Funding the USF Broadband Programs

A number of telecom advocacy groups came together recently to ask the FCC to increase the budget for the high-cost portion of the Universal Service Fund to at least $2.4 billion for the next fiscal year just begun on October 1. The joint filing was by ITTA – The Voice of America’s Broadband Providers, USTelecom – The Broadband Association, NTCA – The Rural Broadband Association and WTA – Advocates for Rural Broadband.

Small telcos are specifically asking that the FCC fully fund the commitments made to them in 2016 for the A-CAM program. This is the fund that is providing money to rural telcos to upgrade their networks to at last 25/3 Mbps – although it seems like most companies are using the money to upgrade to fiber. That program is bringing a permanent broadband solution to numerous rural communities.

The A-CAM and other high-cost support programs are not currently fully funded. This is due to several factors. First, more small telcos accepted A-CAM funding than the FCC anticipated, creating a bigger financial commitment than was expected. But more importantly, the FCC has been tapping the Universal Service Fund for other broadband commitments such as the CAF II program that gave billions to the large telcos to upgrade to only 10 Mbps. This same fund is also used to provide e-rate funding for schools to get affordable broadband, to support libraries, to support rural healthcare and to provide the lifeline program to make telephone and broadband more affordable for low-income households.

It would be a challenge for the FCC to meet the request and I’m not sure there is an easy way for them to do so. The Universal Service Fund is funded by fees assessed against landline telephone service, cellphone service and against broadband connections that are deemed to be interstate in nature – these are generally broadband connections sold by regulated telcos using the soon-to-be-obsolete TDM technology.

This fee is an additive to these services and the rate being charged has climbed over the years as the number of both landline telephones and special access transport circuits has dropped. In the last quarter the assessment topped 20% for the first time and has climbed over the years. I can recall when the assessment was under 5%.

This all creates a dilemma for the FCC. The revenues against which USF can be assessed are shrinking. Landline use continues to plummet; cellphone prices are trending downward and special access is being displaced by other kinds of transport. As much as the FCC might want to fully fund rural broadband, it has numerous other obligations to meet from the same pile of money like the e-rate program and rural healthcare broadband.

There has been talk for years of expanding the USF base. If the USF fee was assessed against home and business broadband the overall percentage would plummet from today’s 20% rate. However, Congress nixed the idea of assessing USF against broadband by sticking to the philosophy that we should not tax the Internet. This was a concept that was introduced when broadband was a fledgling industry, which somehow became a mantra that is outdated. Broadband revenues dwarf the fees for products like landline telephone service.

The FCC’s hands are tied from assessing USF against broadband by Congress. But even if Congress changed their mind, the FCC has now given up regulation of broadband and they might not have the authority to assess a fee on a product they declare they don’t regulate.

It’s to everybody’s benefit that the FCC finds a way to fund commitments they made for rural broadband just a few years ago. The FCC has some latitude and they could probably apply all fund shortfalls against another program like CAF II – but with the lobbying power of the big telcos that’s unlikely.

The FCC also has another huge source of revenue they could tap. The agency has been collecting gigantic fees for the auction of spectrum in recent years and there is no reason that all or part of this money couldn’t be diverted to rural broadband. However, this also would require action by Congress, which directly diverted auction fees to the US treasury earlier this year when they enacted the Ray Baum bill.

The funding shortfalls are mostly the result of the FCC committing more funds than are available in the fund. Since the USF is funded by fees on services, the fund can’t have cost overruns and spend more money than it has – unlike many other government programs. Every time I hear the FCC announce a new initiative out of the Universal Service Fund I always wonder which other parts of the fund will be raided. I think we now know that it’s funding for rural broadband.

Upgrading FCC Broadband Statistics

The NCTA – The Internet & Television Association that represents the large cable companies and telcos has filed a complaint with the FCC asserting that the agency is not updating broadband maps in a timely manner, and this is understating the amount of broadband deployed in the country.

They have a good point, in that the FCC recently released broadband data from 2016 while they already have received June 2017 data. The recently released data is now more than two years behind the actual broadband deployments in the country.

There may have been years in the past where this kind of time delay didn’t make that much difference, but we are now at a time when there are massive amounts of broadband upgrades happening across the country. The big telcos are well into the CAF II upgrades that are upgrading huge swaths of rural America to speeds of at least 10/1 Mbps. There is a lot of upgrades at smaller telcos that are implementing upgrades from the A-CAM program that requires upgrades to at least 25/3 Mbps – although many of them are upgrading to fiber with gigabit speeds. We now see cable companies starting to implement DOCSIS 3.01 upgrades that can increase their download speeds to a gigabit. And there are numerous overbuilders upgrading broadband all over the place by building fiber or fixed wireless technology. We will soon see the CAF II reverse auctions building yet more rural broadband, with a significant percentage of those upgrades being at 100 Mbps or faster.

This means that the FCC’s broadband maps and the underlying databases are far out of synch and provide the wrong narrative about broadband coverage. The members of NCTA want to get credit for the upgrades they are making, which means that numerous households are no longer considered as unserved, with many of them getting a broadband option for the first time.

There are practical and policy ramifications due to the delay in upgrading the maps. For example, some of the federal loan and grant programs score applicant projects according to whether they are upgrading rural areas that are unserved or underserved – and the FCC data overstates the households that are classified as unserved.

There are also real-life implications for communities. Consider Otter Tail County, Minnesota. Looking at the current FCC maps shows the County with a paltry 2% of households able to get download speeds of 100 Mbps. That is a truthful depiction just looking back a year or two. The cable companies serving the towns in the County have had maximum speeds of no more than 60 Mbps and the rural areas all have broadband using DSL, fixed wireless or satellite.

However, that map doesn’t reflect what’s happening in the County today and what will be happening there in the next few years. Charter has promised to upgrade to faster speeds nationwide and their customers in the County ought to be at speeds far above the 100 Mbps threshold. A lot of the rural areas are served by small telcos that are using A-CAM funding to build fiber. In this past summer alone there were dozens of construction crews building fiber around the County. There are also a few pockets of the County that have gotten upgrades to fiber that were assisted with broadband grants from the State of Minnesota. My quick assessment show that the County will soon have 100 Mbps broadband for 70% to 80% of households when the known upgrades are finished over the next few years. And even most of the areas not getting 100 Mbps broadband will still be seeing speed improvements. That facts on the ground in Otter Tail County paint a drastically different picture than what is shown by the current FCC maps. I have no doubt that this same thing is true in numerous other rural counties.

I understand that the FCC wants to use actual data to create their maps. But I’m mystified why they don’t want to brag about the programs they have sponsored that will improve broadband. It should be easy for them to overlay a map of the expected upgrades that will come from the CAF II and A-Cam programs. These future-looking maps are a better picture of the rural broadband situation.

There are obviously numerous upgrades happening that the FCC can’t know about – they have no way of knowing about upgrades being done with non-FCC funding. But there isn’t much excuse for the FCC to be issuing data and maps that are more than two years out of synch at the date of publication. It’s not a difficult  technical challenge to quickly map ISP broadband data as it’s submitted – numerous states already readily create their own versions of these maps. And it shouldn’t be hard for the FCC to create overlays showing the upcoming successes due to the upgrades they have fostered.

$600M Grants Only for Telcos?

The Omnibus Budget bill that was passed by Congress last Thursday and signed by the President on Friday includes $600 million of grant funding for rural broadband. This is hopefully a small down payment towards the billions of funding needed to improve rural broadband everywhere. As you might imagine, as a consultant I got a lot of inquiries about this program right away on Friday.

The program will be administered by the Rural Utility Service (RUS). Awards can consist of grants and loans, although it’s not clear at this early point if loan funding would be included as part of the $600 million or made in addition to it.

The grants only require a 15% matching from applicants, although past federal grant programs would indicate that recipients willing to contribute more matching funds will get a higher consideration.

When I look at the first details of the new program I have a hard time seeing this money being used by anybody other than telcos. One of the provisions of the grant money is that it cannot be used to fund projects except in areas where at least 90% of households don’t already have access to 10/1 Mbps broadband. One could argue that there are no longer any such places in the US.

The FCC previously awarded billions to the large telcos to upgrade broadband throughout rural America to at least 10/1 Mbps. The FCC also has been providing money from the A-CAM program to fund broadband upgrades in areas served by the smaller independent telephone companies. Except for a few places where the incumbents elected to not take the previous money – such in some Verizon areas – these programs effectively cover any sizable pocket of households without access to 10/1 broadband.

Obviously, many of the areas that got the earlier federal funding have not yet been upgraded, and I had a recent blog that noted the progress of the CAF II program. But I have a hard time thinking that the RUS is going to provide grants to bring faster broadband to areas that are already slated to get CAF II upgrades within the next 2 ½ years. Once upgraded, all of these areas will theoretically have enough homes with broadband to fail the new 90% test.

If we look at past federal grant programs, the large incumbent telcos have been allowed a chance to intervene and block any grant requests for their service areas that don’t meet all of the grant rules. I can foresee AT&T, CenturyLink and Frontier intervening in any grant request that seeks to build in areas that are slated for near-term CAF II upgrades. I would envision the same if somebody tried to get grant money to build in an area served by smaller telcos who will be using A-CAM money to upgrade broadband.

To make matters even more complicated, the upcoming CAF II reverse auction will be providing funds to fill in the service gaps left from the CAF II program. But for the most part the homes covered by the reverse auctions are not in any coherent geographic pockets but are widely scattered within existing large telco service areas. In my investigation of the reverse auction maps I don’t see many pockets of homes that will not already have at least 10% of homes with access to 10/1 broadband.

Almost everybody I know in the industry doesn’t think the large telcos are actually going to give everybody in the CAF II areas 10/1 Mbps broadband. But it’s likely that they will tell the FCC that they’ve made the needed upgrades. Since these companies are also the ones that update the national broadband map, it’s likely that CAF II areas will all be shown as having 10/1 Mbps broadband, even if they don’t.

There may be some instances where some little pockets of homes might qualify for these grants, and where somebody other than telcos could ask for the funding. But if the RUS strictly follows the mandates of the funding and won’t provide fund for places where more than 10% of homes already have 10/1 Mbps, then this money almost has to go to telcos, by definition. Telcos will be able to ask for this money to help pay for the remaining CAF II and A-CAM upgrades. There is nothing wrong with that, and that’s obviously what the lobbyist who authored this grant language intended – but the public announcement of the grant program is not likely to make that clear to the many others entities who might want to seek this funding. It will be shameful if most of this money goes to AT&T, CenturyLink and Frontier who were already handed billions to make these same upgrades.

I also foresee one other effect of this program. Anybody who is in the process of seeking new RUS funding should expect their request to go on hold for a year since the RUS will now be swamped with administering this new crash grant program. It took years for the RUS to recover from the crush of the Stimulus broadband grants and they are about to get buried in grant requests again.

A-CAM – A Subsidy that Works

Yesterday I compared the broadband grant programs in California and Minnesota. There are currently two federal broadband funding programs that are producing drastically different results that are worth a comparison. I’ve written a number of blogs complaining about the inadequacies of the FCC’s CAF II program for the largest telcos in the country. Companies like AT&T, Verizon, Frontier and other big telcos accepted the federal subsidies to upgrade the rural parts of their service territories. That program requires the carriers to upgrade rural facilities to be able to deliver broadband speeds of at least 10 Mbps download and 1 Mbps upload. The upgrades also need to have latency less than 100 ms (which is a dreadful latency if near to that threshold).

AT&T and Verizon say that they plan to mostly meet their obligations by converting rural copper lines to cellular connections. Most of the other telcos, which aren’t in the cellular business plan instead to upgrade rural DSL. A few, like Frontier Communications say that they plan to upgrade some customers using point-to-multipoint wireless networks.

But they key element of all of this is the 10/1 Mbps broadband speeds. The CAF II program is spending $10 billion dollars over six years to upgrade 4 million homes to at least the 10/1 Mbps speed. Since most of these households have had little or no broadband today those speeds are going to be the first time that many of these homes get any kind of a broadband connection. But the 10/1 Mbps speeds are already obsolete for any home that wants to use broadband the same as urban households, allowing multiple users and devices on the network simultaneously.

The FCC also has a lesser-known broadband subsidy program aimed at the smaller telephone companies. This program is called A-CAM (Alternate Connect America Cost Model). The A-CAM program is paying out a little over $1 billion per year for ten years and will support a broadband upgrade to 4.9 million households. Just under half of the money is aimed at upgrades to supply at least 25/3 Mbps, with the rest aimed at the same slower 10/1 threshold as the CAF II program for the bigger telcos.

The A-CAM program gets interesting when you look at what the small telcos are actually doing with this funding. While the big telcos in the CAF II program area upgrading to just enough speeds to get them over the 10/1 Mbps requirement, many small telcos are doing a lot more. All around the country there are small telcos using the A-CAM funding as the seed money to finance and build fiber to small towns, farms and other rural areas. The A-CAM money provides the basis for borrowing the money needed to build a permanent new fiber network. Even where small telcos are only upgrading DSL, I see many of them that upgrading speeds to as much as 40 Mbps.

It’s also interesting that the smaller companies are getting less funding, on average. The big telco CAF II money is providing roughly $2,470 per rural customer while the small company A-CAM money is $2,091 per customer. The amount received by each company differs, but overall the small telcos are doing a lot more with less funding.

I don’t know for sure that the big telcos in the CAF II program aren’t spending some of their own capital dollars to augment the CAF II funding, but everything I see tells me that they are not. They are using the federal money to do whatever upgrades that will fund, and no more.

We are starting to see the differences from the two programs appear in the real world. I was just looking the other day at the map for Otter Tail County, Minnesota. It’s a large county with some farmland, a lot of lakes and recreation areas and a lot of woods, trees and rough terrain. It’s comparable to many other rural places in the country. In Ottertail County it looks like about 2/3 of the rural areas are going to get fiber, much of it due to A-CAM money. These fiber areas will be sitting next door to CenturyLink areas that will get DSL upgrades that meet the 10/1 Mbps requirement.

Customers that get fiber will have seen real benefit from the FCC program that helped to fund it. But the customers in the CenturyLink areas will not see the same benefits, although they will have friends, families and neighbors that have world-class broadband. There isn’t any real difference between the two areas other than the way that the telcos decided to use the federal broadband money. The small telcos have used the federal money as a down payment for fiber while the bigger telco are just tweaking the ancient copper network or converting to cellular.

I’ve said all along that the FCC made a colossal mistake in not creating an auction for the CAF II money. Smaller companies would have leveraged the $10 billion of funding to build a lot of fiber to rural communities. They would have borrowed and expanded their businesses to bring a permanent broadband solution to millions of households.

Instead, the $10 billion CAF II money isn’t buying much of a speed increase. In some cases CAF II is going to make things worse. I think when AT&T and Verizon start tearing down rural copper that there will be homes with lousy cellular coverage that will not only not get broadband but will lose voice service. It’s fairly obvious that the CAF II program funding was a victory for the big telco lobbyists. The big telcos had a lot to lose if that funding went to smaller companies that would have built in their service territories. But this victory for the big companies is a big loss for customers who will not see real broadband because of a poorly designed federal subsidy program.