FCC Kicks Off 2020 by Establishing the Rural Digital Opportunity Fund

Taking the next step in closing the digital divide, the Federal Communications Commission (“FCC”) released a draft Order for consideration at its meeting on January 30, 2020 that would establish final rules for the Rural Digital Opportunity Fund (“RDOF”). If adopted, the RDOF would offer up to $20.4 billion over the next decade to support high-speed broadband networks in rural America. Consistent with its proposals for the fund, the Commission would:

• Target support to areas that lack access to broadband service with speeds of at least 25 megabits per second (“Mbps”) downstream and 3 Mbps upstream (“25/3 Mbps”)
• Allocate support under two phases:
  • Phase I would make available up to $16 billion in support to areas that are wholly unserved with 25/3 Mbps broadband service – almost 6 million homes and business in rural America
  • Phase II would make available at least $4.4 billion in support to areas that are partially served, as determined by the FCC’s new Digital Opportunity Data Collection, and any areas that are not won in Phase I
• Offer support through a multi-round, descending-clock reverse auction similar to the Connect America Fund Phase II (“CAF II”) auction
• Set the minimum required broadband speed at 25/3 Mbps – doubling the minimum required broadband speed in the CAF II auction of 10/1 Mbps
• Establish bidding weights with a greater preference for faster speeds and lower latency
• Employ service milestones and non-compliance measures similar to those used for the CAF II auction

In addition, based on feedback in the record, the FCC would:

• Allow applicants to select and bid on an additional performance tier, for a total of four performance tiers: Minimum, Baseline, Above Baseline, and Gigabit
• Prioritize certain bids by automatically choosing a bid to provide faster service once the Phase I auction reaches the clearing amount of $16 billion
• Require Phase I support recipients to offer voice and broadband service to all locations within the awarded areas, which will be identified by the Wireline Competition Bureau (“Bureau”) by the end of the sixth year of support, regardless of the number of locations that were identified prior to the auction
• Prioritize support going to areas lacking 10/1 Mbps broadband and rural Tribal areas, including by adding certain census blocks not previously deemed eligible for CAF II support

The FCC expects to conduct an auction for RDOF Phase I support in 2020. Once the final rules are adopted, the next steps will be for the Bureau to complete the challenge process to determine the eligible areas and the FCC to adopt procedures for implementing the auction.

Budget and Term of Support. The FCC would adopt its proposal to establish a budget of $20.4 billion for the RDOF and offer RDOF support over a 10-year term. It would also adopt its proposal to make available from this budget at least $16 billion in Phase I for areas that are wholly unserved with broadband speeds of 25/3 Mbps. The remaining $4.4 billion, as well as any unawarded funds from Phase I, would be made available in Phase II for areas that are partially served and any areas that are not won in Phase I.

Eligible Areas and Reserve Price. The FCC would adopt its proposal to conduct a challenge process for Phase I consistent with the process used for the CAF II auction, directing the Bureau to release a preliminary list and map of initially eligible census blocks based on the most recent publicly available FCC Form 477 data. The challenge process would be limited to allowing parties to identify areas that have become served since the FCC Form 477 data was released – it would not be used to identify areas that are not actually served. After the challenge process is complete, a list of final eligible areas would be published along with the reserve price (i.e., the maximum acceptable per-unit bid amount) for each eligible area. Departing from its decision in the CAF II auction, the FCC would allow certain census blocks that were not eligible for CAF II support, including on Tribal lands, to be included.

Distribution of Support. Similar to the CAF II auction, the FCC would use a multi-round, descending clock auction to identify the providers that will be eligible to receive support. Unlike the CAF II auction, however, once the Phase I budget “clears,” the FCC would prioritize bids with lower performance tier and latency weights, thereby favoring bids that offer the highest speeds, most usage, and lowest latency for each area.

Performance Tiers, Latency, and Weights. The FCC would adopt its proposal to permit bids for three different performance tiers: Baseline, Above Baseline, and Gigabit. In response to comments received from the public, the Commission would also adopt a fourth Minimum performance tier. In addition, the FCC would adopt its proposal to allow bidders to place low latency or high latency bids meeting the same requirements as the CAF II auction. And the FCC would adopt weights to reflect its preference for higher speeds, higher usage allowances, and low latency. The performance tiers, latency, and weights would be as follows:

Service Milestones. The FCC would adopt its proposed service milestones based on the service milestones it adopted for the CAF II auction – requiring voice and broadband service to 40% of the required locations by the end of the third year and 20% each year thereafter, with 100% by the sixth year. However, instead of engaging in a location true-up process to address discrepancies between the required number locations and actual number of locations as it did for the CAF II auction, the FCC would direct the Bureau to update the location counts by the end of the sixth-year milestone. If fewer locations are identified, the support recipient’s requirement to provide service to 100% of the locations by the end of year six would remain. If more locations are identified, the support recipient would have until year eight to provide service to 100% of the locations.

Non-Compliance. The FCC would adopt the same non-compliance measures and support reductions it proposed, which are generally applicable to high-cost support recipients. Because a support recipient’s service milestone may change based on the Bureau’s updated location counts, the FCC would also make commensurate modifications to the consequences facing a support recipient, depending on whether fewer or more locations are identified. As in the CAF II auction, the Universal Service Administrative Company would be authorized to draw on a letter of credit provided by a support recipient to recover all of the support that has been disbursed in the event that a support recipient fails to fulfill its obligations.

Bidding Credits. The FCC would decline to adopt any bidding credits, including a Tribal bidding credit to incentivize parties to bid on and serve Tribal census blocks.

Application to Participate. The FCC would adopt its proposal to require, similar to the CAF II auction, a pre-auction short-form application to establish eligibility to participate in the auction, relying primarily on ownership disclosures and applicant certifications. The FCC would require technical, financial, and operational information consistent with the short-form application for the CAF II auction. CAF II auction participants that subsequently defaulted on their entire award, however, would be barred from participating in the RDOF auction.

Application for RDOF Support. The FCC would adopt the same post-auction long-form application process as it did in the CAF II auction. The FCC would adopt its proposal that each winning bidder be required to submit in its long-form application information about its qualifications, funding, and the network it intends to use to meet its obligations. In addition, prior to being authorized to receive RDOF support, each winning bidder would be required to demonstrate that it has been designated as an eligible telecommunications carrier in the area(s) for which it is a winning bidder and obtain a letter of credit from a bank meeting the FCC’s eligibility requirements. However, to reduce the burdens on RDOF applicants, the FCC would adopt certain modifications to its CAF II letter of credit requirements, allowing a support recipient to reduce the amount of its letter of credit as it meets the later service milestones.

Defaults. The FCC would adopt its proposal to subject a winning bidder that defaults on its winning bids prior to being authorized to receive support (e.g., the bidder fails to file or prosecute its long-form application or its long-form application is dismissed or denied) to the same forfeitures as CAF II long-form applicants. However, the FCC would increase the limit on the total base forfeiture that could be assessed to further discourage defaults.

Transition Issues. Finally, the FCC would address issues relating to the implementation of the RDOF in areas currently served by price cap carriers receiving either legacy high-cost or CAF II model-based support. In particular, it would adopt its proposal to transition incumbent price cap carriers from legacy high-cost support in areas where RDOF support is awarded using an approach similar to the CAF II auction. It would also transition price cap carriers from CAF II model-based support in areas where RDOF support is awarded by offering an additional seventh year of model-based support.

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