With California’s supplemental subsidy proposed but not yet offered, ISPs must risk RDOF subsidy bets tomorrow

28 October 2020 by Steve Blum
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Update 28 October 2020: The CPUC published a new list of targeted census block groups (CBGs), and clarified its proposed plan to offer additional subsidies to ISPs that successfully bid for RDOF subsidies in those CBGs. The list is here. The updated info about the money is here. The short version is that if the plan is approved by commissioners in December, then the CPUC will offer an amount equal to 10% of the ten year “reserve price” set by the FCC for each CBG – a total of $73 million from CASF – to ISPs that meet the CPUC’s Level 1 service requirements and other qualifications. Additional money – i.e. Level 2 – could be available as well to ISPs that meet more stringent CPUC requirements.

The Federal Communications Commission’s Rural Digital Opportunity Fund (RDOF) auction begins tomorrow. The complex, reverse auction process might or might not take several weeks to complete. At the end, $16 billion will be awarded to the Internet service providers who commit, under pain of severe penalties, to take the lowest subsidy and deliver the best service in a given area.

The competition isn’t just between ISPs, though. It’s also between states and communities. Almost certainly, $16 billion isn’t enough to pay for broadband infrastructure and service upgrades in every eligible area – census block group – in the U.S. So some states and communities will win, and some will lose. States where the cost of building and operating broadband networks is relatively high, such as California, will be at a disadvantage.

At the direction of the California legislature, the California Public Utilities Commission is trying to tilt the playing field in our direction by offering successful RDOF bidders a “kicker”, paid for by the California Advanced Services Fund (CASF). It would be something like an extra subsidy of 10% or 20%, if certain conditions are met and the area is on the CPUC’s list of 279 census block groups that it’s determined have the greatest need.

The problem today is that while the CPUC has published the list of 279 census block groups, it hasn’t said how exactly how much money it’s offering as a kicker in each – the proposed percentages are approximate and not completely defined – or finalised the conditions that must be met to qualify. Or indeed, said whether anything will be offered at all. Although there’s a good faith effort underway to implement the kicker program, it will be mid-November before a formal draft of the rules is published and mid-December before the commission will vote on it. However unlikely, it’s possible that commissioners will reject or significantly amend the draft.

The delay and uncertainty will severely reduce the kicker program’s effectiveness. The goal is to attract federal broadband dollars to California’s neediest communities and not only help bidders be more competitive, but also to provide “an incentive to participate in the auction in the one gigabit tier”.

To factor that incentive into bids, ISPs will have to risk making decisions tomorrow that could force them to drop out of the auction early or make promises they can’t afford to keep on their own. Once the auction begins, the process will gradually reduce bidders’ flexibility, to the point that they won’t be able to jump in on an eligible area that they aren’t already competing for, and they won’t be able to change their proposed service level, i.e. speed and latency.

How many ISPs will start bidding tomorrow for census block groups they can’t profitably serve without the CPUC’s kicker, or offer gigabit-class systems they can’t build on their own? I don’t know, but I am certain the answer could be zero and even if it’s greater than zero it will be less than what it would have been if the CPUC had put its money on the table today.