Orange is the new green –well that’s one way to think of the FCC’s latest announcement of areas eligible for support (subsidies) for providers delivering broadband to unserved areas in connection with the upcoming Connect America Fund (“CAF”) Phase II reverse auction.

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Last week the agency issued a Public Notice identifying a preliminary list and map of census blocks that will be eligible for support in the upcoming Connect America Fund (“CAF”) Phase II auction (“Auction”). On the map all areas eligible for support are identified in orange. So, all of the orange areas on the FCC’s maps may be receiving greenbacks if the FCC makes no further changes to the preliminary list of eligible areas.

While the list of eligible census blocks and map are still preliminary, these resources will permit potential Phase II Auction participants to begin to evaluate whether to participate in the auction and pursue a portion of the $215 million in annual CAF II support that will be directed to service providers delivering both broadband and voice services in these areas. At the same time, release of the list also initiates a challenge process to permit any existing service providers already serving identified areas to inform the FCC of this fact.

Notably, the FCC’s list of eligible areas is subject to further revisions following the challenge process that ends on August 31, 2016. Once the challenge process (discussed in detail below) is complete, and the FCC has finalized the list of eligible areas, it will publish a final list of eligible census blocks at least three months before initial applications in the Phase II auction will be due.

As we have previously reported, in the Phase II Auction Order, the FCC established the overarching framework for this process. At the same time, the FCC directed the Wireline Competition Bureau (“Bureau”) to release a preliminary list of eligible census blocks based on June 2015 Form 477 data. The preliminary list of eligible blocks announced last week is the product of that mandate. In addition, the Public Notice provides further information about the Auction framework, and officially begins the limited challenge process to allow unsubsidized competitors (such as cable operators, CLECs, and fixed wireless Internet service providers) to oppose subsidies in areas they already serve.

Initial List of Census Blocks

The preliminary list of census blocks includes high-cost census blocks located in areas where price cap carriers declined the offer of Phase II model-based support, and certain census blocks nationwide that were not included in the offer of Phase II model-based support. The census blocks on the list are located in a variety of areas that differ greatly in terms of their defining characteristics. For example, some of the census blocks are former rate-of-return census blocks, while others have been identified by Connect America Cost Model (“CAM”) to exceed the extremely high-cost benchmark of $198.60 per location. To assist potential bidders in the Auction, the Bureau has identified the state, census block identification number, and number of locations that are eligible for Phase II support in the preliminary list.

Auction “Reserve Prices” Set

Additionally, the preliminary list sets a baseline illustrative amount of support for each census block by identifying the total amount of support that the CAM calculates for each census block. By including the illustrative amount of support for each eligible census block, the Bureau intends to assist service providers in evaluating whether to bid. The illustrative amount represents the highest possible level of support available for each census block, but the level of support may decline through the competitive bidding process. The FCC has decided that the reserve price in the Phase II auction for each minimum biddable unit will be no greater than the CAM-calculated support amount for each area, and a cap will be imposed in the amount of support per location provided to extremely high-cost census blocks.

Challenge Process

Service providers should review these lists to ensure that areas that they serve are not included on the FCC’s preliminary Phase II Auction list. If any served census blocks are on such lists, the service provider must notify the Bureau by August 31, 2016 of any census blocks that have become “served” since June 30, 2015, and which are not reflected on the June 2015 Form 477 data that the FCC used to develop the preliminary list of eligible census blocks. In order for a census block to be designated as “served” a provider must offer service within the census block of: (i) 10/1 Mbps or greater service, (ii) with a minimum usage allowance of 150 GBs (iii) at a rate meeting the FCC’s reasonable comparability benchmark, (iv) and latency not exceeding 100 milliseconds. It is critical that any updated or revised coverage data filed by a party as part of this notification process be reflected in a revision to that party’s Form 477 submissions if it was not already provided in the December 2015 Form 477. Unlike in previous challenges processes, the Bureau will not entertain challenges from parties seeking to establish that a census block is unserved if the census block is reported as served on a certified Form 477 as of June 20, 2015 or later.

Phase II Auction Details

The Public Notice also announces that census block groups or tracts will be the minimum geographic unit for bidding. If the Bureau ultimately decides to select census tracts when it finalizes the auction design, the number of discrete biddable units will be slightly more limited. However, whether census block groups or tracts are selected by the Bureau, parties will be required to bid on all of the locations within the block or tract. Therefore, parties that are interested in bidding in the Auction should add up the location counts and illustrative support amounts at the census block group or tract level to determine whether a business case may be made to serve the eligible area.

We reiterate that the list of census blocks eligible for the Phase II auction released by the FCC on August 10, 2016 is only preliminary. Once the Bureau has received revised coverage data from carriers through the limited challenge process, the Bureau will update the eligible census block list to reflect more recent Form 477 data and to incorporate any corrections filed by carriers. Additionally, the Bureau may remove additional census blocks from the eligible list, such as those blocks where price cap carriers have deployed eligible service using Phase I incremental support, which the FCC determines to be ineligible. Three months prior to the short-form application deadline for the Phase II auction, the Bureau will release the final list of eligible census blocks for the auction.

We urge interested parties to notify the Bureau by August 31, 2016 of any census blocks that have become “served” since June 30, 2015. However, there is likely still significant time before the Bureau releases the final list of eligible census blocks, which will occur at least three months prior to the short-form application deadline for the Phase II auction. Before the auction can occur the FCC must develop the specific auction framework that is subject to notice and comment and FCC action on the previously issued Phase II Auction FNPRM, and the yet to be released Auction Procedures Public Notice referenced in the Public Notice.