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Top 10 Things to Know About the Rural Digital Opportunity Fund (RDOF)

May, 2020
By Jon Wilkins

The impact of novel coronavirus/COVID-19 across America has caused significant strain across our education and economic systems. One of the unintended consequences of the measures we have taken to combat the virus is the exposure of our country’s broadband network weaknesses.

Almost every article published these days has something to say about our overtaxed broadband infrastructure or why we need a nationwide broadband build out or how the government should be throwing as much money as possible at expanding high-speed broadband across rural America.

Fortunately, the FCC was already working on this problem prior to August 2019 when they announced the Rural Digital Opportunity Fund (RDOF). No, they didn’t know about the virus yet, but they did know a major disbursement of Universal Service Funds to stimulate broadband growth—especially in rural communities—was absolutely needed.

The Consortium is built to help electric utilities successfully bid in the RDOF auction, scheduled to start on October 22, 2020.

You may know all about RDOF, know a little bit about RDOF, or not know anything at all about RDOF… which is why we’ve compiled these Top 10 Things to Know About the Rural Digital Opportunity Fund.

1. RDOF is a nationwide auction of huge scale and complexity:

RDOF is the largest one-time award of funding for broadband in the FCC’s history and will award over $20 billion in two phases. Phase I will auction up to $16 billion in funding this year. RDOF funds will be awarded via a “reverse” auction format, in which multiple service providers across the country will compete against each other. There will only be one winner of RDOF funds in any given geography, and not all eligible areas will yield a winner. Many rural communities across the entire United States are eligible, and hundreds of different providers are expected to compete for funding. The rules and procedures for the auction are highly complex, including hundreds of pages of FCC rules and instructions.

2. RDOF rules encourage participation by rural electric utilities:

The FCC specifically includes electric utility operators within the category of companies who are assumed to be qualified operators of networks. This allows for much faster review and approval of utility bidders. Electric utilities have already secured FCC funding in similar auctions over the past several years; there is no question that utilities can be successful in winning funds. The entire reverse auction funding process is designed to attract capable new providers of broadband services – and especially those who will construct high-quality, fiber-based networks comparable to those used in urban and suburban America – such as rural electric utilities.

3. Award of RDOF funds does not preclude later government funding:

FCC rules for RDOF will exclude any geography that has already received federal or state funding to offer the same broadband service as is targeted by RDOF. Therefore, ineligible areas will include those that have already received USDA ReConnect funds or that are in parts of states such as New York with pre-existing broadband support programs. However, the FCC has directly said that there is no prohibition on areas that do receive RDOF funding from receiving later support from states. In other words, the FCC leaves it up to states and other federal agencies to decide whether and how to provide additional funds in areas where RDOF is awarded.

4. Rural electric utilities have many RDOF participation options:

The basic model for RDOF support features a winning recipient—such as a rural electric co-op—that establishes a wholly-owned subsidiary, which then directly receives the RDOF funds, provides the RDOF service, and becomes an “Eligible Telecommunications Carrier” in its state (as required for the FCC to provide funds). Many electric utilities have already done exactly this. However, there are other equally viable models for electric utilities to benefit from RDOF support without themselves directly offering retail service or becoming ETCs.

For example, FCC rules permit agreements with Internet Service Providers or other communications providers to use electric utility infrastructure as the foundation for high-quality broadband service offered by the ISP or other partner. Additional alternative models provide a robust set of options for any utility that ultimately wishes to play a role in making high-quality broadband available to the communities it traditionally serves.

5. Bidding consortia offer a favorable model for rural electric utilities:

FCC rules permit groups of companies to jointly participate in the RDOF process. This approach offers significant benefits to rural electric utilities, and only minor downside. Members of a bidding consortium can share costs for legal support, FCC interaction and guidance, bidding strategy, and other essential advisory services—benefiting tremendously from economies of scale. Members of a bidding consortium can also pursue joint bidding strategies to improve their odds of success in winning funding.

In contrast, separate bidders are strictly prohibited by FCC rules from any coordination in auction strategy.

Individual members of a consortium can exercise significant independent direction over bidding strategy. Auction results in a given geography for any member do not depend on the success or failure of other members in other geographies. The one potential drawback of a consortium is that only a single member can be the official winner of RDOF funds in a given geography which requires other members with overlapping interests to cede control of funds to the single RDOF winner.

6. Rural electric utilities must make a long-term decision within three months:

RDOF funds are awarded over ten (10) years. In other words, the total award is delivered annually in 10% increments. Once funds are awarded for a geography, they will not be offered again at least until the end of the 10-year period, and quite likely not even after that under current FCC policy.

Many types of service providers (other than electric utilities) are expected to pursue RDOF funding (see below!). Therefore, if a rural electric utility whose territory includes RDOF-eligible locations chooses not to participate in some way, it is very likely that another provider—a telco, a wireless provider, or a satellite operator for example—will instead win the funding in that utility’s service area. This outcome would mean the utility that chose not to pursue RDOF would be locked out of FCC broadband funding in those areas for at least ten years, and likely longer. It would also mean that the utility’s customers would most probably receive inferior broadband service rather than the high-performance fiber-optic service that is the baseline for utilities.

7. RDOF will differ greatly from past FCC auctions (bad news):

Some observers and advisors are telling utilities that RDOF Phase I results will be quite similar to the smaller “CAF II” auction held by the FCC in 2018. Rural electric utilities secured approximately 15% of the total $1.5 billion in CAF II funding awarded (in other words, less than 1/10th the size of RDOF phase 1).

This advice is incorrect for many reasons. By far the simplest (and most significant) is the different competitive make-up of the two auctions. Given the areas available for CAF II support, the nation’s largest telecommunications companies—such as AT&T, Verizon, Frontier, and CenturyLink—almost entirely sat out the CAF II auction. In combined total, these large and highly sophisticated companies ended up with less than $20 million from CAF II, or less than 1.5% of the total. In contrast, these large telcos will compete broadly and aggressively in the RDOF auction.

By way of comparison, of the total $16 billion up for auction in RDOF Phase I, well over $15 billion of that amount is currently being provided to these large carriers. Indeed, RDOF Phase I is literally a process of allowing new competitors (such as electric utilities) to go after funding held for years by the nation’s largest service providers. With many more billions of dollars at stake in RDOF Phase I, these large competitors will compete aggressively, making for an entirely different auction dynamic when compared to CAF II.

8. RDOF will differ greatly from past FCC auctions (good news):

How can small players such as rural electric utilities stand a chance you may ask? The answer is that in a number of important ways, the FCC auction rules for RDOF Phase I have been changed from CAF II to favor companies that will build the fastest, fiber-to-the home networks (such as rural electric utilities).

One new RDOF rule means that, as the auction approaches conclusion, any bidder offering the fastest fiber-based service gets significant extra favoritism toward being declared the winner in a given geography. This is not automatic or iron-clad, but the right bidding strategy can significantly increase the odds of winning vs CAF II.

Other RDOF rule changes from CAF II essentially reinforce the favoring of fiber by penalizing bidders offering slower or higher latency networks such as wireless or satellite-based systems.

Bottom line: although RDOF Phase I is almost certain to be much more competitive in many respects than CAF II, rural electric utilities with the right bidding strategy will have excellent opportunities to succeed.

9. Final auction results CANNOT be predicted or projected with any accuracy:

Some observers and advisors are also telling prospective bidders (i.e., rural electric utilities) that, for example, “We can guarantee you will win at the reserve (or opening FCC offer) amount of funding.” Or, “It’s highly likely that we will get you at least 70-80% of the reserve.”

Although this may be an effective sales practice it is simply wrong—both logically and factually—based on the long history of FCC auctions. The ultimate amount of RDOF funding that a given winner will receive is first and foremost based on one simple factor: how many rounds does the auction last; in other words, when is the so-called “clearing stage” reached.

Because the available RDOF support decreases with each round in every geography—even if, in some given geographies, there is only one fiber bidder or only one bidder at all for that matter—even the most favored and confident bidder has absolutely no guarantee of final funding. In other words, even if a given rural electric utility is the only bidder in its territory and takes full advantage of the pro-fiber FCC bidding rules mentioned above, the amount it wins—whether the full reserve, 80%, 50%, or 30% etc.—will depend entirely on when the auction ends, which is driven entirely by the nationwide bidding and almost not at all on that local utility’s geography.

Bottom line: if an “expert” predicts the funding you will win, your next question should be, “So you are sure you know when the auction will reach the clearing stage, and who else is going to bid, and what their strategies will be?”

The long history of FCC auctions—both reverse auctions for broadband support as well as forward auctions of spectrum licenses—show time and time again that “expert” predictions about auction outcomes are always incorrect, many times comically so. The same is almost certainly going to be the case for RDOF.

10. An effective bidding strategy is key to RDOF success, and that means…:

The most effective RDOF bidding strategies are grounded in a robust business plan backed by partners who are committed for the long term.

“But,” you ask, “if I can’t predict my funding, then how can I participate?”

The answer is surprisingly simple. The most important question is not, “How much can I get?” but rather, “Exactly how much do I need?”

Indeed, the only thing worse than not winning is not winning enough. If you don’t win enough, you are still on the hook with the federal government to build something you can’t actually afford—the dreaded, “Winner’s Curse.”

The best approach to developing a winning bidding strategy is:

  • To know exactly what your business case is, in advance
  • To know how much RDOF is needed to support your business case (if any)
  • To have high confidence that your network build-out plan can be completed on time and on budget

Having a design, engineering, and construction partner who will stand behind their project plan and costs helps provide that critical certainty. With the “what exactly do I need” baseline clearly in place, bidding strategy becomes not exactly easy, but much more manageable.

With expert advice on the auction rules and theory, it is possible for an electric utility to pursue a bidding strategy of simultaneously seeking to maximize funding—including upside beyond the minimum, which could be used to accelerate a build plan to speed cash flows, for example—and to fully protect against the downside of the “Winner’s Curse.”

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