Davis Wright Tremaine LLP

Overview

The FCC approved and released an order that will inject $20.4 billion in funding for the deployment of networks for the provision of high-speed broadband internet access and voice services in areas that are otherwise too costly to be adequately served by the market (typically, rural areas).

Although publicly funding voice communications networks in high cost areas is a long-standing policy in the United States, in 2011 the FCC adopted a new approach. The agency decided to focus high cost funding on the upgrading of those networks so that they would be capable of providing high-speed internet access services in addition to voice, as well as targeting funding to areas that are otherwise unserved by unsubsidized competitors at the requisite speeds.

That approach—which became known as the Connect America Fund (CAF)—was widely viewed as having ushered in much-needed reform to the FCC’s universal service policies, which had previously funded traditional voice services even if a subsidized competitor operated in the same area. The CAF, however, was created nearly a decade ago and the demand for greater speeds and more widely deployed services have only increased.

As a result, the FCC has now embarked on yet another update—this time called the Rural Digital Opportunity Fund (RDOF). RDOF retains many of the fundamental concepts of the CAF, but updates several key aspects, including the following.

  • Higher Speeds - The RDOF increases the minimum download and upload speed requirements for funding recipients from 10/1 Mbps to 25/3 Mbps, and includes incentives for speeds up to 1 Gbps.
  • Lower Threshold for Funding - Based on experience with the CAF, the RDOF lowers the “high-cost threshold” from $52.50 to $40 (and in some cases, to $30) meaning that participants may receive funding once their costs associated with serving an area exceed $40 per location per month instead of the higher CAF threshold.
  • Service Throughout Awarded Area - The RDOF requires successful bidders to serve the entirety of the funded area, even if the exact number of locations without the requisite level of service is not determined in advance (and within a certain margin, perhaps without additional funding).
  • Limited Challenge Process - To reduce the risk of potential overbuild situations, existing providers will have an opportunity to challenge any preliminary designation by the FCC that an area is unserved by broadband speeds of at least 25/3 Mbps.

Otherwise, those familiar with the CAF construct will recognize many of the features of RDOF, including:

  • Use of the Connect America Cost Model (CAM) for various purposes, including to determine the theoretical costs of deploying broadband networks to unserved areas.
  • Reverse auctions, which award subsidies to bidders seeking the least amount of subsidy.
  • Very similar application process, which includes both a pre-auction “short form” application and a post-auction “long-form” application.
  • Deployment obligations which require RDOF recipients to meet certain network build-out requirements at defined intervals beginning in year three of the new program.

RDOF Program Details

Term of Support, Eligible Areas, and Deployment Schedule

The RDOF program will disburse the $20.4 billion over the course of 10 years, in two phases. In Phase I, the FCC will award $16 billion in funding in census blocks that lack both fixed voice and 25/3 Mbps internet access services. In Phase II, it will award the remaining $4.4 billion in those census blocks that it later determines are only partially-served with the requisite voice and broadband services.

The FCC recognizes that it will need to conduct an analysis for purposes of determining which locations are unserved or partially-served, but finds that it has time to determine the latter for Phase II. For purposes of Phase I, the Wireline Competition Bureau (WCB) will create a preliminary list of eligible areas, which will then be subject to challenges by the industry to rebut the WCB’s preliminary conclusion. This preliminary list will be based on a rather long list of factors, but importantly, that list will generally include areas currently served with voice and 10/1 broadband services.

In fact, it may be easier to list the areas that will not be on that preliminary list, such as:

  • Census blocks where a terrestrial provider offers voice and 25/3 Mbps broadband service according to the most recent FCC Form 477 data;
  • Census blocks where a CAF Phase II auction winner is obligated to deploy broadband service;
  • Census blocks where a Rural Broadband Experiment support recipient is obligated to offer at least 25/5 Mbps service over networks capable of delivering 100/25 Mbps service; and
  • Areas awarded funding from the Department of Agriculture’s ReConnect Program, or other similar federal or state broadband subsidy programs to deploy 25/3 Mbps or better service.

While the funding will be disbursed over a period of 10 years, the build out must be completed by the end of the eighth year.

Deployments Completed  Deadline
40 percent of eligible locations in the area End of the 3rd year
60 percent of eligible locations in the area End of the 4th year
80 percent of eligible locations in the area End of the 5th year
Updated location counts (if any)
(WCB to publish any updates by end of 6th year
End of the 8th year

If the updated location counts published by the WCB results in an increase in new locations that must be served in the company’s area in each state by more than 35 percent, the successful bidder may seek additional support or other relief from the FCC (although the order does not specify what such relief might entail).

Performance Tiers, Latency, and Weights

Consistent with prior funding, the FCC will continue to use technology neutral performance standards, subject to a bid weighting analysis, which is intended to favor participants that can deploy “future-proof” networks, i.e., fiber, providing higher speeds and low latency. The FCC will allow bids in four performance tiers, and each bid is weighted by performance and latency measurements. The Fund’s performance tier speeds, latency, and associated weightings are described in the chart below.

Performance Tier  Speed Monthly Usage Allowance Weight
Minimum ≥ 25/3 Mbps ≥ 250 GB or U.S. average, whichever is higher 50
Baseline ≥ 50/5 Mbps ≥ 250 GB or U.S. average, whichever is higher 35
Above Baseline ≥ 100/20 Mbps ≥ 2 TB 20
Gigabit ≥ 1 Gbps/500 M bps ≥ 2 TB 0
Latency Requirement Weight
Low Latency ≤ 100 ms 0
High Latency ≤ 750 ms &
MOS ≥ 4
40

Challenge Process to Avoid Overbuilds

To ensure that RDOF support is not directed to areas already served by an existing provider delivering at least 25/3 Mbps, the Commission will conduct a challenge process before finalizing the list of eligible areas. This process will supplement the agency’s reliance on existing Form 477 data which service providers have already filed with the agency.

However, because that data is sometimes incomplete or not current, the challenge process will provide an opportunity for existing providers to notify the Commission that a designated areas is, in fact, served and that support should not be allocated for that area. Additional details about the procedures for doing so will be released later in the year.

Reverse Auction Procedures

The Commission will use a single, nationwide, multi-round reverse auction to allocate funding support. Drawing lessons from its recent successful reverse auction in the CAF II proceeding, the agency hopes to use this structure to leverage market forces and competition to yield broadband networks above the minimum performance tier at competitive support levels.

Although bidders may compete for the same support by offering different speeds and latencies, bids will be “weighted” as a means of promoting bidding on higher speed tiers with lower latency, with support going to the bidder with the lowest weight. Additional details about bid weighting formulas, and other auction procedures, will be released prior to the auction.

Further, the agency adopted an important change in bidding procedures that is expected to favor bidders willing to commit to deploying networks that can deliver the highest speed and lowest latency tiers. Specifically, at the “clearing round” the FCC will assign support to the bidder with the lowest performance and latency weight instead of carrying forward all bids at the base clock percentage for the same area in order to incent additional bidding in later rounds.

This is one significant change from the CAF II reverse auction. As a result, the FCC will prioritize bids with lower performance and latency weights (but which commit to deploy higher speeds), effectively signaling its intent to favor bidders that can deliver the highest speeds, most usage, and lowest latency for each area.

The initial levels of support set at the beginning of the auction are known as the “reserve prices.” The reserve price identifies the amount of support available per location absent any competitive bidding. It effectively serves as the starting point for the reverse bidding process. The FCC will utilize an established cost-model, known as the CAM, to set the reserve price.

Auction Application Process

Participants are required to seek support using the same general short-form and long-form application process as was used in CAF Phase II. In the short-form application, applicants will provide basic information and certifications regarding their eligibility to receive support so that the FCC can evaluate whether the applicant is a viable bidder. The information includes, but is not limited, to the following details:

  • Ownership structure
  • Description of proposed technology and service
  • Technical and financial qualifications certifications
  • Audited financials
  • ETC Designation (or commitment to get the required designation)
  • Identification and certification of any specific spectrum bands the provider intends to use to deliver the supported services

After the short-form applications are submitted, the FCC will release a public notice that indicates which forms are complete or incomplete and provide a short period to cure incomplete applications. Then, the auction will commence. After the auction ends, the FCC will identify winning bidders who then must complete a long-form application that includes more detailed information about the bidder. 

Below, we have highlighted some important components of the long-form application, which includes, but is not limited to, the following items:

  • Ownership disclosures of the bidder
  • Detailed description of the technology utilized and the system design
  • Proof of ETC eligibility and related documentation
  • Letters of credit

Notably, the Commission modified the letter of credit (LoC) requirements in an attempt to ameliorate concerns raised by CAF II participants that the LoC obligations were onerous. The changes reflect the FCC’s recognition that once RDOF support recipients have met key deployment obligations they should have the opportunity to reduce some of the more significant LoC requirements. In addition, the new LoC framework will permit RDOF recipients to meet accelerated deployment deadlines in order to reduce LoC obligations.

Non-Compliance Framework

Mirroring the enforcement structure from CAF Phase II, the Commission has adopted a specific framework for incentivizing compliance by adopting measures that will reduce a recipient’s funding if the provider fails to meet defined service milestones.

 Compliance Gap Non-Compliance Measure
Tier 1: 5 percent to less than 15 percent of the required number of locations  Quarterly reporting 
 Tier 2: 15 percent to less than 25 percent of the required number of locations  Quarterly reporting + withhold 15 percent of monthly support
 Tier 3: 25 percent to less than 50 percent of the required number of locations Quarterly reporting + withhold 25 percent of monthly support 
 Tier 4: 50 percent or more of the required number of locations  Quarterly reporting + withhold 50 percent of monthly support for six months; after six months withhold 100 percent of monthly support and recover percentage of support equal to compliance gap plus 10 percent of support disbursed to date

Reporting Requirements

Finally, support recipients are required to report, on an annual basis, certain information to demonstrate compliance with the program rules, including:

  1. Filing FCC Form 481 (by March 1);
  2. Certifying that the recipient met service milestones and performance requirements for the prior year;
  3. Identifying locations where the recipient began providing access to broadband service in the previous year;
  4. Identifying the total amount of support that the recipient used for capital expenditures in the prior year; and
  5. Certifying that the recipient has available funds for all project costs that exceeds the amount of support to be received in the next calendar year.

Timing and Next Steps

RDOF is a major step towards providing connectivity to areas that have previously been difficult for providers to serve. With the use of RDOF, providers will be able to serve millions of Americans that presently remain unserved. The FCC plans to begin the auction in 2020. Consistent with prior auctions, the Bureau will establish specific procedures during the pre-auction process, including determining auction-related timing and dates, identifying areas eligible for support, and establishing detailed bidding procedures.

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