Regulation - What is it Good For?

You Want a Piece of the $9 Billion CAF Fund?

I have been asked by several clients if they will be eligible to go after the new CAF II universal service funding that will be disbursed by the Connect America Fund. Over the next 5 – 7 years the fund will be paying out over $9 billion in support of rural broadband. And the answer to them all is – maybe. It’s somewhat complicated and also involves waiting a while to see how certain events play out.

The first issue to consider is who the incumbent telephone area is in the area you might want to compete. Rate of return carriers, meaning all of the small independent telephone companies, are going to continue to receive CAF funding, although the amounts they get are going to be severely phased down over the next five years. But competitors cannot go after the CAF funds in areas served by these rate of return carriers.

So the only places where CAF funding might be available is in areas served by the price cap carriers. That is AT&T, Verizon, CenturyLink, Cincinnati Bell, Consolidated Communications, Fairpoint, Frontier, Windstream and the phone companies in the US territories like Puerto Rico. So if you want to compete in one of these areas there is a chance of getting the funding.

But first, each of these large carriers gets a chance to say that they will take the CAF funding. If they do, then they have to upgrade their rural areas to have broadband that delivers at least 10 Mbps download and 1 Mbps upload to everyone in the supported areas. They have to meet milestones of completing percentages of the construction each year or lose the funding. They are also going to have to do speed tests to verify the upgrades.

The large carriers can take funding for a whole state or just for certain census blocks within the state. The amount of CAF funding that is available by census block is summarized on a CAF map published by the FCC. This shows each area that is eligible for CAF and the amount of money that will be available for that block. These amounts were determined by the use of a very complicated and controversial cost model that purported to calculate the cost of providing service in every part of the country. It considers things like population density, geography and regional labor costs.

So the large incumbents are considering which areas of their service territory they are willing to upgrade through the help of the money available through the CAF models. These subsidies are not intended to pay for the entire cost of upgrading, but rather to be enough to entice the big carriers to make the needed investments.

So if you are interested in the funds, you will need to wait a few months until the big carriers announce their intentions. They will get all of the funding listed on the map for any area they decide to upgrade.

The CAF funding for areas where the price cap carriers elect to not upgrade will then be available to other companies. As you would expect the process to get those funds is complicated. You must be willing to meet or beat the 10/1 data speeds. In addition to data you must provide voice service. You must be willing to serve every customer in a census block where you are getting the CAF funding, not just the ones that are easy to reach. And you must become an Eligible Telecommunications Carrier (ETC) and for areas where you get CAF you become the carrier of last resort.

Competitors will win the ability to do this through what is being called a reverse auction. If more than one carrier files for a given census block, then the one willing to take the least amount of funding will be awarded the CAF funding. But it’s not an auction where you repeatedly bid against each other. Instead you submit a bid once and the low one wins.

Like any federal money this money then comes with a lot of strings. First, you don’t get the money in a lump sum up front to help pay for the construction. Instead you will collect it spread over the five years. Second, like any federal money there will be a mountain of paperwork both before and after taking the money and your project is going to get audited multiple times. There also might be requirements for such things as doing environmental impact studies or complying with prevailing wage laws. These details have not yet been announced.

Going after CAF funds is not going to be an easy choice for most companies. When you look at rural census blocks they generally include a decent percentage of residences that are remote and hard to reach. By taking the funding you will be agreeing to become the carrier of last resort for all of the farms and rural homes in a given census block. That alone is a scary obligation, so before you go after the funds you ought to determine exactly what your state expects these days out of a carrier of last resort. Do you have to build to anybody who builds a new home in your areas regardless of the cost, or are there limits on who you must serve?

Regulation - What is it Good For?

Funding Faster Internet in Schools

The FCC announced this week that they will be providing an additional $750 million in the E-Rate program to promote high speed broadband to schools. This was mentioned in President Obama’s State of the Union address. And this is a follow-up to the announcement last year that the administration wants all schools to have access to 100 Mbps by 2015 and access to a gigabit by the end of the decade.

I want clarify that this does not increase the size of the Schools and Library Fund that is part of the Universal Service Fund. That fund is still at $2.4 billion per year and will stay at that level of funding. So this announcement, while sounding like a big increase, is really a reallocation of the existing fund.

More of the fund will help to pay for fast internet connections, but that means other things will no longer be funded. Many who are getting reimbursed from this fund today for older technologies are going to see their payments decrease or cease. Today this fund pays for a lot of old technologies, and so funding for things like voice lines, dial-up connections for faxes, paging services, and email programs will be eliminated or severely curtailed. For every school who gets more funding there will be another that gets less and this is a zero sum game.

For those who don’t follow this program, let me give you a short primer in how it work. Schools receive funding based upon the percentage of their students who are eligible for the school lunch program. Schools with the highest percentages of school lunches will get some or all of their communications costs for the schools covered by the fund. The lower the percentage of school lunch students, the smaller the amount that the fund will pay, as a percentage of the bill. The funds are awarded from neediest downward until all of the funds for a year are allocated.

The funds pay for a variety of different costs, and one assumes that the menu of things that can be compensated from the plan is going to change with this announcement. But today the fund will not only cover some monthly recurring costs, such as for an Internet connection, but it will pay for one-time costs like wiring a school for Internet.

Every school who gets funding must have an ISP partner who provides the services. Let’s use an example of a school that gets a 60% reimbursement to show how this works. The ISP will sell services to the school at competitive rates. In most places the ISPs are picked using state purchasing laws requiring the low cost bidder to win the job. The school will pay the ISP its unfunded percentage of the bill, in this case 40%. The ISP must be registered with the USF fund to get paid, and they would bill the fund for the remaining 60%. This means that the ISP gets full payment, but that the school in this example saved 60% on their bill.

One has to imagine that the fund is now going to have some sort of incentive to reimburse schools for connections that are at least 100 Mbps download. Connections that are slower than that are going to have to somehow be given a lower rating for the fund to help foster the goal of faster Internet.

I worry a bit in that revising the rules to promote fast Internet might inadvertently disadvantage those schools with the slowest Internet. There are schools that happen to be located in a broadband desert who have no access to fiber, and those schools might lose compensation that helps them to pay for the fastest speed they can get.

Many ISPs already take part in this program. But if you are in a position to sell a high-speed connection to a school or library you should get registered with the USF fund. It’s fairly easy to do and CCG can help you with the paperwork. This program is run well and ISPs report no problems getting reimbursed. There is no reason for ISPs and school partners who qualify to not get help from this fund.