FCC to Allow New York to Allocate CAF Phase II Funding Declined by Verizon

January 26, 2017–Over the partial dissent of FCC Commissioner Mike O’Rielly, the FCC today awarded the state of New York a waiver allowing it to allocate through state-level reverse auctions $170 million in Connect America Fund (CAF) support that Verizon Communications, Inc., previously declined for its New York operations, in lieu of distributing the funding through the FCC’s own CAF reverse auction mechanism, which the Commission said would take longer.  The action was the agency’s first since the departure of former Chairman Tom Wheeler left the Republicans in the majority and the first since Ajit Pai was named Chairman earlier this week (TRDaily, Jan. 23).

Commissioner O’Rielly’s objections included the failure to obtain a commitment from New York State to stop diverting 911 fees collected from consumers to other purposes. On behalf of the state of New York, the Empire State Development (ESD) agency had asked the FCC for a waiver of agency’s rules to remove the CAF Phase II model-based funding for New York broadband connections that Verizon declined from the planned Phase II reverse auction, and to make the funding—approximately $170.4 million, according to the FCC’s Wireline Bureau—available to the state to allocate along with state funding in its own reverse auction under the state’s New NY Broadband Program (TRDaily, Oct. 13, 2016).  In a press release today, the FCC said that state funding and private investment to be combined with the CAF funding in New York would total at least $200 million.

In an order released late today in WC dockets 10-90 and 14-58, the FCC said, “Based on the record, we find that waiving the Commission’s program rules subject to the conditions described below will promote the rapid deployment of advanced broadband services to unserved areas and promote efficient and effective use of Connect America Phase II support.” It added, “We find that New York is uniquely situated to quickly and efficiently further our goal of broadband deployment. New York has committed a significant amount of its own support—at least $200 million—to Phase 3 of its broadband program that is designed to be compatible with and achieve the goals of Connect America Phase II.  Moreover, New York is poised to quickly implement the next phase of its program in a matter of months so that deployment of broadband of speeds that meet or exceed the Commission’s baseline requirements for Connect America can be achieved while the Commission is in the process of finalizing and implementing the Connect America Phase II auction.”

It also noted that awarding the CAF funding to the state would “help ensure that the Connect America Phase II auction does not award support to entities to serve areas where New York has already funded another recipient to offer broadband.”

The Commissioner rejected commenters’ arguments “that that by granting New York’s petition for waiver we are permitting Verizon to ‘game’ Connect America by avoiding its Connect America Phase II model-based obligations and instead receive support through New York’s broadband program, or that our decision would provide an incentive for other price cap carriers that declined Connect America Phase II model-based support to do the same.  First, we note that every price cap carrier had the option of turning down Connect America Phase II model-based support and instead participating in the Connect America Phase II auction. By making this decision, such price cap carriers risk getting no support at all in these areas if they do not place competitive bids. Second, Verizon would face significantly more aggressive build-out requirements through New York’s broadband program given the higher speed requirements and a more rapid build-out schedule. Finally, below we impose upon all recipients of Connect America Phase II support that is authorized in coordination with New York’s program the same public interest obligations and oversight and non-compliance measures that the Commission imposed on Connect America Phase II auction recipients to ensure that support is being used for its intended purpose.”

The conditions imposed by the FCC on the waiver “require that the support that we award in coordination with New York’s program be no more than the support calculated by the cost model (or the cap we adopt below for extremely high-cost census blocks). We will only authorize Connect America Phase II support to match whatever amount New York commits through its program, subject to a cap.  By requiring New York to commit the same or more support to the areas where we authorize Connect America Phase II support, we will likely be able to stretch the available Connect America support to more areas, potentially resulting in the deployment of broadband to more unserved and underserved Americans.”

It said that the FCC would “maintain control over the funds at all times, 1) by specifying where Connect America Phase II support can be awarded and placing limitations on how much support can be allocated to those areas, 2) by ensuring that the recipients are qualified to meet the obligations and individually authorizing the recipients, 3) by having USAC [the Universal Service Administrative Co.] directly disburse the support to authorized ETCs [eligible telecommunications carriers] in monthly installments, 4) by requiring the recipients to comply with the same level of oversight as all other Connect America Phase II recipients, and 5) by subjecting the recipients to non-compliance measures if they do not comply the program requirements.   For all of these reasons, this partnership is fully consistent with the Telecommunications Act of 1996.”

More specifically, it said that the Wireline Competition Bureau should “publish expeditiously an updated list of census blocks in New York that are not served by unsubsidized competitors or incumbent price cap carriers with voice and fixed broadband at speeds of 10/1 Mbps or greater according to the most recent publicly available FCC Form 477 data.  This list shall be used to determine which census blocks will be eligible for the authorization of Connect America Phase II support in coordination with the New York program. Any census blocks that do not receive any winning bids through the New York competitive bidding process will be eligible for the nationwide Remote Areas Fund auction if they remain unserved and would otherwise be eligible for the Remote Areas Fund auction at the time the Bureau finalizes the list of census blocks for the Remote Areas Fund auction.”

The FCC also set a reserve-price condition:  “For Connect America-eligible census blocks, the Bureau will not authorize more than the total reserve prices of all of the Connect America census blocks that are included in the bid.  We have not yet set specific reserve prices for the Connect America Phase II auction, but the Commission has decided that we will use the CAM to set those reserve prices and also that we will cap the amount of support per location provided to extremely high-cost census blocks.  We conclude that it serves the public interest to set reserve prices for purposes of this waiver decision that are specific to New York consistent with the decisions the Commission already made for the Connect America Phase II auction to ensure that Connect America support is used efficiently and effectively. Although we set a reserve price for the maximum Connect America support amount that we will authorize, this reserve price will not limit the amount of New York support that the state can separately award.”

The FCC also directed the Wireline Competition Bureau “to closely review each New York winning bidder that is awarded support from New York in Connect America Phase II eligible areas to ensure that they are financially and technically qualified to meet the Commission’s requirements.”  And it said that carriers that receive funding under the waiver will be subject to the same reporting obligations and non-compliance measures that CAF Phase II auction recipients are subject to.

In his separate statement approving in part and dissenting in part, Commissioner Mike O’Rielly said, “I commend New York and any other state willing to initiate its own program to spur broadband deployment in its jurisdiction. Yet, I am disappointed that the price of working with the state on this waiver request was to compromise on some of the sound policy decisions the FCC has achieved to date.  While some see this as a block grant-like proposal, which I generally support in many contexts, this waiver request shouldn’t be interpreted as such. These are federal USF dollars taken from ratepayers nationwide. They are not New York State funds, and we have the burden of deciding how best to allocate these scarce dollars, as well as the right to demand that they be spent wisely. We also shouldn’t have been held captive by artificial deadlines that had a negative impact on the overall discussion.”

Commissioner O’Rielly added, “The Commission expects that granting this petition will bring broadband to consumers sooner than the timetable for CAF Phase II. If achieved, that is a benefit, to be sure. In addition, I am pleased that New York will now adjust its program to ensure that all companies can compete for funding at the same time and in a technology-neutral manner, although I still have worries that the preferences will unfairly tilt against non-fiber providers. To be clear, I will carefully examine it to ensure that there are no restrictions or preferences that would unreasonably favor or disfavor any particular technology. I also take seriously the idea that the Commission reserves the right to review New York’s filing, and I commend Chairman Pai for his willingness to commit to pull the plug on this whole effort if it is not consistent with our universal service objectives. For these reasons, I am able to approve in part.

“At the same time, I am concerned that the funding will not be used as efficiently as possible. It should not be lost on everyone that New York is one of the states that diverts 9-1-1 fees collected to other non-related purposes, as is noted in the Commission’s recent report on the subject.  We should have received assurances that New York would cease this disgraceful practice. It certainly is one of the reasons that I have reservations about the representations made by the State,” he added.

“Substantively, without the assurances of a multi-round reverse auction or scarcity to drive down bids, our funding could be used in combination with New York’s funding to overpay for deployment in some areas, perhaps well over our reserve price, leaving other areas without service. That means the Commission could be left with more areas that we need to include in our Remote Areas Fund. Moreover, it is highly likely that carving New York out of the CAF II reverse auction means that some funding that might otherwise have flowed to high-cost portions of other states will be used for less efficient purposes in New York. It also undermines some of the competitive pressure we expected to achieve by conducting a nationwide reverse auction. Therefore, I must dissent in part,” Commissioner O’Rielly said.

In his statement, Chairman Pai said that the order takes “common-sense, fiscally responsible steps to coordinate funding between the federal Universal Service Fund and the state’s New NY Broadband Program, which aims to ‘ensur[e that] all New Yorkers have access to high-speed internet.’ By helping to provide Internet access to tens of thousands of locations in rural New York, we take the first of many steps toward bringing digital opportunity to all Americans. “Essential to this result was close, bipartisan collaboration among many officials at the state and federal level. In particular, I am grateful to New York Governor Andrew Cuomo, Senator Charles Schumer, and Representative Chris Collins for working with me to ensure this federal-state partnership progressed from promise to paper,” the Chairman added.

In a statement, Will Johnson, Verizon’s senior vice president–federal regulatory affairs, said, “With today’s order, the FCC takes the smart move of enabling better coordination between the FCC and New York broadband programs.  This step will speed the deployment of broadband to New Yorkers in rural and other unserved areas.  Verizon appreciates the efforts of the FCC and the State of New York to work together to close the digital divide.”

Matthew Polka, president and chief executive officer of the American Cable Association, said, “ACA appreciates the diligent review conducted and balanced decision reached by the FCC in approving New York State’s petition for a waiver to access Connect America Fund support. New York has one-upped the FCC by instituting a program to bring broadband service with performance capabilities that exceed those required by the FCC to unserved areas while ensuring government money is used efficiently and accountably. Moreover, New York is chipping in substantial additional funding. That forward-looking approach, which greatly benefits New York residents, businesses, and communities, should be rewarded. So long as those robust requirements are met, the FCC should permit other states to join New York in partnering in the Connect America Fund program.” – Lynn Stanton, lynn.stanton@wolterskluwer.com

Courtesy TRDaily