The Rush to Complete CAF II

I’ve noticed that the big telcos are talking about efforts they are making this year to complete their obligations under the CAF II grant rewards that gave them over $9 billion to improve rural broadband to speeds of at least 10/1 Mbps. The telcos have had six years to make the upgrades and those upgrades must be finished by the end of this year.

It’s easy to understand why the telcos want to finish the required upgrades for which they’ve been paid. The FCC’s Universal Service statutes define the penalties for failure to comply with the mandates of CAF II in 47 CFR § 54.320 – Compliance and Recordkeeping for the High-cost Program.

The rules outline that the FCC can withhold USF payments to the telcos for missing interim deadlines. For example, CenturyLink reported to the FCC at the end of last year that it had not met all of the required upgrade goals that were to be completed by the end of 2019. The FCC should have responded to that notification by withholding some of the 2020 payments to CenturyLink until the company comes into compliance with its obligations. But as long as the telco finished the required upgrades by the end of 2020, it eventually will receive all of the CAF II funding.

But failure to meet the final milestone in 2020 obligations brings harsh penalties. If a telco doesn’t complete the CAF II construction by the end of this year, the FCC is obligated in these rules to recover 1.89 times the amount of subsidy provided to the telco to make the upgrades, plus 10% of the total support provided to a carrier over the term of the program.

The amount of CAF II awards vary by locality, but the average CAF II grants were for between $2,000 and $3,000 per household in the CAF II areas, meaning the penalties would be between $3,800 and $5,700 per household that didn’t see a CAF II upgrade plus 10% of the total support for a given area. That’s a substantial and permanent penalty and it’s no wonder that the telcos are pushing to complete CAF II.

Once a telco has certified that the CAF II upgrades are complete there are other penalties if the upgraded areas don’t deliver the speeds required by the CAF II program – in this case, speeds of at least 10/1 Mbps. Compliance with these rules is verified with FCC-mandated speed tests.

The testing rules are weighted heavily in the ISP’s favor. To keep full funding, a telco must achieve 80% of the expected upland and download speed 80% of the time. This means that the big telcos must only achieve a download speed of 8 Mbps for 80% of customers to meet the CAF standard. The 10/1 Mbps target was low enough, but the FCC testing rules make it a lot easier for ISPs to meet the CAF II obligations. There are financial penalties for ISPs that don’t meet the FCC tests. For example, ISPs that have between 85% and 100% of 80% threshold lose 5% of their FCC support. At the upper extreme, ISPs with less than 55% of the 80% threshold lose 25% of their support.

Consider what these two sets of rules mean for the big telcos. The big penalties come if a telco is honest and tells the FCC that they didn’t complete the CAF II build-out at the end of 2020. In that case, the telco would have to give back more than two times the subsidy it received for each household that doesn’t get upgraded.

However, if a big telcos says they met the buildout requirements, their potential penalty is reduced to 25% of the CAF II subsidy for areas where there were no upgrades. And that penalty assumes that the areas that weren’t upgraded are tested by the FCC. The FCC testing rules allow the telcos to provide inputs on where to test.

I’ve heard a lot of anecdotal evidence that that Frontier and a few other telcos didn’t make some of the needed CAF II upgrades. There are whole counties where recent wide-spread speed testing didn’t find any rural customers getting speeds faster than 5 Mbps download. The telcos still have until the end of this year to complete CAF II, so it’s premature to know that these areas won’t get CAF II upgrades. But if the rumors I’ve been hearing are true, the telcos can falsely declare to the FCC that they made the upgrades and then take their chances during the testing process that the full extent of their cheating won’t be detected.

There are huge parts of rural America that seemingly have been shortchanged by the CAF II program. The sad consequence of this is that these households would have been able to eke by during the COVID-19 crisis if they had been provided with 10/1 Mbps broadband. What I heard from all over the country is that households in the CAF II areas have seen no improvements in DSL over the six years of the CAF II program.

If the FCC really wants to do the right thing it would ask for local feedback at the end of the CAF II program at the end of this year. The FCC can map every household on Google Maps that should have gotten a CAF II upgrade, and there are local officials all over rural America who would love to verify if these upgrades brought anything close to 10/1 Mbps speeds. Instead, I expect the FCC to quietly sweep the whole CAF II topic under the rug, and we’ll likely never hear much about it after the end of this year.