Problems With FCC Broadband Funding Endure

The FCC recently published a set of proposed rules for managing the Rural Digital Opportunity Fund (RDOF), the agency’s $20.4 billion broadband grant program. The FCC should be applauded for redirecting funding formerly allocated to support the Connect America Fund Phase II (CAF-II) program, but I still foresee some problems in the grant program as proposed.

Reverse auction. Many problems stem from the use of a reverse auction, which is not going to result in the best use of grant funds to bring permanent broadband solutions to rural America. Here’s why.

• Favors those who don’t need the money. In the CAF-II reverse auction, satellite broadband providers won significant funding. This time around, there’s a good chance a large amount of grant money might go to Elon Musk’s Starlink and other low-orbit satellite providers. By definition, for satellites to work, they must cover everywhere. This means providers will launch satellites anyway – without subsidy. These companies can be low bidders because getting anything out of the grant fund is a great result for them. Are we going to be happy if the reverse auction results in billions of dollars being handed to Musk?
• Favors lowest-cost technology. Providers planning to spend less per customer to offer broadband can accept grant money and still be happy. These grants will allow large telcos, once again, to slightly upgrade their legacy copper-based DSL infrastructure if they decide to participate. AT&T and Verizon then would be able to grab a lot of money to support their rural cellular upgrades. Though the FCC is planning to weight the bidding to promote faster technologies, such as fiber, if the weighting isn’t done right, then the funding will favor lower-cost, slower technologies. Maybe that’s what the FCC wants – to provide some broadband solution to the largest number of people – but the best policy is to propose a permanent broadband solution to a smaller subset of areas.
• Discriminates against high-cost areas. The areas that most need broadband are those where it costs the most to build infrastructure. Areas such as Appalachia and Alaska are high-cost because of topology, and anybody applying for grants in these areas likely can’t afford to lose grant funding. The entire concept of reverse auction, by definition, favors parts of the country with the lowest construction costs. Applicants in the wide-open plains of the Midwest have a built-in advantage.

The sheer size of the one-time award. Bidders must develop engineering estimates and business plans to attract financing. If not enough ISPs are ready for the auction in time, about a year from now, even more of the money is likely to flow to big companies, such as the satellite providers. A better plan would be to break the funding into 10-year grants, nine-year grants, and eight-year grants.

No real penalties for cheating. A few wireless providers in the CAF-II reverse auction claimed they can deliver 100 Mbps broadband to everybody. Unless somebody develops that technology in the next two to three years, providers aren’t going to deliver on that promise, at least to parts of their coverage areas. If a company gets a bidding credit by making a false claim, it should lose all funding and have to repay the FCC. The proposed penalties are not much more than a slap on the wrist, encouraging companies to claim faster speeds than they can deliver.

Likely excludes some bidders. The rules still seem to exclude entities that can’t get Eligible Telecommunications Carrier (ETC) status – a regulatory designation required to get money from the Universal Service Fund. This status is available only to entities that own their network and are also the retail ISPs. This would preclude PUDs, the rural municipal electric companies in Washington required by law to operate open access networks. It also could preclude certain kinds of partnerships in which the retail ISP is different from the network owner – an arrangement we’re seeing often in partnerships between telcos and electric cooperatives. Anybody willing to invest in rural broadband should be eligible to participate.