FCC Replaces Rate-Of-Return Competitive Overlap Process With Reverse Auction System
The Federal Communications Commission has approved and released a Report and Order and Further Notice of Proposed Rulemaking that revises many universal service fund (USF) rules that apply to rate-of-return incumbent local exchange carriers.[1] In the order, the FCC replaces the existing overlap process that applies to legacy rate-of-return service areas that are served by unsubsidized competitors with competitive auctions. In the Further Notice of Proposed Rulemaking, the FCC seeks comment on details related to the structure of the auctions.
The Original 100 Percent Competitive Overlap Process
In the 2011 USF/ICC Transformation Order, the FCC adopted a rule to eliminate high-cost universal service support in rate-of-return ILEC study areas where an unsubsidized competitor or a combination of unsubsidized competitors offer voice and broadband services meeting the FCC’s service obligations throughout the study area.[2]
In the FCC’s 2015 competitive overlap proceeding, there were 15 rate-of-return study areas preliminarily subject to 100 percent overlap by unsubsidized competitors, but only one was ultimately found to be subject to 100 percent competitive overlap.[3] In the 2017 overlap proceeding, a total of 13 rate-of-return study areas were potentially subject to 100 percent competitive overlap. However, the Wireline Competition Bureau was unable “to confirm that any of the 13 study areas preliminarily identified were in fact 100 percent served by unsubsidized broadband competitors.”[4] Another competitive overlap determination is scheduled for 2019.
In a March 2018 Notice of Proposed Rulemaking, the FCC sought comment on ditching the current overlap process and moving to an auction mechanism to award support to either the incumbent rate-of-return carrier or the competitors in areas where there is significant competitive overlap.[5]
Reverse Auctions For Areas Served By Qualifying Unsubsidized Competitors
As proposed in the March 2018 NPRM, the FCC has decided to impose reverse auctions on rate-of-return study areas that are subject to unsubsidized competition. So the old 100 percent competitive overlap rule is repealed, and in its place is a reverse auction mechanism. Specifically, competitive auctions will be used to distribute high-cost USF support in legacy rate-of-return service areas that are nearly entirely overlapped by an unsubsidized competitor or multiple competitors that offer voice and 25/3 Mbps broadband service.[6] The FCC will use Form 477 data to make this determination. There will be no comment period or challenge process.
For what it’s worth, the FCC says there are currently 8 legacy rate-of-return study areas with 100% overlap and 7 legacy study areas with at least 95% overlap. These rate-of-return carriers know who they are, so this proceeding applies to them, but it could eventually apply to more and more carriers over time, making this proceeding important to all.
So that is all that has been decided right now – to be a qualifying unsubsidized competitor, the provider must offer voice and 25/3 Mbps broadband service. In the Further Notice of Proposed Rulemaking, the FCC seeks comment on all the necessary details – the who, what, when, where, and why – of the auction. For starters, the overlap auction will operate in substantially the same way as the CAF Phase II auction. Here is a summary of the other issues related to the structure of the auction:
Competitive Overlap Percentage Trigger: The FCC wants suggestions on where it should set the bar for triggering an auction. The FCC asks if legacy study areas that are somewhat less than 100% overlapped should be subject to a competitive auction, such as 99% to 95%. The FCC also proposes to keep conducting the overlap process every other year.[7]
Minimum Geographic Bidding Area: Study areas will be carved up into census blocks, census block groups, or something similar. Each of these units will be auctioned.[8]
Reserve Price: The FCC expects to establish reserve prices – the maximum amount of support available for each bidding unit prior to the auction – and is considering a few methods to get there. The FCC is considering establishing reserve prices based on costs derived from the FCC cost model or the A-CAM, or on some percentage of the incumbent’s prior year’s legacy USF claims.[9]
Bidding Tiers – Service Requirements: Similar to the CAF II auction, the FCC proposes that bids be weighted based on service tiers – 25/3 Mbps, 100/20 Mbps, and 1 Gbps/500 Mbps. Each tier will differentiate between bids that would offer either lower or higher latency. Winning bidders would be required to serve all locations within each auction area, with interim and final deployment milestones similar to those of recipients of CAF Phase II auction support.[10]
Oversight And Compliance: The FCC proposes that the same oversight and non-compliance framework as used in the CAF Phase II auction would apply to competitive auctions offering support to overlapped legacy rate-of-return service areas.[11]
Eligible Auction Participants: The FCC’s proposes the overlap reverse auctions be open not only to the incumbent and the competitors that report coverage within the study area, but open to any eligible provider.[12]
Two Stage Application Process For Participants: The FCC proposes to adopt a two-stage application filing process for participants, similar to that used in other FCC universal service auctions – a pre-auction “short-form” application and a post-auction “long-form” application. To show they are qualified to bid, participants would have to submit information about their ownership, cash flow, and relevant experience providing voice and broadband service.[13]
Multi-Round, Descending Clock Auction Structure: The FCC’s proposes to do what it did in the CAF II auction. Specifically, the FCC proposes using a multi-round, descending clock auction in which bidders selecting different performance levels will compete head-to-head in the auction, with weights to take into account a preference for higher speeds over lower speeds, higher usage allowances over lower usage allowances, and low latency over high latency.[14]
Specific Details Related To Incumbent Providers: The FCC proposes that any incumbent that does not apply to participate in a competitive overlap auction of its study area shall have its support reduced, regardless of whether other carriers apply or bid. The FCC would like comments on what should happen if the incumbent rate-of-return carrier is the only one to bid in the competitive overlap auction. Comment is also requested on what should happen when the incumbent is not a winning bidder.[15]
The Reverse Auction Kool-Aid
Right now, the FCC is really high on reverse auctions because of the perceived success of the CAF Phase II auction. Sure, the results look promising – “The total locations awarded support had an initial reserve price (maximum amount) of $5 billion over ten years, but the amount awarded to cover these locations is only $1.488 billion.” The FCC says it has “now seen the success of the CAF II auction, which ‘unleashed robust price competition’ so that ‘more locations will be served at less cost.’” But, the FCC should really pump the breaks on declaring the CAF II auction a success because we won’t truly know the successes and failures for at least five years. There will be failures. The most likely failure will be the number of locations that are supposed to receive 100 Mbps service but won’t.
Will a reverse auction work for areas subject for competitive overlap? For the relatively small amount of incumbent carriers that are facing this predicament, the answer, surprisingly, may be yes. Why? The old 100 percent competitive overlap rule imposed a 100 percent support reduction penalty. Under a reverse auction system, incumbents at least have a chance to retain some support rather than lose it all.
As mentioned earlier, there are currently 8 legacy rate-of-return study areas with 100% overlap and 7 legacy study areas with at least 95% overlap. The FCC clearly has its eyes set on lowering the bar to at least 95 percent. However, a few years ago, the FCC indicated it could lower the overlap threshold to 75 percent. If the overlap threshold is lowered to 75 percent, it will capture significantly more rate-of-return carriers. And, with the FCC so smitten with the CAF II auction, this trigger could go even lower. That’s why this issue is so important to rate-of-return carriers that will not move to cost model regulation.
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For More Information On This Topic, Try These Blog Posts:
A-CAM II: A New Model Offer for “Legacy” Rate-of-Return Carriers (November 2018)
FCC Considering Minor Changes to “Legacy” Rate-of-Return USF Budget (April 2018)
FCC Provides More Funding For A-CAM Carriers (March 2018)
A-CAM Companies Make Final Push For More Funding (December 2017)
NTCA Presses FCC To Review High-Cost USF Budget (August 2017)
NTCA Survey Says: High-Cost USF Shortfall Harming Rural Broadband Deployment (August 2017)
A Watershed Moment: The FCC’s 2016 Rate-of-Return Reform Order (March 2016)
*****FOOTNOTES*****
[1] Connect America Fund, WC Docket No. 10-90; ETC Annual Reports and Certifications, WC Docket No. 14-58; Establishing Just and Reasonable Rates for Local Exchange Carriers, WC Docket No. 07-135; Developing a Unified Intercarrier Compensation Regime, CC Docket No. 01-92, Report And Order, Further Notice Of Proposed Rulemaking, And Order On Reconsideration, FCC 18-176 (Dec. 13, 2018) (2018 Rural Broadband Order).
[2] Connect America Fund et al., WC Docket No. 10-90 et al., Report and Order and Further Notice of Proposed Rulemaking, FCC 11-161, ¶¶280-84 (Nov. 18, 2011), aff’d, In re: FCC 11-161, 753 F.3d 1015 (10th Cir. 2014) (USF/ICC Transformation Order). The Commission defined an unsubsidized competitor as “a facilities-based provider of residential fixed voice and broadband service that does not receive high-cost support.” Id. at ¶¶103-104. See also 47 C.F.R. § 54.5.
[3] Wireline Competition Bureau Publishes Preliminary Determination Of Rate-Of-Return Study Areas 100 Percent Overlapped By Unsubsidized Competitors, WC Docket No. 10-90, Public Notice, DA 15-868 (July 29, 2015). The Wireline Bureau also identified 11 study areas thought to be subject to greater than 99 percent but less than 100 percent competitive overlap.
[4] Wireline Competition Bureau Publishes And Requests Comment On Rate-Of-Return Study Areas Potentially 100 Percent Overlapped By Unsubsidized Competitors, WC Docket No. 10-90, Public Notice, DA 17-760 (Aug. 11, 2017).
[5] Connect America Fund, WC Docket No. 10-90, ETC Annual Reports and Certifications, WC Docket No. 14-58, Establishing Just and Reasonable Rates for Local Exchange Carriers, WC Docket No. 07-135, Developing a Unified Intercarrier Compensation Regime, CC Docket No. 01-92, Report and Order, Third Order On Reconsideration, and Notice Of Proposed Rulemaking, FCC 18-29 (rel. Mar. 23, 2018).
[6] 2018 Rural Broadband Order at ¶ 144.
[7] 2018 Rural Broadband Order at ¶ 185.
[8] 2018 Rural Broadband Order at ¶ 186.
[9] 2018 Rural Broadband Order at ¶ 187.
[10] 2018 Rural Broadband Order at ¶ 188-190.
[11] 2018 Rural Broadband Order at ¶ 198.
[12] 2018 Rural Broadband Order at ¶ 191.
[13] 2018 Rural Broadband Order at ¶ 192-193.
[14] 2018 Rural Broadband Order at ¶ 194.
[15] 2018 Rural Broadband Order at ¶ 195-197.
