FCC

‘It Was Graft’: How the FCC’s CAF II Program Became a Money Sink

Of $10 billion spent through 2021, 93 percent of households received only 10 * 1 Mbps service.

Published

4 weeks ago

November 9, 2023

Jake Neenan

Photo of Tom Wheeler from the Brookings Institutions

WASHINGTON, November 9, 2023 – In the months before President Joe Biden signed into law the historic infrastructure law on November 15, 2021, Republicans and Democrats wrangled over how much to spend on broadband.

Democratic lawmakers sought $100 billion, while their Republican counterparts countered with $65 billion, saying the former’s proposal was wasteful and excessive. The final score was $65 billion, with $42.5 billion of that earmarked for infrastructure in the Broadband Equity, Access and Deployment program, or BEAD.

Crucially, the BEAD program adopted a new definition of what adequate broadband would look like: 100 Megabits per second download and 20 Megabits per second upload.

It turns out, that speed threshold is serving as a key reason why money from BEAD and other programs will be used to cover already-subsidized projects under an older Federal Communications Commission program that has only recently completed some broadband builds using older technology.

Broadband Breakfast has analyzed the data and spoke with experts and former FCC officials about the pitfalls and problems with the Connect America Fund Phase II, or CAF II, a $10 billion funding program that started in 2014.

FCC officials working on the program said they knew the 10 Mbps download and 1 Mbps requirement was low and would lead to further subsidization down the road.

But they went ahead with it because they needed a political win after the low adoption of the program’s predecessor: Connect America Fund I.

Right after the program started, the FCC changed broadband speed requirements

The problems started just six weeks after the CAF II program was finalized, when the FCC in 2015 approved a new definition of adequate broadband: an internet connection of at least 25 Mbps download and 3 Mbps download.

Critically, it didn’t migrate the CAF II threshold over to the new definition out of fear it would disincentivize interest in the program.

“In retrospect I can say it was a mistake having 10 * 1 Mbps be the standard for CAF Phase II,” said Carol Mattey, a former FCC bureau chief who worked on the plan.

The program offered large telecommunications companies, called price cap carriers, annual funding in exchange for providing that 10 * 1 Mbps service to rural areas across the U.S. without access to faster connections.

The FCC was desperate for providers to get on the program. It realized that it had many more years to formulate a reverse auction process, which would be used under the program’s successor, the Rural Digital Opportunity Fund, and so it was trying to entice providers to accept money by keeping the speed threshold low.

‘It was scandalous… it was graft’

Instead of waiting to formulate the reverse auction, which involves the providers bidding for the lowest amount of public dollars, they wanted to show that they were committed to connectivity – even when they knew that the speeds were low.

“It was scandalous, what the commission did,” said Jonathan Chambers, the FCC’s policy head during CAF II’s implementation. “It was graft.”

Chambers said he and the economists in his office were opposed to subsidizing price cap carriers at 10 * 1 Mbps from the beginning. He saw it as a giveaway to a powerful industry with too few strings attached.

In 2012 and 2013, the FCC offered price gap carriers a baseline of $750 per location to expand internet at the then-minimum broadband speed of 4 * 1 Mbps under CAF I. Five companies, including AT&T, Lumen, and Frontier, accepted a total of $225 million.

That didn’t feel like much to agency staffers who spent years updating the High-Cost Fund, which had provided companies subsidies with much fewer obligations than CAF I.

“Basically nobody took it,” Mattey said. “At the time, it felt like a failure. We’d gone through all this trouble to reform universal service and nobody wanted the money.”

All that amounted to a situation in which FCC staff felt they needed a success after the lackluster CAF I, according to Mattey. With a competitive bidding procedure known as a “reverse auction” still years away, that meant getting big telecom companies to work with the agency on another round of funding.

Those companies had already pushed back on raising the minimum speed from 4 * 1 Mbps to 10 * 1 Mbps, and setting an even higher benchmark would have risked another round of refused money.

“There was a desire to make this a success,” she said. “Better to take an incremental success than to be bold and have an absolute failure.”

CAF II and CAF I were always intended to be a stepping stone, she said. It would serve as a stopgap measure to get people connected while the agency worked out the process for an auction, in which companies would compete for subsidies with plans for building and maintaining new infrastructure.

But the FCC had never administered a reverse auction for broadband subsidies before, and creating one took time. The CAF II auction, in which areas the price cap carriers turned down were put up for auction, took a total of seven years to put together and was not ready until 2018.

Carol Mattey

Even FCC Chairman Tom Wheeler felt the pressure

Tom Wheeler, the FCC chairman at the time, declined to talk about the negotiations among commissioners and telecom companies. But he told Broadband Breakfast he felt the pressure Mattey described.

He confirmed that the 10 * 1 Mbps benchmark was set as low as it was out of fear the price cap carriers would refuse the money if it meant a more substantial upgrade.

The low benchmark worked. Ten companies accepted a total of more than $1.5 billion each year for the next six years in exchange for getting 10 * 1 Mbps service to more than 3.6 million homes and businesses. They would ultimately build to slightly more locations and get a seventh year of funding at the same amount, for a total of more than $10 billion.

But the tradeoff was ultimately not worth it for Mattey. Upping the standard to 25 * 3 Mbps and letting areas turned down by price cap carriers go to auction would have served them better than funding such low speeds, she said.

Michael O’Rielly, a commissioner at the time, concurred with CAF II’s adoption. He said in public statements at the time that he had reservations about the program’s speed benchmark. But he told Broadband Breakfast that in hindsight he feels the low speeds were better than nothing for unserved areas.

“I’ve seen those that have nothing and can’t get connected,” he said. “If you can give them 10 * 1 they can actually do something with it, even if it’s not everything you can do with 100 * 20.”

Michael O’Rielly

93 percent of locations received service of only 10 Mbps 1 Mbps*

The three biggest winners at the time were Lumen, AT&T, and Frontier Communications. Lumen led the pack with a $514 million annual award, while AT&T and Frontier were given $428 million and $283 million, respectively. Windstream received almost $200 million.

The price cap carriers were supposed to get money each year until 2020, when they were required to have finished deploying upgraded infrastructure in their respective areas. Citing pandemic supply chain issues, they took another year. That meant builds finished as late as 2021 were providing 10 * 1 Mbps service – a technological standard deemed by BEAD to be obsolete.

Companies followed the minimum standard set out in the program. FCC data, reported to the agency by those companies, show more than 93 percent of all locations served with CAF II infrastructure received only 10 * 1 Mbps service.

And that took place after the commission had declared 10 * 1 Mbps as substandard. That 93 percent of locations represents about 3.7 million homes and businesses across the country that are now limited to no more than 10 * 1 Mbps internet service.

Most of those, more than 2.9 million, did not receive service on their internet connections until 2019 or later.

That 10 * 1 Mbps threshold was too low for the program to meaningfully connect people, said former FCC Commissioner Jonathan Adelstein. He left the commission in 2009 to head the Department of Agriculture’s Rural Utility Service, an infrastructure funding agency that supports broadband deployment.

“Well, 10 * 1 was our standard in 2010,” he said. “For people to be building that in 2020 is really inadequate.”

New money being spent to cover the failings of old money

Some of those have already been targeted with more federal money. In 2020, the FCC put areas with internet below 25 * 3 Mbps, including those served by CAF II recipients, up for a reverse auction process, the Rural Digital Opportunity Fund. Under RDOF, companies competed for subsidies with plans to cost-effectively build and maintain new infrastructure.

Winners have been allocated more than $6 billion to build and operate networks over the next 10 years under the RDOF program, according to the FCC, with another $14 billion still earmarked for the program. The minimum speed threshold for the auction was 25 * 3 Mbps, but the fiber being deployed by winners almost always provides speeds far in excess of that.

As part of RDOF, the price cap carriers lost 1.2 million homes and businesses to outside bidders, about a third of their previously subsidized locations. Competitors demonstrated to the FCC they would be able to get better internet for less money to the same areas price caps had been receiving money to serve.

Almost every single winning bidder committed to deploy fiber-optic cable: The fastest, most future-proof technology available.

Lumen, the biggest CAF II recipient, lost more than 250,000 locations through the RDOF process. It beat out competitors for just 19,000 locations.

Frontier lost another 285,000 homes and businesses, beating competitors in more than 10,000.

AT&T lost more than half a million locations in the RDOF auction, winning zero locations.

Those losses came largely at the hands of smaller companies and local cooperatives. Charter, the major cable company, also scooped up locations across the county.

Jonathan Chambers

Is there a silver lining?

CAF II did make some positive changes to broadband subsidies generally, Mattey said. There were no requirements at all for funding recipients before the program, which instituted speed minimums and reporting requirements.

Mattey and others also drew up a process for determining exactly where subsidized companies were operating, which again did not exist before. And then there was the smaller CAF II Auction, which happened in the areas where price cap carriers turned down CAF II funding.

The auction happened in 2018 and got faster service for less money. A total of 100 bidders won $1.49 billion over 10 years to serve more than 700,000 locations. The minimum required speed was still 10 * 1 Mbps, but more than half the winning bidders committed to serve customers with 100 Mbps download, and more than 99 percent committed to 25 * 3 Mbps.

BEAD, the latest round of broadband subsidy, requires minimum speeds of 100 * 20 Mbps and prioritizes fiber. Areas receiving less than 25 * 3 Mbps are designated “unserved” and given special priority for funding. States are not allowed to allocate BEAD money elsewhere until all unserved areas are set to be provided with high-capacity broadband.

FCC data still shows more than 800,000 CAF II-funded locations still have no reliable, fast internet infrastructure nearby, and are not among the 1.2 million with RDOF commitments. That puts them at the front of the line for BEAD funds. It’s not clear whether the remaining 1.6 million homes and business in the proximity of faster technology are themselves being served with that speed, meaning they may well also be slated for more federal funds.

“RDOF and BEAD are wholly replacing these networks,” Chambers said. “The FCC spent more than $10 billion, and what did we get for it? Nothing.”

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Jake Neenan

Reporter Jake Neenan, who covers broadband infrastructure and broadband funding, is a recent graduate of the Columbia Journalism School. Previously, he reported on state prison conditions in New York and Massachusetts. He is also a devoted cat parent.

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Broadband Mapping & Data

Robocalls, Rip and Replace, Pole Attachments: More Notes From the FCC Oversight Hearing

Commissioners and House lawmakers discussed key topics at a contentious hearing.

Published

2 days ago

December 1, 2023

Jake Neenan

Screenshot of commissioners at the hearing Thursday.

WASHINGTON, December 1, 2023 – All five Federal Communications Commissioners took part in a lengthy and at times contentious House oversight hearing on Thursday.

Commissioners urged Congress to restore the FCC’s authority to action spectrum, which expired in March and left the nation’s airwaves in limbo, and to fund the Affordable Connectivity Program, the low-income internet subsidy set to dry up in April of next year.

GOP lawmakers FCC Republicans also took the chance to slam efforts by the commission’s Democratic majority.

The discussion touched on other issues including robocall prevention, rip and replace funding, and pole attachments.

Robocalls

The commission has been taking action on preventing robocalls this year, kicking off an inquiry into using artificial intelligence to detect fraud, blocking call traffic from 20 providers for lax enforcement policies and issuing hundreds of millions in fines. In August the commission also expanded the STIR/SHAKEN regime – a set of measures to confirm caller identities – to all providers who handle call traffic.

FCC Chairwoman Jessica Rosenworcel asked multiple times for three Congressional actions she said would help the commission crack down on scam calls: a new definition for “autodialer,” the ability to collect fines, and access to Bank Secrecy Act information.

The Supreme Court limited the definition of autodialers in 2021 to devices that store or produce phone numbers with random or sequential number generators. That leaves the scope of the Telephone Consumer Protection Act, which guides the FCC’s authority, “stuck in the nineties,” according to Rosenworcel.

“A lot of scam artists are using technologies no longer covered” by the act, she said. “We can’t go after them.”

On collecting robocall fines, that authority currently rests with the Department of Justice, and Rosenworcel is not the first to tell Congress the agency’s enforcement has been lax. Industry groups at an October Senate hearing cited slow DOJ action as a major reason FCC fines on the issue often go uncollected.

The Bank Secrecy Act requires financial institutions to keep records on certain transactions to help law enforcement agencies track money laundering and other criminal activity. The FCC cannot access information governed by the act, which Rosenworcel said would help the commission go after repeat scammers.

“These scam artists set up one company, we shut them down, they go and set another one up,” she said.

Rip and replace

Commissioners urged Congress to fund the rip and replace program. Congress allocated $1.9 billion to reimburse broadband companies for replacing network equipment from Chinese companies deemed to be national security threats, mainly Huawei and ZTE.

The FCC was tasked with overseeing the program and found in 2022 that another $3 billion would be needed to get the work done. The Biden administration joined a chorus of lawmakers and broadband companies in calling for Congress to fill the gap, but legislation on the issue has yet to be passed.

“We’re providing 40 cents on the dollar to a lot of small and rural carriers,” said Rosenworcel. “They need more funds to get the job done.”

The commission has been granting extensions to providers unable to get the work done on time. In addition to supply chain issues, some small providers cite a lack of funding as the reason they’re unable to replace insecure equipment.

Pole attachments

Commissioners expressed a willingness to shift some of the burden of utility pole replacements off of broadband providers as they attach new equipment.

“If a pole is getting replaced,” Commissioner Brendan Carr said, “there’s probably a role for the FCC to say that the pole owner should bear somewhere north of the cost of $0.”

The commission has authority in 26 states over most pole attachment deals between utility pole owners and telecommunications companies looking to expand their networks. The issue of who pays for poles that need to be replaced to accommodate more communications equipment is contentious, with telecoms arguing utilities force them to pay for replacing already junk poles.

After spending years sifting through thousands of comments, commissioners have apparently been persuaded. Rules up for a vote at the commission’s December meeting would limit the scenarios in which utilities could pass full replacement costs on to attachers.

Broadband funding map

Rosenworcel repeatedly asked lawmakers to work with the commission on ensuring its broadband funding map is kept up to date.

The FCC launched its funding map in May to keep track of the myriad federal broadband subsidy efforts and avoid funding the same areas multiple times. The Department of Agriculture, the FCC, and the Treasury Department each oversee separate broadband funding programs, in addition to the Commerce Department’s upcoming $42.5 billion broadband expansion effort.

The commission has signed memoranda of understanding with those agencies on providing data for the funding map, but Rosenworcel asked the subcommittee for help ensuring the agencies follow through and respond to FCC requests for their funding data.

“If you could help us make sure those other agencies respond to us with data, you’ll see where there are problems, duplication, areas we haven’t reached,” she said.

Broadband's Impact

House GOP Uses Oversight Hearing to Criticize FCC Actions

Partisan disputes return to FCC policies after years of a 2-2 split on the commission.

Published

2 days ago

December 1, 2023

Jake Neenan

Screenshot of Rep. Cathy McMorris Rodgers at the hearing Thursday.

WASHINGTON, December 1, 2023 – GOP lawmakers took the opportunity to slam recent Federal Communications Commission efforts at a House oversight hearing on Thursday.

That did not come as a surprise, with the communications and technology subcommittee branding the hearing as overseeing “President Biden’s broadband takeover.” Partisan disputes have resumed around FCC policies since the appointment of commissioner Anna Gomez, who gave Democrats a 3-2 majority on the commission.

The hearing also touched on spectrum policy and the Affordable Connectivity Program, which is still set to dry up in April 2024 despite months of calls for its renewal.

Digital discrimination

The FCC voted along party lines on November 15 to instate rules addressing gaps in broadband access along racial and class lines. Those rules are taking an approach industry groups opposed and allow the commission to take enforcement action against companies for practices that do not intentionally withhold broadband from protected groups.

Technology and Communications Subcommittee members and Republican commissioner Brendan Carr echoed talking points from an industry lobbying push that characterized the rules as a “micromanagement” effort to scrutinize routine business practices.

Rep. Cathy McMorris Rodgers, R-Washington, said “burdensome requirements like these will discourage deployment and harm our efforts to close the digital divide.”

Rodgers sparred with FCC Chairwoman Jessica Rosenworcel on the issue, interrupting her answers to questions to reclaim time.

Rosenworcel, for her part, stuck to her argument that the rules are in line with the Infrastructure Act, which mandates the commission take action “preventing discrimination of access based on income level, race, ethnicity, color, religion, or national origin.”

“The language in this statute is exceptionally broad,” she said.

The act also directs the commission to take into account technical and economic feasibility of deploying networks in poor and rural areas, but Rosenworcel’s assurances that the FCC will do so have not convinced industry or Republicans.

Net neutrality

The commission also moved forward on plans to reinstate net neutrality rules in October. The rules would classify broadband internet as a telecommunications service under Title II of the Communications Act of 1934, opening the industry up to more expansive regulatory oversight from the FCC.

Similar rules were in place for two years before being repealed by the Trump FCC in 2017.

Republican committee members grilled the commission on Democratic warnings that the repeal would result in widespread traffic throttling, which did not materialize at scale in Title II’s absence.

Subcommittee Chairman Rep. Bob Latta, R-Ohio, asked Rosenworcel “when the so-called net neutrality rules were repealed, did it end the internet as we know it today, yes or no?”

The commission chairwoman answered a string of similar questions by saying the anticlimactic end to Title II broadband rules was “a result of more than about a dozen states stepping in and developing their own net neutrality laws.”

Commissioner Carr also argued with Rosenworcel on Title II’s impact on national security, talking over each other at points. Carr said there had been “one briefing” in his six year tenure in which he was told about a security issue the government could not address without Title II oversight over broadband.

Rosenworcel said she has told national security authorities “over and over again” that without Title II authority, she cannot take requested actions to stop bad actors from hijacking traffic.

The commission is taking public comments on the proposed net neutrality rules until January 2024.

Broadband's Impact

FCC Pushes Congress on Spectrum Auction Authority, ACP Funding at Oversight Hearing

Commissioners from both parties emphasized the issues to the House Communications and Technology Subcommittee.

Published

3 days ago

November 30, 2023

Jake Neenan

Screenshot of FCC Chairwoman Jessica Rosenworcel at the hearing Thursday.

WASHINGTON, November 30, 2023 – The Federal Communications Commission asked Congress to move on renewing the agency’s auction authority and funding the Affordable Connectivity Program at a House oversight hearing on Thursday.

“We badly need Congress to restore the agency’s spectrum auction authority,” said FCC Chairwoman Jessica Rosenworcel at the hearing. “I have a bunch of bands that are sitting in the closet at the FCC.”

Rosenworcel pointed to 550 megahertz in the 12.7-13.25 GHz band. The commission would “be able to proceed to auction on that relatively quickly” if given the go ahead, she said.

The commission’s authority to auction spectrum expired for the first time in March after Congress failed to extend it. Auction authority lets the commission auction off and issue licenses allowing the use of certain electromagnetic frequency bands for wireless communication.

Repeated pushes to restore the ability, first handed to the commission in 1996, have stalled in the face of gridlock on Capitol Hill.

Opening up spectrum is becoming more necessary as emerging technologies and expanding networks compete for finite airwaves. The Joe Biden administration unveiled a plan this month to begin two-year studies of almost 2,800 MHz of government spectrum for potential commercial use.

FCC Commissioner Brendan Carr said that’s not fast enough. “I would have had the spectrum plan actually free up more than zero megahertz of spectrum,” he said.

Rosenworcel said the FCC was in talks with the National Telecommunications and Information Administration, the agency that wrote up the plan, during the drafting process. When asked if the NTIA followed her recommendations, she said she would “like everyone to move faster and have a bigger pipeline in general.”

Commissioners expressed support for a House bill that would give the FCC temporary authority to issue the licenses it already auctioned off for 5G networks in the 2.5 GHz band. An identical bill passed the Senate in September.

T-Mobile took home more than 85 percent of the 8,000 total licenses in the band for $304 million, but the company and other winners cannot legally use their spectrum until the FCC issues the licenses.

Affordable Connectivity Program

Also at the top of commissioners’ minds was the Affordable Connectivity Program. Set up with $14 billion from the Infrastructure Act, the program provides a monthly internet subsidy for 22 million low-income households.

The program is expected to run out of money in April 2024.

“We have come so far, we can’t go back,” Rosenworcel said. “We need Congress to continue to fund this program. If it does not, in April of next year we’ll have to unplug households.”

The Biden administration asked Congress in October for $6 billion in the upcoming appropriations bill to keep the ACP afloat through December 2024. The government has been funded since September by stop-gap measures, with House Republicans ousting former Speaker Kevin McCarthy, R-CA, over his unwillingness to cut spending and making similar demands of his replacement.

A coalition of 26 governors joined the chorus of calls to extend the program on November 16. Lawmakers, activists, and broadband companies have been sounding the alarm on the program’s expiration for months as the $42.5 billion Broadband Equity, Access and Deployment effort gets underway. Without the subsidy, experts have said, households could be unable to access the new infrastructure built by BEAD.

Representative Yvette Clarke, D-NY, said of the ACP shortfall that she is “looking forward to introducing legislation on that very subject before Congress concludes its work for the year.”