Wireline / Regulatory November 2019 by Mike Harder RDOF – Rural Development Opportunity Fund Broadband Mapping - Digital Opportunity Data Collection (DODC) According to the most recent FCC broadband report, ~24% of “rural” areas still lack access to 25/3 Mbps broadband speed. In Also in August 2019, the FCC approved an order for improved August 2019, the FCC voted on two important items that should Digital Opportunity Data Collection (DODC), which will collect improve funding for broadband providers to these rural more granular location broadband speed data than the outdated communities. Most notably, the FCC approved a new “Rural FCC “Form 477”. The new DODC program will be a completely Digital Opportunities Fund” (RDOF), which is the next iteration new data collection regime that requires all fixed broadband of the Connect America Fund (CAF) for areas served by price cap providers to submit “geospatial broadband deployment maps” carriers. In effect, RDOF is expected to replace the CAF program showing much more precise coverage data than the census block for the price cap carriers when that program expires in 2020. The level data collected via the legacy Form 477. new RDOF program will disburse ~$20.4 Bln in support over 10 years, with the first phase expected to begin in ~2021. RDOF will FCC chair Ajit Pai has openly acknowledged the need for better essentially be “CAF III” and awarded via a reverse auction similar tools to collect data about broadband deployment and to improve to the CAF II process that took place in 2018. The RDOF will not the current Form 477 reporting process. Accurate maps of who provide funding for any services less than 25/3 Mbps, such as 10/1 does and who doesn't have access to broadband are viewed as a Mbps services that were funded in the CAF II auction. Otherwise, critical first step toward closing the digital divide. the FCC proposes generally to use the same auction format as CAF II for the upcoming RDOF. The RDOF will be doled out in two phases. Phase I ($16 Bln in funds) will target census block areas that are completely without access to 25/3 Mbps speed. These award areas must meet the required speed thresholds within the next 6-years. Phase II award is budgeted for $4.4 Bln and will cover those areas with “partial” 25/3 Mbs service coverage. Some believe that the new RDOF has the potential to trigger a shift of government support funding away from the traditional legacy price cap carriers. Similar to the recent CAF II auction, varying communications won auction block awards including electric cooperatives, fixed wireless providers, and satellite providers. In fact, 5 of the top 10 CAF II award winners were fixed wireless Some industry lobbyist groups argue that the long time approach providers with only 2 ILEC’s being in the top 10 award recipients. of using the reported Form 477 data has led to some material These 2 LEC’s cited fixed wireless as a potential source of the misapplication of government funds. Shirley Bloomfield, CEO of funds to be deployed. NTCA–The Rural Broadband Association claims that: "Better broadband maps can play a key role in making sure that we both CAF II - Winning Bidder (in $ millions) Award Sector AMG Technology Investment Group LLC $281.3 Fixed Wireless build broadband where it is lacking and sustain broadband where Wisper ISP, Inc $220.3 Fixed Wireless it exists today". She also calls the FCC's current maps Rural Electric Cooperative Consortium $186.0 Fiber/Electric Coop "frustratingly inconsistent and unreliable" with many "false Viasat, Inc. $122.5 Sateliite positives" that identify areas as "served" even if only a few California Internet, L.P. $87.8 Fixed Wireless individual sites within a large region actually have broadband Commnet Wireless, LLC $79.9 Fixed Wireless Benton Ridge Telephone Company $52.4 Fiber/LEC & Fixed Wireless access.” In any case, the new DODC is expected to result in more Cal.net, Inc. $50.5 Fiber/LEC & Fixed Wireless accurate broadband speed reporting and cut down on wasteful Midcontinent Communications $38.9 Fiber & Fixed Wireless spending. Wilkes Telephone Membership Corporation $32.8 Fiber/LEC & Fixed Wireless So all this it begs the question: Will the traditional ILEC still be considered the carrier of last resort in the years to come? When A-CAM Deployments the FCC transitioned the voice-focused USF to the broadband- focused CAF program, it gave price cap carriers the right of first The FCC announced certain guidance on the deployment refusal on funding to bring broadband to areas of their local service obligations for all LEC carriers who elected A-CAM federal territory where broadband wasn’t available. As the legacy USF support. A-CAM stands for the “Alternative Connect America programs are being replaced with support programs geared Model”, which is a federal government support subsidy payment towards greater broadband deployment, the traditional ILEC could to rate-of-return carriers that voluntarily elected to transition to a be in the hot seat. new cost model for calculating High Cost funding. ACAM models Wireline / Regulatory November 2019 by Mike Harder forward-looking economic costs of deploying and operating a Some argue that ripping Huawei/ZET equipment out of US fiber-to-the-premise (FTTP) network. Carriers who elected this networks could be a costly headache for rural telecommunications option will have the certainty of receiving specific and predictable providers. As an example, one LEC provider in indicated that they monthly support amounts over the 10 year support term (2017- have ~$500,000 of Huawei equipment in their existing network. 2026). Those that elected model support must maintain voice and This particular LEC estimated that buying new parts and hiring a existing broadband service and offer at least 10/1 Mbps to all contractor to replace the equipment could cost between $1.2 -$1.5 locations fully funded by the model. They must also offer at least million. Additionally, if this legislation is passed it could also lead 25/3 Mbps to a certain percentage of those locations by the end of to delays in various projects geared towards deploying faster the support term. In addition, carriers must also offer at least 4/1 broadband speeds in their rural markets. In addition to terrestrial Mbps to a certain percentage of capped locations by the end of the fixe line/fiber networks, rural wireless companies could also be support term, and provide broadband upon reasonable request to affected. The Rural Wireless Association, a trade association the remainder. representing rural wireless carriers who each serve fewer than 100,000 subscribers, claimed that ~25% of its membership could If carriers fail to meet their required buildout obligations. be impacted by the “rip and replace” legislation companies could be subject to support recovery by the FCC. The FCC would seek to recover the percentage of support “that is equal to 1.89 times the average amount of support per location received “E-Rate” Program Modernization in that state” over the support term for the relevant number of locations that were not deployed, plus 10% of the carrier’s total relevant high-cost support over the term for the state. For those For over 20 years, schools and libraries have received universal carriers who elected A-CAM there could be negative cash flow service support program, commonly known as the “E-Rate” implications in the event of not meeting the mandated deployment program, to help obtain affordable broadband access. Eligible oblations as required under the A-CAM program. Thus, it this is schools, school districts and libraries may apply individually or as an important due diligence item to inquire about in order to part of a consortium. Discounts for support depend on the level of determine a LEC borrower’s overall credit risk profile. poverty and whether the school or library is located in an urban or rural area. The discounts range from 20% to 90% of the costs of eligible services. E-rate program funding is based on demand up to an annual established cap of $4.15 billion. A recent report from Huawei & ZTE gear – $1Bln Rip and Replace an E-Rate compliance firm called “Funds for Learning” found that the demand for E-Rate is continuing to grow, with 88% of It’s getting real now – a newly proposed House of Representatives applicants expecting bandwidth needs for schools and libraries to Bill asks for $1Bln to “rip & replace” any Huawei gear from US increase over the next three years. telecommunications networks. The bill is bipartisan in nature and specifically singles out Huawei and ZTE equipment manufactured Notably, E-Rate has two in China. The newly proposed legislation follows the Department categories of funding that of Commerce’s action in May to place Huawei and 70 of its support schools and affiliates on an “entity list,” effectively banning the entities from libraries. “Category one” buying components from U.S. companies without government provides connectivity to approval. schools and libraries, and “Category two” provides connectivity for services within schools and libraries (i.e. Wi-Fi, Ethernet, etc.) When the FCC adopted the new 5-year budget, the “category two” funding was deemed temporary in nature, expiring in 2019. Recently, the FCC announced that they The proposed bill directs the FCC to establish a reimbursement are considering making changes to how the program would make program to help smaller telcos replace equipment from the the “category two” funding permanent. aforementioned Chinese equipment companies. The funds would remain available through fiscal year 2029. This new bill We see this as a credit positive event for those borrowers who rely represents an increase in funding from the previously announced on E-rate funding as a meaningful source of revenue.