Tag Archives: RDOF

Our Balkanized Broadband Leadership

Congress inserted an interesting requirement into the bill that reauthorizes the funding for the National Telecommunications and Information Administration (NTIA). Both the House and Senate added language that would require that a national broadband plan be created that would try to put the FCC, the NTIA, USDA, and other agencies on the same page. This legislation makes sense, because it’s clear that the three agencies do not coordinate in trying to solve broadband gaps – if anything they are competing and trying to one-up each other.

The House version of the new legislation was sponsored by Reps. Tim Walberg (R-MI.) and Annie Kuster (D-NH). The Senate version of the language was sponsored by Sens. Roger Wicker (R-Miss.), Ben Ray Luján (D-NM), John Thune (R-SD), and Peter Welch (D-VT.).

The genesis of the plan came from a GAO report from 2022 that said that there was a balkanized approach to federal funding programs aimed at solving the rural digital divide. That is putting it mildly. The three agencies seems to be stepping over each other trying to get headlines.

Just consider the last year. The NTIA has been working on getting the BEAD grant program going (at a pace that has been widely criticized as being far too slow and meticulous). Immediately after the NTIA announced the amount of BEAD funding that was to be allocated to each State, the FCC announced the new EA-CAM subsidy program for small telephone companies that covered many of the same locations that are eligible for BEAD. There is no conceivable excuse for the two agencies not to have coordinated this – and had the FCC announcement been considered, the BEAD funding would have been allocated differently to States.

The USDA also recently closed a new round of ReConnect grants on the eve of States getting ready to finally launch BEAD grants. This puts State Broadband Offices in a quandary with how to treat areas with a pending ReConnect grant – they won’t be able to make any grant awards for these area until Reconnect is resolved.

The GAO’s use of the word balkanized is now my favorite word for describing the federal broadband effort. The FCC’s RDOF program was a disaster from the beginning. A third of awarded RDOF subsidies ended up being canceled by the FCC or turned back in by ISPs. There are still ISPs defaulting on BEAD several years later, with recent announcements by Charter and Altice walking away from some RDOF areas. Even where RDOF was awarded, it butchered the rural landscape by creating a checkerboard (or Swiss cheese) in many counties of places covered and not covered by RDOF – making it incredibly hard to design a broadband solution for the remaining unserved pockets. The FCC also gave ISPs far too long to implement an RDOF solution – in some cases until 2028 – and a huge number of counties are still wondering today if the ISPs that won RDOF in their county will show up.

All of the grant and subsidy programs suffer by relying on faulty FCC broadband maps. I would rate the maps used to allocated RDOF as maybe a 2 out of 10. The FCC knew these maps were faulty but blazed ahead with a subsidy program that pretended the maps were perfect. It’s impossible in many cases to see any difference between areas included in RDOF and neighboring Census blocks.

The maps being used for BEAD have probably improved to a 5 out of 10. The biggest flaw in the BEAD maps is the inexplicable decision of the FCC to still allow ISPs to claim marketing speeds rather than something closer to actual speeds. There is a large number of rural ISPs that miraculously claim a speed of exactly 100/20 Mbps in the FCC maps, which blocks others from pursuing BEAD grants. The FCC thinks they have accounted for this problem by allowing for a map challenge process, without realizing that the counties that have the biggest broadband gaps are also the ones with barely any staff or budget – so the places that should have undertaken map challenges are doing nothing. The NTIA piled on top of the situation by creating a map challenge process for BEAD that is so technical and obscure that even well-funded counties can’t come close to putting up a decent challenge for places that everybody agrees don’t have good broadband.

Local governments are increasingly irate with all three agencies tackling broadband. The word balkanized doesn’t come close to describing the behavior of each agency that not only ignores what the other agencies are doing but seems hell-bent on sticking a thumb in each other’s eyes.

I have very little faith that the broadband coordination proposed by Congress will do the slightest bit of good. When President Biden came into office, he ordered the three agencies to coordinate efforts, which obviously fell on deaf ears. The only way to make the three agencies work together would be to put them under the same boss – and that’s not likely to happen.

I’ve predicted for quite some time that BEAD is going to miss millions of homes that should be classified as unserved and underserved. I have to think the federal agencies are already planning on how to blame each other when BEAD doesn’t work as promised.

RDOF Amnesty

I have been asked my opinion several times recently about RDOF amnesty – letting RDOF winners walk away from their obligations without big penalties. There is no easy answer to the question.

It’s certainly a timely topic, since we are seeing ISPs walk away from RDOF. As I was writing this blog, Charter announced it was returning RDOF winnings in 125 Census block groups in Michigan, Missouri, and Wisconsin due to pole replacement issues. Altice defaulted on 18 Census blocks in Louisiana. Other RDOF winners are considering walking away from RDOF commitments.

There are several good arguments to be made that favor some kind of amnesty. Soon after the end of the RDOF auction the country experienced much higher inflation than has been seen for more than a decade. I’ve seen estimates across the industry that the cost to build a new broadband network increased 20% to 25% over the last few years. That certainly makes it significantly harder for an RDOF winner to build the markets it won in the auction.

The counterargument is that this same inflation also impacted other federal grants like ReConnect and various state broadband grants awarded across that same time period. When the FCC offered a 10-year RDOF subsidy, there was no guarantee that the economy would not change over that time frame. In fact, anybody winning a 10-year subsidy should expect at least one economic downturn during a ten-year cycle. The current spate of inflation is significant, but it’s not unprecedented, and there have been several worse periods of inflation during my career.

Another argument that can be made for amnesty is that RDOF was never enough funding to build rural networks. While RDOF wasn’t a grant program, many companies who took the funding treated is as such. Most ISPs, except perhaps the few giant ISPs, use the RDOF subsidy to secure funding to build the promised network. In doing so, RDOF winners treat the funding as if it is a grant.

Anybody who now complains that they didn’t get enough funding from RDOF doesn’t have a strong argument. Nobody required winners to bid below a price that they thought was sufficient. It’s clear that the reverse auction for RDOF got crazy due to bidders who had no business being in the auction – but anybody that got into a bidding war with one of the crazy bidders can’t complain that they didn’t achieve the RDOF award they were hoping for.

Perhaps the best reason to allow RDOF amnesty is that there is a good chance that anybody asking for amnesty might walk away. Or they might build a minimal network to try to say they satisfied the RDOF rules – but there is a good chance they will eventually walk away from RDOF, penalties or no penalties.

The immediate issue with RDOF amnesty is the impact it could have on BEAD grants. It’s completely unfair to State Broadband Offices to ask them to toss new locations into the BEAD process at this late date. Many States have already finished or are in the middle of the BEAD map challenge – and RDOF locations were not part of that process. States also didn’t look at the RDOF areas when defining high-cost plans.

Maybe even worse, ISPs haven’t considered building in any RDOF areas that are suddenly dumped into BEAD. The BEAD grants require careful deliberation by ISPs, and a significant amount of work is needed to understand the cost of building into grant areas. This isn’t something that ISPs are going to quickly tackle. This is even more so for areas like the ones that Charter is abandoning because of the cost of replacing poles – that would scare anybody else off from considering such areas.

I believe that at this late stage, the FCC needs to own the consequences of ISPs abandoning RDOF. I hope that the NTIA and states refuse to roll abandoned RDOF locations into BEAD grants at this late date. The FCC broke RDOF, and whether they allow amnesty or ISPS just walk away, the FCC needs to be the one to fix the problems caused by RDOF defaults.

Subsidizing Rural Broadband Networks

We are preparing to award over $44 billion to construct rural broadband networks. Almost by definition, these networks will be built in rural areas where it’s hard to justify a business plan where revenues generated from the grant areas are sufficient to fund the ongoing operation and eventual upgrades to any broadband networks.

The FCC has addressed this issue in the past, and numerous FCC programs have provided ongoing subsidies for rural broadband networks. The FCC has been very careful over the past decades to create separate subsidies for small telephones and cooperatives versus the largest telephone companies. The reasons for the distinction had to do with economy of scale. A higher level of subsidy has been provided to smaller telcos since it was reasoned that small rural companies have a hard time staying afloat without a subsidy.

Conversely, the historic reasoning of regulators was that large telcos didn’t need as much subsidy, or even any subsidy since the big companies also operated in county seats and large cities. Historic regulation assumed that the profits generated in urban and suburban areas could be used to subsidize rural areas.

The original subsidy to small telcos came from the Universal Service Fund (USF). Not every small telco received a subsidy, and the amount of any FCC subsidy was calculated according to the cost structure of each small telco. Small companies would annually calculate costs, and the amount of subsidy benefited the rural companies with the highest costs.

The FCC adopted a major change to the rural subsidy program in 2014 with the USF/ICC Transformation Order. This made the compensation for small telcos more complicated and created different subsidies for different kinds of costs – but the subsidies still benefited the highest-cost small telcos. The subsidy program for small telcos eventually morphed to include the A-CAM program.

Before the USF/ICC Order, only a small portion of big telephone company areas were eligible for any USF subsidy. The ICC Order was a huge win for big telcos, and subsequent to the Order, the FCC created the CAF II subsidy for the most rural locations served by the big telcos. Suddenly, many billions of dollars of subsidy flowed to big telcos to upgrade rural DSL speeds to at least 10/1 Mbps.

In recent years, the FCC opened subsidy programs to a wider range of carriers than just incumbent telephone companies. Both the CAF II reverse auction and the Rural Development Opportunity Fund (RDOF) were conducted using a reverse auction and were available to any ISP. Some of these funds went to telcos, but also went to cable companies, fixed wireless ISPs, and new start-up fiber overbuilders.

This history raises an interesting question. The BEAD grants are not a subsidy program. As a grant program, practically every dollar spent with BEAD funds must be used to build broadband infrastructure – with only some minor reimbursements allowed to cover the cost of complying with the grant paperwork. The BEAD money does not cover any operating expenses for the rural networks that will be built.

In a post-BEAD world, there will be a reshuffled mix of rural broadband networks – properties still operated by small telcos, properties that are still receiving CAF II or RDOF subsidies, and areas built with BEAD or ARPA grants that will not be receiving any subsidies. Some of the BEAD properties will be operated by giant telcos and cable companies, while others will be operated by a wide range of smaller ISPs. The FCC will have created a real mess in rural America, with adjoining areas receiving drastically different levels of federal support – even when the local cost characteristics are identical.

I find it inevitable that companies that win BEAD will start lobbying for operating subsidies within a few years of networks being constructed. The FCC will be faced with the challenge of coming up with a sustainable subsidy program for all rural broadband networks. I think the FCC has several possible paths to take in the post-BEAD world:

The FCC could continue with existing subsidy programs with no acknowledgement that there is a wide disparity between areas that get and don’t get subsidies. The FCC could randomly decide on new subsidy programs to support subsets of companies – perhaps a subsidy program for BEAD winners and another for RDOF properties.

Or the FCC could start all over and design a subsidy program for the post-BEAD world. The best subsidy program would be cost-based, like the original USF. The original cost-based USF looked at the company-wide costs of each ISP, not at the costs to operate in rural areas. Under a cost-based system, small rural companies would likely get the most subsidy per subscriber while large ISPs that operate urban networks would likely get nothing and would be expected to support rural properties with urban profits.

Another option would be that the same amount of subsidy goes to support every rural subscriber, regardless of who owns the ISP business.

There has been a tickle in the back of my brain for the last year wondering why companies like AT&T, Charter, and Comcast seem to be willing to pursue grants for rural areas where it will be a challenge for revenues to fully cover costs. The big telcos have been working feverishly to ditch copper networks, and it’s hard to understand why they are now willing to go back into rural areas that have low density and long drive times.

But it recently struck me – these big companies are betting on the FCC creating a future subsidy program for areas being built with the current flood of ARPA and BEAD grants. I can’t see any other way to justify some of the grants I’ve seen the big companies accept. My bet is that we’ll barely make it through the BEAD grant awards before the big company start lobbying for new subsidy programs that benefit them more than other rural ISPs.

Is There Enough BEAD Funding?

There is a tendency to think of high-cost areas – places where it’s expensive to build fiber as only being in remote places with tough terrain. As companies start filing BEAD grants we’re going to see a lot of other cases of high cost locations that I think are going to surprise State Broadband Grant offices. There are many reasons that drive up the cost of building a landline network.

Some places are high-cost by definition. For example, I know of a small town in Arizona that is fifty miles away from the nearest other people. Building fiber to this town means building middle-mile backhaul, which in this case is through tough terrain and faces the extra burden of aging poles.

The condition of poles can be a huge cost driver anywhere. I’ve worked with several rural communities where more than 90% of poles need major work to add fiber. This is clearly the fault of the electric company, but an ISP building fiber is expected to pay to rebuild the poles. The new FCC pole rules might make this a little better, but even those rules can’t make costs reasonable when all of the poles are bad.

In Appalachia, I’ve seen places where pole lines have not been maintained and the poles are now in the middle of the woods. For purposes of adding fiber, these poles might as well not exist.

The issue that is going to blindside a lot of grant offices is housing density, measured by the number of residences per mile of road. States have been operating state broadband grants that invited ISPs to seek funding to build the parts of counties with the highest route density. The same thing happened with federal broadband grants. ISPs carefully crafted grant areas where the construction costs were the most reasonable.

The billions spent by state broadband grants using CARES and ARPA money were awarded to the most densely populated rural areas. This was bound to happen with grant programs that expected fairly high matching contributions from ISPs. ISPs carefully carved out proposed grant areas that avoided high cost roads, and state grant rules rewarded grant applications that served the most locations per grant dollar. This was a smart use of state grant funds, but the end result of the many state grants is that the remaining rural locations in many counties are those places where costs are the highest.

Another factor that is driving up costs is the way that the FCC awarded RDOF. I’ve been talking for years about how the RDOF awards chopped many counties into swiss cheese serving areas, with seemingly random areas that got RDOF next to areas with the identical broadband options that didn’t. I’m working with a county where RDOF and State grants covered about 80% of rural residents. In doing so, RDOF left behind scattered pockets of the least dense homes. The cost to build the entire rural area that includes RDOF is around $6,000 per passing – a cost that could be comfortably handled by BEAD grants. However, the remaining 20% of locations have a cost per passing over $10,000.

Another major issue to consider is the degree to which inflation and BEAD grant rules are driving up the cost of construction. BEAD rules can easily add up to 30% to the cost of building a rural network due to factors like prevailing wages, letters of credit, and environmental studies. Most engineers I know estimate that inflation has increased costs by 15% to 20% since the date when BEAD grants were announced.

Finally, I think broadband offices are relying too heavily on using fixed wireless as the solution for high cost areas. There are places where fixed wireless is a good solution, but plenty of others where it is not. Areas with rough terrain can be a nightmare for a WISP that is required to reach every home. Some of the small pockets left behind by RDOF and other grants are isolated and not near any WISP markets – and no ISP wants to take on tiny pockets of customers that are far from existing networks.

Hopefully I’m being pessimistic, but I fear that states are often basing their estimates of how far BEAD grants will stretch based on the cost to build to rural areas with State broadband grants. When I look at real counties, I’m seeing that the areas that are left behind by earlier funding efforts are the most expensive places to reach. I cringe when I hear States that say that they have enough money to build fiber everywhere before they have received grant applications.

Will Small ISPs Pursue BEAD?

In a recent article in FierceTelecom, U.S. Commerce Secretary Gina Raimondo was quoted as urging small ISPs to participate in the upcoming BEAD grants. She was quoted in the article in a speech made to small ISPs saying, “We want you to apply. We need you to apply. We will work with you and hold your hand so that you can apply. The message is: Prepare to compete and win. You can win.” She went on to say that small ISPs are the only ones who will likely be interested in serving some of the most remote places in the country.

I was honestly floored by these quotes. I’ve been working with broadband grant programs for decades, and the requirements for BEAD are massively over the top compared to other broadband grant programs. Raimondo is quoted as saying that the grant requirements have been crafted to “protect taxpayers.” The first day I read the legislation I knew that small ISPs would have huge problems making these grants work.

I’ve been hoping that State Broadband Offices would soften the harsh requirements that were suggested or mandated by NTIA. Unfortunately, most State Broadband Offices did just the opposite and doubled down and made it even harder to justify pursuing a BEAD grant. As an example, the legislation offered that BEAD grants could fund as much as 75% of the cost of building a rural project. However, most state grant scoring rules are pushing that number a lot lower. There are states that only give worthwhile grant points to somebody taking a 35% or 40% grant. It’s not hard to understand the reason for this. A lot this comes from pressure from the NTIA to make sure that the BEAD money can be spread around enough to serve all unserved locations. But all of the policy folks don’t seem to understand the basic financial fundamentals of serving broadband in rural areas. This one issue alone is making it impossible for many ISPs to even contemplate a BEAD grant.

But it doesn’t end there. The requirement to have an irrevocable letter of credit that feels like punishment to small ISPs. I have one client that would struggle to somehow come up with $3 million needed for the BEAD matching requirement. The letter of credit adds over $1 million in additional investment for this small ISP – and that breaks the financial model. The folks who made this requirement don’t seem to realize that a lot of small ISPs could never qualify for a letter of credit of this magnitude.

The most expensive requirement might be the requirement to pay prevailing wages that are being required by many states. In all of the business plans we’ve examined, this requirement increases the cost of building a network by 15% to 20% (which then also inflates the matching and the letter of credit).

I understand the federal goal of the NTIA to protect the public, but are they really protecting the public when the grant rules favor huge companies over small ones? It was clear from the first day of the process that NTIA is more worried about not having any BEAD failures than it is about having wide participation by ISPs – you can’t have both. The funny thing is that the three items listed above have added so much cost to building a BEAD-funded network that the chance of an ISP failing is far higher than it would have been without these requirements. Networks that cost too much to build are going to be at risk in future years when ISPs realize that it was a mistake to take the grants.

In addition to the high costs that come from the NTIA being super-cautious, the paperwork process for reporting on the grants is also way over-the-top. A lot of ISPs who take this money are going to regret it when they see the volume and frequency of reports that are going to be due for years after taking the money.

On top of all of this, the grant maps are a mess in many places due to the decision to allow licensed fixed wireless ISPs to claim a monopoly for rural locations simply by reporting a speed of 100/20 Mbps to the FCC. It’s virtually impossible to dispute this kind of claim in areas where the WISPs don’t have many active customers. The FCC BEAD map in many rural areas is a jumbled mix of served, underserved, and unserved households in the same rural neighborhoods. It’s almost impossible to make a workable business plan out of the mess that has been created by the FCC maps along with the residual mess created by RDOF.

There are going to be small ISPs who will brave BEAD and win grants. But a lot of ISPs cannot tackle BEAD even if they wanted to. Their balance sheets are not iron-clad enough, and they don’t have the borrowing power for the matching and letter of credit. Many can’t find a coherent service area due to the mess created by the maps.

I had to laugh at the “we will hold your hand” quote. Is the NTIA going to go to the bank with a small ISP to convince the banker that they should take a chance on lending a lot of money to a small company? There is only one way that the NTIA could increase participation in BEAD – and it’s something that other grant programs have done. If NTIA wants small company participation, it could give State Broadband Offices the ability to waive the harshest rules for smaller ISPs. I’m pretty certain that is not being discussed.

FCC Getting Serious About RDOF Defaults

In December, the FCC issued fines for two ISPs that the FCC says defaulted on RDOF obligations. RDOF was the FCC subsidy program where broadband subsidies were awarded by a reverse auction that ended in December 2020.

The fines are substantial and were set at $3,000 per passing for the defaults. I think the FCC is using these fines to issue a firm warning to any other  RDOF winners who might be considering default.

The first fine was to Etheric Communications for $732,000 for 244 locations. Etheric was one of the largest RDOF winners, having won $248.6 million to cover 64,463 locations. The FCC said that Etheric had failed to become designated as an Eligible Telecommunications Carrier (ETC) for the affected passings.

A much larger fine of $21.7 million was levied again GigFire (or LTD Broadband) for defaulting on 7,238 locations. Apparently, LTD Broadband has rebranded as GigFire, and the FCC levied the fine against both entities since it seemed uncertain of the relationship between LTD Broadband and GigFire.

LTD was largest RDOF auction winner, having won the auction for 528,088 passings and claiming $1.32 billion in RDOF subsidy. The FCC had rejected most of LTD’s claimed winnings. The FCC concluded that the company would not be able to deploy at the scope and scale needed to meet the RDOF obligations. The FCC levied the current fines against GigFire saying that the company failed to obtain ETC status for the effected passings, and because the FCC doesn’t believe the company didn’t meet the funding requirements in its most recent filings.

Default on RDOF are not new and there has been fines in the past from other defaults from companies like larger companies like Charter, Nextlink, and Breezeline. A number of small defaults happened soon after the end of the auction.

I’ve heard a lot of rumors about possible RDOF defaults over the last six months. I have no idea if any of these rumors are real. In many cases, the rumors seem to stem from counties who are getting nervous because they don’t see any construction started yet by RDOF winners. In many counties the RDOF awards cover a substantial part of a county, and counties fear having defaults after it’s too late to redirect these areas to the upcoming BEAD grants.

RDOF deployment rules require that a winner deploy 40% by the end of 3 years, 60 percent by the end of 4 years, 80% by the end of 5 years, and 100% by the end of 6 years. For most RDOF winners, the third year will be 2024. Unfortunately for nervous counties, the build-out requirements are measured on a statewide basis. An RDOF winner that won in multiple counties in a state could be meeting its statewide obligations without doing any construction in some counties.

It will be massively disruptive if there are any RDOF defaults after the BEAD grant process is underway, especially since most BEAD grants will likely be awarded this year. The FCC would still have the RDOF funding and could transfer the award to somebody else – assuming it could find somebody willing to tackle the areas for the level of funding that was set in 2020 before high inflation and higher interest rates. The FCC also has the ability to hold another RDOF auction, and it was anticipated there would be a second round of RDOF until BEAD grants seem to be covering the same areas that would be eligible for RDOF.

My Predictions for 2024

BEAD Predictions. It’s clear that most state broadband offices are going to try to award all of the BEAD grants in 2024. There will be barely any BEAD construction completed in 2024, but there will be big hoopla over the handful of customers that get connected before the end of the year.

A lot of pundits have been predicting that a large majority of the funding will go to the largest ISPs to build fiber. But after reading the grant rules in numerous states, I’m not so sure. In some states, the big companies will win it all. States that emphasize the cost of the grant per passing might end up giving all of the money to WISPs. A few state rules are so obtuse that even the big ISPs might decide to take their money to a neighboring state.

RDOF Troubles. I’ve talked with a lot of local governments that haven’t heard a peep from RDOF winners. Most winners will be required to have completed 40% of the RDOF construction by the end of 2024, so this is the year that will flush out ISPs that are going to default. Defaults will probably be too late to attract any BEAD funding.

Wireless Technology Improvements Shake up the Market. 6 GHz radios will change the WISP landscape. New radios that include the giant 6 GHz channels will deliver much faster speeds. More WISPs will begin advertising gigabit speeds in 2024, but most will not deliver what they advertise – but speeds will still be fast.

Big cellular companies will use C-Band spectrum to boost speeds on FWA broadband. But a lot of rural counties that are hoping to get faster speeds will not see the new technology deployed in 2024.

The Beginning of Consolidation. We’re going to see some interesting acquisitions in 2024. I don’t know who, but some of them will be big names. There is a huge amount of venture capital suddenly interested in broadband, and as it becomes clear that these companies will not win as much BEAD grants as they hoped, they’ll turn their attention to acquisitions.

Cable Companies Will Lose Broadband Customers. The large cable companies collectively gained only 4,700 customers in the third quarter of this year, and the only one that grew was Charter. In 2024, customer losses will increase each quarter, and the cable industry is going to panic. Cable company board rooms are at a loss on how to stem the losses. They are now banking that the public will be happy with faster upload speeds with mid-split upgrades, but that isn’t going to impress customers who are offered a fiber alternative or a much cheaper FWA alternative.

Little Impact from FCC Broadband Regulation. If you listen to the rhetoric from the big ISPs, the double whammy of Title II regulation and the new digital discrimination rules will devastate ISPs and kill innovation and new investments. The reality is that there will barely be a peep from regulators concerning the new regulations in 2024. Some minor investigations will be undertaken, but the new regulation will have almost no impact on the market or investments.

Congress Will Let ACP Lapse. There seems to be a big consensus in Congress that the ACP program should continue., But I can’t picture the currently dysfunctional Congress approving new funding for the subsidy program before ACP runs dry. I think ACP will get renewed later in 2024, but only after first lapsing, which will create chaos for ISPs and customers. When ACP is renewed, the number of eligible households will be greatly pared down.

The FCC Will Launch the 5G Fund. This is intended to bring more rural cell towers. The industry says that $9 billion is not nearly enough to reach all of the places that need better cellular coverage, so counties and states will lobby fiercely to get included in the funding.

Big ISPs Will Continue to Buy Back Stocks Rather than Invest in Networks or Maintenance. This may be the least bold prediction I have ever made.

Is Carrier of Last Resort Dead?

The concept of common carrier stretches back to the 14th century in English law, where businesses were granted the exclusive right to be in business as long as they were willing to serve everybody. The term common carrier came into use to describe the obligation of businesses like coaches, ferries, etc. that were required to serve anybody who asked to be transported. The concept was carried over to businesses that were given a franchise to serve a local area, and businesses like blacksmiths and innkeepers were required to serve anybody who wanted service. This concept still applies to businesses today, like railroads, which are not allowed to selectively refuse to carry freight.

Carrier of last resort (COLR) is a version of common carriage that has been applied to businesses that operate large networks like telephone companies, electric companies, water companies, and gas companies. Federal or State rules have always required such businesses to serve anybody inside of the franchise area who requests service.

In exchange for being granted a franchise area, COLR for telephone companies has always come with specific obligations. A COLR is expected to serve everybody in the franchise area, even if that means extending facilities. A COLR needs regulatory approval to withdraw from serving customers. A COLR is expected to operate the business with care, skill, and honesty and to charge fair and reasonable prices.

The concept of carrier of last resort for telephone companies started to weaken with the passage of the Telecommunications Act of 1996. This Act allowed for local telephone competition, and some legislators or regulators granted relief for telephone companies from some of the carrier of last resort obligations. For example, some states have eliminated COLR obligations as part of deregulation. Some regulators have eliminated most COLR obligations for specific telephone companies for the same reason. But even in most cases where the COLR obligations have been weakened, regulators still usually require a telco to ask for permission to withdraw from a market.

While some COLR obligations were weakened, others were expanded. For example, some states have required CLECs (competitive telephone companies) to accept COLR obligations in exchange for participating in subsidy programs. Cities have often only agreed to give a franchise agreement to CLEC or ISP that agrees to serve everybody. In many cases, this obligation is no longer explicitly called COLR, but uses terms like “duty to serve” or “obligation to serve” but refers to obligations similar to COLR.

The COLR issue has come to the forefront for broadband because of broadband grants and subsidies. Some state and local broadband grants have included an obligation to serve everybody in a grant area. The largest subsidy program to require 100% coverage is the Rural Digital Opportunity Fund (RDOF). ISPs that accept this funding are expected to offer service to 100% of homes and businesses in the covered Census blocks by the end of the six-year deployment period. It’s not entirely clear if the upcoming BEAD grants will require 100% coverage, and that final determination will likely be included in each State’s final grant rules.

Is the agreement to serve customers that is obligated through a grant or subsidy program the same as a carrier of last resort obligation? I expect not. For example, will an RDOF winner be expected in the future to extend the network to newly constructed homes?

There are clearly going to be households in RDOF areas that are not offered service. For example, many of the RDOF winners use fixed wireless technology, and there are always homes in any area that can’t be reached with the technology for some reason. In hilly and heavily wooded areas, this might be a large percentage of households.

Does a home that is not covered by RDOF have a reasonable remedy to get service? In the past, a customer could complain to State regulators if a telco was refusing to serve them. It’s hard to imagine an individual homeowner opening an expensive and complicated FCC proceeding to complain about being missed by RFOF.

Technology is also creating havoc in rural areas for traditional telephone company obligations. When I was recently upgrading my cellphone in an AT&T store, I overheard the AT&T representative tell a customer that they would soon be losing their telephone copper and would be moved to FWA cellular wireless.  My county is extremely hilly and wooded, and there is a major lack of rural cell towers. There is a good chance that this customer is not within reach of the offered cellular broadband. It sounds like the end of carrier of last resort obligations if a telco can cut the copper wires and move customers to a cellular service that doesn’t work at their home.

In circling back to the question asked at the beginning of this blog, are there many places left where a regulator will step in and demand that an ISP built infrastructure to reach an unserved household? I think the chances of that happening are getting increasingly remote.

Reinventing ReConnect

Your guess is as good as mine about whether Congress will ever pass the draft annual Agriculture Reauthorization Bill as written. It’s my understanding that the legislation includes new money for the ReConnect grant program that is administered by the Rural Utility Service (RUS), which is part of the Department of Agriculture.

This has been a successful grant program, and I know of quite a few rural projects that have been funded through these grants. The ReConnect grants only fund areas that are remote and include a test that gives priorities to grant areas that are the farthest distance from towns and cities.

There have been changes in the broadband industry that have made it harder each year to define a ReConnect grant area. The RUS grant rules favor grant requests that cover large contiguous areas. You can cobble together grant service areas that include multiple different geographic pockets of homes and businesses, but this involves a lot more paperwork.

It’s getting quickly harder to find big contiguous unserved areas. This started with the CAF II reverse auction and really came to fruition with the Rural Digital Opportunity Fund (RDOF). That subsidy program awarded subsidies by Census blocks, often widely scattered across a county. When I saw the first RDOF map, I quickly started thinking of RDOF as the Swiss cheese program. RDOF often chops rural areas into small pieces and leaves behind scattered pockets of homes that are not easy to aggregate into a grant like ReConnect.

This chopping up of grant areas continued as States and counties have been awarding broadband grants, often for grant areas that cherry pick the densest pockets of homes. This not only breaks the remaining unserved areas into more Swiss cheese, but it also makes it harder to justify somebody asking for a grant to serve the areas that are left over.

It’s going to get hard to find grant areas after BEAD grants start being awarded. The BEAD grants are supposed to bring broadband to all unserved locations in each state and hopefully also to the underserved. But I think everybody who understands the industry knows this will not happen as planned. There are already states that are saying that BEAD funding won’t cover everybody. There will be ISPs that don’t build everything they promised. There will be ISPs using technologies that won’t reach everybody as promised. There will be ISPs that financially fail and don’t finish the grant projects. And this won’t just be for BEAD – there are going to be plenty of areas supposedly covered by RDOF that won’t get the broadband they have been promised.

The biggest pile of places that won’t get broadband from BEAD are the millions of places that are still incorrectly identified on the FCC maps as served but which aren’t. These places won’t start to become apparent until after the BEAD grants are awarded and mapped and people living in areas with no good broadband start to make noise.

It’s very unlikely that the locations that get missed by RDOF and BEAD will easily fit into the current ReConnect grant template. ReConnect might be the only major ongoing grant program, and if ReConnect is going to reach the places left over from other federal grants, the RUS is going to have to make some significant changes.

First, it has to become easier to ask for funding for small pockets of homes. The RUS has purposefully given out a small number of large grants in each grant cycle to reduce its burden of monitoring the grant construction. But there are even more significant changes needed. For example, the RUS requires a substantial pledge of other assets to get an RUS grant. Unless somebody is already an RUS borrower, they are not likely to accept draconian collateral pledges for small grants.

Currently, the ReConnect grant is totally reliant on the FCC maps, and that has to change as well – because many of the places that will be missed with broadband will be incorrectly labeled as served by the FCC. The ReConnect process is complicated, it’s a challenge to input grant requests that must tie to penny while doing so in financial formats that nobody outside of the RUS understands.

In a post-BEAD world, any future grants are going to have to be creative, nimble, and able to bring solutions to small grant areas without a huge amount of paperwork. Unless the RUS is willing or able to change how it awards grants, this could be a grant program with very few future takers – and that would be a shame.

Who’s In Charge of Broadband?

On July 24, the FCC authorized a new subsidy program, Enhanced A-CAM (Alternate Connect America Cost Model). This program will extend subsidies to small, regulated telephone companies at a cost of about $1.27 billion per year for ten years. The subsidy will be paid from the FCC’s Universal Service Fund.

The funding requires recipients to deploy voice plus broadband with speeds of at least 100/20 Mbps to 100% of the areas covered by the subsidy within four years. The order is technology neutral, so telcos could elect to meet this requirement with fiber or with licensed fixed wireless technology.

According to Mike Conlow, this order will bring broadband to almost 583,000 unserved or underserved locations that are already covered by the NTIA’s BEAD grant footprint. Today’s blog talks about the absurdity of the FCC making this announcement only weeks after the NTIA announced the distribution of the $42.5 billion in BEAD funds to states. This means that two U.S. agencies both announced funding to cover the identical half-million locations within a month of each other.

Think about what this means. A state that has some of these A-CAM locations was allocated BEAD grant money to bring broadband to these areas. The FCC order is then directly funding to build broadband to the same passings. This means that a state that has a lot of unserved and underserved A-CAM passings is getting a funding windfall. Conlow estimated that this double funding is bringing a funding windfall of $180 million to Nebraska – the state with the most unserved and underserved A-CAM locations. The downside of this is that if Nebraska and other states are getting a windfall from the FCC decision, then other states are receiving less BEAD funding than they would have if these locations had been excluded from BEAD before the NTIA allocated the $42.5 billion.

The FCC’s A-CAM order was released only three weeks after the NTIA announced the BEAD allocations to states. There is no way that the FCC didn’t do this deliberately. The FCC could have asked the NTIA to take these locations out of the BEAD process so that the $42.5 billion would have been allocated fairly.

Two years ago, the Biden administration directed the FCC, the NTIA, and the USDA to coordinate everything associated with federal funding for broadband. The FCC’s actions with this decision are the exact opposite of coordination.

I speculate that the FCC did this to reclaim relevance in the discussion of who is helping America solve the rural broadband gap. The FCC has taken a lot of criticism in recent years for botching the RDOF funding process and handing out wasted billions to the big telcos in the CAF II subsidies. The FCC was also largely cut out of the biggest effort ever with BEAD grants to solve the rural broadband gap, and that had to sting. The FCC can now say to the folks living in the A-CAM areas that it provided the funding to bring better broadband instead of the NTIA. I’m picturing FCC ribbon cuttings for projects that launch fiber in these areas. I can’t think of any other reason that this order would have been released so soon after the NTIA announcements of BEAD funding for each state.

The NTIA should react to this announcement by reallocating the BEAD funding to states because for every state that got a windfall like Nebraska from the FCC’s A-CAM order, other states received less BEAD funding. Unfortunately, reopening the allocation process could open a can of worms, so that likely won’t happen.

In my mind, the FCC has become a loose cannon due to its control of the Universal Service Fund. The USF for all practical purposes is a big slush fund that gives the FCC the ability to tackle anything it wants, outside of any control by Congress or the White House. After this announcement, it wouldn’t shock me to see the FCC announce another round of RDOF funding in the middle of the BEAD grant process next year.