Some Problems with the RDOF

The FCC recently published a set of proposed rules for conducting the $20.4 billion broadband grant program it has labeled as the Rural Digital Opportunity Zone (RDOF). While the FCC is to be applauded for redirecting the funding that formerly was used to support the CAF II program, there are still some problems I foresee in the grant program as proposed.

Reverse Auction. Many of my problems come because of the use of a reverse auction. I understand why politicians and policymakers like this idea. The general concept that those willing to take the least amount of subsidy get the funding somehow sounds fair, but a reverse auction is not going to result in the best use of these funds to bring permanent broadband solutions to rural America:

• Favors Those Who Don’t Need the Money. We saw this in the CAF II reverse auction where satellite broadband won a significant amount of funding. This time around there’s a good chance that a large amount of grant money might go to Elon Musk’s Starlink and the other low orbit satellite providers. By definition, for satellite technology to work they have to cover everywhere – and so they are going to be launching the satellites anyway without subsidy. These companies can easily be the low bidders because getting anything out of the grant fund is still a great result for them. As we going to be happy of the result of the reverse auction results in billions of dollars handed to Elon Musk?
• Favors Lowest Cost Technology. By definition, those planning to spend less per customer to bring broadband can take accept money from the grants and still be happy. This means the grants will favor solutions the big telcos again tweaking DSL over ancient copper if they choose to participate. This would allow AT&T and Verizon to grab a lot of money to support rural cellular upgrades. While the FCC is planning to weight the bidding to promote faster technologies like fiber, if the weighting isn’t done right, then the funding will automatically favor lower-cost yet slower technologies. Maybe that’s what the FCC wants – to bring some broadband solution to the largest number of people – but the best policy is to bring a permanent broadband solution to a smaller subset of areas.
• Discriminates Against High Cost Areas. The areas that need broadband the most are where it costs the most to build any infrastructure. Areas like Appalachia and Alaska are high cost because of topology, and anybody applying for grants in these areas likely can’t afford to reduce the percentage of grant funding their receive. The entire concept of reverse auction, by definition, favors parts of the country with the lowest construction costs. Applicants in the wide-open plains of the Midwest have a built-in advantage.

The Sheer Size of the One-Time Award. The grant awards are likely to be about a year away. I wonder if there will be enough ISPs ready to bid in that short time frame? Bidders need to develop an engineering estimate and business plan of sufficient quality to also attract financing. If there are not enough ISPs able to be ready for the auction in that time frame, even more of the money is likely to flow to big companies like the satellite providers who would be glad to take the whole pot of funding. A better plan would have been to break this into several grant years and award some 10-year grants, some 9-year grants, and some 8-year grants.

No Real Penalties for Cheating. Companies don’t get penalized much for lying about the speeds they can deliver. We saw a few wireless providers in the CAF II reverse auction claim they can deliver 100 Mbps broadband to everybody. Unless somebody develops that technology in the next 2-3 years they are going to deliver something less, at least to a large percentage of their coverage area. If a company gets a bidding credit by making a false claim, they should lose all of their funding and have to repay the FCC. The proposed penalties are not much more than a slap on the wrist and encourage companies to claim faster speeds than they can deliver.

Likely Excludes Some Bidders. The rules still seem to exclude entities that can’t get Eligible Telecommunications Carrier (ETC) status – a regulatory designation required to get money from the Universal Service Fund – a status only available to entities that own the network, and which are also the retail ISP. This would preclude entities like the PUDs, the rural municipal electric companies in Washington that are required by law to operate open access networks. It also could preclude certain kinds of partnerships where the retail ISP is different than the network owner – an arrangement we’re seeing a lot in partnerships between telcos and electric cooperatives. Anybody willing to invest in rural broadband should be eligible to participate.