Chapel Hill and Carrboro Should Send Gig.U RFP Back to Drawing Board

The Town of Chapel Hill and the Town of Carrboro should not authorize their managers to continue with the Gig.U (aka North Carolina Next Generation Network [NCNGN]) initiative at this time. Both elected bodies should direct staff to send the request for proposals (RFP) back to the drawing board for repairs.

The primary reason to reject the current RFP is that local governments could not enforce important parts of agreements that could come from a resulting contract. Municipalities all over North Carolina have been stripped of any legal authority to franchise or regulate either cable or broadband systems. This is important because, as the current RFP is structured, this is how the towns would make sure we all have access to a new fast network.

It may be true that the current RFP doesn't suggest towns should create franchise agreements. But how else should our elected officials make sure we all have access to this network and that it's priced in a way everyone can afford? There are creative ideas to approach this. (See this version of RFP for suggestions.) But the current RFP does not address them.

Let's say this RFP does attract interest and the towns entered into an agreement. All kinds of promises could be made to fulfill our interests of controlling costs and providing equal access. But when the time came for this to happen, a business may choose not to honor these agreements. At that time, the towns would not have the authority to compel that business to bridge the digital divide--a stated goal of the RFP.

Another and equally serious reason is the proposal in the RFP that steering committees be created. This would only wrestle away control from the citizens of Chapel Hill and Carrboro and place them in unelected regional bodies.

The proposed Gig.U RFP is here. The Town of Chapel Hill agenda item is here. The Town of Carrboro agenda item is here (pdf).

For at least nine months, representatives of Duke University, North Carolina State University, the University of North Carolina at Chapel Hill, the City of Raleigh, the Town of Cary, the City of Durham, the City of Winston-Salem, Wake Forest University, the Town of Chapel Hill, and the Town of Carrboro have met in private to discuss a collaboration on bringing more high-speed broadband to our communities. Originally I was hopeful that such a large and powerful group could really get something done.

A few months ago, I spoke at meetings of both the Town of Chapel Hill and the Town of Carrboro to express my concerns with Gig.U. I warned both elected bodies that giving away public fiber optics without a good return would be wrong. And to remind them that we must make sure everyone in our community has assess to the Internet should they want it, especially school children.

At that time, Mayor Mark Chilton told the Carrboro manager that bridging the digital divide was Carrboro's primary concern in any dealing with Gig.U. This led Gig.U to include the digital divide in their documents. Before Mayor Chilton spoke to this, no mention about bridging the digital divide was mentioned by UNC CIO Larry Conrad during his speeches about Gig.U to both towns.

Below is a legal brief on these matters from telecommunications attorney Cynthia Pols. It has been sent to Andy Vogel of the Town of Carrboro and John Bjurman, CTO of the Town of Chapel Hill. Ms. Pols is a telecommunications attorney and a broadband consultant who has represented local governments on broadband and telecommunications matters. She spoke at a Town of Chapel Hill meeting a few months ago offering advice. Since then, she has done pro bono work with the Town of Carrboro crafting their part of the Gig.U RFP. Unfortunately, little of her advice was included in the current RFP.

Terri Buckner works as the UNC Gig.U Initiative project manager. She has been one driving force behind lobbying both towns to participate in the Gig.U initiative.

Catharine Rice is a cable and broadband consultant to municipalities. She has worked hard to help North Carolina towns and cities retain control of and build local broadband networks. She too worked pro bono with the Town of Carrboro crafting their part of the Gig.U RFP. Little of her advice was included in the current RFP.

This e-mail is reprinted here with Ms. Pols's permission.

From: Pols Cynthia
Date: November 13, 2012 2:31:51 AM EST
To: Buckner Terri
Cc: Rice Catharine
Subject: legal issues associated with the proposed NCNGN RFP

Dear Terri:

I thought that it would be helpful if I laid out our concerns about the legal issues surrounding the RFP for the proposed North Carolina Next Generation Network (NCNGN) in writing so that it is clear exactly what those concerns are. Our concerns relate primarily to whether and the extent to which proposals made by potential network providers may be incorporated into legally enforceable, binding agreements between the network provider (or providers) and each of the six participating municipalities or whether the bidders’ proposals will turn out to be little more than non-binding, nice-sounding statements of aspirations.

North Carolina is a “Dillon’s Rule” state, which means that municipal authority is limited to authority that is granted by the state’s statutes or constitution. Municipalities in North Carolina do not have broad home rule powers and are permitted to engage in only those activities that have been authorized by state law in some way. In the case of broadband, the North Carolina legislature has moved aggressively in recent years to limit both regulation and operation of broadband systems by municipalities, leaving very little municipal authority in the broadband area. This very limited municipal authority, in turn, raises questions as to whether the six NCNGN municipalities will be able to enforce the provisions of the proposals to be solicited through the RFP process and suggests the need for creative lawyering to make the NCNGN process work.

STATUTORY LIMITS

First, municipalities do not have authority under state law to franchise or regulate either cable or broadband systems.

In 2006, the North Carolina legislature enacted the Video Services Competition Act, banning all municipal franchising of new cable systems as of January 1, 2007, and requiring cable providers to secure a state franchise instead of a local franchise (N.C. Gen. Stat. §§ 66-350 – 360). The state made its deregulatory intent clear by also not allowing those state franchises to include provisions that once were standard features of local franchises like build-out requirements, minimum system capability requirements, and rate regulation provisions. This absolute prohibition on municipal franchising of cable systems affects broadband systems because most cable systems are also broadband systems and because the North Carolina courts had construed the statute’s definition of cable systems very broadly so that it included broadband systems.

State law also prohibits local franchising and regulation of broadband systems that do not carry traditional video programming and therefore arguably do not fall within the definition of cable system. North Carolina law does so by designating broadband service as an unregulated service (N.C. Gen. Stat. §§ 62.2(b) and (b1)) and allowing all new providers of broadband service to operate based on a state-granted “certificate of convenience and necessity” (N.C. Gen. Stat. §§ 62.3(23)a and 62-110). Through provisions included in the Telecommunications Act of 1996, federal law further constrains local regulation of broadband systems by removing barriers to entry at the state and local level and prohibiting most state and local regulation (see, e.g., 47 U.S.C. § 253).

The combined effect of these state and federal laws is to leave North Carolina municipalities without authority to franchise broadband systems, impose restrictions on broadband rates (such as requirements for discounts for low-income customers), or regulate the operation of broadband systems (e.g., required open access operations). In the context of the RFP for the NCNGN communities, these restrictions matter because a franchise is typically the means by which local governments would impose binding requirements on users of the public right-of-way such as a new network provider. That franchise pathway is effectively foreclosed by North Carolina and federal law, meaning that alternative tools will need to be devised to ensure that the selected network provider(s) complies with its commitments.

Second, municipalities generally do not have authority to provide communications services to members of the public for a fee.

This is due to the enactment by the North Carolina legislature of the Level Playing Field/Local Government Competition Act in 2011 (N.C. Gen. Stat. §§160A-340.1 - .6). This law effectively bars most municipal broadband retail operations, whether wireless or wireline, and applies to traditional cable systems as well as more advanced broadband systems. This law regulates only direct sales to customers for a fee and therefore does not cover the leasing of a municipal broadband system to a third party for operations or the leasing of dark fiber or other facilities to third parties. The law also expressly exempts three important service categories from its restrictions and allows municipalities to provide them: (1) free communications services; (2) the provision of communications services to other governmental entities (e.g., school systems, sewer and water authorities, state agencies, public safety agencies, transit authorities); and (3) remote meter reading for utility and parking meters and smart grid-type services for electricity, water, and sewer systems.

The effect of this law is to leave North Carolina municipalities without authority to provide most broadband services for a fee to conventional residential and business customers. As noted, there are important exceptions to this ban and the ban does not limit the authority of municipalities to lease some or all of their communications facilities to third parties. In the context of this RFP, these restrictions matter because they provide important guidance as to “public purpose” under North Carolina municipal law and therefore what may be included in a municipal contract with a private entity.

STATUTORY AUTHORITY

Under North Carolina law, municipalities have authority to enter into a contract with a private entity as long as the contract is for a “public purpose that the city is authorized by law to engage in” (N.C. Gen. Stat. §160A-20.1).

The restrictions described above on the authority of municipalities to franchise broadband systems and to become direct providers of broadband service could be invoked by industry interests as evidence of the absence of a “public purpose” in municipal involvement in the broadband business and as therefore establishing outside limits under North Carolina law on municipal contracting authority with regard to broadband.

On the flip side, the North Carolina Supreme Court has recognized “public purpose” as broad in concept. At the same time, it has also ruled that that the municipality’s activity should primarily benefit the public and not a private party although there is some flexibility under the public purpose test as it is not necessary that the service be for the use of every citizen in the community. See, e.g., Maready v. City of Winston-Salem, 342 N.C. 724 (1996).

But, regardless of judicial recognition of broad notions of “public purpose,” an agreement between a municipality and a network provider that includes franchise-like provisions when franchises are expressly prohibited by state law (N.C. Gen. Stat. § 66.351(a)) and when the fee-based provision of most broadband services by a municipality is prohibited by state law could very well face rough sledding if challenged in a judicial forum. For example, a court could determine that a broadband network contract with service requirements and restrictions is nothing more than an attempt to circumvent the restrictions of state law on local franchising and is a prohibited franchise masquerading as a contract. And similarly vulnerable to legal challenge would be contract provisions that purport to do things by contract that are well outside the regulatory authority of a municipality (e.g., requiring that price discounts be provided to particular categories of broadband customers, establishing prices for particular services, establishing network build-out requirements or requiring that particular neighborhoods be wired, requiring that the broadband system be operated as an open access system).

Finally, North Carolina municipalities may also lease municipal property but for no more than 10 years (including options to renew or extend) and subject to such terms and conditions as may be established by the council (N.C. Gen. Stat. §160A-272). A municipality could, in theory, lease dark (or lit) fibers or space for a network operations center or customer service facilities to a network provider and include conditions and restrictions on the use of the property that are designed to accomplish regulatory purposes such as discounts for low-income customers or universal wiring. Once again, conditions that reach well beyond standard lease terms for the use of the property being leased could be vulnerable to legal challenge as the “public purpose” requirement applies to all municipal activities.

CONCLUSION

There is nothing in North Carolina law that expressly authorizes municipalities to impose the regulation-like requirements contemplated by the RFP on a network provider. This is true whether the goal of the proposed RFP is to impose open access rules on the operation of a broadband system, require discounts to be provided to particular categories of customers, or require particular neighborhoods to be wired. The absence of express municipal authority would be of less concern if the North Carolina legislature had not recently sharply curtailed municipal involvement in the broadband arena, whether as a franchising authority or as a direct provider of broadband service, thereby implying that certain broadband actions by municipalities no longer satisfy the “public purpose” test.

Broadband areas that are open to municipal entry under North Carolina law include those areas specifically exempt from the Level Playing Field/Local Government Competition Act’s restrictions on the provision of municipal broadband services. Those areas of municipal broadband activity that are exempt from restriction likely identify broadband areas where municipal involvement would satisfy the “public purpose” requirement and include the direct municipal provision of the following services: + Free communications services; + Communications services to other governmental entities (e.g., school systems, sewer and water authorities, state agencies, public safety agencies, transit authorities); and + Remote meter reading for utility and parking meters and smart grid-type services for electricity, water, and sewer systems.

The required provision of any or all of the aforementioned services pursuant to a contract with a network provider, along with ancillary and associated requirements, might very well pass muster under the public purpose test although that question has not been definitively addressed by the courts. There is case law that preceded the 2006 enactment of the Video Services Competition Act and the 2011 enactment of the Level Playing Field/Local Government Competition Act that provided significant latitude to municipalities in the broadband area but neither of these restrictive state laws have been construed by the courts to any significant extent since their enactment.

Thus, an RFP that contemplates a contract with a network provider that includes regulation-like requirements such as required open access operations, mandatory discounts for any or all customers, and required wiring of certain neighborhoods would rest on a shaky legal foundation, given the severe restrictions of state law. Attorneys for the affected communities, with expertise in navigating the “public purpose” quagmire and working around the restrictions of existing North Carolina law as it relates to municipal involvement in the broadband area, should examine the legal foundation for the RFP so that it is crafted to focus only on requirements and goals that can be incorporated into a binding contract with the successful bidder or bidders.

Many of the requirements and goals outlined in the draft RFP embody concepts that will prove to be difficult if not impossible to reduce to enforceable, binding obligations due to the very real limitations of state law. Further, those requirements and goals, as currently stated, will likely scare off most bidders, who, due to deregulation, have the right under state and federal law to serve any or all of the NCNGN communities without the consent of the affected municipalities. Bidders will likely be attracted only if inducements are offered as part of the RFP (or in subsequent negotiations with bidders) such as guaranteed governmental customers, low-cost access to existing municipal facilities, and/or guaranteed smart meter or similar customers.

My apologies for being long winded but there is not much point in proceeding with the RFP until the legal issues are sorted out and a comfort level is attained among the participating communities as to exactly which service and network commitments may be reduced to contract form and be fully enforceable.

Sincerely,

Cynthia M. Pols