What is the Rural Digital Opportunity Fund?

Benton Institute for Broadband & Society

Friday, February 14, 2020

Weekly Digest

What is the Rural Digital Opportunity Fund?

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Round-Up for the Week of February 10-14, 2020

Kevin Taglang
Taglang

On February 7, the Federal Communications Commission released the report and order that creates the framework for the Rural Digital Opportunity Fund, the latest effort to extend the reach of broadband networks deeper into rural America. The FCC's own research estimates that $80 billion is needed to bring broadband everywhere in the U.S., so the $20.4 billion Rural Digital Opportunity Fund is a significant -- although likely insufficient -- step in closing the digital divide over the next decade. Here we review the framework and note some controversy around the FCC decision.

First, to put the FCC's most recent action into perspective: the Communications Act of 1934 states that all people in the United States shall have access to rapid, efficient, nationwide communications service with adequate facilities at reasonable charges. With this mandate, and over time, the FCC provided universal service support through four mechanisms of the Universal Service Fund. The FCC created a mechanism by which interstate, long-distance carriers were assessed to subsidize telephone service to areas that were costly to serve (called "high-cost areas") and (much later) to low-income households. The Telecommunications Act of 1996 expanded the traditional definition of universal service -- affordable, nationwide telephone service -- to include telecommunications and high-speed internet access to rural health care providers, and schools and libraries. 

In 2011, the FCC adopted a new universal service funding approach in high-cost areas served by incumbent local exchange carriers, known as price cap areas, through a combination of 1) a new forward-looking model of the cost of constructing modern multi-purpose networks, and 2) a competitive bidding process. The FCC's Wireline Competition Bureau developed a specific engineering cost model that would estimate, at a granular level, the support needed to serve areas where costs are above a specified cost benchmark, but below an “extremely high-cost” benchmark. 

In 2015, following the development of the Connect America Cost Model (CAM), the FCC provided the incumbent price cap carriers an opportunity to accept fixed support based on the CAM in exchange for defined deployment obligations in each state where they were providing service. Nine price cap carriers accepted over $1.5 billion in annual support to deploy broadband networks serving more than 3.6 million homes and businesses in 45 states and one U.S. territory by the end of 2020. In areas where the price cap carriers declined the model-based support, and for certain other high-cost areas nationwide, support was allocated through the subsequent Connect America Fund (CAF)  Phase II auction, a competitive bidding process in which all eligible providers(1) were given an equal opportunity to compete. The auction yielded 103 winning bidders, with the 10-year support amount totaling $1.488 billion and covering 713,176 locations in 45 states. As of December 2019, the FCC has authorized the Universal Service Administrative Company (USAC) to obligate and disburse funding totaling about $1.2 billion over the ten-year term to support almost 550,000 locations in 45 states for which support was made available in the CAF Phase II auction.

For today's discussion, we focus on the largest of the four Universal Service mechanisms, the High Cost Support Mechanism, which, with $4.5 billion annually, works to expand networks in underserved areas so that all people in the U.S. have access to affordable voice and broadband. The High Cost program, which consists of multiple funds, provides support to certain qualifying telephone companies that serve high cost areas. The Rural Digital Opportunity Fund will supersede a number of these funds. 

The High Cost program has a five-step process:

  1. The FCC determines which areas telecommunications and broadband providers are eligible to receive federal subsidies for building new networks or upgrading existing networks.
  2. Service providers accept an offer, or submit a bid, for subsidies to build out network infrastructure and provide service.
  3. Participating companies receive funding to deploy network infrastructure and provide service.
  4. Service providers report regular progress on broadband deployment showing where they are building out mass-market, high-speed internet service.
  5. Service providers' reports are reviewed and validated to ensure providers are building out broadband networks as intended.

The Rural Digital Opportunity Fund has a budget of $20.4 billion total over the next ten years to subsidize network builds in areas that lack access to both fixed voice and 25/3 Mbps broadband service. The fund will be executed in two phases. Details for Phase II will be worked out later, so here we focus on Phase I which has a budget of $16 billion and is scheduled to launch on October 22, 2020. 

Eligible Areas

Phase I will target census blocks that are wholly unserved with broadband at speeds of 25/3 Mbps. Although the FCC admits there are problems with the data it relies on to identify areas that are served with 25/3 broadband, it says it is not aware of cases in which the data have identified as “unserved” a census block that is in fact served. So it will press ahead on Phase I. 

Critics warn about the reliance of FCC data which counts an entire census block as served if a provider reports that a single location can be served there. Rebecca Dilg, rural community and outreach manager for the Utah Governor’s Office of Economic Development, notes that census blocks can be huge areas in Western states. If one household is served in these census blocks, many more can go unserved and these areas will be ineligible for Rural Digital Opportunity Fund Phase I support. 

While voting for the report and order, FCC Commissioner Michael O'Rielly said, “[B]y limiting Phase I eligibility to those census blocks that have no broadband whatsoever and targeting those consumers truly deserving of FCC assistance, our action should not in any way trigger or exacerbate the rightful concerns raised over our broadband mapping procedures.”

Fellow Commissioner Jessica Rosenworcel has doubts about the commission's decision, however. "[I]f your home is marked as served by the FCC’s maps today and it is not, then for the next decade you are on your own. Good luck. It means millions of Americans will slip deeper into the digital divide," Rosenworcel said.

Jeff Sural, director of the North Carolina Department of Technology’s broadband infrastructure office, said he would rather see the FCC wait to develop its new, more granular mapping system, called the Digital Opportunity Data Collection, to disperse the first $16 billion. The new mapping system, which relies on carriers submitting polygonal maps of their coverage areas, won’t be ready until the FCC finishes dispersing the first $16 billion of the $20.4 billion fund. Sural said that the current FCC approach doesn’t ensure that funding will go to the people who need access to broadband most in rural areas and that his office has been forced to rely upon various other data sources to craft an accurate state broadband coverage map.

The FCC will compile a preliminary list of eligible areas for Phase I of the Rural Digital Opportunity Fund auction using the following methodology. First, the list will include:

  1. The census blocks for which price cap carriers currently receive CAF Phase II model-based support; 
  2. Any census blocks that were eligible for, but did not receive, winning bids in the CAF Phase II auction;
  3. Any census blocks where a CAF Phase II auction-winning bidder has defaulted;
  4. The census blocks excluded from the offers of model-based support and the CAF Phase II auction because they were served with voice and broadband of at least 10/1 Mbps;
  5. Census blocks served by both price cap carriers and rate-of-return carriers(2) to the extent that the census block is in the price cap carrier’s territory, using the most recent study area boundary data filed by the rate-of-return carriers to identify their service areas and determine the portion of each census block that is outside this service area;
  6. Any unserved census blocks that are outside of price cap carriers’ service areas where there is no certified high-cost eligible telecommunications carrier (ETC) providing service, such as the Hawaiian Homelands, and any other populated areas unserved by either a rate-of-return or price cap carrier; and
  7. Any census blocks identified by rate-of-return carriers in their service areas as ones where they do not expect to extend broadband (as the FCC did with the CAF Phase II auction).

After compiling the preliminary list of eligible areas, the FCC will conduct a limited challenge process for the Rural Digital Opportunity Fund Phase I auction consistent with the process used for the CAF Phase II auction. Because there is an inevitable lag between the time when areas are served and the time that service is reflected in FCC data, parties will be given an opportunity to identify areas that have subsequently become served, and the FCC will have the opportunity to compare the preliminary list of eligible areas with the final list to identify any obvious reporting errors.

Not included in these categories for Phase I eligibility are census blocks where a winning bidder in the CAF Phase II auction is obligated to deploy broadband service, and census blocks where a Rural Broadband Experiment support recipient is obligated to offer at least 25/5 Mbps service over networks capable of delivering 100/25 Mbps.

Second, the FCC will exclude those census blocks where a terrestrial provider offers voice and 25/3 Mbps broadband service according to the most recent publicly available FCC data. The FCC will also exclude those census blocks which have been identified as having been awarded funding through the U.S. Department of Agriculture’s ReConnect Program, or awarded funding through other similar federal or state broadband subsidy programs to provide 25/3 Mbps or better service. The FCC says it wants to ensure "that finite universal service support is awarded in an efficient and cost-effective manner and does not go toward overbuilding areas that already have service." The FCC says its intent here is "to exclude areas where 25/3 Mbps or better service has been or will be deployed without Rural Digital Opportunity Fund support, not to prevent winning bidders from accessing other funding sources, including from states."

Commissioner O'Rielly applauded the move saying, "[I]ncluding funded areas in Phase I would have been beyond foolish and incredibly wasteful, and undermined longstanding Commission policy against awarding duplicative support in areas already served by an existing provider."

The preliminary list showing the number of potentially eligible locations by state generated controversy when it was released because it did not include any locations in Alaska or New York. Alaska is different from other rural states in that it has communities that are relatively densely populated but are far from other communities. Accordingly, the FCC created a separate support plan for the state.

New York was not included for a different reason. When the FCC made plans to award broadband funding through the 2018 Connect America Fund reverse auction, the state of New York already had dedicated $500 million for rural broadband through a program known as New NY Broadband. Plans for that program were further along than plans for the CAF. Accordingly, the FCC allowed the state to award up to $170 million in CAF funding for the state at the time the state awarded New NY Broadband funding. At the time, this decision received some criticism, with opponents arguing that New York may have received more CAF money than it would otherwise have won had it participated in the nationwide CAF auction. The FCC said it would not categorically eliminate New York from RDOF eligibility. However, it appears that locations that received state funding will still not be eligible.

As Benton Institute Senior Fellow Jonathan Sallet points out, however, there is a tendency to call the construction of new, competitive networks in a locality with an existing network “overbuilding”—as if it were an unnecessary thing, a useless piece of engineering. But what some call “overbuilding” should be called by a more familiar term: “Competition.” “Overbuilding” is an engineering concept; “competition” is an economic concept that helps consumers because it shifts the focus from counting broadband networks to counting the dollars that consumers save when they have competitive choices. The difference is fundamental—overbuilding asks whether the dollars spent to build another network are necessary for the delivery of a communications service; economics asks whether spending those dollars will lead to competition that allows consumers to spend less and get more. 

"The Best Available Tool for Closing the Digital Divide"

Phase I of the Rural Digital Opportunity Fund will be modeled after the CAF Phase II auction, employing "a single nationwide, multi-round reverse auction with competition within and across eligible geographic areas to identify areas that will receive support and determine support amounts." A reverse auction, if you are unfamiliar, turns around a traditional auction in which multiple buyers bid, raising the price for one seller. In a reverse auction, one buyer (in this case, the FCC) chooses from multiple sellers (broadband internet access service providers) in an attempt to find the lowest subsidy needed to build a new network. The FCC says that "reverse auctions are the best available tool to achieve our overall goal of closing the digital divide in a transparent and efficient manner while maintaining fiscal responsibility and cost-effectiveness."

In designing the auction, the FCC says it is trying to balance closing the digital divide against supporting the deployment of future-proof networks. For Phase I, the FCC will use an auction design in which bidders committing to different performance levels will have their bids weighted to reflect the FCC's preference for higher speeds, greater usage allowances, and lower latency. The bidding system will take into account the combined performance tier and latency weight when assigning support to bidders competing for support in the same area. The FCC's aim here is to encourage deployment of networks that will be sustainable even as new advancements are made and which will be capable of delivering the best level of broadband access for many years to come, all while keeping funding within the Phase I budget. 

The FCC will accept bids in four performance tiers, and for each tier will differentiate between bids that would offer either low- or high-latency service(3):

  • Minimum Performance Tier: 25/3 Mbps with a usage allowance that is the greater of 250 GB per month(4).
  • Baseline Performance Tier: 50/5 Mbps speeds with a 250 GB monthly usage allowance.
  • Above-Baseline Performance Tier: 100/20 Mbps speeds with 2 terabyte (TB) of monthly usage.
  • Gigabit Performance Tier: 1 Gbps/500 Mbps speeds with a 2 TB monthly usage allowance.

The following charts summarize how the FCC will weigh bids:

Performance Tiers, Latency, and Weights

 

 

Just before the FCC adopted the Rural Digital Opportunity Fund framework, Benton's Jonathan Sallet suggested that the fund focus on subsidizing future-proof networks capable of 100/100 Mbps service without usage limits and latency low enough to run interactive video applications (like videoconferencing). Sallet's first concern is the communities that will be locked into 25/3 service for the foreseeable future if a provider wins a Minimum Performance Tier bid. These communities will not likely be upgraded for the next decade. One could reasonably debate if 25/3 service is robust enough in 2020, but does one imagine it still will be in 2025 or 2030? It is very unlikely. 

Sallet says federal funds for the construction of broadband networks should focus on future-proof, scalable networks that will last at least a decade. That’s fiscally responsible. Minimum requirements should equal or exceed 100/100 Mbps; we’ve heard from industry observers that networks built to this performance level are extremely likely to be easily and relatively cheaply upgraded as demand for broadband builds.

We’ve already seen what happens when the FCC funds the construction of networks that are not fit for the future. At the beginning of the last decade, the FCC paid for the construction of “broadband” networks by so-called price-cap carriers that had to provide 4/1 Mbps service. Then, halfway through the decade, the FCC offered more money for 10/1 Mbps networks. Now, the FCC is poised to spend a great deal of money to build new networks again in the same places where it paid for the 10/1 Mbps and 4/1 service. Why? Because the requirements for broadband performance failed to look to the future.

Public Interest Obligations

In accepting Rural Digital Opportunity Fund support, carriers agree to a number of public interest obligations. 

1. All Rural Digital Opportunity Fund support recipients, like all other high-cost Eligible Telecommunications Carriers, will be required to offer standalone voice service and offer voice and broadband services at rates that are reasonably comparable to rates offered in urban areas

2. All Rural Digital Opportunity Fund support recipients will be required to report annually the number of anchor institutions to which they newly began providing service and to comply with all relevant Lifeline rules.

3. All Rural Digital Opportunity Fund support recipients are required to commercially offer voice and broadband service to 40% of the CAM-calculated number of locations in a state by the end of the third full calendar year following funding authorization, and adding 20% each year thereafter. Although initial service milestones will be based on the number of locations identified by the CAM, the FCC is confident it will have access to more accurate location data in the next few years, whether as a result of the Digital Opportunity Data Collection, the development of a broadband serviceable location database, the 2020 Census and/or some other data source. Winning bidders will be required to serve the number of locations subsequently identified in each respective area.

4. The FCC will not require Rural Digital Opportunity Fund support recipients to commercially offer voice and qualifying broadband to 100% of the new number of locations until year eight. The FCC will continue to use the CAM location counts to measure compliance with interim service milestones up to 100% of the CAM locations by the end of the sixth calendar year. If there are more new locations than CAM locations, recipients should be able to meet those milestones, and measuring compliance against the new number of locations later in the term will give carriers the opportunity to revise and update deployment plans after the FCC announces the new number of locations.

5. A Rural Digital Opportunity Fund support recipient will be deemed to be commercially offering voice and/or broadband service to a location if it provides service to the location or could provide it within 10 business days upon request.

6. All Eligible Telecommunications Carriers must advertise the availability of their voice services through their service areas, and the FCC requires support recipients also to advertise the availability of their broadband services within their service area.

7. Compliance with service milestone requirements will be determined on a state-level basis, so that a support recipient would be in compliance with a service milestone if it offers service meeting the relevant performance requirements to the required percentage of locations across all of the awarded areas included in its winning bids in a state.

8. The Rural Opportunity Digital Fund will have the same reporting requirements as the CAF Phase II auction. Rural Digital Opportunity Fund support recipients will be required annually to file location and technology data and to make the same certifications when they have met their service milestones. Rural Digital Opportunity Fund support recipients (as all high-cost support recipients currently do) will be required to file their annual location data by March 1, and the FCC will encourage them to file such data on a rolling basis.

9. Rural Digital Opportunity Fund support recipients will be required to certify each year after they have met their final service milestone that the network they operated in the prior year meets the FCC’s performance requirements. In addition, they will be required to identify the number, names, and addresses of community anchor institutions to which they newly began providing access to broadband service in the preceding calendar year as well as identify the total amount of support that they used for capital expenditures in the previous calendar year. Moreover, support recipients will need to certify that they have available funds for all project costs that will exceed the amount of support they will receive in the next calendar year. Finally, Rural Digital Opportunity Fund support recipients will be subject to the same annual certifications, the same record retention and audit requirements, and the same support reductions for untimely filings as all other high cost Eligible Telecommunications Carriers (ETCs).

Non-Compliance Measures

In the unlikely event of a water landing -- or the more likely event that a Rural Digital Opportunity Fund support recipient does not meet a service milestone -- the FCC has adopted the same non-compliance measures that are applicable to all high-cost ETCs, the same framework for support reductions applicable to high-cost ETCs that are required to meet defined service milestones, the same process the FCC adopted for drawing on letters of credit for the CAF Phase II auction, and measures for a support recipient that fails to meet its third-year service milestone by more than 50%. The measures are reflected in this handy-dandy chart:

Non-Compliance Framework

A support recipient will have the opportunity to move tiers as it comes into compliance and will receive any withheld support as it increases build-out and moves from one of the higher tiers (i.e., Tiers 2-4) to Tier 1 status during the build-out period. If a support recipient misses the six-year or eight-year service milestone as applicable, it will have 12 months from the date of the service milestone deadline to come into full compliance.

Next Steps

On February 28, the FCC will vote on a public notice launching the process of establishing pre- and post-auction application procedures and competitive bidding procedures to allocate up to $16 billion in Phase I of the Rural Digital Opportunity Fund. The FCC seeks comment on the appropriate minimum area for bidding in the Phase I auction to balance bidders’ need for flexibility against the need for an efficient and manageable auction. The FCC plans to collect public comment through April 10 before setting the procedures. 

Benton will track implementation of the Rural Digital Opportunity Fund and you can follow all the news via Headlines

Notes:

  1. State regulatory commissions (or, in some cases, the FCC) designate qualifying wireline and wireless carriers as Eligible Telecommunications Carriers (ETCs) to provide service in remote and underserved areas.
  2. A Rate-of-Return Carrier is any incumbent local exchange carrier not subject to price cap regulation.
  3. Low latency means 95% or more of all peak period measurements of network round trip latency are at or below 100 milliseconds. High latency means 95% or more of all peak period measurements of network round trip latency are at or below 750 milliseconds and a demonstration of a score of 4 or higher using the Mean Opinion Score with respect to voice performance.
  4. The FCC may adjust usage allowances based on average usage of a majority of fixed broadband customers.
  5. Except that year three non-compliance of 50% or more will result in default with no additional time to come back into compliance.
     

 

Quick Bits

Weekend Reads (resist tl;dr)

ICYMI from Benton

Upcoming Events

Feb 18 -- Everything is better with better broadband (Berkman Klein Center)

Feb 19 -- Section 230 – Nurturing Innovation or Fostering Unaccountability? (Department of Justice)

Feb 19 -- The Role of States in Expanding Broadband Access (NTIA)

Feb 20 -- Rural Broadband: Connecting Consumers and Empowering Small Businesses Across America (House Commerce Committee)

Feb 26 -- Disability Advisory Committee Meeting (FCC)

Feb 28 -- February 2020 Open Meeting (FCC)

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    Kevin Taglang

    Kevin Taglang
    Executive Editor, Communications-related Headlines
    Benton Institute
    for Broadband & Society
    727 Chicago Avenue
    Evanston, IL 60202
    847-328-3049
    headlines AT benton DOT org

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