Expert Insights: Should RDOF Winners Get Amnesty?
Bowling Green, Kentucky (April 22, 2024) - As the launch of the Broadband Equity, Access, and Development (BEAD) program by state broadband offices across the country comes closer, many ISPs, in concert with other broadband stakeholders, are pressing the Federal Communications Commission (FCC) for an amnesty from their obligations under its Rural Digital Opportunity Fund (RDOF) program, so that affected areas can participate in BEAD instead. A large coalition sent the FCC this letter on February 28. On March 5, the FCC’s Wireline Competition Bureau issued a request for public comment on the letter. Comments were due on April 9. Now the FCC needs to decide what to do.
What’s this all about? Why does it matter? It matters because it will affect how, or whether, hundreds of thousands of unserved and underserved broadband serviceable locations (BSLs) across the country reap the benefits of broadband deployment incentives over the next few years. Two well-meaning federal programs, both dedicated to closing the digital divide, may trip over each other in some places, resulting in inefficiencies or possible program failures and ongoing coverage gaps. The issue is very technocratic and subtle, and it may be challenging even for the very expertise-rich FCC to come up with a satisfactory decision. There are strong vested interests at play on both sides. Whatever the FCC decides will first affect state broadband offices and the broadband industry and then, a few years down the line, lots of American households and businesses.
The issue is urgent, and ideally, it would have been decided months ago. By now, some of the state broadband maps that an FCC decision ought to inform or shape have already passed the challenge process window and are in the pipeline to approval. Some solutions are no doubt fairer and/or more efficient than others, but any early and clear decision is probably better than lingering uncertainty.
Here’s what you need to know.
The Long Backstory: The Winding, Rocky Road to Subsidizing Broadband Universal Service
Over the past twenty years, the United States has traveled a rather winding and rocky road to the principle that broadband access must be treated as something near to a universal right of the citizenry, comparable to utilities such as electricity, clear water, and roads. There is still no general right to broadband, but policy increasingly treats broadband access as a basic feature of the social contract.
The transition is similar to that which occurred roughly a century ago with respect to land-line telephony, where an early creative chaos of competition gave way to an arrangement that was labeled “universal service.” Universal service meant both (a) that all telephone customers should be able to call all other telephone customers regardless of which company they subscribed to, and (b) that rural telephone customers, who are generally more expensive to serve than urban customers, should be cross-subsidized by urban telephone customers to ensure that rural telephone services are sustainable and rates are reasonably comparable. Through the decades of the late 20th century, regulations ensured that just about anyone could order telephone service. That’s still not true for broadband, despite many billions of dollars of private and public investment, but much progress has been made.
The policy approaches to universal broadband access built on the institutional and policy legacy of universal service for telephony in some ways, but also differed in important ways. For most of the past twenty years, the FCC, the federal agency that oversees telephone service, has also been the leading federal agency to oversee, promote, incentivize, and support broadband deployment. Many of the companies that deployed broadband were the same as those that have long provided telephone service, often using the same physical wires or at least the same utility poles. Meanwhile, the regulatory landscape was changing. The 1996 Telecommunications Act recast the traditional local telephone monopolies as “Incumbent Local Exchange Carriers” (ILECs) and opened the door to “Competitive Local Exchange Carriers” (CLECs), ensuring that the ILECs would provide needed connectivity for CLECs to enter the market and give their customers access to other companies’ customers. The broadband rollout took place in the midst of this shakeup.
While the spirit of the 1996 Telecommunications Act was one of deregulation and an embrace of market competition, that had to be melded somehow with the old mandate of “universal service.” The result was an awkward mishmash, which, however, may have been more conducive to innovation and change than the old system. There was a wave of industrial reorganization, of spinoffs and reconsolidations. There was much investment, too, but also much underinvestment in the maintenance of many rural networks. Voters complained about that, and repeatedly mobilized state and federal legislators and agencies to try to solve it. Subsidy was layered on subsidy as government worked towards a solution. Until recently, most of those subsidies were administered by the FCC, with important roles for the National Information and Telecommunications Administration (NTIA), a branch of the US Department of Commerce, and the US Department of Agriculture (USDA). But since 2021, Congress has channeled significant federal broadband funding through the states, under the supervision of federal agencies. The American Rescue Plan Act (ARPA), passed in January 2021, channeled broadband funding to states through the US Treasury Department’s Capital Project Funds (CPF). The Infrastructure Investment and Jobs Act (IIJA), passed in November 2021, channeled broadband funding to states through the Broadband Equity, Access and Development (BEAD) program, administered by the NTIA, which had previously run the broadband programs enacted as part of the American Recovery and Reinvestment Act (ARRA) of 2009. Federal investment through the US Department of Agriculture (USDA), especially its ReConnect program, continues, but for the next few years, the big federal money will flow through the states.
The Puzzle with Moving Pieces
The RDOF, CPF, and BEAD programs are currently all underway at the same time, with similar goals of subsidizing deployment to areas lacking adequate broadband service, but they are at different stages in the process. RDOF, whose original $20 billion budget translated into over $9 billion of auction winnings (https://auctiondata.fcc.gov/public/projects/auction904/reports/total_assigned_by_state) and then over $6 billion of authorizations (https://docs.fcc.gov/public/attachments/DA-23-1185A1.pdf), is the furthest along. Its selection process ran in 2020, with awards first announced in 2021. CPF, with $10 billion of budget mainly for broadband deployment, has approved programs for most states (https://home.treasury.gov/policy-issues/coronavirus/assistance-for-state-local-and-tribal-governments/capital-projects-fund/awards-made-to-states-territories-and-freely-associated-states) and has the shortest timeline, with all spending required to complete by December 31, 2026. BEAD has been engaged in planning for the past two years but appears to be a few months out from a surge of awards that will start deploying around mid-2025, and accelerate thereafter, for completion in 2029 and 2030.
While these programs have the same main purpose, it’s important to keep them territorially segregated. Intuitively, it’s only fair. Projects should go to areas with needs, and an area that has its needs met by one project shouldn’t get a second project while some other area goes without. More subtly, the broadband business has strong “natural monopoly” tendencies. It might sound like good news for a broadband consumer to have options, but if an area barely has enough business to cover one ISP’s overhead, two ISPs might just be a recipe for failure. Usually, there is some competition in broadband, if you include options like satellite and fixed wireless access over cell phone networks, but broadband policy may have the best chance of achieving basic coverage if it recognizes up front that high-cost, outlying areas are lucky to get one affordable, high-speed ISP. And so RDOF, CPF, and BEAD are all designed not to “overbuild”– build to serve the same customers as– current high-speed providers or preexisting funded projects with ongoing deployment commitments. The aim is for the three programs, and state programs and a few other federal programs like USDA ReConnect, to jointly achieve a nationwide universal access solution, without overlapping each other. Like fitting together a puzzle.
Except that the puzzle pieces are moving. In the case of RDOF, many of the awards made in 2021 have fallen by the wayside. Many auction winners failed to achieve the required Eligible Telecommunications Carrier (ETC) status, or otherwise didn’t qualify. It should be feasible to remove from BEAD eligibility RDOF winners that have already defaulted, though snafus are possible. Those projects are null and void and shouldn’t affect the eligibility of the locations they had planned to serve. But what about RDOF projects that may yet fail in the future, as some probably will?
That’s where the coalition’s letter comes in. The signatories think that the FCC should offer an “amnesty,” a temporary window of reduced penalties, to RDOF winners who now want to relinquish their awards. That would make the defaulted areas eligible for BEAD. Would it also make the defaulting RDOF winners eligible for BEAD? That’s not clear. Why do so many RDOF winners want to relinquish their awards, anyway?
Why BEAD’s Money Looks More Generous than RDOF’s
Let’s consider a few numbers.
In December 2023, the FCC announced (https://docs.fcc.gov/public/attachments/DA-23-1185A1.pdf) that it had completed the review of the long-form applications that RDOF winners had to file to follow up on their awards won in the 2020 auction. This resulted in “over $6 billion” of awards for “just under” 3.5 million locations. Dividing $6 billion by 3.5 million locations yields an average per location subsidy of $1,714, or, rounding up a bit, maybe $2,000 per location on average.
Meanwhile, recent FCC data (https://mikeconlow.substack.com/p/new-fcc-broadband-map-version-3) suggest that there are about 7.1 million unserved (less than 25/3 available) and about 3.0 million underserved (less than 100/20 available but more than 25/3) locations left in the US. If 3 million of those get service from RDOF (assuming some will default and/or already got served while waiting), that leaves about 7 million locations for CPF and BEAD, which should be able to spend $50 billion or so on broadband projects after planning, administration, and a few non-deployment projects in some states. That should average to about $7,000 per location.
Based on the experience of other federal and many state broadband grant programs, the conclusion to draw here is not that CPF and BEAD are overfunded. Rather, the surprise is that RDOF secured so many broadband deployment promises so cheaply. Part of the story is a “low-hanging fruit” effect. RDOF will surely prove to have funded locations that are relatively cheap to deploy to, and left an uphill battle for CPF and BEAD. Part of the story is that the RDOF auction was very skillfully designed to mobilize and leverage competition to find the most cost-effective deployers and compete away their profit margins to get down to the minimum required subsidy.
But part of the story seems to be a phenomenon that economists and auction theorists call “the winner’s curse.” The concept of the winner’s curse applies to auctions where participants put about the same value on what is being offered, but face uncertainty, and make different guesses. In this case, the bidder that most overvalues what is offered wins the auction, and then likely finds itself cursed because its aggressive bid causes it to overpay.
RDOF seems to have had a winner’s curse problem. The well-designed auction set bidders against each other with great skill, and often made awards to companies that made aggressive promises for unrealistically low subsidies. That yielded great value for taxpayer money, on paper, as the low subsidy price per location shows. And when all is said and done, it likely will turn out that the FCC will have secured a lot of broadband deployment for a strikingly low cost through its RDOF auction, by selecting low-cost deployers and forcing them to spend their own money to keep their bids competitive. But a lot of RDOF projects have already failed, and more may do so in future.
Since the RDOF auction, a lot has happened. Supply chain problems starting in 2021 sent the price of broadband network inputs such as fiber-optic cable skyrocketing. While the supply-chain problems have mitigated since then, it’s still more expensive to build broadband networks in the 2020s than it was when optimistic ISPs prepared their winning RDOF bids a few years ago. Meanwhile, federal broadband funding has gotten a lot more generous. In 2020, RDOF was the last chance for a lot of rural areas to get funded, as far as anyone knew. Nobody knew then that BEAD was just around the corner.
The coalition letter is a reminder that a lot of those RDOF winners now wish they had waited. But the real problem is that a lot of the areas for which RDOF selected and funded a broadband provider to deploy to serve may also be wishing, or may be wishing soon, that RDOF had skipped them.
Another coalition, the Coalition of RDOF Winners, has also filed a letter in response to the FCC’s Public Notice in support of amnesty, detailing some of the factors that have led to default by coalition members as well as disputing some points made by the Commission, including by Chairwoman Jessica Rosenworcel, about the program and the grant winners. The primary reason stated for RDOF winners defaulting is skyrocketing costs between the time of bidding for the projects and when projects would have begun.
Regardless, state broadband offices are tasked by the NTIA with using BEAD grants to get solutions for all unserved and underserved locations in their states, except areas that have preexisting federally funded broadband projects that would meet BEAD specifications– including RDOF. BEAD has more money than RDOF ever did, and while most states’ plans are still under construction, it’s a safe bet that they won’t be as ruthlessly competitive as RDOF was. Therefore, ISPs applying for BEAD should be able to get more money than RDOF winners did, leading to better projects, or maybe just more profits, but at any rate fewer defaults and failures.
For RDOF areas, if an RDOF winner builds, a BEAD project might have been better, but at least broadband needs will be served. If an RDOF winner fails now, and pays the prescribed penalties, the area can still get a BEAD project. The worst-case scenario is that an RDOF project fails too late, when the BEAD Program’s ship has already sailed. That shouldn’t happen too often, but since there’s no general solution in place to avoid it, we’re on track to seeing it happen somewhere.
And that’s what the proposed RDOF amnesty is trying to prevent. But aside from the fairness issue of bailing ISPs out of their promises, the more RDOF defaults there are, the more locations are left for BEAD to address. And while BEAD is better funded than RDOF, it still faces anticipated funding shortfalls in many states.
RDOF, BEAD, and the Mapping Challenge
Keep in mind that this abundance of broadband funding is a good problem to have. For years, many rural areas and small towns have faced very uncertain futures, in part because of inadequate connectivity. . The FCC did good work in lean years, retooling the long-standing universal service system for landline phones to cover broadband expansion. Now broadband funding has become so abundant that the funding programs risk tripping over each other. Federal agencies like the FCC, NTIA and USDA have a complicated task blending various funds, programs, and rules into coherent plans to channel funds, mostly through private ISPs, to deliver high-speed internet service throughout the United States. Their hard work has paid off in lots of broadband expansion, and now the dream of universal broadband coverage, of everyone living in a connected nation, finally seems to be within reach.
But the coalition letter about RDOF amnesty is a reminder that there are still some important kinks to work out.
Whatever decision is made, it had better happen soon, and states need to pay attention and adapt.
The first step in the BEAD program is called “the challenge process.” It’s the chance for some communities, namely communities that really don’t have broadband, and where, unfortunately, the FCC maps wrongly say that they do, to mobilize and provide evidence for their lack of coverage so that states can correct the maps before the BEAD funds start to flow. The outcome of the challenge process should be a complete list of BEAD eligible locations in each state. Part of the challenge process is to identify all the locations where preexisting funded commitments should already ensure broadband deployment that meets BEAD standards within the next few years, to be distinguished from locations where no such commitments exist, and it will be the task of the BEAD program to secure them through grant funding. Quite a few states have already launched their BEAD challenge processes. Some have finished them. The rest are likely to launch their challenge processes in the spring or summer of this year.
The purpose of RDOF amnesty would be to allow RDOF winners who can’t build with the funds available, to let their RDOF areas be incorporated into and served by the BEAD program. To accomplish that, RDOF amnesty would need to become an option soon, RDOF winners would need to take advantage of it quickly, and the FCC would need to make sure that adequate public data is available about which RDOF winners opt for amnesty, so that states can know about it, and adjust their BEAD eligibility maps to add the RDOF amnesty areas to the BEAD program’s agenda.
RDOF amnesty has its downsides, but there’s a case for it. Good luck to the FCC in making a quick decision and, if it decides to pursue this, following through fast and hard to get it done in time to shape the BEAD program. And good luck to the NTIA and state broadband offices in making a quick adaptation to whatever the FCC decides. Let’s iron out the wrinkles and then close the last coverage gaps!
Bibliography
https://www.fiercetelecom.com/broadband/fcc-faces-pressure-pardon-rdof-defaults
https://connecthumanity.fund/wp-content/uploads/2024/02/RDOFFCCLetter.pdf
https://docs.fcc.gov/public/attachments/DA-23-616A2.pdf