service. In addition, the NPRM seeks comment on how the Commission can comply with the statutory requirements of [S]ection 7 of the Act for Commission-initiated proceedings for new technologies or services.” The Press Release regarding the NPRM can be accessed at Emerging Communications Technologies Press Release and the full text of the NPRM can be accessed at Emerging Communications Technologies NPRM. 

IV.   In the Press 

Law360 – Law360 published an article on February 20, 2018 discussing the DOJ’s vehement arguments against AT&T’s request for evidence of Donald Trump’s rants against CNN in the DOJ’s lawsuit opposing AT&T’s proposed purchase of CNN parent, Time Warner.

On February 23, 2018, Law360 published an article describing how FCC Chairman Pai was awarded a “token firearm” by the National Rifle Association (“NRA”) for alleged threats and insults made against him because of the recent net neutrality deregulation. According to the article, other recipients of the “courage under fire” award include Mike Pence, Rush Limbaugh, and former Milwaukee sheriff David Clarke.

You must have a subscription to Law360 to view and read these articles.  Subscription information can be found at Law360 Telecom Website.

REMINDER – Annual CPNI Certifications Due to Federal Communications Commission (“FCC”) by March 1, 2018

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REMINDER – Telecommunications carriers and interconnected Voice over Internet Protocol (“VoIP”) providers must file an annual Customer Proprietary Network Information (“CPNI”) certification with the FCC no later than March 1, 2018.  Examples of telecommunications carriers include, but are not limited to, local exchange carriers (“LECs”) (including incumbent LECs, rural LECs, and competitive LECs), interexchange carriers, commercial mobile radio services (“CMRS”) providers, resellers, prepaid telecommunications providers, and calling card providers.  There is no filing exemption for small companies.

The 2018 annual CPNI certification attests to calendar year 2017 CPNI compliance.  Certifications should be electronically filed using the FCC’s Electronic Comment Filing System (“ECFS”).  Filers must reference EB Docket No. 06-36 in the “proceeding” field when filing.  Separate certifications must be filed for each affiliate in possession of a unique FCC Form 499 Filer ID.  Failure to timely file the 2018 CPNI certification may result in an FCC enforcement action, including fines of up to $196,387 for each violation or each day of a continuing violation, up to a maximum of $1,963,870.

Because past certifications have contained informational deficiencies, the FCC has released a CPNI Certification Template.  The CPNI Public Notice, which includes the CPNI Certification Template, can be accessed at CPNI Public Notice.

This Week in Telecom – Week Ending 2.18.18

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In honor of Leslie Herbst-Saporito[1] 

Below is a smattering of telecommunications stories from this past week.  Some are trendy, some are interesting, and some are just weird.  This is by no means an exhaustive account of the past week in telecommunications.  It is simply what I personally found interesting from the wide array of telecommunications news.

Disclaimer – The views expressed in this summary are my own and not necessarily those of Bradley, Berkland, Hagen & Herbst, LLC.

I.  Universal Service 

Federal Communications Commission (“FCC”) Wireline Competition Bureau (“WCB”) Releases FCC Forms 499 and Accompanying Instructions – The FCC WCB has released the FCC Forms 499-A, FCC Forms 499-Q, and accompanying instructions.  The FCC Form 499-A and accompanying instructions are to be used in April 2018 to report calendar year 2017 revenues.  The FCC Forms 499-Q and accompanying instructions are to be used in calendar year 2018 to report quarterly projected and collected revenues.  According to the Public Notice, the revisions to the FCC Forms 499 are limited to date changes, a circularity factor update, and other non-substantive form revisions.  The Public Notice can be accessed at FCC Form 499 Public Notice and the official revised FCC Forms 499 and accompanying instructions will be made available shortly on the Universal Service Administrative Company’s (“USAC”) website at USAC Forms – Contributors.

Commissioner Clyburn Talks Federal Universal Service Fund (“USF” or “Fund”) Contributions – In her February 14, 2018, comments at the Winter Summit, Commissioner Clyburn expressed concerns about the sustainability of the federal USF absent changes to the method of assessing contributions.  Acknowledging that contribution reform “has languished for far too long,” Commissioner Clyburn advocated for the following contributions assessment system: “the infrastructure that is supported by the Fund, should be the infrastructure that is assessed by the Fund.”  Responding to objections that broadband connections should not be included in the USF contributions assessment methodology, Commissioner Clyburn asserted that the Internet Tax Freedom Act does not bar assessing contributions on broadband and a hybrid connections/revenue approach would not only significantly reduce consumers’ per-connection fees, it would also significantly reduce the contribution factor.  Should contribution reform by the Joint Board fail, Commissioner Clyburn advocated for a pitch competition that would invite new, outside experts to consider and present their ideas for contributions reform.  The only caveat, according to Commissioner Clyburn, is that the “pitches must be ideas[] that have not been hashed, rehashed, or rehashed again in the contributions docket.”  Commissioner Clyburn’s comments also addressed the High Cost and Lifeline programs.  A full transcript of Commissioner Clyburn’s remarks can be accessed at Clyburn Remarks. 

II.  Open Internet/Net Neutrality 

House Democrats Send Letter to Federal Communications Commission (“Commission”) Chairman, Ajit Pai Asking for Information About How the Commission Analyzed Public Comments Filed In the Restoring Internet Freedom Proceeding – In a February 13, 2018 letter, twenty-four (24) Democratic members of the House Energy and Commerce Committee asked Chairman Ajit Pai to answer a series of questions about how the Commission analyzed public comments in the Restoring Internet Freedom Proceeding.  The inquiries primarily seek information regarding any guidelines and/or internal legal analyses provided to staff working on the proceeding, the treatment of consumer comments filed in the proceeding, data to support the Chairman’s statement that comments filed from Russian email addresses were in favor of net neutrality, reasons for the FCC’s refusal to cooperate with New York Attorney General Eric Schneiderman’s criminal investigation, any verification or procedural devices used to confirm the identities of persons who allegedly filed comments in the proceeding, how the Commission decided which arguments filed by members of Congress should be considered in the proceeding, what analysis the Commission used to determine that consumer complaints about net neutrality violations were not relevant to the Commission’s net neutrality decision, why the Commission did not remove fraudulent comments from the public website, the scope of comment review and resources devoted to that review, and whether any training sessions were held for staff tasked with record review.  The letter asks Chairman Pai to respond to these questions no later than March 6, 2018.  The full contents of the letter can be viewed at Letter to Pai Concerning Net Neutrality Comments. 

Multiple Entities File Motions Seeking to Intervene in Restoring Internet Freedom Appeal – On February 14, 2018, AT&T, the American Cable Association (“ACA”), the Internet & Television Association (“NCTA”), USTelecom, and CTIA (collectively “Entities”) filed motions with the D.C. Circuit, First Circuit, and Ninth Circuit Courts to intervene in the Restoring Internet Freedom Appeal.  According to the Entities, they filed the motions to intervene to preserve their right to participate in judicial review, if the Federal Communications Commission’s motions to dismiss petitions seeking review of the Restoring Internet Freedom Order are not granted.  The Case Nos. for each Circuit are as follows: (1) D.C. Circuit – Case No. 18-1011; (2) First Circuit – Case No. 18-1053; and (3) Ninth Circuit – Case No. 18-70133.

Federal Communications Commission (“Commission”) Files Motions to Dismiss Petitions for Review of Restoring Internet Freedom Order – On February 9, 2018, the Commission filed motions with the D.C. Circuit, First Circuit, and Ninth Circuit to dismiss Petitions for Review (“Petitions”) filed by New America Foundation’s Open Technology Institute.  The Commission argued that the Petitions are premature because neither a summary of the Restoring Internet Freedom Order, nor the text of the amended rules have yet been published in the Federal Register.  The Case Nos. for each Circuit are as follows: (1) D.C. Circuit – Case No. 18-1011; (2) First Circuit – Case No. 18-1053; and (3) Ninth Circuit – Case No. 18-70133. 

III.  Telephone Consumer Protection Act (TCPA) 

A Pattern of Egregious Behavior and Procedural Defects Undercut Petition to Reconsider $1.84 Million Fine – On February 15, 2018, the Federal Communications Commission (“Commission”) rejected a Petition to Reconsider (“Petition”) filed by Scott Malcom and his companies DSM Supply, LLC and Somaticare, LLC (collectively “Companies”).  The Companies sought reconsideration of a $1.84 million fine issued by the Commission in February 2016 for the illegal transmission of unsolicited facsimile advertisements (“junk faxes”).  Rejecting the Petition on procedural grounds, the Commission noted that: (1) the Petition relied on facts and arguments previously raised by the Companies and rejected by the Commission; and (2) with respect to the Companies’ argument that the fine violated the Excessive Fines Clause of the Eighth Amendment, the time to raise that argument was in 2014, in response to the Commission-issued Notice of Apparent Liability (“NAL”).  Specifically, regarding the Companies’ actual ability to pay, the Commission found that the Companies’ Petition relied on financial information that could have been presented in response to the NAL and the Companies had not disputed their ability to pay when responding to the NAL.  The Commission further found that the public interest did not justify a reconsideration of the fine because, the Companies’ “TCPA violations were numerous, egregious, and occurred after [the Companies were] issued a citation advising [them] that [they] were violating the law.”  Although the Commission dismissed the Companies’ Petition on procedural grounds, it also rejected the Companies’ Eighth Amendment argument on the merits. Specifically, the Commission found that the Companies did not meet their burden to show that the forfeiture imposed was unconstitutionally excessive given the maximum statutory forfeiture amounts and the gravity of the Companies’ underlying offenses.  Note that, according to the Order on Reconsideration, the Companies filed their response to the NAL nearly seven (7) months after the filing deadline, engaged in rude and dismissive behavior when responding to complaining consumers, and the Commission received over 350 consumer complaints after the Companies received their first warning that their conduct was in violation of the law.  Click on the following links to view the Press Release and the Order On Reconsideration.

IV.  Broadband 

Trump Releases American Infrastructure Initiative and Fiscal Year 2019 Budget – According to Trump’s American Infrastructure Plan released on February 12, 2018, “$50 billion of the $200 billion in direct Federal funding will be devoted to a new Rural Infrastructure Program to rebuild and modernize infrastructure in rural America.”  The plan will also allocate $20 billion to expanding infrastructure financing programs, including rural utility lending.  Additional details on Trump’s rural infrastructure goals can be found in the Trump American Infrastructure Initiative and the Trump Fiscal Year 2019 Budget.  

Trump Discusses Rural Broadband at Infrastructure Proposal Meeting – The White House released remarks made by Trump on February 14, 2018 about Rural Broadband Infrastructure during a meeting of bipartisan members of Congress.  The remarks contain the following information regarding rural broadband infrastructure:

  1. Trump has laid out principles for an infrastructure initiative;
  2. The infrastructure initiative seeks to implement a faster permitting process of two years, as opposed to ten years, with a goal of one year, if possible;
  3. $50 billion will be spent on rural infrastructure and Internet access.

A transcript of the remarks can be accessed at Trump Infrastructure Remarks. 

V.  In the Press 

Law360 – Law360 published two articles this week discussing the involvement of Federal Communications Commission (“FCC”) and Department of Justice (“DOJ”) officials in ongoing investigations or trials.  In one article, Law360 states that the FCC Office of Inspector General is investigating Chairman Ajit Pai over allegations that he improperly pushed for rule changes relaxing media ownership rules for the benefit of Sinclair Broadcasting Group.  In the second article, Law360 states that AT&T Inc. is seeking to have Makan Delrahim, head of the U.S. Department of Justice’s Antitrust Division, testify in the case challenging AT&T’s planned purchase of Time Warner Inc.  According to Law360, there has long been speculation about what motivated the DOJ’s November decision to sue over the $85.4 billion mega-merger, with some attributing the action to undue influence by Trump.  You must have a subscription to Law360 to view and read these articles.  Subscription information can be found at Law360 Telecom Website.

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[1] I recently lost my dear friend and work colleague, Leslie Herbst-Saporito.  Leslie always wanted us to do a weekly telecom write-up.  Sadly, we did not accomplish that goal prior to her passing.  Leslie would have supported the idea of generating this summary.  Leslie, you are with me every day in this practice.  I will miss you always.

First Quarter 2018 Proposed Federal Universal Service Contribution Factor of 19.5% Announced by FCC OMD

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On December 14, 2017, the Federal Communications Commission (“FCC”) Office of Managing Director (“OMD”) released Public Notice DA 17-1203 announcing that the proposed federal Universal Service contribution factor for the first quarter (January – March) of 2018 will be 19.5%.  

If the Commission takes no action in the 14-day period following the release of the Public Notice, the proposed contribution factor will be deemed approved.

Net Neutrality Rollback? Restoring Internet Freedom Order Approved in December 14, 2017 FCC Open Meeting

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As anticipated, the Federal Communications Commission voted earlier today to overturn the 2015 Protecting and Promoting the Open Internet Order adopted under former FCC Chairman Wheeler.  The Commissioners voted along party lines, with Chairman Pai, and Commissioners Carr and O’Rielly approving Chairman Pai’s Restoring Internet Freedom Order and Commissioners Clyburn and Rosenworcel dissenting.

Among other things, the adoption of the Restoring Internet Freedom Order will:

  • return the classification of BIAS to that of an information service;
  • reinstate the private mobile service classification of mobile BIAS;
  • adopt transparency requirements that ISPs disclose information about their practices to consumers, entrepreneurs, and the Commission;
  • turn over broadband consumer protection authority to the FTC;
  • and eliminate the Internet Conduct Standard.

Note that the Restoring Internet Freedom Order is not yet in effect and has not yet been released.  Rather, the Restoring Internet Freedom Order will take effect upon approval by the Office of Management and Budget of the new transparency rule that requires the collection of additional information from the industry.

A thoughtful analysis of the impact of today’s events to follow.

A Help and A Hinderance. New FCC Order Creates Benefits and Obligations for Providers of Intrastate Mixed-Use Special Access/Private Lines.

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With all the recent hoopla surrounding broadband Internet privacy regulation and the potential rollback of the Net Neutrality Order, contributors may have overlooked new mixed-use special access/private line benefits and obligations created for them by the FCC.

Confirming the Old

On March 30, 2017, the Federal Communications Commission’s (“FCC” or “Commission”) Wireline Competition Bureau (“WCB”) released an order, the Intrastate Request for Review Order (“Order”),[1] denying several pending requests for review contesting Universal Service Administrative Company (“USAC”) audit findings related to intrastate mixed-use special access/private lines and the “ten percent rule.”[2]

Generally speaking, the Order was unremarkable, confirming that USAC appropriately relied on the ten percent rule to determine the jurisdictional nature of mixed-use special access/private line revenues[3] and affirming the FCC’s past decisions that it is the nature of the traffic carried on a private line that determines whether the line should be classified as intrastate or interstate.[4]

Creating the New

The Order did diverge from historical FCC precedent, however, in two particular ways:

  1. Most importantly, the Order created an affirmative obligation for telecommunications providers, requiring them to “provide basic guidance to their customers [who provide intrastate certifications or statements] regarding what constitutes intrastate or interstate traffic.”[5] Specifically, the Order held that “[c]arriers should specifically make customers aware that it is the nature of the traffic over the private line that determines it jurisdictional assignment, not merely the physical endpoints of the facility over which service is delivered.”[6]

How this will play out in an audit context, and whether telecommunications providers can truly be required by the FCC to take on an affirmative obligation to educate their customers on federal Universal Service intrastate mixed-use special access/private line revenue requirements, remains to be seen.  Given that USAC does not have the authority to make policy, interpret unclear provisions of the statute or rules, or interpret the intent of Congress,[7] however, it tends to read the FCC’s orders very literally.  Therefore, at a minimum, the safest course of action for telecommunications providers at this time is to add the language from the Order to their customer intrastate certifications and/or statements and ensure that a good faith effort to understand the jurisdictional nature of the traffic over their customers’ mixed-use special access/private lines is undertaken. 

  1. The Order held that whether a certification has been completed is irrelevant if a telecommunications provider can prove that the traffic carried on the private line is less than ten percent interstate.[8] Pursuant to the Order, acceptable forms of proof of intrastate jurisdiction that telecommunications providers can obtain include:
  • A tariff demonstrating that the revenues associated with the service purchased pursuant to that tariff are properly assigned to the jurisdiction in which the tariff was published.[9]
  • Customer statements or acknowledgements regarding the jurisdictional nature of a customer’s traffic. Per the Order, “[t]hese statements need only indicate whether, to the customer’s understanding, more than ten percent of the traffic on its private line is interstate or, alternatively, ten percent or less of the traffic is interstate.[10] 
  • In those instances where a private line is technically unsuitable for interstate use, a sworn declaration from a corporate officer.[11] The FCC WCB states that such a declaration should be “based on the carrier’s precise knowledge of the network design and the customer’s stated or planned usage of the network” and would be “supported with engineering reports or other documents regarding the technical specifications for the service.”[12]  Acknowledging that it may be difficult to meet this standard, the Order concludes that “it may be easier for the carrier to collect a certification or equivalent statement from the customer regarding the nature of the traffic.”[13] 
  • Any other documentation or evidence of the jurisdictional nature of a private line that USAC finds reasonable in its role and judgment as an auditor.[14]

Note that the Order does not shift the burden of proof to USAC with respect to determining the jurisdictional nature of a mixed-use special access/private line.  Telecommunications providers and their customers must make a good faith effort to assign a mixed-use special access/private lines to their appropriate interstate or intrastate jurisdiction.[15] 

Timing

Given that the FCC views the Order as affirmative in nature, telecommunications providers should immediately account for the benefits and obligations created by the Order, if they have not already done so.  Any information and/or documentation obtained from a customer to demonstrate the nature of traffic on a mixed-use special access/private line should be retained for a minimum of five years from the date of the applicable contribution.[16]  So should any information/documentation created to educate a customer regarding the jurisdictional assignment of traffic over the mixed-use special access/private line.[17]

Complying with the FCC’s federal Universal Service intrastate mixed-use special access/private line requirements can be challenging and lack of proper information/documentation is a common finding in USAC federal Universal Service audits.  If you have questions regarding the FCC’s rules surrounding the treatment of mixed-use special access/private lines, we encourage you to reach out to Kristin Berkland, of Bradley Berkland Hagen & Herbst, LLC for more information.  Kristin can be reached at [email protected] or (651) 379-0900 ext. 106.

Disclaimer

This blog post is a publication of Bradley Berkland Hagen & Herbst, LLC.  The purpose of this blog post is to inform our clients, colleagues, and friends of recent federal universal service legal developments.  This blog post is not intended to be, nor should it be used as, a substitute for specific legal advice as Bradley Berkland Hagen & Herbst, LLC only provides legal counsel to its clients, and only in response to specific factual inquiries regarding situations.

_______________________________________________________________________

[1] In the Matter of Federal-State Joint Board on Universal Service, Changes to the Board of Directors of the National Exchange Carrier Association, Inc., Universal Service Contribution Methodology, Request for Review by McLeodUSAC Telecommunications Services, Inc. et al., CC Docket Nos. 96-45 and 97-21, WC Docket No. 06-122, Order, DA 17-309 (2017) (“Intrastate Request for Review Order”).

[2] Id.

[3] Id. at paras. 3, 8-11 (“Mixed-use special access lines are assignable to the interstate jurisdiction if the interstate traffic constitutes more than ten percent of the total traffic and to the intrastate jurisdiction if it constitutes ten percent or less.”) (citing 47 C.F.R. § 36.154(a); and MTS and WATS Market Structure, Amendment of Part 36 of the Communications Rules and Establishment of a Joint Board, CC Docket Nos. 78-72 and 80-286, Decision and Order, 4 FCC Rcd 5660, 5660-61, para. 1 & Appendix (1989)).

[4] Intrastate Request for Review Order at paras. 2, 11.

[5] Id. at para. 25.

[6] Id.

[7] 47 C.F.R. § 54.702(c).

[8] Intrastate Request for Review Order at paras. 2, 23-27.

[9] Id. at para. 24.

[10] Id. at para. 25.

[11] Id. at para. 27.

[12] Id.

[13] Id.

[14] Id. at para. 26.

[15] Id. at paras. 11-17, 21.

[16] Id. at para. 29.

[17] Id.

New Bradley Firm Name

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We are pleased to announce that our firm name has changed to Bradley Berkland Hagen & Herbst, LLC.  Our firm location, webpage, emails, and phone number all remain unchanged.

Bradley Berkland Hagen & Herbst, LLC, is a law firm located in Woodbury, Minnesota. The firm also has an office in Waseca, Minnesota. The firm was founded in 1998, by Mike Bradley, who has worked in private practice for over 20 years. The firm has developed a well respected practice both locally and nationally. Nationally, the firm represents clients on cable and telecommunications matters. Locally, in addition to cable and telecommunications, the firm represents clients on a wide range of matters including V.A. Disability Benefits, estate planning and probate, employment, business, and real estate.

Bradley Berkland Hagen & Herbst, LLC

1976 Wooddale Drive, Suite 3A

Woodbury, MN 55125

(651) 379-0900

www.BradleyLawMN.com

Best of Luck to Joy

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Our partner Joy Gullikson has decided to return to the public sector, where she has accepted the position of PUC Rate Analyst at the Minnesota Department of Commerce.  Joy officially joined the Department of Commerce on October 4, 2016.  We thank Joy for her years of work with the firm and wish her the best in her work with the Department of Commerce.

How Much Is Too Much? Can a Ministerial Error Override the One-Year Downward Revision Deadline?

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A well intentioned federal universal service contributor files a revised FCC Form 499-A just prior to, or on, the March 31st one-year revision deadline thinking that he/she will receive a downward adjustment of the form.  For some reason, the filer accidentally reports non-assessable revenue on an assessable line of the form.  Approximately four months later, the filer receives a true-up invoice from the Universal Service Administrative Company (“USAC”), but instead of finding a federal universal service fund credit on the invoice the filer finds a substantial additional federal universal service assessment.  The filer now may have good reason consider an FCC waiver request.  The FCC’s recently issued ATS Financial Hardship Order, available at https://prodnet.www.neca.org/publicationsdocs/wwpdf/da161089.pdf, specifies the circumstances under which such an error constitutes sufficient financial hardship such that the filer may seek a waiver of the one-year downward revision deadline.

With very limited exceptions, federal universal service contributors are required to file FCC Forms 499-A by April 1 of each year reporting their prior calendar year’s revenues.  A filer that discovers an error in the revenue reported on its FCC Form 499-A is required to correct that error by filing a revised form.  The FCC requires revisions that result in additional federal universal service contributions upon discovery of a revenue reporting error.  Ever since the Commission issued its One-Year Downward Revision Deadline Order, available at https://www.universalservice.org/_res/documents/about/pdf/fcc-orders/2004-fcc-orders/DA-04-3669.pdf, however, revisions that result in a reduction in federal universal service contributions must be filed by March 31 of the year after the original filing due date or the filer risks foregoing return of the amounts it overpaid to the federal universal service fund.

Such was the case for American Teleconferencing Services, Ltd. (“ATS”), a filer who determined upon receiving its true-up invoice from USAC, that it had inadvertently reported non-assessable foreign-to-foreign revenue on an assessable line of its revised 2012 FCC Form 499-A.  As a result, instead of receiving its anticipated refund, ATS was invoiced for additional federal universal service contributions.  Although ATS attempted to file a second revised 2012 FCC Form 499-A, USAC rejected the second revision as untimely because it was filed outside of the one-year downward revision deadline.  The FCC Wireline Competition Bureau sided with USAC, denying ATS’s waiver request of the one-year downward revision deadline.

Enter the ATS Financial Hardship Order.  Upon review, the full Commission overturned the FCC Wireline Competition’s Bureau’s decision, granted ATS’s waiver petition, and directed USAC to process ATS’s second revised 2012 FCC Form 499-A as if timely filed.  In so doing, the Commission enumerated a number of conditions that it found sufficiently compelling to demonstrate good cause for granting a waiver of the one-year downward revision deadline.  Specifically, the Commission noted that:

  1. ATS was able to demonstrate that it had to treat the additional federal universal service assessments as material and necessitating shareholder disclosure under SEC standards;
  2. ATS was able to provide information demonstrating the estimated per-share earnings impact of its error;
  3. ATS’s error involved non-assessable revenue that would not have resulted in any additional federal universal service contributions had ATS filed its second revised form correctly and, therefore, caused minimal harm to the federal universal service fund;
  4. ATS was not a filer that failed to submit its FCC Form 499-A at all, nor was it a filer that alleged it misunderstood the filing procedures, or was negligent in filing its FCC Form 499-A.  Rather, ATS timely submitted its initial 2012 FCC Form 499-A and first revision based on the best information available at the time;
  5. The time commitment involved with ATS developing the ability to more precisely identify its foreign-to-foreign revenues and improve its reporting practices resulted in ATS filing its first revised FCC Form 499-A only a few days before the FCC Form 499-A one-year downward revision deadline; and
  6. ATS’s inadvertent clerical mistake was made on a timely filed FCC Form 499-A revision and was the result of reporting otherwise non-assessable revenue on an assessable line of the form.

While the Commission limited its holding in the ATS Financial Hardship Order to ATS’s particular circumstances, a filer who finds itself in a similar predicament should consider filing a request for waiver with the FCC.  Moreover, even where a filer does not meet the circumstances set forth in the order, if it notices an error in its FCC Form 499-A reporting after the one-year downward revision deadline that would result in reduced contributions, a conversation with USAC and review of FCC precedent may be in order.  For filers who face a contribution obligation as a result of an FCC Form 499-A error that amounts to a significant portion of their annual revenue or multiple times their actual obligations, USAC, with the oversight of the FCC, has put in place an administrative procedure that may apply depending on the dollar amount of the additional federal universal service contributions at issue.  Moreover, precedent demonstrates that the FCC has granted waivers of the one-year downward revision deadline to at least some filers who have made ministerial or clerical errors that have resulted in a significant increase in federal universal service contributions.

Disclaimer

This blog post is a publication of Bradley Hagen & Gullikson, LLC.  The purpose of this blog post is to inform our clients, colleagues, and friends of recent federal universal service legal developments.  This blog post is not intended to be, nor should it be used as, a substitute for specific legal advice as Bradley Hagen & Gullikson, LLC only provides legal counsel to its clients, and only in response to specific factual inquiries regarding particular situations.

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