FCC Eases Restrictions on Broadband Deployment Support for Rate-of-Return Carriers; Faces Challenges to Connect America Fund Phase II Auction
As part of its continued focus on accelerating broadband deployment, the Federal Communications Commission (FCC) eased restrictions on its universal service support for deployments by rate-of-return carriers in rural and other high-cost areas. In a unanimous Order on Reconsideration issued at its April meeting, the FCC found that the restrictions drove providers to exclude high-cost areas from planned deployments, “stranding” communities without broadband. Rate-of-return carriers will be able to receive support for broadband deployments up to certain thresholds, so long as they cover any additional expenses themselves. Rate-of-return carriers should factor in this potential support when assessing broadband deployment plans or expanding existing buildouts. As for providing support in areas served by price cap incumbent carriers, the FCC faces challenges to its recent order on instituting the Connect America Fund (CAF) Phase II auction, under which it will provide support to deploy broadband in unserved areas where the price cap carriers did not elect receive support. Comments on the CAF challenges are due on May 18, 2017, with replies due on May 29, 2017.
In 2016, the FCC imposed restrictions on universal service support for capital expenses incurred by rate-of-return carriers associated with broadband deployments in high-cost areas. Specifically, broadband providers lost all support for their capital expenses if their per-location deployment costs exceeded a particular threshold. The FCC intended the thresholds to serve as a restraint on inflated deployment costs, preserving universal service funds for more efficient projects covering more locations.
An association of rural broadband providers opposed the thresholds, arguing they resulted in the exclusion of high-cost locations from broadband deployments, even if including them would be more efficient. The association indicated that rate-of-return carriers revised network buildout plans to remove very high-cost locations, rather than risk losing support for entire projects. The association therefore asked the FCC to provide universal service support for broadband deployments up to the thresholds, with providers covering any excess costs. On reconsideration, the FCC agreed, finding that the current restrictions reduced broadband network investment by rural rate-of-return carriers, preventing certain communities from accessing high-speed Internet service. As a result, the FCC’s decision affords certain rural broadband providers additional flexibility in planning deployments and encourages them to build to high-cost areas they might otherwise choose not to serve.
As for bringing broadband service to unserved areas in price cap incumbent carrier territories, the FCC received two petitions for reconsideration of its recent order finalizing the bidding rules for the upcoming CAF Phase II auction, where about $1.98 billion in support will be awarded. The order established an auction structure where bidding will be based on four technology-neutral broadband performance tiers with varying speeds and usage allowances. Auction bids will be weighted according to the performance tier a provider proposes to meet as well as the latency of a provider’s proposed service. The system is intended to make higher-cost, higher-quality bids competitive against lower-cost, lower-quality bids.
The CAF order drew a challenge from major satellite provider Hughes Network Systems, which argued that the bid weighting scheme “effectively excludes” satellite providers from participating in the auction by heavily favoring high-speed, low-latency services. Hughes stated that the weights gave preferential consideration to fiber broadband providers, even though consumers indicate similar customer satisfaction levels with relatively slower satellite services. Hughes requested that the FCC lower the weight penalty for high-latency services to create a level playing field for auction participants. The FCC also received a request from the Pennsylvania Public Utility Commission and Department of Community and Economic Development to alter the weights applied to auction bids from price cap carriers in its state. Specifically, the state asks the Commission to attach a lower weight to bids from providers receiving state broadband deployment funds. Lowering the bid weights would increase the chances that these Pennsylvania providers will win CAF support at the auction. Pennsylvania argued that lowering the bid weights would expand the overall amount of CAF support available and recognize the commitment to broadband deployment demonstrated by its subsidized providers. The state noted that the FCC recently waived its auction rules to extend up to $170 million in CAF support to New York broadband providers. Pennsylvania estimates that its request would open up over $139 million in broadband support previously declined by Verizon.
The formal notice of the petitions was published in the Federal Register on May 3, 2017. Oppositions will be due May 18th and replies will be due May 29th. Regardless of the outcome, these challenges to the CAF Phase II auction process send a clear signal that how (and how much) FCC universal support is allocated for broadband deployment will remain a hot topic in 2017.