After some months of delay, the FCC has launched the second phase in its plans to provide significant subsidies over the next decade to fund the expansion of mobile wireless services to unserved rural areas of the country.

On March 7, 2017, the FCC released a Report and Order (Order) and Further Notice of Proposed Rulemaking (FNPRM) that establishes a framework to distribute $4.53 billion in Mobility Fund support for rural mobile broadband over the next decade ($453 million annually) to mobile broadband providers. As we recently commented, the FCC plans to redirect certain legacy High Cost subsidies currently received by competitive providers to Mobility Fund Phase II, and disburse support through a multi-round reverse auction where mobile broadband providers commit to compliance and deployment requirements. Through this reverse auction process, the FCC intends to incentivize providers to deploy mobile broadband services across rural America.

As discussed in further detail below, the Order allocates funding for Tribal and non-Tribal unserved areas, establishes a reverse auction process to disburse support, establishes criteria to determine areas that are eligible for funding, establishes compliance obligations for recipients, and establishes provider eligibility requirements. In addition, the item includes a brief FNPRM that asks questions about how best to conduct a challenge process in order to avoid disbursing subsidies to areas already served by an unsubsidized provider.

Background The FCC began reforming the High Cost program in 2011 when it adopted the USF/ICC Transformation Order. That order sought to reform the High Cost program in several ways to better balance universal service objectives against the burdens faced by “consumers and businesses who ultimately pay to support the [Universal Service] Fund.” The thrust of these reforms was to eliminate over time funding for multiple providers in the same geographic area, reforming how funding levels were calculated, restrict funding to areas that would otherwise go unserved without support, and increase service level requirements of recipients. As a result, the FCC began to phase out the “identical support rule,” which had resulted in competitive providers (mostly mobile carriers) receiving the same level of funding as the wireline incumbent local exchange carrier in any given area, regardless of the competitive providers’ actual costs.

At the same time, the FCC established the Mobility Fund to ensure that the Universal Service Fund would continue to support mobile services. The Mobility Fund was structured in two phases. Mobility Fund Phase I was a one-time infusion of roughly $300 million in support, awarded through a reverse auction in September 2012 to 33 winning bidders to preserve and deploy 3G or better mobile voice and broadband services throughout rural America. In contrast, Mobility Fund Phase II was envisioned as a form of recurring support that would distribute up to $500 million per year, including to Tribal lands, and was intended to begin in 2014. The funding for Phase II would come from the phased out identical support.

By April 2014, however, the FCC was still in the planning stages for Mobility Fund Phase II. It had proposed to target support in areas where 4G LTE would not be available absent support. Given that the Mobility Fund Phase II was not operational by July 1, 2014, the FCC paused the phase down of “identical support” to competitive providers at the 60% level until Mobility Fund Phase II was launched. In September 2016, the FCC renewed its efforts to launch Mobility Fund Phase II. The FCC’s Wireless Telecommunications Bureau released a report and found that about 575,000 square miles (or one-fifth of the area of the continental United States), either lacks 4G LTE service or is being served only by subsidized 4G LTE providers. An order had been drafted for the FCC’s November 2016 meeting, only to be pulled from the agenda at the last minute. A few months into the new Republic administration, the FCC has finally announced most of the major details of Mobility Fund Phase II. We have summarized the key features of Phase II below.

Budget

The FCC adopted a budget of $4.53 billion for Mobility Fund Phase II over ten years. This equates to the amount of legacy High Cost support mobile carriers outside of Alaska would have received over the next decade less funding needed to complete the phase-down of identical support. (High Cost funding to Alaska is distributed on the basis of a separate Alaska-specific plan that addresses the unique circumstances of that state.) The FCC also reserved $340 million out of the $4.53 billion budget, to support mobile broadband deployment on Tribal lands, which it has dubbed Tribal Mobility Fund Phase II.

While not quite topping out the $500 million limit envisioned in 2011, the $453 million annual budget for Mobility Fund Phase II exceeds the $200 million in annual support available under the Connect America Fund Phase II auction for wireline broadband networks.

Areas Eligible for Support

In general, areas lacking unsubsidized, qualifying 4G LTE service will be eligible for the auction. The FCC defines “qualifying 4G LTE service” to include mobile broadband with download speeds of at least 5 Mbps. In order to determine what areas meet these requirements and are eligible for the auction, the FCC will utilize mobile wireless coverage data reported on the FCC Form 477 to determine which areas are served by qualifying service, and High Cost funding disbursement data to determine which areas are subsidized.

As it did in the Connect America Fund program, the FCC will implement a process to permit certain parties to challenge assertions that any particular area is unserved so that only unserved areas receive Mobility support. The first step is that the FCC will publish a provisional list of eligible areas based on its review of Form 477 data. Parties, such as any service providers with facilities in those areas, will have an opportunity to review the FCC’s coverage analysis and rebut that data. There are multiple details pertaining to the Mobility Fund Phase II challenge process, however, that remain in flux, which is the sole subject of the companion FNPRM. In the FNPRM, the FCC proposes two different forms of challenges after issuance of the provisional list of eligible areas. One type of challenge proposed would rely on a certification from the challenger that the area is unserved that based on a good faith belief or actual data that there is no qualifying 4G LTE coverage in a specific census block. The FCC seeks comment, however, on the type and extent of supporting data that should accompany a certification-based challenge. The second type of challenge proposed would follow a more rigid structure. Under this process, service providers or governmental entities located in or near relevant areas to would be required to submit challenges within 60 days of the release of the FCC’s provision list of eligible areas and along with specific supporting data, such as shapefiles of network coverage and actual speed tests.

Once the challenge process has concluded, auction participants will bid to provide qualifying 4G LTE service. The FCC will use square miles to measure coverage, compare bids, and assess compliance with the corresponding coverage requirements for Mobility Fund Phase II, although bidders will be required to bid for at least a census block group or tract. (Prior to the auction, the FCC will specify whether a group or tract is the minimum required area.) The decision to use square miles is a notable difference from Mobility Phase I, which used road miles as the metric by which bids should be judged. In this Order, the FCC found that square miles are an administratively easier, and better, measure of whether mobile service is available where Americans work and live.

Public Interest Obligations

In order to receive Mobility Fund Phase II support, successful bidders must meet certain public interest obligations. Significantly, winners of Mobility Fund Phase II support must provide voice service and meet broadband performance metrics for minimum data speeds, maximum latency measurements, and minimum usage allowances. Specifically, auction winners must offer at least one plan throughout the area they have committed to serve that meets the following performance requirements:

  • Median data speed of the network for the supported area: 10 Mbps download/ 1 Mbps upload;
  • 90 percent of the required measurements must have a data latency of 100 milliseconds or less;
  • Data allowance comparable to mid-level service plans offered by nationwide providers (~2 GB); and
  • Rates for the plan must be reasonably comparable to those offered in urban areas.

Each of these performance requirements will be further defined by the FCC in the pre-auction process. It is important to note, however, that even though technology is certain to evolve, the performance metrics will remain the same over the course of the entire ten year term. The FCC’s rationale is that evolving performance metrics would create a disincentive for potential bidders and administrative complexity and burdens for the FCC.

Finally, the FCC will require Mobility Fund Phase II support recipients to meet defined deployment benchmarks. Specifically, winning bidders must demonstrate coverage of at least 40 percent (40%) of the supported areas in a state by three years after a start-up period of 60 days after the close of the auction, 60 percent (60%) four years thereafter, 80 percent (60%) five years thereafter, and 85 percent (85%) six years thereafter.

Auction

Mobility Fund Phase II support will be awarded through a multi-round reverse auction with competition across geographic areas. Through the auction, the FCC will award support to providers that are willing to provide 4G LTE service for the lowest subsidy amount. Participation in the auction will be limited to providers that meet certain specific eligibility requirements. First, winning bidders in the auction must either be an eligible telecommunications carrier (ETC), or become an ETC within 180 days of the public notice identifying winning bidders, although there are provisions to provide some flexibility on the timing of the ETC designation process. Second, any winning bidder in the auction must have access to spectrum necessary to fulfill any obligations related to the support it received. Specifically, a winning bidder must demonstrate that it has access to the available spectrum resources for the term of support necessary to provide qualifying 4G LTE service. Third, as with almost every universal service program, winning bidders must demonstrate their financial and technical capability in order to provide assurances to the FCC that they will indeed be able to provide the supported service.

Prior to the launch of the auction, applicants must submit a “short-form” application, which provides basic information about the applicant and certifies that it is eligible to receive the support that is the subject of its bid. Subsequent to the auction, winning bidders will be required to submit a “long-form” application, which will essentially be the same as the long-form application utilized in the Mobility Fund Phase I auction. The long-form application will be much more detailed and will provide the FCC with a significant amount of information about each winner. This information includes: ownership information, ETC eligibility, financial and technical capability information and certifications, network coverage plan, spectrum access information, certifications for each Mobility Fund program requirement, and certain additional information.

In addition to the application forms themselves, the FCC will require multiple safeguards to protect universal service funds in the case of bankruptcy or otherwise the bidder failing to meet its obligations. First, the FCC will require an irrevocable standby letter of credit. Second, the FCC will require a winning bidder to submit a legal opinion letter stating, in part, that “in a proceeding under the Bankruptcy Code, the bankruptcy court would not treat the letter of credit or proceeds of the letter of credit as property of the winning bidder’s bankruptcy estate.”

The FCC’s adoption of the Mobility Fund Phase II framework will significantly shape the deployment of mobile broadband services across rural America. The FCC anticipates that the first stage of Phase II, the challenge process, will begin later this year and conclude no later than the first quarter of 2018. Providers interested in participating in the challenge process or in Phase II more broadly should contact DWT for assistance.