Cable Operators See Obstacles to Getting USF Broadband Funds
Small and mid-sized cable operators are watching how the FCC develops Connect America Fund Phase II before deciding whether to bid for federal funds to expand broadband networks to unserved rural areas, industry officials told us. They said the Phase II CAF cost model, on which the FCC held a workshop earlier this month (CD Sept 14 p3), is one element that could prompt cable operators to compete for the funding. But plans haven’t been firmed up, and none may come to fruition on the part of cable operators, industry officials said.
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Several things have to happen before cable operators could see USF funding in the second phase of CAF, starting with LECs exercising right of first refusal to accept the subsidies, industry officials said. In that case, any local eligible telecom carrier could bid in a reverse auction on the funding, and only unserved areas can qualify for funding. It’s an open question in the cable industry whether it’s worthwhile to undertake the expense of obtaining ETC status from state public utility commissions, industry officials said.
"If you're a pure cable operator, and not a LEC, there are hurdles,” said lawyer James Moskowitz of Cinnamon Mueller, who represents operators and said he’s trying to “sell” some on placing bids. Some cable operators are CLECs by dint of selling phone service, while others sell only video and broadband. Earning ETC certification from PUCs not only can be expensive and tedious, but it will subject the operator to new regulatory oversight, industry officials said. “It’s a barrier to entry and it’s expected to be a real problem,” American Cable Association Vice President Ross Lieberman said of ETC certification. It’s a requirement that’s unlikely to change, Moskowitz said, as the FCC clearly stated in its USF order that states would retain their role. That order from October 2011 said it “anticipated” that the cost model would be ready by Jan. 1 (http://xrl.us/bnhyb7).
It may be years before any bidding starts, cable officials speculated. In the meantime, industry officials are watching how the FCC forms the system, starting with the cost model. The commission’s challenge with the cost model will be finding the right balance, said Wiltshire & Grannis cable lawyer John Nakahata. “It’s a little like Goldilocks -- it has to be just right if the cable companies are going to participate.” Officials said if the funding is too high, incumbent LECs will take the subsidy, eliminating any potential competitive bidding. Too low, and there could be no takers, regardless the technology. Lieberman said cable companies will be active in the cost model process to help ensure fairness, as it’s difficult for the FCC to effectively prevent LECs from using the overfunding to overbuild their cable competitors.
The FCC workshop gave agency and industry officials a chance to see CostQuest Associate’s broadband analysis tool (CQBAT), a cost model designed to find unserved areas and estimate the cost to serve them. The model uses the ABC Coalition definition of high-cost areas as anything over $80 and showed much of the unserved areas to be in the West, with some loops costing more than $1 million to construct in order to serve one house. Workshop speakers also discussed a separate model for Alaska. The ABC Coalition has included AT&T, CenturyLink, FairPoint Communications, Frontier Communications, Verizon and Windstream, and some of its USF suggestions were the basis of October’s order (http://xrl.us/bnqs2r).
How the FCC designs the bidding process will also affect whether cable operators pursue CAF Phase II funding, industry officials told us. The size of the service area will be a consideration, Nakahata said. “The larger the area, the harder to bid.” When designing the bidding rules, Lieberman said the FCC could also consider what kind of service an operator is proposing. The agency will require its minimum broadband floor of 4 Mbps downstream for funding, but cable operators could offer 15-20 Mbps downloads that in many cases incumbent carriers couldn’t meet with a DSL upgrade, he said. “For the same amount of funding, cable operators can do more,” Lieberman said. “The FCC could view this as good government."
Telcos have already demonstrated they will turn down the funding if they think it isn’t sufficient (CD July 25 p3). Only $115 million of the allotted $300 million was claimed by telcos, with three accepting funding and AT&T and Verizon declining the funding completely. Windstream accepted just 1 percent of the funding, and said the FCC’s offer of $775 per connection was too low to make deployment in high-cost areas economically feasible. Cox Communications is an ETC in some states, as is GCI in Alaska. Both companies declined to comment. While the FCC sets minimum ETC requirements, states can add additional regulation, Moskowitz said. Most cable companies will evaluate whether to pursue ETC status based on what rules and responsibilities a state requires, he said. In some cases, cable operators may need to establish a LEC affiliate to advance the process and give them a better chance to win the bid, he said. Moskowitz said finding interest among cable operators to bid for the funding has been a “tough sell.”