Defining Success in the FCC's Connect America Fund Phase II Auction

Carol Mattey
Carol Mattey

The Federal Communications Commission’s (FCC) upcoming Connect America Fund (CAF) Phase II auction will be the first significant U.S. effort to use competitive bidding to address the digital divide in rural America.

In the Phase II auction, the FCC will award nearly $200 million in annual support for a ten-year term to entities willing to provide voice and fixed broadband service to rural, high-cost areas currently lacking broadband connections.

Awarding support through auction has long been advocated by economistsand think tanks, but it has taken years to resolve the operational details to turn academic theory into reality. With the FCC now poised to adopt its final decisions for the Phase II auction at the end of January, and the auction scheduled to begin July 24, 2018, it’s not too early to ask what will be viewed as a successful auction.

This is an auction for subsidies to serve markets that existing service providers (both incumbents and competitors) have not, to date, wished to serve. These are places with low density and other challenging physical characteristics. The areas up for auction are a checkerboard, scattered across a landscape where CAF subsidies are not available.

Various parties have argued to the FCC that various rules present barriers to their participation in the upcoming auction. That may just be regulatory posturing, but at the same time, it’s hard to imagine there will be bids on each and every one of the census blocks that will be in the Phase II auction. The FCC is encouraging electric coops to participate, alone or in partnership with local telcos, and fixed wireless internet service providers are getting ready, but not all of the areas up for auction will have a locally based service provider willing to bid. The extent of incumbent telco, cable and satellite participation remains a wildcard. And many local communities haven’t done the necessary homework to figure out how they might participate if there is no private sector entity ready to step up to the challenge.

Likewise, it would not be surprising if only some geographic areas see head to head competition among multiple bidders. While that might take place in discrete geographies, it is unlikely to occur on a widespread basis. If no one has been willing to serve an area up until now, it’s hard to imagine that not one, but two or more bidders will suddenly emerge, willing to bid for support to take on these new obligations in unserved areas.

It is inevitable that some areas may have a bidder that doesn’t win, and other areas will have no bidder at all. By design, auctions allocate scarce resources, and not everyone can win. The sum of the reserve prices for eligible areas is more than three times the auction budget, with bidders essentially placing bids that will result in lower and lower amounts in each successive round. Once the sum of bids equals the auction budget, the auction is likely to be largely over, with only limited bidding to resolve the remaining subset of areas where there are multiple bidders.

If some areas end up with no winning bidder, does that mean the Phase II auction is a failure? The answer is “No!”

The FCC will need to look at the results of the Phase II auction to evaluate how universal service auctions are different in practice from spectrum auctions, and adjust accordingly, as necessary. The FCC will learn from the Phase II auction, just as it learned from its prior Mobility Fund Phase I auction in 2012 to award up to $300 million in one-time support to extend mobile service, and its Rural Broadband Experiments in 2014 to award up to $10 million annually for ongoing support to extend broadband service in rural areas.

No matter what happens in the Phase II auction, it should be viewed as a success because it will help the FCC refine its thinking on how best to award USF subsidies to serve these rural areas.

Back in 2011, the FCC concluded it would only provide support to the largest incumbent telecommunications carriers for a limited number of years, with support subsequently awarded on a competitive basis to serve these geographic areas. The FCC expected that bigger Phase III auction to occur “before the end of 2019.” The FCC also has talked about holding a “Remote Areas Fund” auction a year after the Phase II auction.

Whether the FCC will stick to these previously announced schedules for USF auctions remains to be seen given the queue of auctions — both spectrum and universal service — on the agency’s horizon. Given how long it has taken to implement the Phase II auction, it now would be sensible to consider combining the Remote Areas Fund and Phase III auctions, rather than tackling the problem of unserved areas in piecemeal fashion.

In many respects, future USF auctions are far more important than the Phase II auction. Both potential bidders and localities will have more time to get organized, and may be more motivated once they see the results of the Phase II auction. The Phase II auction is merely the warm-up. Game on!

Also by Carol Mattey:

Looking Ahead to the Connect America Fund Phase II Auction (May 2017)

Carol Mattey is the former Deputy Bureau Chief of the FCC's Wireline Competition Bureau (2010-2017) and Senior Advisor on the National Broadband Plan (2009-2010), where she led teams working on the landmark Connect America Fund and other initiatives to modernize the FCC’s universal service programs. She currently is the principal of Mattey Consulting LLC, which provides strategic and public policy advisory services to broadband providers, governmental agencies, non-profit organizations, and other entities active in the telecommunications arena.