Introduction

On February 7, 2020, the Federal Communications Commission (FCC) released a Report and Order which established the Rural Digital Opportunity Fund (RDOF) under which up to $20.4 billion will be made available at auction to help bring high-speed broadband to the Nation’s unserved rural areas. $16 billion will be made available through the Phase I reverse auction (also referred to as Auction 904) that is scheduled to begin on October 22, 2020. At least $4.4 billion, plus the remaining funds from the Phase I auction and, possibly, other funds will be available under the Phase II auction, which has yet to be scheduled.

Despite adopting a telework policy earlier this month, the FCC is taking the necessary steps to meet its October 22, 2020 Auction 904 start date. On March 2, 2020, the FCC released its Procedures Public Notice requesting comments on proposed bidding procedures and related program requirements for Auction 904. The most significant issue raised in this Public Notice is whether the FCC should establish census tracts as the minimum bidding areas, or the census block groups used in the Connect America Fund Phase II (CAF II) auction (also referred to as Auction 903).

On March 17, 2020, the FCC released the preliminary list of census blocks and a map of areas initially eligible for Auction 904 (Preliminary List.) The areas identified in the Preliminary List are subject to limited challenges. First, existing providers may identify any census blocks as ineligible that have become served with voice and 25/3 Mbps or better broadband service since their June 2019 Forms 477 were filed. Second, FCC staff will determine whether areas identified on the Preliminary List are obtaining 25/3 Mbps or better service by providers supported by state broadband programs or other Federal programs, such as the Rural Utilities Service ReConnect Loan and Grant Program, Auction 903, and the Rural Broadband Experiments. These areas will not be eligible for Auction 904.

Report and Order

The FCC adopted four performance tiers for the Phase I auction, adding a new “baseline” tier of 50/5 Mbps. It also increased the weight for high latency services, adversely impacting satellite-based services.

Performance Tiers, Latency, and Weights

As outlined above, areas eligible for Phase I support are those wholly lacking broadband services at 25/3 Mbps and wireline voice services from a terrestrial provider. The FCC is relying on data from providers’ Form 477 reports to determine whether a census block will be eligible. These reports have been criticized because a census block is considered “served” if only one location obtains fixed voice and 25/3 Mbps broadband services, but the Form 477 data do allow the agency to identify wholly-unserved areas. The Commission believes that the new reporting rules and mapping procedures adopted in its ongoing Digital Opportunity Data Collection proceeding will make more granular data available. It predicts that unserved locations in many areas nominally classified as “served” will be identified and included in the Phase II auction.

Apart from the substantial $16 billion 10-year budget (up to $1.6 billion per year), the Phase I auction is expected to provide more money per bid than Auction 903 for three main reasons: (1) new bid assignment procedures, (2) the reduced high cost threshold and increased cap in maximum support per location, and (3) the opportunity for substantially lower Letter of Credit (LOC) carrying costs as compared to the LOC carrying costs imposed on CAF II auction winners.

1. Bid Assignment Procedures

The most significant difference between the bidding procedures for Auction 904 and Auction 903 is the change in bid assignment rules. While the lowest price point bid in the clearing round will still be awarded support, when two bids are each placed at the base clock percentage or at any other price point in the clearing round, the bid will be assigned to the bed having the lowest weight performance and latency combination (“T&L combination”). Under Auction 903, when two bids having different T&L combinations were placed at the same price point, the bids were carried forward to the next round. Under the revised bidding assignment rules, more bids are expected to be assigned during the clearing round of Auction 904.

2. High Cost Thresholds and Caps

To include more unserved areas than the CAF II auction, the FCC lowered the high-cost threshold from $52.50 to $40 per location. For Tribal areas and those entirely lacking 10/1 Mbps connectivity, the threshold is $30 per location. The $52.50 high-cost threshold is the price the FCC believes end-users should be obligated to pay based on what urban area customers pay. This threshold was reduced because the FCC determined there are several million customers in totally unserved areas where the estimated cost of service is less than $52.00, but 25/3 Mbps and fixed voice services are not available.

Additionally, the high-cost support cap per location is increased $212.50, up from $146.10, with the cap for Tribal areas and areas without any broadband service set at $222.50. The effect of reducing the high cost threshold and increasing the high cost cap is that far more locations will be eligible for Auction 904, as compared to those eligible for the CAF II auction. This makes sense as up to eight times more money is being made available in Auction 904 ($16.0 billion) as compared to Auction 903 ($1.98 billion).

3. Letter of Credit Obligation

The FCC adopted a noticeable reduction in the carrying costs for the required Letter of Credit (LOC). In the CAF II auction, the amount of the LOC increased annually until the buildout was complete. That is, if a buildout is completed in six years, the LOC, during the last year, would equal six times the winning bidder’s annual support amount. In Auction 904, the Commission retained the LOC requirement, but the Commission provided RDOF winning bidders an incentive to limit the amount of the LOC; as an award recipient satisfies its buildout milestone (as verified by USAC), the LOC is reduced to an amount equal to only one year of support payments.

Recognizing that the initial buildout milestone is 40% at the end of year three, the FCC established an optional 20% buildout milestone. This means that once a winning bidder meets the 20% buildout threshold, the LOC will be reduced to an amount equal to one year’s support.

Conclusion

The Phase I auction is an important opportunity for existing and prospective rural broadband providers. The $16 billion Phase I budget will likely exceed any other Federal or state broadband funding program for at least 10 years, so service providers that have sought federal or state funding opportunities in the past should strongly consider Auction 904, particularly in light of the auction process refinements that have been adopted by the Commission.