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FCC CAF II Auction to Bring Broadband to Rural Homes and Businesses

The U.S. has made tremendous strides over the past two decades in connecting Americans to high-speed broadband. But hurdles remain, as 24 million Americans still lack access. This is particularly true for sparsely populated areas where the economics of broadband are challenging. While only 2% of urban residents lack access, that number increases to 30% for rural residents. The FCC's number one mission is the close the Digital Divide, and there are many efforts under way, including the recent "Connect American Fund Phase II" auction. How does the auction work, and what will it mean for rural America? Joining Evan is Chelsea Fallon, Director of the FCC's Rural Broadband Auctions Task Force. For more information on the auction results, check out the FCC's interactive CAF II map. (Disclaimer)

Transcript: 

MR. SWARZTRAUBER: Welcome to More than Seven Dirty Words, the official FCC podcast. I'm Evan Swarztrauber. Over the past couple of decades, the U.S. has made tremendous strides in connecting Americans to high-speed broadband, but hurdles remain. There are challenges, both in terms of our population density and economics, particularly in serving rural areas.

The FCC's number one mission is to close the digital divide, and what do we mean by digital divide? Well, there are 24 million Americans that still lack access to high-speed broadband. The FCC defines that as at least 25 megabits per second down, 3 megabits per second up. Now, while that only includes two percent of urban residents who are on the wrong side of the digital divide, that number skyrockets to 30 percent when we're talking about rural America.

There are many efforts underway across various different agencies of the U.S. government, but recently the FCC conducted an auction called Connect America Fund Phase II, and that's what we're going to discuss on today's show. Joining me is Chelsea Fallon, Director of the FCC's Rural Broadband Auctions Task Force. Chelsea, thanks for joining.

MS. FALLON: Thank you. Happy to be here.

MR. SWARZTRAUBER: So before we jump into the auction, I'm always curious to ask FCC folks how they ended up in the jobs that they're in. It's not exactly the most obvious career path, but we all find our way here. So how did you get here?

MS. FALLON: Well, I've been at the FCC for almost 20 years. I first started work out of college at a law firm that specialized in telecommunications, and my first position at the FCC was actually in the auctions division of the Wireless Bureau. And I spent about 13 years in the Wireless Bureau working on spectrum auctions and mobile competition issues and then moved to the Wireline Bureau where I got some experience working on universal service and broadband issues and also some IT development experience working on data collections.

And then in April of 2017, the Commission decided to form this task force to focus on auctions for universal service funding.

MR. SWARZTRAUBER: All right. So you've been around the block and you've gotten some experience in various different parts of the agency.

Now, universal service. You know, this is an old concept that comes from the, you know, monopoly telephone era. But since 2011, the program was expanded to include universal service funding for broadband. And where does this $10 billion a year fund come from? It's thanks to you, listeners, for the fees that are paid on your phone bill. So thank you all very much for your contributions.

But, Chelsea, the Universal Service Fund is a $10 billion fund, and this program that we're talking about today is a slice of that. Can you briefly describe, you know, the program writ large and how many different areas it covers and different things that it tackles in the United States?

MS. FALLON: Sure. I will try to sum that up in a few sentences. Basically, universal service is a program overseen by the FCC based on the principle that all Americans should have access to communication services. And as you said, that now extends to broadband.

And there are basically four different programs within universal service, each with a different focus. One focuses on access for rural healthcare communication services, one is on schools and libraries, one is on the Lifeline program for low-income individuals.

The Connect America Fund is one part of the fourth bucket, which is often referred to as high cost, and that is funding that goes directly to providers to build networks in rural and remote areas of the country that are costly to serve and likely would not be served without this form of support.

MR. SWARZTRAUBER: Yes. I mean, when you think about the population density and economic challenges of deploying broadband, they're quite different. Here in Washington, D.C., you can, you know, trench a mile of fiber and you're covering lots of people. There are parts of America where there's only one mile per person, so, obviously, those are going to be two very different costs.

So how did this Connect America Fund Phase II come about?

MS. FALLON: So back in 2011, the FCC issued a major decision. We call that the USF Transformation Order. And one part of that was offering funding to legacy landline phone providers, the larger providers that we think of. We often call them price cap carriers, and these are companies like AT&T, Verizon, CenturyLink, sort of the former big Ma Bell companies.

MR. SWARZTRAUBER: Yes, the companies that kind of broke off when the monopoly was broken up.

MS. FALLON: Exactly.

MR. SWARZTRAUBER: Yes.

MS. FALLON: And so the Commission offered them funding on a state-by-state basis to serve the areas in those states that were deemed to be high cost and determined an area to be high cost based on a cost model that the Commission worked with an outside party to develop this cost model.

MR. SWARZTRAUBER: And they're essentially just trying to estimate what it would cost to provide service in these areas. Right.

MS. FALLON: Yes, basically. And so then it offered this amount of money to the providers to serve the high-cost areas of the territory on a state-by-state basis, and the provider could either accept the money for that state and build out to those areas or it could decline the offer for that support. And the states where these larger price cap carriers turned down that offer for support based on the model, those areas then became eligible for the CAF II auction.

MR. SWARZTRAUBER: Right. So rather than just say, all right, guys, I guess you're not getting service, the FCC decided to try something else. So, you know, that money was offered for fiber, right? And we traditionally think of fiber as very good but also can be expensive in some low-density areas. So is the biggest difference between CAF II, as we call it, and this older model in 2011 is that the FCC opened it up to other technologies besides fiber or combinations of technologies, essentially taking a tech-neutral approach basically? As long as you can provide the broadband service at the standard that the FCC requires, you can deliver however you want?

MS. FALLON: Basically, I think so. So the cost model in developing those costs that the cost model was based on, the cost for deploying fiber, those price cap carriers that accepted the model-based support then had to basically build out a minimum level of service. And at the time, the Commission decided that 10/1 was an acceptable level of service. And so that's the requirement for the price cap carriers that accepted model-based support.

Then in shifting to opening these areas that were sort of turned down up to a larger group via the auction, there were several differences, and one is that this funding now became available to a wider range of broadband providers. So --

MR. SWARZTRAUBER: So not just those former, you know, Ma Bell companies and those independent or, sorry, those incumbent telephone providers. Essentially, the FCC opened it up to lots of different companies, like satellites, wireless, cable, etcetera?

MS. FALLON: Right. Yes, a variety of different companies applied to participate in the auction, and they could use a variety of technologies just to meet the different service benchmarks associated with receiving support.

MR. SWARZTRAUBER: And for those areas that become eligible because funding was declined in 2011, I understand that they stretch out over 48 different states?

MS. FALLON: Yes. So looking at the total areas that were eligible for the auction, it was close to a million locations in sort of very small geographic areas called census blocks. But taken altogether, those blocks included about 974,000 locations, basically homes and small businesses that are lacking broadband. And the Commission also relied on data that it collects through its Form 477 broadband data collection program to ensure that those blocks were not being served by another provider.

MR. SWARZTRAUBER: So that's an important aspect of this program is that it's going to areas that truly do not have any service. It's not funding a competitive service where there's a provider already there.

MS. FALLON: Right. That is the idea, that it lacks service that at least is below, you know, below 10/1.

MR. SWARZTRAUBER: And a lot of commissioners, when discussing this auction, noted that it was a first of its kind. And the FCC has done a lot of auctions. The FCC auctions off FM translators, it auctions off spectrum for cell phone coverage, and it's been doing auctions for a while ever since it started doing auctions after the old beauty contests from way back in the day.

But what's interesting about this is when we say reverse auction, is this the first time the FCC ever used an auction to give out funds, as opposed to taking in funds?

MS. FALLON: So this actually isn't the first time the Commission has used a reverse auction, but it is the first time it has used a reverse auction for fixed broadband service. It did a small auction for Mobility Fund Phase I. And also in the larger incentive auction program, there was a reverse auction component to that.

MR. SWARZTRAUBER: Oh, when the broadcasters sold their spectrum to then be re-purposed for wireless coverage, right?

MS. FALLON: Exactly. But this is the first auction for ongoing high-cost universal service support for fixed broadband service.

MR. SWARZTRAUBER: And, essentially, the idea is that, rather than bidding up, which is what the FCC normally does, I guess, when it's selling spectrum or selling, you know, broadcast licenses, or bidding down. So that means that the FCC had to decide where to start, so how did we decide $2 billion would be the starting point for the auction?

MS. FALLON: Right. So the Commission established a budget of $2 million --

MR. SWARZTRAUBER: Two billion with a B, right?

MS. FALLON: Two billion dollars over ten years and established that as the amount of money it was willing to offer to serve these areas in the auction. However, each of the areas that was available in the auction had its own starting price associated with it. We call that the reserve price, and folks out there may have heard this term when using eBay, bidding on eBay.

MR. SWARZTRAUBER: Essentially, the lowest price that a seller is willing to accept.

MS. FALLON: Exactly, exactly. So sometimes, you know, a seller will say, well, I'm only willing to sell this if I can get X amount of dollars.

MR. SWARZTRAUBER: Right, at least that. But in this case, the FCC is kind of turning that around and saying this is the most we're willing to spend on this area.

MS. FALLON: Exactly. And so the reserve price, in a sense, kind of serves as an opening price. And so if you, if you took the -- and the reserve prices were based on that cost model that we talked about earlier, and so if you added up the reserve prices of all of the areas that were eligible for support in the auction, that added up to just over $6 billion, and so then the budget is $2 billion.

MR. SWARZTRAUBER: That's quite a difference.

MS. FALLON: Right. And so the Commission felt like the most efficient way to decide which areas would be served and by whom and for how much would be to use the auction mechanism.

MR. SWARZTRAUBER: So you start -- for each area, you're using that 2011 number and then essentially allowing providers to bid down in theory and I guess in practice. Because not everyone is going to use the most expensive technology fiber to the home to deploy, you're going to end up with some numbers that are lower than those reserve prices. And that is what happened, but we'll get to that in a second.

I wanted to ask what kind of speeds are we talking about here? You know, the FCC's definition of broadband for fixed broadband is currently 25 megabits down, 3 megabits up. You mentioned that under the old 2011 model, at the time it was 10/1, 10 megabits, one megabit up. Was this auction all 25, or were there different speed tiers?

MS. FALLON: So one of the interesting things about this auction is that there were actually four different speed tier levels that the bidders could bid at. So the bidders could choose which tier they wanted to serve, and so the lowest one was 10/1 and then the second one was 25/3 and then the third one had download speeds of a hundred megabits per second and then the highest tier was gigabit service.

MR. SWARZTRAUBER: Wow.

MS. FALLON: And so bidders had to commit to building out those speeds when they're making those bids. The way the auction design worked was that they could receive more money through the auction for an area if they were willing to serve a higher speed, willing to provide a higher speed in that area.

MR. SWARZTRAUBER: Right. So depending on the technology or what they were willing to provide, the funding would then correspond to that. Now, this is an auction. We didn't know how it was going to go. What was that like for the team? You know, going into this, you're saying, okay, we're starting at $2 billion, we don't know how much is going to end up being funded, we don't know what areas are going to get served, I mean, was that worrisome at all or were you guys pretty confident that it was going to work out well?

MS. FALLON: Well, we did not know what to expect going into it. There were a large number of participants, so we felt like that, you know, that was a good sign. We had, 220 applicants were qualified to participate in the auction.

MR. SWARZTRAUBER: That's pretty remarkable because, often, you know, telecom policy focuses on extremely large companies, but it's important to remember that there are a lot of mom-and-pop ISPs out there, there are small providers all over the country, particularly in rural areas. So some of these you probably haven't heard of unless you live there.

MS. FALLON: Right. There's a whole range of companies in the applicant pool and, ultimately, in the winning bidder pool. So wireless internet service providers, which are often smaller companies serving smaller rural areas, rural electric co-ops that are using, you know, leveraging their electric company infrastructure to provide broadband service, cable companies, satellite companies, as well as some of your more traditional telephone company, you know, local exchange carrier type companies.

MR. SWARZTRAUBER: Yes, and it was all of the above. So now for the fun part. Everyone probably wants to know how their state was impacted. And we're not going to have time to go through all 50, but what were the results? You know, what were the big top-line numbers that people should know about? You know, the auction was concluded recently, and what happened?

MS. FALLON: Yes, so there were 103 winning bidders out of, as I mentioned there were 220 qualified applicants, and $1.5 billion in support was awarded. And --

MR. SWARZTRAUBER: So it went $500 million below the reserve price essentially?

MS. FALLON: Exactly. So the way the auction worked, the bidders had to kind of compete for the budget, not just compete for the same area. So the prices had to come down low enough so that we got to that budget number of $1.98 billion.

MR. SWARZTRAUBER: Right.

MS. FALLON: And then that's what was basically saying the budget cleared, and then areas could begin to be assigned to the winning bidders. But then in certain areas of the country, bidders were competing to be able to get support for the same area, and so that intra-area competition kind of brought the amounts down further from that $1.98 billion down to about $1.49 billion.

MR. SWARZTRAUBER: And out of the, you know, million or so homes and small businesses that you said were eligible, how many are looking at potentially getting service out of this?

MS. FALLON: Right. So about a little over 700,000 homes and small businesses are included in the areas that got winning bids, and I think the most notable point is the speeds that the winning bidders have committed to offer. As I said, there were four different speed tiers.

The lowest one was 10/1. However, 99.75, you know, nearly 100 percent of the locations should get speeds of 25/3 or above and even over half of them should get 100 or above.

MR. SWARZTRAUBER: So only a tiny, tiny fraction are looking at speeds of less than the current definition of broadband by the FCC for fixed service.

MS. FALLON: Exactly, exactly.

MR. SWARZTRAUBER: Yes, 0.25 percent.

MS. FALLON: Exactly. And one other thing to note is that if you took those reserve prices of the areas that won and added them up, that would be about $5 billion, so that's what it would have cost to kind of serve them under the model. But now, you know, they'll get service for $1.5 billion, so that's a great savings to the ratepayers and a more efficient way of serving --

MR. SWARZTRAUBER: Yes, that's a huge difference. I mean, if you think about, you know, starting out with saying, okay, it would cost $6 billion to serve all these people under the FCC's old estimates, it just shows the power of auctions and the power of opening things up to other providers. I mean, and you didn't know exactly what was going to happen, but it turns out that 1.5 billion instead of 5 billion, that's a major difference.

MS. FALLON: Yes, I think so. And then having a large number of locations be able to get high-quality service is exciting.

MR. SWARZTRAUBER: Were there any states that stood out or areas where, you know, it was surprising or maybe not surprising that they were kind of outliers because of the makeup of the state or was it fairly evenly distributed throughout the country?

MS. FALLON: We really did not know what to expect in terms of where there would be a lot of activity, and all of the detailed information is available online about, like, you know, which areas of the country got the most activity and the most bids. I think a lot of areas in the middle of the country, Oklahoma, Missouri I think kind of stand out, my memory is areas that had a lot of bidders, a lot of competition. You know, you don't always know why things occur or know what to expect, and that's kind of the interesting and exciting thing, I think, about auctions.

MR. SWARZTRAUBER: Yes, and every state has its own challenges with deployment, whether it's terrain or density or whatever. And the FCC actually has an interactive map, so we will make sure to link to that in the show notes and you can check out how your state did in the auction.

But then there's the next step of actually building the infrastructure because, yes, we completed the auction but everyone doesn't magically have service immediately. There's a lot of work that goes into getting these networks up and running, so what happens from here?

MS. FALLON: Right. So as you say, there is a lot of work and most of that is going to be done by the providers and getting that infrastructure built out. I think our role is to make sure that that happens.

So all of the auction winners are required to file what we call a long-form application, just a post-auction application to give some more information about their financing, their network deployment plans, their ownership structure, that type of thing. And then all of the winning bidders have to obtain a letter of credit, which is basically like an insurance policy.

MR. SWARZTRAUBER: To make sure that they're, like, financially solvent and, you know, legit.

MS. FALLON: Right. And if, for some reason, they ultimately default or don't meet their requirements, then the Commission and ultimately the ratepayers can have access, you know, to get that money back and have it continue to be used in the fund. And they also have to get what's called an ETC or Eligible Telecommunications Carrier certification, and generally that's something they have to obtain from a state public utility commission as part of the process of becoming a recipient of universal service support.

MR. SWARZTRAUBER: And then we also have to make sure that people actually get service, so does the FCC have any idea of how it's going to require that? What exactly is the build-out requirement here?

MS. FALLON: Right. So there are some specific build-out requirements. So 40 percent of the locations that are won have to be built out to within three years and then an additional 20 percent in each subsequent year and then reaching 100 percent of the locations won within six years. And the winning bidders have to submit detailed location information on all of the locations that they serve to USAC, the Universal Service Administrative Company, which is sort of an independent organization kind of overseen by the FCC that handles all of the administrative parts of universal service, and so they handle the collection and looking at this data.

And there are also some requirements that the winning bidders have to do: Testing of their networks to show that they're actually providing the speed and latency that they are required to provide. That's sort of associated with their winning bid. And then one last thing is they're required to offer prices that are reasonably-comparable to similar service in urban areas.

MR. SWARZTRAUBER: Right. And that doesn't just apply to this auction and this program. That's across the board in the $10 billion fund. Whether it's a school or a hospital whatever, the entire point of the program is to make sure that the price paid by the ratepayer is similar to what someone in an urban area would pay.

MS. FALLON: Right. And I think the idea of that in urban areas you have competition to bring the prices down. In these rural and remote areas where we're offering support for service to get there, it's, you know, often for the only provider and you want to make sure that they're not going to charge monopoly rates.

MR. SWARZTRAUBER: Exactly. Now, you know, looking at this and talking to you, you know, it sounds like this was very successful both in terms of, you know, the speeds that are going to be rolled out here and also the savings for taxpayers, you know. This is obviously a lot of money that's spent every year to connect the country, and we want to make sure we're responsible stewards of that money. You know, do you think there's a lesson here about other things the FCC can do? Do you expect to see more reverse auctions going forward in the future?

MS. FALLON: I think so. I think that this has shown that the auctions can be a viable approach for distributing universal service support, that they can be used to kind of distribute money, give money out, not just raise money. And there are more universal service auctions on the horizon. The Commission is working on one for getting mobile service to areas that lack mobile broadband and voice coverage called Mobility Fund Phase II. And then on the fixed side, on the horizon we have the Remote Areas Fund, which would include the areas that were not sold in this CAF II auction and then another program called Connection America Fund Phase III, which would be the areas where those price cap carriers that accepted model-based support, that support runs out at the end of 2020, and so then we'll have to, you know, look at the best way to fund those areas going forward.

MR. SWARZTRAUBER: All right. Well, yes, it may not sound like we made the biggest dent in the world, but just remember this is just one piece of the puzzle here. And the digital divide is a big thing to tackle, but this is, you know, one aspect of it and there are other programs at other agencies going on and it's clearly the FCC's number one priority right now, and, you know, it's great that you're working on it. So thanks so much for your efforts and your team's efforts and congrats on a successful auction, and thanks for joining.

My guest has been Chelsea Fallon, Director of the FCC's Rural Broadband Auctions Task Force. Thanks for coming on.

MS. FALLON: Thank you so much.

MR. SWARZTRAUBER: You'll find this podcast in Google Play, Apple Podcasts, or wherever you get your podcasts. Please leave us a review because it will help others find the show. For more information about this auction, check the show notes for links. And, otherwise, that's it for today's episode. Catch you next time.