Category Archives: Regulation – What is it Good For?

FCC Implements Broadband Labels

The FCC voted recently to implement consumer broadband labels. This was required by section 60504 of the Infrastructure Investment and Jobs Act. The new rules will become effective after the Office of Management and Budget approves the new rules and after the final notice is published in the federal register. ISPs will then generally have six months to implement the labels.

The labels look a lot like the nutrition labels that accompany food. The label will include basic information like a customer’s service plan name, the monthly price for standalone broadband, any special pricing that in place currently and when that special pricing expires, and a description of other monthly and one-time fees. The labels also must disclose the typical broadband speeds and latency.

It’s going to be interesting next summer to see how ISPs react to the label requirement. The pricing information alone must be giving shivers to the marketing folks at the biggest ISPs. This will make them list the price of standalone broadband to every customer and compare that to what the customer is currently paying. It’s been incredibly easy for consumers to subscribe to broadband in the past and never know the list price of what they are buying.

The requirement that I think will be the most controversial is the requirement to disclose the typical broadband speed and latency. I can’t wait until next year to see big ISPs implement this requirement. In the many surveys we have done, most consumers tell us that they have no idea of the speeds they are supposed to get – and that most of their monthly broadband bills don’t mention the speed.

Some ISPs will have a real dilemma with the speed disclosure.

  • It’s extremely challenging for a DSL or fixed wireless ISP to tell any customer the speed, since speeds vary from home to home and by the time of day. Even if one of these ISPs wants to disclose a reasonable estimate of speed, it’s hard to think how they can reasonably do so. I can’t imagine how these ISPs can provide a label to a prospective customer since the ISP won’t know the real speed until they try to connect to the customer.
  • What will ISPs do who have been exaggerating speeds in the FCC broadband reporting? Just to use an example I heard yesterday, there are places where Starlink reported 350 Mbps to the FCC where a customer was barely getting 50 Mbps. If ISPs report the FCC speeds to customers, they are going to hear a mountain of complaints from folks who aren’t seeing the high speeds. But if an ISP tries to be more truthful about speeds on the broadband label, it will have demonstrated that it has fudged the speeds for the FCC mapping.
  • The most interesting speed issue might be upload speeds. It’s hard to think that any cable company or WISP is going to report upload speeds under 20 Mbps because doing so would be an admission of not delivering broadband. But declaring 20 Mbps or faster upload speeds won’t sit well with customers who are getting something far slower.

We’ll have to wait and see, but my guess is that ISPs will report the same speeds to customers that are reported to the FCC. But an ISP that is exaggerating FCC speeds should be ready for an onslaught of customer complaints from customers that know the speeds on the label are not right. I think this is part of the reason why these labels were mandated – to force ISPs to come closer to telling customers the truth. But there are going to be some contentious years coming for ISPs that claim imaginary speeds on the broadband label or to the FCC.

The FCC is not quite done with the labels. The FCC issued a Future Notice of Proposed Rulemaking to solicit input on a few issues. One is how to include bundling on the labels. The surveys my firm does are still showing more than 50% of customers on bundles in urban areas, and bundling allows ISPs to hide the pricing for any component of the bundle.

The FNPRM also asks if there is a better way to disclose speeds, such as average speeds instead of typical speeds. Finally, the FCC is asking if ISPs should disclose network management policies that might harm consumers, such as blocking, throttling, or paid prioritization for some customers.

We won’t see the broadband labels in practice until at least next summer – but I’m expecting an uproar after folks see what ISPs say about prices and speeds.

How Good are the New FCC Maps?

The long-promised new FCC maps came out recently, and everybody rushed to see what the maps said about their own home. But a lot of folks looked deeper to try to understand the difference between this and earlier maps. There are two ways to judge the maps – the mapping fabric and the broadband coverage story.

The mapping fabric represents the FCC’s attempt to count the number of locations with or without broadband. They chose to do this by trying to put every potential broadband customer on the FCC map. The FCC hired CostQuest to create the mapping fabric, and the company used a variety of data sources to pinpoint locations on the fabric.

The State of Vermont has already sent a challenge letter to the FCC that says that 11% of the locations in the FCC mapping Fabric don’t match Vermont’s own data. Even worse, Vermont says that 22% of locations it knows about are missing from the FCC map.

I looked at my own neighborhood, which is deep inside Asheville, NC. My neighborhood was established one hundred years ago, and as I expected, most homes are shown on the FCC map. But the FCC maps did not show several new homes that were built here in the last few years. My guess is that the FCC maps generally do better in cities than in suburbs and total areas.

Vermont also looked at the broadband coverage claims by ISPs. According to the new maps, over 95% of Vermont homes have access broadband to broadband of at least 100/20 Mbps. The State created its own broadband maps, which show that only 71% of homes in the state could receive broadband at 100 Mbps or faster at the end of 2021. In looking at the data, the difference seems to come from claims on the new FCC maps that satellite and fixed wireless broadband can reach huge numbers of folks – something that is not true in hilly and wooded Vermont. There also are ISPs that have claimed speeds that are faster than what the State believes is being delivered.

Industry folks have said all along that the new maps are not going to be any better than the old ones if an ISP can claim any marketing speed it wants with no repercussions for exaggerating speeds. There seems to be a lot of work still needed if the new maps are going to be used to allocate BEAD funding to states and, more importantly, to define areas that are eligible for grant funding.

On a local level, the new reporting is interesting. For example, in looking around my city, I can now find the little pockets where AT&T has built a few blocks of fiber. There was no way in the past to be this granular. The new maps are going to drive a lot of folks crazy to see that fiber is only a block away.

The new maps also let me look at Charter’s coverage in more detail than ever before. It’s been said for years that the big cable companies don’t serve everybody in cities, and assuming that Charter is reporting coverage accurately, this can now be verified. I found little pockets all around my city where Charter doesn’t serve. The old FCC reporting by Census block normally showed everybody in a metropolitan area having access to cable company broadband. The new map also shows at the edges of the city how Charter hops over some neighborhoods to serve others that are farther out.

My own house shows a lot of ISP options, some of which don’t really exist. For example, there are several WISPs shown as covering my neighborhood. There is no way that is possible from where the towers are located due to the large hills in the city that creates huge wireless dead zones. The cellular broadband speeds reported were a little more accurate. Verizon doesn’t show coverage at my home at all – which is true since there are also zero bars of voice coverage at my end of the block. I’m not sure why T-Mobile even bothers reporting the 0.2 Mbps speeds – that might be true – but isn’t that really zero broadband? The satellite speeds reported at my house are improbable in a city surrounded by a bowl of mountains and a lot of trees.

For those who haven’t looked yet, here is the new map. I’d be interested to hear from anybody who was surprised by what the maps show for your home.

The RDOF Fixed Wireless Dilemma

I’m working with a number of rural counties that are trying to come to grips with the long-term implications of RDOF awards in their counties going to ISPs that plan to deliver broadband using fixed wireless technology. Most of them are not sure what to make of the situation for a number of reasons.

First, many of these counties are pleased about the wireless RDOF winners if that means bringing a broadband solution sooner. The folks in their counties are crying out for a broadband solution. But the big worry about the RDOF award winners is that the FCC gave RDOF winners a relaxed construction obligation compared to most other grants.

An RDOF recipient has six years to build the full broadband solution – starting with the year after the award. A recipient of a 2022 RDOF award must build 40% of the network by the end of 2025, 60% of the deployment by the end of 2026, 80% of the network by the end of 2027, and 100% of the network by the end of 2028. At the end of 2028, the FCC will publish a final list of locations in the RDOF area, and the ISPs have until the end of 2030 to reach any locations that were not already covered. Counties are rightfully worried that RDOF recipients will use the full timeline, meaning some folks won’t see a solution until 2027 or 2028.

There is also a concern that the FCC has a poor history of follow-through with subsidy awards, such as the many locations that were slated to get CAF II upgrades that don’t seem to have been upgraded – with no apparent reaction or consequences from the FCC. The fear is RDOF winners will cherry-pick the easiest areas and not bother with the rest and some folks will never get served. The worst thing is that a county won’t know for sure that folks won’t be served until 2028.

Another concern I’m hearing is that, in many cases, the RDOF awards were given in counties where there is one or more local ISPs willing to build fiber with grant assistance. These might be an electric cooperative or small telco that would willingly have brought fiber to the RDOF areas. These counties feel cheated by the FCC, particularly the RDOF awards that were made by the FCC after the announcement and funding of the $42.5 billion in BEAD grants. These counties feel that the FCC snatched away a fiber solution instead of putting the RDOF awards on hold.

The concern several of them have expressed is the sustainability of fixed wireless. They understand that a fiber network is probably going to still be in place and working at the end of this century, with perhaps three or four electronics upgrades during that time. But they’ve all heard that wireless technology has a shelf life of perhaps seven years, and they worry if the RDOF winners are going to be willing and able to pay for upgrades ten or eleven times during the rest of the century.

Finally, the ISPs in these counties are dismayed at what can best be described as the checkerboard way that the RDOF was awarded. The RDOF award areas are rarely nice contiguous service areas but are scattered pockets of Census blocks. ISPs can see that it is going to be extra challenging to find other grant funding to bring a solution to other areas. In many cases, they’ll have to spend their own money to build across RDOF areas in order to create a coherent fiber network.

Finally, some counties are concerned that the RDOF winners have not reached out to them to discuss these concerns and to convey their plans for bringing the promised faster broadband. I know that many of these awards were just made this summer, but there has been sufficient time for the RDOF winners to have met with local officials to convey their plans.

To be fair, some of these same counties have a similar list of concerns if grants go to the giant ISPs instead of somebody local. The folks in most rural areas know that the current round of grant funding is probably the only chance to get the broadband solution done right, and none of them want to be the poster child as a place where the giant grants and subsidies failed.

Restricting FCC Mapping Data

Last week, the FCC rejected dozens of requests from ISPs to keep confidential the method that the ISPs use to identify broadband coverage areas. This was prompted by the FCC requiring each ISP to explain to the agency how it determined broadband coverage areas in the latest round of gathering data for the FCC broadband maps.

Several dozen ISPs then asked the FCC to keep those responses confidential, with most ISPs arguing that the method of how customers are counted reveals proprietary data about the ISP networks. The FCC rejected all such arguments and commented that the public needs to know how customers and coverage areas are determined if there is to be any meaningful review and challenge of the FCC mapping data.

By the way, we now have some new industry acronyms. The FCC is referring to the new mapping process as the BDC (Broadband Data Collection initiative). A second new acronym is mapping fabric, meaning the underlying data that supposedly shows the location of every building in the country where somebody could order broadband. It’s always been hard to know if it’s deliberate but referring to regulatory efforts using new acronyms acts to confuse the public about what is going on. Somebody reading a news article talking about the BDC and challenges to the fabric likely has no idea what is being discussed.

All of this matters because the FCC has already started the process of allowing challenges to the mapping fabric. Local governments and ISPs are now able to challenge the locations of the ‘passings’, which are residential and business locations that could be a customer for broadband. There have been early comments made that there are a lot of errors in the fabric developed by CostQuest. There are some places where too many passings have been identified, such as a farm where there are multiple buildings, most of which are not candidates to buy a broadband subscription. I’ve also heard there are places where a lot of actual passings are missing from the map. Most confusing is that there are a lot of places in the country that nobody knows how to count – such as vacation cabins.

One of the biggest hurdles to the fabric challenge is that the FCC mapping fabric data is not widely available for the public to examine. CostQuest has provided free access to localities to review local data, although some local governments are saying that it has been a challenge to get access to the data. Unfortunately, the contract between CostQuest and local government restricts the use of the data only for purposes of challenging the fabric data. It seems a local government can’t disclose details about the fabric to its citizens.

The FCC mapping data is not being made available to the general public. This makes challenging the maps difficult for rural counties, which mostly don’t have the resources to take the time to understand, let alone challenge the maps. Keeping the data proprietary means that the general public can’t participate in this challenge. In many rural counties, there are ad hoc broadband committees that would devote the time and energy to understand the local maps. But local folks who are interested in broadband but who are not officially sanctioned by the local government are not being allowed access to the data. The data is also not available generically to nonprofits, consultants, or others that have the technical skills to analyze the data.

I guess this means that the mapping fabric challenge is supposed to be done by local governments that don’t have the staff, funding, time, or technical expertise to understand the mapping fabric, let alone suggest corrections. Most of the rural counties I know are not reviewing the fabric – meaning that nobody is reviewing the broadband data in the places that most need better broadband.

I know several folks who are trying to find out how this happened – how a commercial business like CostQuest is allowed to act as if it owns the mapping data. Apparently, the FCC contract with CostQuest has given the company the right to monetize the data. I hope after the facts are better known that Congress will step in and makes all FCC mapping data open to the public.

I wrote recently about the data divide – where public data is not making it to the folks that need it the most. The federal government is spending huge amounts of money developing maps that show areas with and without access to broadband. I can’t think of a single reason why this data isn’t available to everybody. But I can think of two reasons to keep the data restricted. First, this will tamp down on a raft of news articles talking about errors in the mapping fabric. The second reason is to give CostQuest the chance to monetize the process. In my opinion, these are both unacceptable ways to treat data that was created with taxpayer money.

Regulating Hidden Fees

Some of the big telcos and almost every large cable company uses what the industry calls hidden fees. These are fees that are not mentioned when advertising for a service but are put onto customer bills. The cable companies have the most egregious fees, in many cases over $20 per month for new video subscribers.

There is a class action lawsuit in California that shows why ISPs are not worried about using hidden fees. In times past, when the big companies were regulated, they might have been ordered to make a 100% refund of a fee that regulators decided was questionable. But the only realistic remedy against ISPs that misbill customers is a class action lawsuit or the rare ruling against a single ISP by the Federal Trade Commission.

There has been a class action lawsuit in California about the ‘administrative fee’ that AT&T charges to wireless customers. That fee started at $1 per month in 2013 and was raised to $1.99 in 2018. There is no basis for this fee – it’s just a portion of the cost of service split off into a separate charge. This lets AT&T advertise rates for $2 less than the actual fee charged to customers. Somebody buying a $60 advertised plan will actually pay $61.99 because of this fee.

The Verge reported earlier this summer that AT&T and the plaintiffs in a class action lawsuit reached an agreed settlement, and AT&T is refunding $14 million to California wireless subscribers who make a claim. The class action lawsuit claimed that AT&T billed the fee without notifying the public or advertising the fee. But even in agreeing to the settlement, AT&T refused to admit any wrongdoing and says it fully disclosed all fees.

This award shows why big carriers can bill hidden fees with impunity. The typical settlement for a customer that makes a claim under this lawsuit will be between $15 and $29, which is far less than the average amount of this fee collected by AT&T in California at $180 per subscriber. The worst part of the settlement is that AT&T will continue to bill the fee, so they’ll recover any settlement from customers over the next year. AT&T also knows that most eligible customers won’t make a claim. It was reported that AT&T notified customers of the possible claim by text – which many people assume is spam. The settlement only applies to California customers and not folks in the rest of the country. This is a minuscule slap on the wrist to AT&T.

Class action lawsuits are not a great tool for punishing bad behavior by carriers. Lawyers taking on these issues are taking a big chance that they will lose. Anybody filing such a suit has to spend a lot of time on discovery, made worse because carriers will typically drown plaintiffs with mountains of documents in response to data requests. The lawyers employed by large corporations are generally the best around, and many class action suits never reach completion. In this case, the class action lawyers will receive $3.5 million from the settlement – but they likely spent a lot of money over many years to get the case to a settlement.

The real solution to holding ISPs accountable is strong regulation. In an ideal world, the FCC or the California Public Utilities Commission would have ordered a full refund to customers that were harmed by misdeeds by a carrier. I didn’t do the research in writing this blog, but I assume that neither regulatory body felt it had that authority in this instance – or else they chose not to take it on. That’s certainly not surprising on the Federal side since the FCC under Ajit Pai prided itself on a shift to light-touch regulation – which is a euphemism for basically no regulation at all. When I broke into the industry in the 1970s, regulators would have made a carrier rebate every cent of an overbilling, so carriers were cautious about trying something like the administrative fee.

It is within the purview of the Federal Trade Commission to tackle this sort of issue, but the agency only has the manpower to pursue a limited number of cases against bad behavior of industries of all types. Companies like AT&T know that the risk of having an issue like this brought before the FTC is tiny. And even if it happened, the company would not likely have to return all of the improperly charged fees.

Hidden fees are an interesting issue because it’s clear that hidden fees give carriers a marketing edge when competing against companies that don’t have hidden fees. The intent of carriers is to hide the fees or at least make it hard for a prospective customer to know about the fees. The issue with hidden fees is not that a company divides a fee for service into several pieces – it’s that the full fees are not disclosed. ISPs and carriers are not the only ones using hidden fees, and President Biden said last month that the administration is going to crack down on hidden fees from the airline and travel industry.

Funding the Universal Service Fund

The FCC’s Universal Service Fund (USF) has been a mainstay in the telecom industry since it was created in 1997 as a result of the Telecommunications Act of 1996. That Act explicitly ordered the FCC to adopt the following universal service principles – all of the FCC’s actions with the USF are derived from these simple principles.

  • Promote the availability of quality services at just, reasonable, and affordable rates.
  • Increase nationwide access to advanced telecommunications services.
  • Advance the availability of such services to all consumers, including those in low-income, rural, insular, and high-cost areas, at rates that are reasonably comparable to those charged in urban areas.
  • Increase access to telecommunications and advanced services in schools, libraries, and rural health care facilities.
  • Provide equitable and non-discriminatory contributions from all providers of telecommunications services for the fund supporting universal service programs

The size of the USF has remained stable over the last decade, with USF disbursements in 2012 of $8.7 billion and 2021 disbursements of $8.5 billion. The USF is funded by an assessment on interstate telecommunications services. This includes a variety of telecommunications services – with the largest source of funding being assessed in landline telephone service, interstate long-distance, cellular and texting services, interstate private lines, and a host of smaller telecommunications services.

The USF is facing a big challenge because keeping the size of the USF stable has been an ever-increasing burden on those paying into the fund since interstate services have been steadily declining. To put this into perspective, the assessment on interstate services was 16.7% in the first quarter of 2017 and grew to 33% in the third quarter of 2022.

In the IIJA legislation, Congress ordered the FCC to take a fresh look at the USF. It ordered the agency to explore both the uses of the USF and the sources of USF funding.

The FCC reported back to Congress as ordered, and the FCC largely said that it still believes that its uses of the USF funding are appropriate and should continue into the future. There are critics of many of the functions funded by the USF, such as the 2020 RDOF reverse auction, but there is nearly universal support of programs like supporting broadband for schools and rural healthcare.

As part of the review of the USF, the FCC considered two funding ideas:

  • One of the easiest ways to spread the costs of funding the USF would be to expand the assessments to include broadband. This would lower the assessment rate from 33% to some tiny amount depending on how the assessment for broadband is calculated.
  • The FCC also explored the idea of assessing USF to “edge providers,” which are the large Internet firms such as streaming video providers, digital advertising firms, and cloud services companies – companies like Netflix, Facebook, and Amazon. This would shift most of the burden for funding the USF from the public to businesses – although businesses typically pass USF fees back to the public. But edge providers that offer free services like Facebook, Twitter, and Google search would have to eat the cost of such assessments.

The FCC decided not to take a position on the two funding ideas. The report to Congress said that the agency probably doesn’t have the authority to expand the USF assessment to these two groups of payers. The FCC thinks that Congress would have to act to change the method of USF assessments.

It will be interesting to see if Congress decides to take up the USF issue. One of the key issues facing Congress will be deciding if it wants to fund and continue the ACP program that provides a $30 discount from broadband for low-income homes. Congress assigned the operation of that fund to USAC, a non-profit organization that works under FCC guidance to operate the USF.

I have to think there are those in Congress that take exception to the FCC’s assessment that it is using the USF wisely. There are a lot of critics of recent programs like CAF II and RDOF. There have been plenty of critics of the Lifeline program, and I assume there are those against continuing the ACP low-income discounts. One of the risks that the FCC faces is that Congress might decide to resize or eliminate programs if it takes up the issue.

Please Don’t Force Low Rates

The NTIA conducts an annual broadband survey, and the 2021 survey asked a question about affordability. The survey asked folks who didn’t have home broadband what they would be willing to pay, with the question, “At what monthly price, if any, would your household buy home Internet service?”

The NTIA estimates that there are over four million households that say they can’t afford broadband. The purpose of the survey was to understand the kind of price points that might be needed to get broadband to more of these households. I think the NTIA was surprised by the results – three-quarters of respondents said they would only get broadband if it was free.

I find this result to be troubling for several reasons. First, many of the homes in this category are the poorest homes that truly can’t afford broadband. I’m sure many of the folks who say they can’t afford broadband would love to have it like most of the rest of us. But as important as broadband is, it’s not more important than rent and food.

My second problem is that not everybody who says they can’t afford is telling the truth. How do I know this? My firm has been doing surveys in the industry for over twenty years, and we’ve asked some version of the same question in hundreds of surveys. What I have discovered is doing surveys is that the responses to any survey questions involving money are not fully reliable.

This is well-known by folks who give surveys for a living. As an example, as many as half of survey respondents give a false answer when asked the level of family income. There are a lot of conjectures about why this is so, but surveyors know you can’t fully trust the responses to most questions involving money.

A question I’ve often asked is what people would like to pay for broadband. That’s a little different than the question being asked by the NTIA, but not much different. The big difference is that we ask this question to everybody, not just those who say they can’t afford broadband. It’s not usual to see 20% or 30% of respondents saying they don’t want to pay more than $10 or $15 per month. Most of the people giving that response are already paying $60 or $70 per month for broadband. I have no doubt that the responses about wanting low rates are serious – folks really would love to save money. But the responses I see are clearly reflecting what folks wish that broadband cost, which is different than what they are willing to spend – we already know they are spending a lot more. ISPs that get this survey response never know what to do with the answer – they know they can’t afford to sell broadband at super-low rates if they want to stay in business.

My biggest concern is what the NTIA or State Broadband Offices will do with the results of this survey. I’m afraid they are going to come out with a policy that ISPs must offer a $30 broadband rate coupled with the $30 ACP plan reimbursement for qualifying homes. This would provide broadband to the homes that really can’t afford broadband – but it would also give low-price broadband to a lot of homes that are willing to pay more, but who will gladly take the discount.

I’ve looked at dozens of rural broadband feasibility studies this year, and most rural ISPs absolutely cannot make the business work if some portion of customers is only paying $30 (through the ACP). I’ve looked at a lot of plans where the rates have to be $60, $70, or even $80 for the ISP to cover all costs – particularly the debt used to provide grant matching funds.

The NTIA isn’t supposed to be able to direct rates in the BEAD grants. The IIJA legislation clearly says that the NTIA cannot force any kind of price control on grant applicants. But that doesn’t mean they can’t try this in a backdoor way, such as giving more grant points to ISPs willing to offer super-low rates. That probably doesn’t qualify as forcing low rates, but it sure feels the same.

My last trouble is that I sympathize with the NTIA if they try this. The agency wants to get broadband into every home, and the only way to do this for the poorest homes is to make broadband somehow free. I know that rural cooperatives and telephone companies might try to make this work. But as I tell all of my clients – you have to let the numbers speak. If an ISP needs $70 rates to break even and then offers a $30 broadband product as a way to get grants, they are going to put the entire business at risk if too many people take that product.

I know forcing low rates is tempting, and it would feel like a good policy. But you can’t put rate pressure on ISPs willing to work in rural areas where costs are already sky-high. If the government wants the poorest homes to get broadband, the right solution is to something like putting more money into the ACP. The right solution is not to ask ISPs to shoulder the economic burden of too-low rates.

Digital Equity Foundation Act

In an interesting bill before Congress, Senator Ray Lujan of New Mexico and Representative Doris Matsui of California introduced the Digital Equity Foundation Act of 2022. This bill would create a nonprofit organization called the Foundation for Digital Equity that would work to leverage public and private funds to solve the digital equity gap. Within six months after the bill is passed, the Secretary of Commerce would be required to establish a nonprofit corporation called the Foundation for Digital Equity.

It’s an interesting concept because it would create an organization that would bridge government and philanthropic organizations to formally tackle problems associated with digital equity. The Foundation would have four specific goals:

  • Work to raise funds from philanthropic organizations, businesses, and state and local governments to tackle issues associated with digital literacy, digital inclusion, and digital equity.
  • Work to promote partnerships and collaborations that would tackle specific hands-on projects that would further digital equity goals.
  • Promote equitable access to broadband and associated applications like telehealth, distant learning, and e-government.
  • Work to supplement programs from the NTIA that are aimed at solving digital equity issues.

The Act gives the Foundation a wide scope of operations and suggests a number of different activities that the Board would be free to pursue. Some examples include:

  • Conduct and support studies, competitions, and projects.
  • Award digital equity, digital inclusion, and digital literacy grants (I assume the grants would be funded by the private sector).
  • Support training programs related to digital equity for researchers, scientists, government officials, and those in higher education.
  • Create for-profit subsidiaries to stimulate economic development.
  • Engage in data collection related to inequities and community needs related to digital equity.
  • Write, edit, print, publish, and sell books and other materials relating to efforts carried out by the Foundation, the Department of Commerce, or the FCC.
  • Developing a publicly available evaluation process to enable communities to identify and quantify digital equity problems.

The Foundation would not be a government agency but instead would be a 501(c) nonprofit. However, there would be some government funding to pay for the administrative operation of the Foundation. Interestingly, donations to the Foundation would not be tax deductible. The governance of the Foundation would start with a Committee of named government officials who would have six months to seek a Board of five non-compensated Board members to permanently operate the Foundation. At least three of the Board members must have broad and general experience with digital equity, digital inclusion, or digital literacy. One member must have experience working with private nonprofit organizations. The Secretary of Commerce, the Director of the NTIA, the Chairman of the FCC, the Secretary of the Treasury, and the Under Secretary of Agriculture for Rural Development will also serve as non-voting members of the Board.

This is an interesting approach and recognizes that it’s going to take a long time to tackle digital equity problems. The IIJA provides for $3 billion in digital equity grants over the next three years, but this Act recognizes that a long-term approach is needed to go beyond the work started with these grants.

The one thing I’ve learned about digital equity in the last year is that the only successful approach requires working with people one by one. Somebody has to sit with the recipient of a first computer to help them learn how to use it. Training somebody to effectively use the web requires individual training. This Foundation is not going to itself solve any digital equity problems. But if done well, it will match government, philanthropic, and business donations with organizations that are going to do the hard work that is needed.

Taxability of Grant Funding

Congress will be considering a bill in a lame duck session after the election to make grant revenues non-taxable. This is a big deal because making grants taxable was another huge hurdle for smaller ISPs to accept large amounts of grant funding. The new legislation is co-sponsored by Senators Mark Warner (D-Va.) and Jerry Moran (R-Kan.). They are hoping the bill will be considered as part of a larger tax bill that will consider other issues like keeping the government open past December, extending the President’s enhanced child-care credit, and other tax and financial issues.

Grant funding is normally taxable. The majority of federal grants go to state and local government agencies, which by definition don’t pay income taxes. But folks like businesses and scientists that accept grant funding have always had to declare the grant funding as income. That makes a lot of sense for a grant that is largely used to pay salaries – the grant is income while the salaries are deductions, and there would typically be little tax liability for most grant recipients.

But that’s not true for grants used to build infrastructure. Consider a $20 million grant to build fiber. If grant income is taxable, a grant recipient accepting the grant in one year will incur roughly a $4.2 million federal tax liability for the year. Over the next 20-30 years, the grant recipient will see taxable income reduced by the original $20 million as the grant recipient writes off the asset through depreciation expense. Theoretically, a $20 million grant recipient has no overall tax liability over the life of the grant assets. But a grant recipient must write a big check to the IRS now and wait for decades to slowly get the money back.

No ISPs like the idea of a huge upfront tax bill as the cost of taking a grant. The largest ISPs can handle this since their corporations have a lot of cash. This is not true for smaller ISPs. I know very few small ISPs who sit with million of cash in the bank that could be used to cover the instant tax liability. Having to pay this tax is a major disincentive to taking grants – and could be a disaster for an ISP not ready to make the big tax payment.

The IRS used to have the authority to make this kind of change, but that ability was rescinded in the big tax bill that passed in 2017. The IRS waived the taxability of grants in 2009 for broadband infrastructure grants that were awarded under the BIP and BTOP programs. But with the IRS out of the picture, it now requires a specific Act of Congress to excuse the taxability for broadband grants.

This taxability issue doesn’t only apply to the big upcoming $42.5 billion in BEAD grants but to all other broadband grants. The billions in grants being awarded by the NTIA, the USDA ReConnect program, and the many state broadband grants are also taxable. Even should Congress pass this law, it’s unlikely that it will reach back to past years to excuse grants taken recently.

ISPs in most states must also contend with the state income taxes that would follow the grants. Most states automatically adopt changes made in federal tax laws – but a few do not and would also need legislative intervention to exclude infrastructure grants from taxability.

ISPs should reach out to legislators in the coming month to be heard on the issue. If this law doesn’t pass, I foresee grant recipients that will be unable to make the needed large tax payments immediately after accepting grant funding. This is one more item that will significantly add to the cost of accepting grant funding – and in many cases, will make it infeasible to accept funding for rural broadband projects that are barely going to break even.

Starlink and RDOF

In August, the FCC denied the SpaceX (Starlink) bid to receive $885 million over ten years through the RDOF subsidy. This is something that Starlink won in a reverse auction in December 2020.

In the press release for the rejection, FCC Chairman Jessica Rosenworcel was quoted as saying, “After careful legal, technical, and policy review, we are rejecting these applications. Consumers deserve reliable and affordable high-speed broadband. We must put scarce universal service dollars to their best possible use as we move into a digital future that demands ever more powerful and faster networks. We cannot afford to subsidize ventures that are not delivering the promised speeds or are not likely to meet program requirements.”

The FCC went on to say in the order that there were several technical reasons for the Starlink rejection. First was that Starlink is a “nascent” technology, and the FCC doubted the company’s ability to deliver broadband to 642,925 locations in the RDOF areas along with serving non-RDOF areas. The FCC also cited the Ookla speed tests that show that Starlink speeds decreased from 2021 into 2022.

Not surprisingly, Starlink appealed the FCC ruling this month. In the Starlink appeal, the company argued, “This decision is so broken that it is hard not to see it as an improper attempt to undo the commission’s earlier decision, made under the previous administration, to permit satellite broadband service providers to participate in the RDOF program. It appears to have been rendered in service to a clear bias towards fiber, rather than a merits-based decision to actually connect unserved Americans”.

Rather than focus on the facts in dispute in the appeal, today’s blog looks at the implications on the broadband industry during the appeal process. Current federal grant rules don’t allow federal subsidies to be given to any area that is slated to get another federal broadband subsidy. This has meant that the RDOF areas have been off-limits to other federal grants since the end of 2020. This has included NTIA grants, USDA ReConnect grants, and others. Federal grant applicants for the last few years have had to carefully avoid the RDOF areas for Starlink and any other unresolved RDOF award areas.

As a reminder, the RDOF areas were assigned by Census block and not in large coherent contiguous areas. The RDOF award areas have often been referred to as Swiss cheese, meaning that Census blocks that were eligible for RDOF were often mixed with nearby ineligible Census blocks. A lot of the Swiss cheese pattern was caused by faulty FCC maps that excluded many rural Census blocks from RDOF that should have been eligible, but for which a telco or somebody else was probably falsely claiming speeds at least 25/3 Mbps.

ISPs that have been contemplating grant applications in the unresolved RDOF areas were relieved when Starlink and other ISPs like LTE Broadband were rejected by the FCC. It’s difficult enough to justify building rural broadband, but it’s even harder when the area to be built is not a neat contiguous study area.

The big question now is what happens with the Starlink areas during an appeal. It seems likely that these areas will go back into the holding tank and remain off-limits to other federal grants. We’re likely going to need a definitive ruling on this from grant agencies like the USDA to verify, but logic would say that these areas still need to be on hold in case Starlink wins the appeal.

Unfortunately, there is no defined timeline for the appeal process. I don’t understand the full range of possibilities of such an appeal. If Starlink loses this appeal at the FCC, can the agency take the appeal on to a court? Perhaps an FCC-savvy lawyer can weigh in on this question in the blog comments. But there is little doubt that an appeal can take some time. And during that time, ISPs operating near the widespread Starlink grant areas are probably still on hold in terms of creating plans for future grants.