In this post, we’re going to take a look at developments in the FCC’s $9 billion-per-year Federal Universal Service Fund and more recent pandemic-related efforts to address deficiencies in broadband access that have been exposed by our year of remote work, school and social activities.

On the universal service front, the principal activity surprisingly has as much to do with non-Universal Service Fund (“USF”) programs as with the USF itself. The USF is a $9 billion-per-year fund with four primary programs aimed at different elements of the challenge to bring broadband telecommunications to all. For 25 years, the Fund has aimed to provide support to increase broadband availability in rural areas, in schools and libraries, among low-income consumers and to serve rural healthcare needs. These programs all have been modified significantly in the last ten years to re-focus on broadband services and de-emphasize (but not completely eliminate) support for voice services. The FCC also has focused on ensuring that these programs are run efficiently while protecting against waste, fraud and abuse by actors with mal intent. In 2020 and early 2021, we’ve discussed efforts to establish a new Connected Care pilot program, to waive rules during the pandemic and to implement a Rural Digital Opportunity Fund.

Separately, as the USF contribution factor continues to reach new and staggering heights, attention is again returning to the idea of USF contributions reform. With the contribution factor expected to top 33% in the next quarter, Acting Chairwoman Rosenworcel pledged to Senators Thune and Wicker to work with Congress “to explore how to improve [the contributions] system” in the coming months. We’ll have more on contributions reform in a future blog post.

Special Programs Dwarf the USF

But the big news of 2021 is turning out to be the additional funding that is being provided outside the traditional fund. In legislation since December, Congress has authorized four programs that affect USF beneficiaries, to the tune of over $13 billion.

• In the Consolidated Appropriations Act (“CAA”), Congress authorized a second Telehealth Fund to provide reimbursement for services and equipment used to provide telehealth services during the COVID pandemic. The Telehealth II fund provides $249.95 million in new funding for this program. The FCC already has designated USAC to administer the new fund and promises to adopt criteria for USAC to use in evaluating applications soon.
• Also in December, Congress authorized an Emergency Broadband Benefit of up to $50 per month for services and a one-time benefit of $100 for a qualifying computer, laptop or tablet for low-income consumers during the pandemic. (For tribal subscribers, the benefit is $75 per month). A total of $3.2 Billion is appropriated for this emergency fund. Importantly, the program is open to providers that do not currently participate in the USF programs, expanding access to the funding. The FCC recently adopted rules for the program and you can read our summary here. The program is expected to begin sometime in April.
• Congress recently approved an additional $7.1 Billion over several years for E-rate support for remote learning and remote library services. The legislation authorizes funding for the purchase of eligible equipment, advanced telecommunications services and/or information services used to support education of students at locations other than the school and to support delivery of library services at locations other than the library. This fund will reimburse 100% of the cost of the equipment or services, up to the amount the FCC determines is reasonable. Funding remains available until the June 30th that is one year after the COVID-19 public health emergency order is terminated. The FCC will have 60 days to establish rules for this program.
• Finally, although not related to the COVID emergency, Congress recently appropriated $1.9 Billion to fund the removal and replacement of telecommunications equipment that is deemed to present a national security threat. The FCC has been developing this so-called “Rip and Replace” program for over a year, contingent on the appropriation of funds, after determining in November 2019 to prohibit recipients of federal USF funding to purchase, install or maintain prohibited equipment. The FCC most recently adopted a Further Notice of Proposed Rulemaking to align its reimbursement priorities with the implementing legislation.

To stay up-to-date on these and other USF developments, join us on March 22, 2021 for our annual webinar discussing the state of the federal Universal Service Fund. This webinar, back for its 12th year, provides an in-depth look at all four USF programs and the USF contribution mechanism, highlighting major developments in the last year and trends for the upcoming year. In addition, this year we will discuss how the ongoing pandemic has influenced the importance of the USF and related policy decisions.

This webinar supplements the knowledge our clients gain from the monthly USF Tracker to provide context and analysis of the issues you need to know.

The 12th Annual Update will address the following, among other topics:

• The COVID-19 Telehealth Program
• The Connected Care Pilot and Rural Healthcare Program
• Lifeline and the Emergency Broadband Benefit Program
• E-Rate Outside the Classroom
• The Rural Digital Opportunity Fund and Broadband Mapping
• Rip and Replace
• Contributions Reform

EBB Program Overview

The EBB Program was authorized by Section 904 of the CAA, which was designed to provide affordable broadband services to low-income households on an emergency basis. Congress allocated $3.2 billion to the EBB Program to reimburse participating providers for providing discounts on qualifying internet service offerings to qualifying low-income households. The EBB Program will provide discounts of up to $50 per month ($75 for residents of Tribal lands) to subsidize broadband services for eligible households. Eligible consumers can also receive a one-time discount of up to $100 for a desktop or laptop computer, or tablet (no smartphones) supplied by a participating provider. The EBB benefit is limited to one monthly service discount and one device discount per eligible household. To qualify for the EBB program, households must prove that at least one member of their household meets one of the following criteria:

• qualifies for the FCC’s Lifeline program (including those who are receiving Medicaid or SNAP benefits);
• approved for the free or reduced-price school lunch program (including through the USDA Community Eligibility Provision);
• experienced substantial and documented loss of income since February 29, 2020 and the household had a total income in 2020 below $99,000 for single filers and $198,000 for joint filers;
• received a federal Pell Grant in the current award year; or
• qualifies for a participating provider’s existing low-income or COVID relief program (subject to FCC approval of that provider’s eligibility process).

Next Steps

The Order includes many specifics for the implementation of the EBB Program, but also delegates liberally to the Wireline Competition Bureau (“Bureau”) for additional details and processes. On Thursday, March 4, the Bureau issued additional guidance on the timeline for participating provider elections and applications. ETCs are automatically eligible as participating providers in the EBB Program and therefore need only submit an election to participate. The inbox for election notices will open on March 11, 2021. Non-ETC broadband providers that had existing low-income support programs as of April 1, 2020 can apply to be participating providers and will be automatically approved by providing certain information. Non-ETCs without such programs can also apply to be participating providers, but must submit an application to the Bureau for approval before they can elect to participate. The application window opened on March 8, 2021 and all application submitted by March 22, 2021 will be reviewed and acted on by the EBB service commencement date. Applications submitted after March 22 will be reviewed on a rolling basis.

For service providers to be eligible, they must file an election notice to the Universal Service Administrative Company (“USAC”), and non-ETCs must submit an application for either automatic or expedited approval by the Bureau.

Existing ETCs:

Existing ETCs need only submit an election notice to USAC. The following information must be included in election notices:

• a list of states in which the provider plans to participate in the EBB Program;
• a statement that, in each of the listed states, the provider is a “broadband provider” as of December 1, 2020;
• a statement identifying where the provider is an existing ETC;
• a statement identifying where the provider received FCC approval to participate in the EBB Program (this is primarily for providers that are seeking approvals outside of states where they are existing ETCs);
• a statement confirming whether the provider intends to distribute connected devices under the EBB Program; and
• a description and documentation of the Internet service offerings for which the provider plans to seek reimbursement from the EBB Program in each state.

Non-ETCs must file an application with the Wireline Competition Bureau (“Bureau”) that must be approved to participate in the EBB Program. Non-ETCs with an existing low-income support program must file an application describing:

• the jurisdictions in which it plans to participate,
• the service areas in which the provider has the authority, if needed, to operate in each state, and
• a description, supported by documentation, of the established program with which the provider seeks to qualify for automatic admission to the EBB Program.

Non-ETCs without pre-existing low-income support programs must first submit an application for Bureau approval describing:

• the states in which it plans to participate,
• the service areas in which the provider has the authority, if needed, to operate in each state but has not been designated as an ETC, and
• documentation of the provider’s plan to combat waste, fraud, and abuse.

The FCC has set the expectation that the EBB Program will begin within 60 days of the adoption of the Order. Therefore, participation providers should start providing EBB discounted services by the end of April. For more information on the EBB and related programs, join us on March 22, 2021 for Kelley Drye’s annual webinar discussing the state of the federal Universal Service Fund ("USF"). This year will feature segments on how the ongoing pandemic has influenced the importance of the USF and related policy decisions.

If you have any urgent questions, please contact your usual Kelley Drye attorney or any member of the Communications Practice Group. For more information on other aspects of the federal and state response to the COVID-19 pandemic, as well as labor and employment and other issues, please visit Kelley Drye’s COVID-19 Response Resource Center.

FCC Seeks Comment on TCPA Exception for COVID-19 and Flu Vaccine Communications Under “Emergency Purposes” Exception

On September 18, 2020, the FCC’s Consumer and Governmental Affairs Bureau issued a Public Notice seeking comment on a request for clarification filed by the National Association of Chain Drug Stores (“NACDS”). NACDS requests clarification that communications from pharmacies related to COVID-19 vaccines, once available, and flu vaccines during the pandemic fall within the Telephone Consumer Protection Act’s “emergency purposes” exception to the statute’s prior express consent requirement. Comments are due September 25, 2020, and reply comments are due October 2, 2020.

FCC Opens Second Window for 2020 E-Rate Funding Requests

On September 16, 2020, the FCC’s Wireline Competition Bureau (“WCB”) directed the Universal Service Administrative Company (“USAC”) to open a second funding year 2020 filing window, allowing E-Rate program participants to request additional funding to purchase more bandwidth needed to meet the unanticipated and increased demand for e-learning during the pandemic. E-Rate program participants will be permitted to request additional funding for this limited purpose without having to undergo a new competitive bidding process. This window opened on September 21, 2020 with the publication of the Notice in the Federal Register and will close on October 16, 2020.

FCC Extends Inteliquent Waiver of Access Stimulation Rules Through December 1, 2020

On September 17, 2020, the WCB granted Onvoy d/b/a Inteliquent, Inc.’s (“Inteliquent”) second request to renew the temporary waiver of part of the FCC’s access stimulation rules. On June 23, 2020, the WCB granted Inteliquent’s request for renewal of its temporary waiver of certain access stimulation rules until September 1, 2020. Inteliquent requested a limited renewal of the temporary waiver with respect to traffic it terminates in four urban areas to preexisting customers on the basis that its terminating-to-originating traffic ratios in those areas continue to be particularly unbalanced as a result of the “unprecedented amounts of conference platform traffic that Inteliquent is terminating for pre-existing customers Zoom and Cisco Webex to facilitate remote work and other forms of social distancing.” Absent the waiver, Inteliquent would be required to accept financial responsibility for paying certain access charges associated with the traffic.

Inteliquent requested that the waiver be extended until March 1, 2021. However, the FCC only extended the waiver through December 1, 2020, in light of the ongoing uncertainty regarding the pandemic.

FCC Streamlines Financial Hardship Regulatory Fee Payment Request Procedures

On September 4, 2020, the FCC released a Public Notice highlighting streamlined processes for regulatees to request a waiver, fee reduction, deferral, and/or installment payment plan for FY 2020 regulatory fees in light of the pandemic. Waiver and installment plan requests must be filed on or before September 25, 2020. Waiver requests filed after that date will not be dismissed but any unpaid regulatory fees will be assessed the FCC’s 25% late payment penalty and may accrue interest.

FCC Extends E-Rate and RHC Gift Rule Waivers Through December 31, 2020

On September 3, 2020, the WCB extended waivers of the Rural Health Care (“RHC”) and E-Rate program gift rules through December 31, 2020. The FCC previously waived gift rules applicable to both programs to assist rural health care providers and schools and libraries affected by the pandemic by allowing them to accept free upgrades to connections, equipment, and other services. The WCB also waived the previously extended RHC deadline for responding to information requests from USAC through December 31, 2020. These waivers were set to expire on September 30, 2020.

If you have any urgent questions, please contact your usual Kelley Drye attorney or any member of the Communications Practice Group. For more information on other aspects of the federal and state response to the COVID-19 pandemic, as well as labor and employment and other issues, please visit Kelley Drye’s COVID-19 Response Resource Center.

FCC Eases Lifeline Application Process for Tribal Consumers, Extends Previous Waivers

On June 1, the FCC’s Wireline Competition Bureau (“WCB”) released an Order (DA 20-577) aimed at easing the Lifeline program application and enrollment process for consumers who reside in rural areas on Tribal lands and qualify for Lifeline benefits. Specifically, the WCB FCC’s Wireline issued a temporary waiver to allow Lifeline carriers to begin providing Lifeline service to consumers in rural Tribal areas even if those consumers have not yet submitted certain documentation to complete their application. The FCC noted that consumers living in rural areas on Tribal lands already face difficulties in providing this documentation, and the pandemic has added to these hardships.

Under the June 1 waiver, until August 31, 2020, a Lifeline eligible telecommunications carrier (“ETC”) may choose to immediately begin providing Lifeline service to a consumer living in a rural Tribal area who applies for Lifeline but is unable to provide the necessary documentation to resolve a failed automated eligibility check at the time of application. The consumer will have 45 days from the time of application to submit the documentation. If the applicant then does provide the necessary documentation within 45 days and is determined to qualify for Lifeline service, the Lifeline provider can go back and claim reimbursement for the discounted service provided during the 45-day period.

In addition, in the Order, WCB also extended its recent waivers of the Lifeline program’s recertification, reverification, general de-enrollment, usage requirements, and three-month documentation requirements for income verification through August 31, 2020. Those waivers were set to expire at the end of June.

FCC Approves Latest Set of COVID-19 Telehealth Applications

On May 28, 2020, the WCB approved 53 funding applications for the COVID-19 Telehealth program. Under the latest funding round, $18.22 million in funding will go to health care providers across 24 states. With this latest set of approvals, the FCC’s COVID-19 Telehealth Program has funded 185 health care providers in 38 states, plus Washington D.C., for a total of $68.22 million in funding awarded. Read the latest issue of Kelley Drye’s USF Tracker for details on awards granted.

FCC Grants Washington Tribe’s Temporary Spectrum Access Request

On May 29, 2020, the FCC’s Wireless Telecommunications Bureau (“WTB”) granted the Makah Tribe emergency Special Temporary Authority (“STA”) request to operate in the 2.5 GHz band in Washington State. This is the latest action in the FCC’s continued effort to improve communications and broadband service in rural and other hard-to-serve areas during the crisis.

First, the Order adopts rules prohibiting the use of USF support to purchase services and equipment from “Covered Companies” deemed to present national security threats and initially designates Huawei and ZTE as Covered Companies. Second, the Further Notice of Proposed Rulemaking (“FNPRM”) solicits comments on a proposal to require eligible telecommunications carriers (“ETCs”) – and possibly all communications providers – to remove and replace Huawei and ZTE services and equipment subject to the FCC establishing a reimbursement program providing financial assistance. Third, the Order establishes an information collection and requires ETCs to submit information regarding their use of Huawei and ZTE equipment and services as well as the costs associated with removing and replacing such services and equipment from communications networks.

The new rules will take effect immediately upon publication in the Federal Register rather than providing the standard thirty-day post-publication waiting period. Federal Register publication of the Order also initiates a thirty-day comment period regarding the initial designations of Huawei and ZTE. The Public Safety Homeland and Security Bureau will issue a “final designation” on Huawei and ZTE – we fully expect that Huawei and ZTE will be designated as Covered Companies – and set a compliance effective date. In light of the potentially short timeframe before the rules and compliance requirements take effect, USF support recipients should be sure to review the Order/FNPRM carefully and assess whether and how the rules will affect the recipient’s specific circumstances.

A Focus on China

Pulling no punches, the FCC made clear its concern about the potential for the Chinese government to engage in industrial and economic espionage and other malicious acts by exploiting Huawei’s and ZTE’s access to U.S. communications networks. Chairman Pai (here and here), Commissioner O’Rielly, and Commissioner Starks, among others, have spoken out regarding the need to protect U.S. communications networks from security threats. Prohibiting USF recipients from using USF support for Huawei and ZTE services and equipment was an easily foreseeable next step.

While the Order received unanimous support from the FCC, Commissioner O’Rielly expressed some reservation regarding the likely significant equipment replacement costs and advocated for a process to challenge future designations of Covered Companies should there be concern that a designation was mistaken. Interestingly, and suggesting the FCC anticipates that the Order will be appealed, the Order appears to methodically respond to Huawei arguments and provide further support for the FCC’s decision.

We highlight below a few of the key takeaways from the Order.

The Order – USF Support Usage Prohibitions

First, the USF support use prohibitions are broad. The new rules prohibit USF support recipients from using USF support to “purchase, obtain, maintain, improve, modify, or otherwise support any equipment or services [including software] provided or manufactured by a covered company.” The FCC defines a “Covered Company” as including not only the particular company at issue but also the company’s affiliates, subsidiaries, and parents. Consequently, USF support recipients will need to understand a Covered Company’s “family” of companies to avoid inadvertently violating the FCC’s rules.

The rules do not bar USF support recipients from using Covered Company services and equipment, although, in practice, the restrictions may have that effect. While the FCC appears to prefer that Covered Company services and equipment not be used at all, the rules are based on the FCC’s authority over the USF program and, therefore, the restrictions are limited to the use of USF support. USF support recipients are permitted to use Covered Company services and equipment but must self-fund purchases, including ongoing maintenance for existing services and equipment. USF support recipients will need to assess whether they are able to completely self-fund ongoing Covered Company equipment and service maintenance, upgrades, etc. or if they will need to replace the services and equipment.

Second, USF support recipients may find compliance with the new rules challenging. For example, the Order dismisses concerns about compliance difficulties where USF support recipients are unaware that their underlying providers are reselling, such as under “white labeling” arrangements, the services and equipment of Covered Companies. Parties to multiyear contracts for Covered Company services and equipment also could face difficulties because, although the rules apply prospectively only, such contracts are not exempted from the new rules, potentially exposing USF support recipients to early termination or other contract modification costs.

Third, USF support recipients will be required to certify compliance with the new rules once the Wireline Competition Bureau (“WCB”) and USAC develop the specific certifications and information collection revisions for the USF programs. USAC audits will be used to confirm compliance and, unless the WCB or USAC provide guidance on acceptable compliance support, USF support recipients will need to consider what records may best support compliance should they be audited. USAC will seek recovery from the entity that violated the rule, potentially including entities such as schools, healthcare providers, or consortiums, rather than a service provider.

The FNPRM – Potential Replacement and Reimbursement of Covered Company Equipment

The FNPRM seeks comment on a wide range of questions related to removing and replacing Covered Company services and equipment from U.S. telecommunications networks. While the initial draft of the FNPRM limited the removal and replacement proposals to ETCs, the final FNPRM takes a much broader approach. The FCC now questions whether the prohibition on the purchase, maintenance, improvement, etc. of Covered Company services and equipment, as well as the remove and replace requirement, should extend to all communications companies, not just those receiving USF support.

The FNPRM proposes conditioning future USF support on an ETC’s agreement not to use Covered Company services and equipment and requiring such services and equipment be removed and replaced, contingent on the FCC’s establishment of a reimbursement fund to aid ETCs with costs of complying with the changes. The FNPRM seeks comment on a variety of issues related to this proposal, including, but not limited to, the scope of the remove and replace requirement, what costs should be reimbursed, who should be eligible for reimbursement, and the timing of compliance with the proposal. Carriers should note that the FCC also seeks comment on whether Huawei and ZTE handsets should be prohibited even though not supported by the USF program.

The FNPRM also seeks comment on the scope, as well as the authority for, a possible expansion of the Covered Company services and equipment remove and replace requirement to all communications networks. The FNPRM also queries how the FCC should treat entities such as interconnected VoIP providers and facilities-based ISPs for purposes of the proposed service and equipment prohibitions.

ETC Information Collection

The final component of the Order requires an information collection to determine the scope of Huawei and ZTE services and equipment currently in use on ETC networks and the cost of removing and replacing the equipment. The information collection is mandatory for ETCs, including their affiliates and subsidiaries, and ETCs should be prepared for the information collection to proceed quickly as the FCC directed the WCB to request emergency collection approval from the Office of Management and Budget if necessary. While not required, USF recipients that are not ETCs voluntarily may participate in the information collection, particularly should they have pending ETC applications or intend to seek ETC designation in the future.

Kelley Drye will be following these rules and proceedings so check back for further updates.

The proposed rules also would impose new disclosure obligations on support recipients and require them to verify that they do not work with suspended/debarred entities. In addition, the proposed rules would create a federal reciprocity system, in which entities suspended/debarred from participating in funding programs administered by other agencies similarly would be prevented from participating in the FCC’s programs (and vice versa). The proposed rules would impact nearly every USF participant and warrant close attention. The FCC has not announced comment deadlines on its proposals, but they will likely occur in early 2020. While the FCC’s proposals are just the first step towards actual rule changes, the agency has shown every indication that it will continue moving full speed ahead on USF reform in the coming year.

Expansion of the Suspension and Debarment Conditions

The FCC’s current suspension/debarment rules only apply to its USF programs and only allow for suspension/debarment following a conviction or civil judgment involving fraud or certain criminal offenses. In the past, the FCC backed off on attempts to withhold USF funding while it conducted enforcement proceedings, in the face of claims that the only trigger in its rules involved convictions or civil judgments. Under the proposed rules – which follow guidelines adopted by other federal agencies – the FCC now would be empowered to suspend/debar entities without a conviction or final judgment and for a broader array of alleged bad behavior. In particular:

• Entities could be suspended/debarred for repeat violations of FCC rules (whether or not related to USF), submitting false documentation for support, failing to pay FCC regulatory fees, refusing to cooperate with FCC investigations, or any other conduct deemed by the agency to indicate “a lack of business integrity.”
• Suspensions would require “adequate evidence,” meaning the FCC has a “reasonable belief” that the alleged misconduct occurred, and would take effect immediately and prospectively. The proposed rulemaking suggests that allegations contained in a Notice of Apparent Liability (“NAL”) may be enough to warrant a suspension, even though Section 504(c) of the Communications Act says that the FCC may not use the fact of an NAL to the party’s detriment.
• Debarments would require a “preponderance of evidence,” meaning the FCC finds that it is more likely than not that the alleged misconduct occurred.
• Entities would have 30 days to challenge a suspension/debarment and the FCC would be required to render a decision within 45 days of receiving such a challenge. In addition, the FCC seeks comment on establishing an expedited, “limited” debarment mechanism subject to its own challenge process that would allow it to prohibit an entity from participating in a particular USF, TRS, or NDBEP program for a limited time for an even broader list of issues, including concerns that the entity has “documented deficiencies” or “irregularities” in past program participation or that the entity’s future participation poses “an unsatisfactory risk.”

The proposed rules would impose new disclosure obligations on USF support recipients, requiring them to inform the FCC not only if they are suspended, debarred, or otherwise disqualified from federal funding programs, but also whether any of their contractors, subcontractors, suppliers, consultants, agents, or representatives are similarly banned. While use of personnel disqualified from a federal funding program would not automatically prevent an entity from participating in an FCC program, the FCC would take a closer look at all individuals playing a significant role relating to or affecting USF disbursement claims. The FCC further expects to adopt a reciprocity system that would exclude entities barred from participating in funding programs administered by other agencies from its funding programs (and vice versa), and seeks public input on how best to share suspension/debarment information with other federal regulators. Suspended or debarred entities also would be prohibited from serving on FCC advisory committees and task forces.

Open Questions

Although the proposed rulemaking provides some detail on how the new suspension/debarment process would work, it still leaves key questions unanswered. For example, the proposed rulemaking does not designate who would investigate and prosecute suspension/debarment cases and who would render decisions in such cases. Such duties currently reside within the FCC’s Enforcement Bureau, but the proposed rulemaking hints that the Office of Inspector General, Office of Managing Director, and/or the rulemaking bureaus could play significant, to-be-determined roles. It is undetermined how a beneficiary of a USF benefit through an entity that is suspended/debarred (e.g., a school that receives E-Rate benefits) could continue to receive benefits if its service provider is suspended. Moreover, the proposed rulemaking indicates that the FCC may apply the new suspension/debarment rules retroactively to cover conduct occurring before their adoption, although prior settlements generally would be left undisturbed. This significant (and legally-suspect) proposed expansion of liability is sure to draw opposition. With their broad scope as well as complex procedures, the proposed suspension/debarment rules will generate significant comment and could ultimately transform how the FCC approaches enforcement involving its major funding programs.

You will find more details on the most significant July meeting items after the break:

Mid-Band Spectrum Auction: The draft Order would set the stage for a 2.5 GHz Band auction by eliminating rules that prevented non-educational institutions from obtaining licenses, allowing commercial providers to enter the Band. New licensees would no longer be required to use the spectrum for educational purposes and would possess more flexibility in leasing spectrum to others. The auction would not affect existing contracts or leases for 2.5 GHz Band spectrum, which would remain in place. The FCC plans to provide rural Tribal organizations with a priority filing window for new 2.5 GHz Band licenses, but would not implement a similar window for educational institutions. After the close of the priority filing window, the FCC would auction the remaining 2.5 GHz Band spectrum in 100 megahertz or 16.5 megahertz blocks at the county level.

High-Band Spectrum Auction: The draft Public Notice would establish rules for the auction of Upper 37 GHz Band, 39 GHz Band, and 47 GHz Band spectrum for commercial mobile use. Auction participants would first bid on generic spectrum blocks covering partial economic areas. The bid amounts in this round would determine the size of the incentive payments received by incumbent 39 GHz Band licensees. Following the generic bidding round, auction participants would bid on frequency-specific spectrum blocks, with the aim of creating contiguous block assignments. The FCC plans to provide bidding credits to small businesses and rural service providers to encourage auction participation. The FCC would accept applications to participate in the auction beginning August 2, 2019, with the auction scheduled to start on December 10, 2019.

Connected Care Pilot Program: The draft Notice of Proposed Rulemaking (“NPRM”) would seek input on the eligibility requirements, application processes, goals, and evaluation metrics for the proposed Connected Care Pilot Program. The FCC anticipates operating the Connected Care Pilot Program as a new program within the Universal Service Fund (“USF”), supported by an additional assessment on telecommunications providers to be added to the contribution factor that will slightly increase USF contributions. The FCC therefore says it does not plan on diverting resources from existing USF programs to support the Connected Care Pilot Program. Moreover, in a reversal from its initial inquiry last year on the Connected Care Pilot Program, the FCC is no longer considering restricting program participation only to facilities-based eligible telecommunications carriers (“ETCs”); rather, service providers do not even have to be ETCs. Comments on the NPRM will be due 30 days after Federal Register publication of the NPRM, with reply comments due 30 days later.

Transport Services Reform: The draft Orders would relieve price cap carriers from pricing regulation of their lower-speed, legacy transport services known as Time Division Multiplexing (“TDM”) transport. The FCC would find that sufficient competition exists in the provision of TDM transport services to justify eliminating the pricing controls. Although the FCC already voted to eliminate TDM transport service pricing controls in 2017, a federal court subsequently returned the issue to the agency to allow for full notice and comment on the issue. The FCC also would forbear from enforcing its unbundling requirements for legacy transport services known as DS1 and DS3 transport, subject to certain conditions and a multi-year transition period. The forbearance would free price cap carriers from providing such legacy transport services based on regulated rates.

A request to extend the NPRM comment period has been filed by the Education and Library Networks Coalition, but the FCC generally does not grant such requests.

Stay up to date on USF news and developments by signing up for Kelley Drye's USF Tracker newsletter.

The release of the NPRM was our first look at the specifics of a proposal that broke a month ago. The NPRM does not propose a specific budget, primarily raises questions about how to proceed, and does not contain any proposed rules. Nevertheless, opponents of the proposal have been most vocal since word of the NPRM came out, and we expect those USF stakeholders to continue in opposition to the approach. Meanwhile, proposals to reform USF contributions remain stalled (and lacking any consensus), while the contribution factor hovers around 20% of assessable revenues.

Section 254 of the Communications Act requires the FCC to establish “sufficient and predictable” mechanisms to promote universal service goals. Funding must be explicit (ending the pre-1996 Act era of implicit USF subsidies) and funding must be available on an equitable and nondiscriminatory basis, among other things. Through the USF, financial support is provided to reimburse the cost of services under four separate programs—High-Cost (aka “the Connect America Fund”), the Low Income Program (aka “Lifeline”), Schools and Libraries (aka “E-rate”), and Rural Health Care—that implement the FCC’s mandate of ensuring all Americans have access to universal service. Presently, each program operates with some form of annual funding cap or estimated budget but the total amount differs based on the specific needs or demand.

With the NPRM, the FCC proposes for the first time to establish an overall cap on the Universal Service Fund. The NPRM states at the outset of the discussion that one of its goals is to promote a debate about the relative effectiveness of the USF programs—indicating that there may be some basis to the reservations USF stakeholders have expressed. The FCC seeks comment on whether the overall cap should be set at $11.42 billion—the total of the 2018 authorized budgets for the individual programs (and $3 billion above the actual expenditures of the programs).

The NPRM contains a number of questions about how a cap should operate, whether to index the cap to inflation, whether one-year projections or five-year projections should be used and what would happen if the budget cap is reached. In addition, in a surprise, the NPRM asks whether the budgets for the E-rate program and the Rural Health Care program should be combined in a single budget. Commissioner Starks called out this proposal as raising “an alarm for me” and even Commissioner O’Rielly pronounces himself “not sold” on the proposal. With respect to Lifeline, the NPRM does not propose any changes to the program. Commissioner O’Rielly claims the proceeding is not a “back door” cap on Lifeline – although he states he would be willing to establish such a cap directly.

Looking Ahead

This is setting up to be a particularly contentious debate. One side downplays the proposal as simply encouraging a “healthy debate” and not placing any immediate limits on expenditures, while the other side argues that the proposal would undermine universal service policies and eventually pit one program against another in competition for funds. Now that the details of the proposals are out, USF stakeholders are expected to weigh in. Already, many USF-focused organizations have expressed concern about the proposal, and the NPRM is not likely to allay any of those concerns.

Notably missing from the NPRM is a discussion of USF contributions. Although logically distinct from operation of the programs themselves, it is no secret that even the current size of the Fund places pressure on the current system of supporting USF through end user interstate and international telecommunications revenues. For half of 2018, the USF contribution factor exceeded 20%, and early demand projections for the Third Quarter of 2019 make a return to a 20% factor a distinct possibility. The FCC last seriously considered contributions reform in 2008, but proposals have stalled and the Federal-State Joint Board is deeply divided on how to proceed. Changes to the contribution system do not appear likely any time soon, regardless of what happens with this NPRM.

The FCC imposed the rate floor in 2011 due to concerns that rural carriers could use USF support to offer rates below those found in urban areas for comparable services. The agency found such action would undermine its duty to support “reasonably comparable” services between rural and urban areas. The rate floor reduces the USF support for carriers whose basic voice rates (plus state-mandated fees) fall below a FCC-set floor based on charges for comparable service in urban areas. However, the rural rate floor continued to increase following its adoption, eventually surpassing the charges for service in some urban areas. In response, the FCC froze the rate floor in 2017 (at $18) while it considered reforms to the policy. In the absence of further action by the agency, the rate floor would jump to nearly $27 in July 2019, likely leading to concomitant price increases for rural customers.

In support of the rate floor elimination, the FCC plans to conclude that the policy created a perverse incentive for carriers to raise rural rates to avoid losing USF support. The agency also would find that this incentive particularly hurt older consumers and Tribal area residents by hampering access to affordable telecommunications services. The FCC anticipates finding that the rate floor places unnecessary regulatory burdens on rural carriers, who must seek authorization from state authorities and satisfy customer notification requirements for rate hikes. Finally, the agency would question prior claims that rural carriers used USF support to offer artificially low rates and note that CAF recipients must meet strict buildout obligations that prevent carriers from failing to put their subsidies to use.

The rural rate floor would be eliminated 30 days after publication of the proposed order in the Federal Register. All rural carriers subject to the rate floor, as well as consumer advocacy groups, should closely review the proposed order and work with counsel to assess its impact. It remains to be seen what level of support the proposed order receives at the meeting. Both Republican Commissioner O’Rielly and former Democratic Commissioner Clyburn strongly opposed eliminating the rural rate floor when the FCC froze it in 2017. At the time, the Commissioners argued that rural carriers should recoup some revenue from their subscribers first before relying on USF support and called for means-testing CAF support in lieu of eliminating the rate floor. While there is no indication that Commissioner O’Rielly has softened his views or whether current Democratic Commissioners Rosenworcel and Starks oppose the elimination of the rate floor, it is likely that the proposed order will draw at least some dissent. Such dissent may fuel calls for reconsideration or subsequent appeals of the rural rate floor elimination following the April meeting.

You will find more details on the significant April meeting items after the break:

Spectrum Incentive Auction: The draft Public Notice would propose auction application and bidding procedures for licenses in the Upper 37 GHz (37.6-38.6 GHz), 39 GHz (38.6 GHz-40.0 GHz), and 47 GHz (47.2-48.2 GHz) bands. In the first auction phase, participants would bid for generic 100 megahertz blocks in the three mmW bands. The first auction phase also would determine the amount of incentive payments due to incumbent licensees that opted to relinquish their existing spectrum holdings. The second auction phase would establish the specific frequency assignments awarded to the auction winners. The actual number of licenses available for auction is not yet settled and will depend upon how many incumbent licensees previously agreed to give up their existing spectrum holdings for payment or accept modified licenses. The FCC would announce the particular licenses available at auction in advance of the auction application deadline. The FCC expects to complete the auction by the end of 2019.

37 GHz/50 GHz Band Access: The draft Order would facilitate the auction of the Upper 37 GHz band by establishing procedures for the Department of Defense (“DOD”) to operate in this spectrum on a shared basis with commercial wireless operators under limited circumstances. Specifically, the FCC would review DOD requests to use Upper 37 GHz band frequencies, contact potentially-affected commercial wireless licensees, and help coordinate shared usage, if possible. The draft item also would permit the licensing of Fixed-Satellite Service earth stations to transmit in the 50 GHz (50.4-51.4 GHz) band to potentially provide faster, more advanced services.

OTARD Reform: The draft Notice of Proposed Rulemaking would reform the FCC’s OTARD rule, which currently protects only end-user antennas (e.g., satellite TV dishes) from state, local, or private restrictions. Under the FCC’s proposal, the OTARD protections would be extended to hub or relay antennas used by fixed wireless providers that represent the backbone of emerging 5G networks. The FCC would seek input on how reforming the OTARD rule would impact small antenna infrastructure deployment, particularly in rural areas. The FCC anticipates retaining OTARD rule exceptions for state, local, and private restrictions on antennas based on public safety issues or historic preservation objectives, so long as the restrictions are not overly burdensome and apply in a nondiscriminatory manner.

Legacy Regulation Forbearance: The draft Order would partially grant a petition filed by USTelecom asking the FCC to forbear from enforcing certain legacy long-distance service regulations applicable to former Bell Operating Companies (“BOCs”) and other incumbent carriers. First, the FCC would no longer require incumbent rate-of-return carriers to offer long-distance service through a separate affiliate. Second, the FCC would grant incumbent carriers relief from the “provisioning interval” requirement obligating them to fulfill telephone exchange service and exchange access requests within the same period that they provide such services to affiliated entities. Third, the FCC would refrain from requiring incumbent carriers to submit reports about their legacy “special access” services. Finally, the FCC would eliminate a BOC-specific requirement to provide nondiscriminatory access to poles, conduits, and rights-of way, finding the obligation duplicative of a similar access rule already imposed on all local exchange carriers. The FCC plans to hold off on USTelecom’s request that it forbear from enforcing its incumbent carrier network element unbundling and resale mandates, but the agency likely will take up this issue before the end of the year.

Rate Floor Elimination: The draft Order would abolish the USF “rate floor” that limited the amount of Connect America Fund support received by some rural carriers to build and maintain networks in underserved areas. Today, if a carrier elects to charge its customers less than the rate floor set by the FCC for voice service, the difference between the amount charged and the rate floor is deducted from the amount of USF support received by the carrier. The FCC plans to conclude that this process results in artificially-inflated rates for rural customers and should be eliminated, along with all of the rate floor’s associated reporting and customer notification requirements. The FCC previously froze the rate floor for two years while it considered reforms and the rule’s elimination would prevent a nearly 50% increase in the rate floor scheduled to take effect in July 2019.

Under the FCC’s proposal, the Fraud Division would be comprised of existing Enforcement Bureau staff reassigned from other divisions who currently work on USF-related investigations. Once established, the Fraud Division is expected to collaborate with the FCC’s Office of the Inspector General, the Department of Justice, and other federal and state agencies to prosecute fraud involving USF programs. But beyond its proposed basic composition and collaborations, the FCC offered few details regarding how the new Fraud Division fits into its existing enforcement structure. For example, the Order provides no information regarding the anticipated size or leadership of the Fraud Division. The Order also does not explain whether the proposed Fraud Division would operate as a replacement for or some other evolution of the Enforcement Bureau’s existing USF Strike Force established in 2014, which the FCC similarly charged with combating waste, fraud, and abuse in USF programs. In addition, the Order does not indicate what role, if any, the new Fraud Division would have in prosecuting violations involving other FCC-supported programs, such as the Telecommunications Relay Services. Finally, unlike the other Enforcement Bureau divisions, which generally are organized around a broad subject matter (e.g., spectrum, media), the new division would be organized around a particular violation: USF fraud. Thus, it remains to be seen how the new Fraud Division would operate in concert with its concomitant divisions during investigations and enforcement actions.

As the FCC’s Fraud Division proposal involves internal Enforcement Bureau reorganization and does not alter existing regulations, it is not subject to notice and comment rulemaking. In accordance with federal law, however, the Fraud Division will not be established until the FCC’s reorganization plan receives approval from the White House Office of Management and Budget as well as both the House and Senate Appropriation Committees. The FCC did not provide a timeframe in which such approval is expected.

The Justice Department accused Huawei of stealing trade secrets and materials used to test mobile phones from a major U.S. telecommunications carrier. The criminal charges stem from an earlier civil suit brought by the U.S. carrier, in which Huawei was found guilty and ordered to pay compensation. Prosecutors alleged that Huawei encouraged corporate espionage, offering bonuses to employees who succeeded in stealing confidential information from U.S. competitors. In addition, Huawei, several of its affiliates, and its chief financial officer were charged with bank fraud for purportedly misleading U.S. banks into clearing transactions with Iran in violation of international sanctions. Officials also claimed that Huawei obstructed justice by allegedly moving witnesses outside of U.S. jurisdiction, destroying evidence, and lying to Congress about its association with Iranian business interests.

While the U.S. governments’ investigation into Huawei is ongoing, the indictments show the national security and trade risks inherent in working with foreign telecommunications interests. Federal officials continue to advocate action to impede or outright block the use of foreign-made equipment in critical telecommunications networks, particularly those forming the backbone of next-generation 5G wireless technologies. However, some smaller U.S. carriers have raised concerns with the pushback, pointing to potential cost increases due to restricted access to foreign components and resulting detrimental effects on broadband deployment in rural areas. As a result, it remains to be seen how U.S. policymakers plan to balance national security and trade objectives with broadband deployment and telecommunications innovation goals. For those using or considering using Huawei equipment, careful monitoring of the open FCC proceeding is advisable.

Probably the most significant take-away was an acknowledgement by USAC’s VP of Audit & Assurance that USAC audit output had slowed significantly in the middle of 2018. She attributed this to personnel turnover and a temporary shift in resources to assist an investigation at the FCC’s request. Nevertheless, USAC announced that it was back on track and planned to “close out” the remainder of its open audits by the end of the year. For those with audits that are underway, expect to see final reports soon, and to face an appeal deadline as early as January 2019.

Going forward, USAC announced a shift in its methodology for selecting audits to conduct. Since 2015, the FCC has directed that USAC apply a risk-based methodology to select its audits. Under this risk-based methodology, USAC generally would conduct audits of high-revenue filers, either based on total revenues or targeted revenues. This approach, as we noted before, is consistent with recommendations from the GAO on USAC contribution audits. However, beginning in 2018, and continuing into 2019, USAC intends to conduct a mix of random audits, risk-based audits and “targeted” audits based on referrals from the FCC or whistleblower tips. For filers, this change means that the universe of potential recipients will expand, and that no filer is immune from receiving an audit notice.

Finally, the meeting gave us insight into the next round of PQA audits that will begin in November. A PQA audit, or a “Payment Quality Assurance” audit, is a targeted inquiry, principally focused on whether a USF beneficiary has sufficient documentation to justify payments made by the Fund to recipients. It is used to calculate the program-wide improper payment percentages, but results may lead to recoupment of improperly disbursed USF payments as well. For FY 2019, the PQA announcements will begin next month (in November), with a target completion by August 2019 in order for the statistical analysis to be completed by the end of the FCC’s fiscal year. One notable change in FY 2019 is that PQAs will once again include Rural Healthcare Fund recipients. The FCC had ordered an end to those PQAs in 2015, after an improper payment rate of zero percent was found. However, based in part on a notable Rural Healthcare NAL , the FCC directed USAC to include Rural Healthcare recipients in the pool this year. As noted, PQA announcements should be sent soon, so if you’re a recipient, please be on the lookout for the notice and documentation request.

The FCC’s current review will look at rules adopted in 2005-2006 and covers a number of major regulatory areas. For example, the FCC asked for comment on certain USF rules, including:

• the agency’s definition of “rural area” in the Rural Health Care Program;
• certain eligibility requirements for carriers to qualify to receive high cost or Lifeline USF support, including the demonstration of compliance with consumer protection and service quality standards, the public interest standard, and the requirement to provide a copy of any eligible telecommunications carrier (“ETC”) petitions to affected Tribal governments;
• certain annual reporting obligations for high cost fund recipients; and
• the certifications that must be made by schools and libraries to obtain E-Rate funds.

The FCC also will review its equipment authorization procedures, particularly the testing and certification requirements for software defined radios. As we previously highlighted, the FCC has taken a number of recent enforcement actions against small- to medium-sized manufacturers for equipment marketing violations, which often involve complex testing and disclosure obligations.

Disabilities access rules will be reevaluated as well, such as the technical standards and carrier contribution mechanisms for the Telecommunications Relay Service that helps facilitate communications by persons with hearing or speech disabilities. Moreover, the FCC will re-assess the requirements on wireless providers and mobile device manufacturers to offer a sufficient selection of hearing aid-compatible handsets.

The range of topics covered by the FCC’s review is indeed wide and presents an opportunity for all stakeholders to submit their thoughts over the coming months on how these rules should be expanded, contracted, or eliminated. The FCC will accept comments until October 29, 2018.

Recently Congress has expressed concerns about foreign state influence in U.S. communications networks resulting from the use of equipment and/or services by certain foreign entities, particularly from China and Russia. For a number of years, many mitigation arrangements imposed by Team Telecom on certain Section 214 authorization holders and submarine cable landing licensees have required the affected carriers and cable operators to obtain government consent to use principal equipment suppliers, as part of the Team Telecom’s ongoing review of these carriers and operators to ensure equipment used in cable systems or carrier infrastructure does not come from certain companies that raise national security issues. To reinforce existing measures that address these concerns, the FCC proposes the above-stated bright line rule and seeks comment on scope, implementation, and enforcement.

Scope of the Prohibition

One key issue in the NPRM is how to identify companies that pose a national security threat to communications networks or the communications supply chain. Several potential approaches are discussed. First, it asks whether the Commission should “establish the criteria for identifying a covered company,” and if so, how it should determine such criteria. Second, the NPRM suggests that the Commission could “rely on existing statutes listing companies barred from providing certain equipment or services to federal agencies for national security reasons.” Third, another federal agency could “maintain a list of communications equipment or service providers that raise national security concerns regarding the integrity of communications networks or the communications supply chain.” A related definitional issue is whether the prohibition would also apply to a covered company’s subsidiaries, parents, and/or affiliates, and how these entities should be defined.

Implementation Issues

The Commission also has requested input on various implementation issues related to the proposed rule, such as:

• Whether the prohibition should apply to all equipment and services from companies that have been identified as raising national security risks, or whether the rule should be more narrowly tailored to certain types of equipment and services more prone to supply chain vulnerabilities. One approach would be to “limit the scope of the proposed rule to equipment and services that relate to the management of a network, data about the management of a network, or any system the compromise or failure of which could disrupt the confidentiality, availability, or integrity of a network.” This approach would seem to exclude end user equipment. Another approach could “prohibit the use of any USF funds on any project where equipment or services produced or provided by a company posing a national security threat to the integrity of communications networks or the communications supply chain is being purchased or obtained.” This approach might apply to indirect purchases of services from covered companies as well as direct purchases. This approach potentially could cover end user equipment whether directly or indirectly purchased with USF funds.
• Whether and how the rule should apply to contractors and subcontractors of USF recipients.
• Whether the Commission should adopt “rules on a program-specific basis across the four separate USF programs.”
• The proposed rule would be prospective only, but the item seeks comment on how much time USF recipients would need to come into compliance with the rule, and whether there should be staggered compliance deadlines for certain recipients (e.g., schools and libraries, smaller USF recipients). The Commission tentatively concludes that the proposed rule would extend to upgrades of existing equipment or services.
• The potential impact of the rule on existing contracts between USF recipients and parties identified as posing a supply chain risk.
• How to ensure that USF recipients are able to and do comply with the rule (e.g., requiring certifications from USF applicants or recipients).
• How to enforce the rule, particularly in the E-Rate program, when USF support may be distributed to a school or library rather than a service provider.
• Whether USF recipients should be permitted to seek a waiver of the rule.
• The costs and benefits of the rule.
• The FCC’s legal authority to adopt the proposed rule, which the FCC tentatively concludes from its statutory authority to administer the universal service fund, the absence of statutory limits to place conditions on how such funds are used, and its general rulemaking authority to carry out the provisions of the Communications Act.

Finally, and with potentially much farther reaching impact than the proposed rule, the NPRM asks more generally whether the Commission should “consider actions targeted not only at the USF-funded equipment of [covered] companies, but also non-USF funded equipment or services produced or provided by those companies that might pose the same or similar national security threats to the nation’s communications networks.”

Next Steps

This proceeding is at its early stage, and affected parties will have an opportunity to respond to the FCC’s proposal. Already, some smaller rural carriers have raised concerns with the proposal, citing costs and the potential impact on broadband deployment in rural areas. Both direct and indirect recipients of federal USF disbursements should examine the proposal carefully to determine its impact on the company’s operations. Initial comments on the NPRM will be due 30 days after the item is published in the Federal Register, and reply comments will be due 60 days after publication.

Nearly a year after it ordered sweeping deregulation of the business data services (“BDS”) market, the Federal Communications Commission (“FCC”) proposed new rules that would allow certain small rural carriers to move from longstanding rate-of-return regulation to price cap regulation for their BDS offerings. The transition would reduce the regulatory obligations of such carriers, including the need to prepare and file complex cost studies, which the FCC stated would allow carriers to rededicate resources to building and maintaining networks in underserved areas. The FCC also proposed removing pricing restrictions on lower-speed BDS offerings in areas with sufficient competition and sought input on whether pricing restrictions for higher-speed DBS offerings also should be eliminated.

Unlike prior BDS actions, where the issue was hotly contested for years and deregulation passed on a party-line vote, the proposed rulemaking was supported by all five Commissioners, at least for purposes of gathering a record. It’s not clear if this unanimity will hold throughout the proceeding, but the FCC may be on the verge of turning a page in its focus on these services, which are a bedrock for both retail offerings and for competitive carriers extending their networks.

BDS are dedicated point-to-point transmissions at guaranteed speeds over high-capacity connections used by major businesses, governments, and other large institutions to move their data. Last year, the FCC generally deregulated BDS and eliminated price controls in areas that satisfied a new competitive market test. However, these actions did not extend to the more than 200 smaller carriers predominately located in rural areas that received universal service funding under the Alternative Connect America Model (“A-CAM”). A-CAM carriers previously operated under rate-of-return regulation, where they reported costs annually to the FCC and received a specified return based on those costs. This system required the carriers to prepare and submit complex cost studies to the FCC to justify their returns. However, these carriers elected in 2016 to move to price cap regulation under the A-CAM, which sets the price that the carriers can charge for services. With a cap on prices, the A-CAM carriers possessed strong incentives to become more efficient and reduce costs to increase profits. However, the price cap regulation of A-CAM carriers did not cover their BDS offerings and these carriers continued to be obligated to conduct cost studies for BDS.

The FCC’s proposed rules eliminate this disparity and take additional steps to lessen the regulatory oversight of A-CAM carriers and other BDS providers:

First, the FCC proposed allowing all A-CAM carriers to move their BDS offerings to price cap incentive-based regulation, creating regulatory uniformity among their services and eliminating the time and resources spent on annual cost studies. The FCC proposed that carriers would move to incentive regulation at the holding company level in all states where they receive A-CAM support. Under the proposal, the election would take effect on the July 1st following the FCC’s adoption of a final order setting out the incentive regulation transition rules. As a result, it is likely that the move to incentive regulation may not take place until next year. The FCC intends to use A-CAM carriers’ current rates and demand levels as the basis for the initial DBS rates under incentive regulation, but sought comment on alternative price-setting methodologies.

Second, the FCC proposed eliminating price restrictions for lower-speed DBS offerings in areas with sufficient competition. As with its BDS reforms last year, the FCC plans to adopt a competitive market test that dictates, on a county-by-county basis, whether a carrier will still be subject to price cap restrictions and tariffing obligations. The FCC sought comment on the specifics of the competitive market test and asked whether it should apply the two-pronged test it adopted last year, which looked at whether 50 percent of the locations with BDS demand in a county were within a half mile of a location served by a competing provider or, alternatively, whether a cable provider offered sufficiently fast broadband service in 75 percent of the census blocks in the county. The competitive market test adopted last year drew considerable fire from critics alleging that it deregulated BDS offerings in areas lacking meaningful consumer choice. These concerns certainly will be raised again, especially because the A-CAM carriers generally serve rural areas with limited competition. The FCC also asked whether it should remove pricing restrictions from higher speed BDS offerings and whether it should allow other carriers still operating under rate-of-return regulation to move their services to incentive regulation.

The FCC requested input on how to best transition A-CAM carriers to incentive regulation and ensure consumers do not see a flash cut to increased prices. Specifically, the FCC proposed a three-year transition period during which carriers may (but are not required to) de-tariff their BDS offerings, a six-month freeze of tariffed rates in areas newly deregulated under the competitive market test, and a grandfathering of existing contractual or other long-term BDS arrangements. Consequently, the FCC’s proposed rules mark just the first step in what potentially will be a years-long transition of the BDS offerings of A-CAM carriers.

Comments on the FCC’s planned BDS reforms will be due 30 days after publication of the proposed rulemaking in the Federal Register, with reply comments due 45 days after the proposed rulemaking’s publication.

The Rural Health Care Program (“RHCP”) is sure to face increased scrutiny in the wake of a $18.7 million proposed fine issued by the Federal Communications Commission (“FCC”) at its January meeting against a telecommunications reseller for allegedly defrauding the program. The FCC claims that DataConnex, one of the top five recipients of RHCP funding, violated the program’s competitive bidding rules and submitted falsified documents to increase the support it received. The FCC recently ramped up enforcement involving the RHCP and proposed significant reforms last month aimed at improving oversight and deterring fraud. The FCC’s actions potentially foreshadow additional restrictions on the use of RHCP consultants and the amount of available funding.

The RHCP offers funding to rural health care providers to make telecommunications services more affordable. Under the program, contracts for telecommunications services are awarded through an open competitive bidding process designed to select the most cost-effective bid. The RHCP’s Telecom Program allows service providers to receive payments based on the difference between the normally higher rates for telecommunications services in rural areas and the generally lower rates charged in urban areas. The FCC alleges that DataConnex engaged in a multi-year scheme with a healthcare consultant, through which DataConnex referred rural healthcare providers to the consultant with the understanding that the consultant would direct the healthcare institutions to select DataConnex as their telecommunications service provider. In exchange, DataConnex purportedly paid hundreds of thousands of dollars to a company owned by the consultant. DataConnex also allegedly misrepresented the costs of urban telecommunications services to boost the support it received from the RHCP.

Following recent trends in enforcement actions involving federal funds, the FCC upwardly adjusted the proposed fine to include a penalty equal to three times the amount DataConnex received from the program and threatened to revoke the company’s authorizations to provide service. In addition, recognizing the disruption the enforcement action posed to healthcare providers contracting with DataConnex, the Commission indicated it would consider waiving the competitive bidding rules to allow affected institutions to select a new RHCP service provider.

FCC Chairman Pai noted that the proposed fine represents the second enforcement action in the past year involving charges of RHCP fraud. Last summer, the FCC issued an amendment to its first-ever RHCP enforcement action, increasing the proposed penalty against telecommunications service provider Network Services Solutions and its chief executive for allegedly using inside information to gain an unfair advantage in the competitive bidding process. The FCC cited the Network Services Solutions case in support of RHCP reforms it proposed last month. Specifically, the FCC proposed establishing a benchmark to identify outlier requests for RCHP support and subject such requests to increased scrutiny. The FCC also proposed bolstering the RCHP competitive bidding rules and imposing more detailed requirements for determining urban and rural service rates. Critically, the FCC sought comment on whether it should implement disclosure requirements regarding the use of RHCP consultants and restrictions on the receipt of gifts in connection with funding requests.

Through its recent enforcement actions, the FCC appears to be making the case for significant reforms to the RHCP that will impact telecommunications service providers, healthcare institutions, and the healthcare consultant industry. As a result, stakeholders should carefully monitor the FCC’s actions and consider participating in the rulemaking process. The attorneys of Kelley Drye & Warren have significant experience with RHCP regulations and compliance, and can assist telecommunications and healthcare providers with navigating new rules and responding to FCC actions.

The proposed 18.8% contribution factor appears to mark a decisive upward turn in the contribution factor trajectory. Over the past two years, the contribution factor has fluctuated slightly, starting from a high of 18.2% for first quarter 2016 and ending at 17.1% in the third quarter 2017 but generally averaging in the mid-seventeen percent range. The proposed contribution factor not only sets a new high but also represents an increase of nearly two percentage points over third quarter 2017’s 17.1% contribution factor.

To anyone watching USF contribution issues, this increase likely comes as no surprise. The USF contribution base has seen a steady decline over the past several years and increasing the contribution factor is likely the easiest option for offsetting the declining base. The key question is whether this new high in the contribution factor - astoundingly close to 20% - is sufficient to spark Commission action to reform the contribution side of USF. Industry participants probably ask themselves the same question each time the contribution rate increases – frankly, as far back as 2011, we thought the 17.9% factor, a new high at that time, would be the catalyst triggering contributions reform. For those who might not have been following the issue, USF contributions reform has been under discussion by the Commission since 2006. In 2014, the Commission referred the record on USF contributions to the Federal-State Joint Board and requested the Board provide a recommendation for how the Commission should modify the USF contributions methodology. That referral request remains pending with the Board. However, the Chief of the Commission’s Wireline Competition Bureau recently noted that USF issues have been attracting a lot of attention lately, and when asked, suggested there is a reasonable possibility that contributions reform could come in the near future. Consequently, while only time will tell what will be the impetus that breaks the logjam of contribution reform, it looks like there may be light at the end of the tunnel.

Although OMD’s USF contribution factor is still just a proposal, the factor will take effect unless the Commission takes action within fourteen (14) days after the Public Notice release date. We are not aware, in recent memory, of the Commission ever stepping in to change a proposed contribution factor so the industry should anticipate this contribution factor will be in effect for fourth quarter 2017. Increases in the contrition factor mean reporting errors become more costly. In addition, the increased contribution factor means more carriers that previously qualified for de minimis status could be brought within the USF contribution base. Consequently carriers should be sure to review their Form 499A reporting and customer invoicing to be ready for the new contribution factor.

The Auction is the second part of CAF Phase II. The initial part of CAF Phase II occurred in 2015, when ten price cap carriers accepted offers of support calculated by a cost model in exchange for the providers’ commitment to deploy and maintain voice and broadband service in high cost areas. Service providers that seek to participate in the Auction will bid on providing service to eligible high cost areas including those areas where incumbent price cap carriers declined the support calculated by the cost-model. In 2016, the FCC adopted the Phase II Auction Order, which established the rules for the Auction’s bidding process including the bidder performance obligations, application mechanism, bidder eligibility criteria, eligible areas, and post-auction obligations. More recently, in March 2017, the FCC adopted bidding weights for the different performance category tiers for Auction 903 (as previously discussed here). The Notice takes final steps towards executing the Auction by resolving specific details of the mechanics established in these earlier proceedings.

The FCC previously decided that geographic areas eligible for bidding would be designated by census block but reserved the right to require bids be submitted based on census tracts in order to limit the number of discrete biddable units. In the Notice, the FCC proposes to use census block groups containing one or more census blocks as the minimum geographic area that can be bid on during the Auction. This is intended to provide flexibility to providers regarding the scope of the network area since the use of census tracts might require providers to bid on a broader geographic area than they want to cover. The Notice reaffirmed that the Wireline Competition Bureau will release an updated list of eligible census blocks using recently available Form 477 data at least three months prior to the deadline for short-form applications.

APPLICATION REQUIREMENTS

Auction 903 will involve a two-stage application process in which a short-form application will be used pre-auction to establish a bidder’s eligibility to participate while the long-form application will involve a more extensive review of bidder qualifications after bidding is complete. The Notice seeks comment on the type of information an applicant should be required to provide in both its short- and long-form applications. The FCC makes the proposals regarding the following matters in the Notice:

State Selection and Overlapping State Bids

An applicant must identify the states in which it intends to bid for support in the short-form application. The applicant will be restricted to bidding on eligible census blocks in the states identified in its application. Separate applicants that are commonly-controlled or are parties to a joint bidding agreement may not bid in the same states. The Notice provides entities with options to avoid running afoul of the restriction on overlapping bids. A company has the option of submitting a single application to qualify for the Auction then designating the operating company that would receive the support if the bid is successful. If a parent company or a consortium/joint venture is a winning bidder in the Auction, the FCC proposes to allow the entity to designate at least one operating company for each state that will be receiving Phase II support. The winning bidder would not be allowed, however, to apportion a package of eligible census block groups in a winning bid among multiple operating companies.

Alternately, parties that have common control or are part of joint bidding arrangement can bid independently, just not for the same states. To ensure this state overlap provision is abided by, the FCC proposes requiring each applicant to certify that it knows it cannot place bids in the same state as (i) another commonly-controlled entity; (ii) another party to a joint bidding arrangement related to the Auction that it is a party to; or (iii) any entity that controls a party to such an arrangement. Additionally, the FCC propose to require short-form applicants to briefly describe any agreements relating to participation of the applicant in Auction 903 bidding. In the long-form, winning bidders will be required to submit updated information on any such agreements as well as possibly disclosing the specific terms, conditions, and parties involved.

Performance Tier and Latency Combinations

The FCC previously created an auction framework that included four technology-neutral broadband performance tiers with increasing speeds and usage allowances along with commitments to either low or high latency (“public interest obligations”). In the Notice, the FCC outlines its proposals for the information and process to be used in assessing an applicant’s ability to meet the public interest obligations it selected on the short-form application.

• Operational Information. For each chosen performance tier and latency combination, an applicant must show how it will provide service and that it is reasonably capable of meeting the public interest obligations for each state it selects. Included in an Appendix of the Notice are a list of questions that each applicant would need to provide brief, narrative responses to as a part of its application.
• Required Information for Applicants Proposing to Use Spectrum. An applicant proposing to use spectrum to provide service will need to (i) identify the spectrum bands it will use for last mile, backhaul, and any other part of the network; (ii) describe the amount of uplink and downlink capacity (in MHz) that it has access to in these bands for last mile; (iii) explain the authorization it has to operate in the spectrum band; and (iv) provide call signs and/or application file number associated with its spectrum authorizations. In addition, for the long-form application, the FCC proposes to require each applicant to provide any updates to the relevant spectrum authorizations and certify that the applicant will have access to the spectrum band it proposes to use for at least ten years from the funding authorization date. The Notice includes a list of spectrum bands the FCC has identified as those likely to be used for last mile connectivity. Comment is sought on the sufficiency of the uplink or downlink bandwidth in these bands. A provider that intends to offer satellite service must also identify any space station licenses that will be used in the areas where it intends to bid.
• Use of Information Provided to FCC in Other Contexts. The FCC proposes to allow staff to consider any information that a provider has submitted to the FCC in other contexts when assessing whether a provider is reasonably capable of meeting its public interest obligations. To aid with this process, applicants will be required to provide any relevant identifiers in its short-form application including FCC registration number, associated study area codes, and Form 499 filer ID number.
• Precluding Eligibility of Certain Technologies from Certain Performance Bids. The FCC proposes to exclude applications that propose to use certain technologies from bidding on certain performance tier and latency combinations. For example, satellite providers would be prohibited from selecting low latency in combination with any of the performance tiers.

The FCC also proposes that, in addition to providing audited financial statements, applicants should identify and explain specific information from their most recent financial statements on the short-form application. Earlier rules determined that applicants that are not subject to audits in the ordinary course of business but have provided voice, broadband, or electric transmission services would be permitted to wait until after it is announced as a winner bidder to provided audited financial statements. The FCC seeks comment on whether such providers should be required to submit unaudited information during the pre-auction application process.

Additionally, the FCC intends to use a five point scale, responses to one financial question and status of four financial metrics, to assess financial information. Specifically, the FCC will ask whether an applicant received an unmodified, non-qualified opinion from an auditor of its prior year-end audited financial statement. The four metrics to be considered are (1) latest operating margins, where a margin greater than zero receives one point; (2) time interest earned ratio (TIER), where TIER/interest greater than or equal to 1.25 receives one point; (3) current ratio (i.e., current assets divided by current liabilities), where a ratio greater than or equal to 2 would receive one point; and (4) total equity divided by total capital, where a result greater than or equal to 0.5 would receive one point.

Applicants would also need to certify in the short-form application that they performed due diligence regarding participation in the Auction including evaluating all technical and marketplace factors that may have an impact on the level of support being bid on.

RESERVE PRICES

The FCC previously determined that the reserve price, representing the maximum amount of support the FCC is willing to provide for service to a particular area, will be set using the Connect America cost model (CAM) and bids that exceed the reserve price will not be accepted. In the Notice, the FCC proposes to set the reserve price to be the total of the support amounts calculated for each eligible census block in a census block group, subject to the support cap on extremely high-cost areas. For census blocks with costs that exceed the high-cost threshold, the FCC proposes imposing a funding cap of $146.10 per location per month. The reserve price in those extremely high-cost areas would then be equal to $146.10 multiplied by the number of locations that census block.

BIDDING PROCEDURE

The FCC proposes to use a descending clock auction that will consist of sequential bidding rounds for the Auction. The system would announce a base clock percentage at each round that would be used to delimit the acceptable prices in each round of the Auction. The base clock would begin at a high level, indicating a support amount equal to the full reserve price, and then it would descend in subsequent rounds as bidders indicate the bid percentage (equal to a certain support amount) they are willing to accept to provide service in that area.

The base clock percentage will continue to descend with subsequent rounds until the aggregate amount of support represented by bids in a round is no greater than the support amount budgeted for that round. Once this happens, the system will assign support to bidders in areas where there are no competing bids. If there are still competing bids, the system will continue with subsequent rounds and the clock percentage will continue to descend until there is no competition.

The Notice also seeks comment on the amount of information that should be made available to the public and to bidders during the Auction process. The FCC proposes to withhold from the public information related to the short-form application before the Auction. After the Auction results are announced, the FCC would make available short-form application information and bidding data, except confidential financial information, operational information, and proxy bidding instructions. The FCC will make information available to bidders during the Auction about the status of their bids and the areas in the states in which they are qualified to bid.