Winners of the CAF II Auction

The FCC CAF II reverse auction recently closed with an award of $1.488 billion to build broadband in rural America. This funding was awarded to 103 recipients that will collect the money over ten years. The funded projects must be 40% complete by the end of three years and 100% complete by the end of six years. The original money slated for the auction was almost $2 billion, but the reverse auction reduced the amount of awards and some census blocks got no bidders.

The FCC claims that 713,176 rural homes will be getting better broadband, but the real number of homes with a benefit from the auction is 513,000 since the auction funded Viasat to provide already-existing satellite broadband to 190,000 homes in the auction.

The FCC claims that 19% of the homes covered by the grants will be offered gigabit speeds, 53% will be offered speeds of at least 100 Mbps and 99.75% will be offered speeds of at least 25 Mbps. These statistics have me scratching my head. The 19% of the homes that will be offered gigabit speeds are obviously going to be getting fiber. I know a number of the winners who will be using the funds to help pay for fiber expansion. I can’t figure what technology accounts for the rest of the 53% of homes that supposedly will be able to get 100 Mbps speeds.

As I look through the filings I note that many of the fixed wireless providers claim that they can serve speeds over 100 Mbps. It’s true that fixed wireless can be used to deliver 100 Mbps speeds. To achieve that speed customers either need to be close to the tower or else a wireless carrier has to dedicate extra resources to that customer to achieve that speed – meaning less of that tower can be used to serve other customers. I’m not aware of any WISPs that offer ubiquitous 100 Mbps speeds, because to do so means serving a relatively small number of customers from a given tower. To be fair to the WISPs, their CAF II filings also say they will be offering slower speeds like 25 Mbps and 50 Mbps. The FCC exaggerated the results of the auction by claiming that any recipient capable of delivering 100 Mbps to a few customers will be delivering it to all customers – something that isn’t true. The fact is that not many of the households over the 19% getting fiber will ever buy 100 Mbps broadband. I know the FCC wants to get credit for improving rural broadband, but there is no reason to hype the results to be better than they are.

I also scratch my head wondering why Viasat was awarded $122 million in the auction. The company is the winner of funding for 190,595 households, or 26.7% of the households covered by the entire auction. Satellite broadband is every rural customer’s last choice for broadband. The latency is so poor on satellite broadband that it can’t be used for any real time applications like watching live video, making a Skype call, connecting to school networks to do homework or for connecting to a corporate WAN to work from home. Why does satellite broadband even qualify for the CAF II funding? Viasat had to fight to get into the auction and their entry was opposed by groups like the American Cable Association. The Viasat satellites are already available to all of the households in the awarded footprint, so this seems like a huge government giveaway that won’t bring any new broadband option to the 190,000 homes.

Overall the outcome of the auction was positive. Over 135,000 rural households will be getting fiber. Another 387,000 homes will be getting broadband of at least 25 Mbps, mostly using fixed wireless, with the remaining 190,000 homes getting the same satellite option they already have today.

It’s easy to compare this to the original CAF II program that gave billions to the big telcos and only required speeds of 10/1 Mbps. That original CAF II program was originally intended to be a reverse auction open to anybody, but at the last minute the FCC gave all of the money to the big telcos. One has to imagine there was a huge amount of lobbying done to achieve that giant giveaway.

Most of the areas covered by the first CAF II program had higher household density than this auction pool, and a reverse auction would have attracted a lot of ISPs willing to invest in faster technologies than the telcos. The results of this auction show that most of those millions of homes would have gotten broadband of at least 25 Mbps instead of the beefed-up DSL or cellular broadband they are getting through the big telcos.

Carrier of Last Resort

Every once in a while I see a regulatory requirement that makes me scratch my head. One of the requirements of the current CAF II reverse auction is that every winner must become an Eligible Telecommunications Carrier (ETC) before receiving the funding – and I wonder why this is needed? This requirement is coupled with another puzzling requirement that anybody taking this funding must provide telephone service in addition to broadband. Since the purpose of the CAF II program is to expand rural broadband these requirements seem incongruous with the purpose of the program.

The ETC regulatory status was created by the Telecommunications Act of 1996. Congress created this new class of carriers to mean any carrier that is willing to provide basic services within a specified geographic area (and in 1996 this was specified as providing voice service) and for that willingness to serve would be eligible to receive any available subsidies.

While this is not in writing anywhere, I’m guessing that these requirements are part of the ongoing plan to erode the rural carrier of last resort obligation (COLR) for the big telcos. Carrier of last resort is a regulatory concept that is applied by regulators to utility infrastructure providers including telco incumbents, electric, gas and water providers. The textbook definition of carrier of last resort is a utility provider that is required by law to serve customers within a defined service area, even if serving that customer is not economically viable. Further a COLR is required to charge just and reasonable prices and generally has legal hurdles that make it difficult to withdraw from serving within the defined service area.

We are seeing rural carrier of last resort obligations eroding all over the place. For example, the FCC is proposing rules that will allow copper providers to tear down copper networks with no obligation to replace them with some alternate technology.

I think this requirement in the CAF II reverse auction is along the same vein. All of the areas covered by this auction are within the historic regulated footprint of one of the large telcos. Except for the Verizon service areas, where Verizon did not accept the original CAF II funding, these are the most remote customers in this auction are in very rural areas. These are the customers at the far end of long copper lines who have no broadband, and likely no quality telephone service.

Anybody accepting the CAF II reverse funding must file for ETC status for those census blocks where they are getting funding. This is a requirement even if the auction winner is only going to be serving one or two people within that census block. Census blocks are areas that generally include 600 – 800 homes. In cities a census block might be as small as a block or two, but in rural areas a census block can be large.

My bet is that the large telcos are going to claim that they no longer have carrier of last resort in any rural area where there is now a second ETC. They will ask regulators why they need to serve a new home built in one of these areas if there is another carrier with similar obligations. If that’s the case, then this reverse auction is going to remove huge chunks of rural America from having a carrier of last resort provider. It’s likely that incumbent telcos will use the existence of a second ETC to avoid having to bring service to new homes.

I have an even more nagging worry. ETC status is something that is granted by state regulatory commissions. In granting this status it’s possible that some states are going to interpret this to mean that a new ETC might have some carrier of last resort obligations. If the incumbent telco tears down the copper network, it’s not unreasonable to think that state regulators might turn to the new ETC in an area to serve newly constructed homes and businesses.

I would caution anybody seeking ETC status as part of getting this funding to make sure they are not unknowingly picking up carrier of last resort obligations along with that status. If I was making such a filing myself I would query the regulators directly to get their response on the record.

I will be the first to tell you that I could be off base on this – but this feels like one of those regulatory requirements that could have hidden consequences. I can’t think of any reason why this program would require a new provider to supply telephone service other than for letting the large telcos off the hook to do so. I know that many companies going after this funding would think twice about taking it if it means they become the carrier of last resort.