On Wednesday, June 11, 2014, the Federal Communications Commission (FCC) released its long-awaited order establishing a framework for competitors to obtain broadband subsidies (support) through Phase II of the Connect America Fund (CAF). The 212-page Order and Further NPRM sets forth the framework for competitive providers (including cable operators, CLECs, and fixed wireless ISPs) to bid for support to deploy broadband and voice services in high-cost unserved areas of the country.

Under the framework adopted in earlier decisions, the FCC will make Phase II support available to competitive providers in areas where a price cap LEC (i.e., the largest carriers such as Verizon, AT&T and CenturyLink) declines model-based support. In those circumstances, the agency will release the uncommitted support to competitive providers pursuant to a competitive bidding process that will be conducted as a reverse auction.

Overview
As explained in greater detail below, the Order takes several significant steps towards finalizing a policy framework that will permit competitors to participate in the CAF program through a competitive bidding process. First, the Order resolves several open issues concerning participation in the program through a competitive bidding process, including the adoption of a ten year support period and broader definition of permissible funding areas. Second, the Order clarifies several open issues surrounding necessary eligible telecommunications carrier (ETC) designations required of all competitive bidders. Third, although the Order leaves the Phase II challenge process unchanged, it raises significant questions concerning potential rule changes that may result in overbuilds of competitors’ networks. Finally, the Order raises many more questions in a Further NPRM that must be addressed before final implementation of Phase II competitive bidding process. The Commission expects to make final decisions regarding the mechanics of the Phase II competitive bidding process by the end of 2014.

Competitors’ participation in this program is not without a price. Recipients of CAF support are required to satisfy certain “public interest” obligations associated with their broadband services, including meeting speed, latency and usage capacity obligations. However, some see these obligations as impermissible common carriage regulations on broadband providers. The FCC rejects that argument and reasons that these obligations are mere conditions to receipt of CAF support, accepted on a voluntary basis by the price cap LECs who elect to receive such support. More significantly, after the Commission’s decision to dismiss an NCTA Application for Review, these obligations will also apply to competitors challenging the allocation of CAF support to any particular census block they serve.

We expect the Commission will soon implement the next steps in this proceeding by publishing a notice of census blocks that are eligible for funding under Phase II. As we explained in a prior DWT Alert, that will begin a challenge process. Carriers who provide broadband and voice service in any of those census blocks will then have 45 days to file evidence demonstrating that they provide qualifying service in that census block—in other words, showing that the area is served. A price cap LEC seeking funding for a challenged census block will then have 45 days to file rebuttal evidence showing that broadband provider does not meet the qualifying criteria, and that the census block should be designated as unserved. The FCC will reconcile that data and publish a final list of unserved census blocks eligible for Phase II funding.

As noted above, if a price cap LEC declines the offer of support under Phase II, those funds will be available to competitors through the competitive bidding process. Summarized below are key elements of the competitive bidding process and framework. Comments on the issues raised in the Further NPRM will be due 30 days after its publication in the Federal Register. Please contact us if you have any questions about this proceeding, the challenge process or competitive bidding procedures.

Summary—CAF Phase II Competitive Bidding Framework and Related Issues

CAF Phase II Participation Framework
The Order clarifies several important aspects of the competitive bidding process, including the framework for participation. Key decisions include the following: 

• Competitive bidders may obtain support for a period of ten years. This period is twice as long as the five-year support period currently established for price cap LECs, and is intended to stimulate interest in the competitive bidding process.
• Competitive bidders may seek support in both “high-cost areas” and “extremely high-cost areas” —i.e., areas where the average cost per location equals or exceeds a specified cost benchmark. This approach will allow carriers to build “integrated networks” that span both types of areas in adjacent census blocks. 
• Price cap LECs who decline state-wide support will be allowed to participate in the competitive bidding process. 

CAF Phase II Competitive Bidding Procedures
Although the basic framework for bidding procedures is established, the Further NPRM proposes to adopt the following key governing principles for competitive bidding: 

• Adopting a reserve price for each geographic area in the competitive bidding process that will be equivalent to the amount of support the CAF Cost Model would have calculated for that same geographic unit; 
• Permitting bidders to bid for a package of geographic areas, either by census blocks or tracts; 
• Setting a cap for the total of all bids accepted nationwide at an amount no greater than the total CAF Phase II budget remaining after the price caps LEC’ state-level elections; 
• Establishing a competitive bidding process using a multi-round auction that will allow bidders an opportunity to re-evaluate their bids in light of the actions of others; and 
• Implementing the competitive bidding process in a way that rewards bidders proposing to exceed the Commission’s broadband service standards. Specifically, the rules will first reward bidders that substantially exceed service standards, then followed by bidders that propose to merely meet service standards, then (if any funds remain) to those willing to provide service under relaxed performance standards.

CAF Phase II ETC Designation Issues
As required by the Communications Act, all carriers receiving CAF funding must be certified as ETCs, typically by state regulatory commissions. To assuage concerns about the burden created by this requirement, the FCC determined that:

• Applicants in the competitive bidding process need not be ETCs at the time they initially apply for funding with the Commission, but rather, may seek ETC designation after being selected for Phase II funding. 
• At the time of bidding competitive providers must certify as to financial and technical capabilities to provide the required services, and eventually obtain ETC designation in order to receive Phase II funds. 

In the Further NPRM, the Commission proposes additional ETC rule changes, including the following:

• Winning bidders must apply for ETC designation to a state commission within 30 days of winning the bid, and submit proof of that application to the FCC. 
• Adoption of a rebuttable presumption that a state commission lacks jurisdiction over an ETC petition for purposes of Phase II funding if it fails to initiate a proceeding within 60 days—in which case the carrier may file for ETC designation with the FCC. 
• Whether a similar rebuttable presumption should be adopted if a state commission fails to decide a petition within a certain time period (e.g., 90 days).

CAF Phase II Challenge Process Unchanged
As noted above, the Order does not modify the rules governing the current challenge process. For a detailed review of that process please see our prior advisory. However, several other important issues surrounding the challenge process were raised in the Order, including:

• The dismissal, on procedural grounds, of an Application for Review filed by NCTA, which challenged the FCC’s decision to classify “unsubsidized competitors” as those entities that meet the same broadband performance requirements as Phase II recipients. 
• As a result, in order to be considered an “unsubsidized competitor” under Phase II rules, challengers must meet the following performance standards: offer broadband at actual speeds of at least 4 Mbps downstream and 1 Mbps upstream; with latency suitable for real-time applications, such as VoIP (roundtrip latency of 100 ms or less);with usage capacity reasonably comparable to that available in comparable offerings in urban areas (100 GB per month); and at rates that are reasonably comparable to the rates offered in urban areas. 
• The Further NPRM also includes a proposal to allow Phase II recipients to substitute locations in partially-served census blocks for locations in the unserved census block for which it received support. Specifically, a price cap LEC would be permitted to deploy service to a small number of locations in a partially-served census block in lieu of deploying service to 100% of the locations in any adjacent unserved census block. 
• The Further NRPM seeks comment on whether the benefits of this “flexible” approach outweigh the costs imposed on those using private capital to deploy networks in served census blocks. If adopted, this proposal has the potential to significantly increase the costs and burdens of unsubsidized competitors challenging potential overbuild situations.