Connect America Fund, ETC Annual Reports and Certifications, Rural Broadband Experiments, Connect America Fund Phase II Auction, 15982-15994 [2018-07509]

Agencies

• FEDERAL COMMUNICATIONS COMMISSION

[Federal Register Volume 83, Number 72 (Friday, April 13, 2018)]
[Rules and Regulations]
[Pages 15982-15994]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-07509]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 54

[WC Docket Nos. 10-90, 14-58, 14-259, AU Docket No. 17-182; FCC 18-5]


Connect America Fund, ETC Annual Reports and Certifications, 
Rural Broadband Experiments, Connect America Fund Phase II Auction

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: In this document, the Commission considers the remaining 
issues raised by parties challenging the Commission's orders 
implementing the Connect America Phase II (Phase II) auction (Auction 
903). Specifically, the Commission resolves petitions challenging the 
Commission's decisions on the following issues: How to compare bids of 
different performance levels, standalone voice requirements, Phase II 
auction deployment and eligibility, and state-specific bidding weights, 
among other matters. The Commission also adopts a process by which a 
support recipient that sufficiently demonstrates that it cannot 
identify enough actual locations on the ground to meet its Phase II 
obligations can have its total state location obligation adjusted and 
its support reduced on a pro rata basis. Lastly, the Commission 
modifies the Commission's letter of credit rules to provide some 
additional relief for Phase II auction recipients by reducing the costs 
of maintaining a letter of credit.

DATES: This rule is effective May 14, 2018, except for the amendment to 
47 CFR 54.315(c)(1)(ii), which requires approval by the Office of 
Management and Budget (OMB). The Commission will publish a document in 
the Federal Register announcing approval of the information collection 
requirement and the date the amendment will become effective. For more 
information, see SUPPLEMENTARY INFORMATION.

FOR FURTHER INFORMATION CONTACT: Alexander Minard, Wireline Competition 
Bureau, (202) 418-7400 or TTY: (202) 418-0484.

SUPPLEMENTARY INFORMATION: The Commission adopted this Order on 
Reconsideration on January 30, 2018, and the decisions set forth 
therein for the Phase II auction, along with all associated 
requirements also set forth therein and the amendment to the heading of 
Sec.  54.315 of the Commission's rules, 47 CFR 54.315, go into effect 
May 14, 2018, except for the new or modified information collection 
requirements related to the location adjustment process contained in 
paragraphs 12-14 and the amendment to 47 CFR 54.315(c)(1)(ii), that 
require approval by the Office of Management and Budget (OMB). The 
Commission will publish a document in the Federal Register announcing 
approval of those information collection requirements and the date they 
will become operative.
    This is a summary of the Commission's Order on Reconsideration in 
WC Docket Nos. 10-90, 14-58, 14-259, AU Docket No. 17-182; FCC 18-5, 
adopted on January 30, 2018 and released on January 31, 2018. The full 
text of this document is available for public inspection during regular 
business hours in the FCC Reference Center, Room CY-A257, 445 12th 
Street SW, Washington, DC 20554, or at the

[[Page 15983]]

following internet address: https://transition.fcc.gov/Daily_Releases/Daily_Business/2018/db0131/FCC-18-5A1.pdf

I. Order On Reconsideration

    1. Discussion. The Commission declines to reconsider the weights it 
adopted for bids in the Phase II auction for the varying performance 
tiers and latency levels. In adopting these weights, which the 
Commission found to be within a reasonable range of the increments 
proposed in the record, the Commission appropriately recognized the 
value of higher-speed and lower-latency services to consumers. The 
Commission sought to balance its preference for higher-quality services 
with its objective to use the finite universal service budget 
effectively. Based on its predictive judgment, the Commission concluded 
that its approach is likely to promote competition within and across 
areas by giving all service providers the opportunity to place 
competitive bids, regardless of the technology they intend to use to 
meet their obligations.
    2. The Commission disagrees with Hughes' contention that low-
latency, high-speed bids will always necessarily win. Bids will be 
scored relative to the reserve price and therefore bids placed for 
lower speeds and high latency will have the opportunity to compete for 
support, but will have to be particularly cost-effective to compete 
with higher tier bids.
    3. Hughes presents a hypothetical example that only reinforces the 
conclusion that adopting minimal weights would be inappropriate. Even 
if the Commission were to adopt Hughes' proposed weights, it is unclear 
from Hughes' own statements in the record whether Hughes could place 
winning bids. Hughes argues that the Commission failed to take into 
account record evidence that ``the lower bound for satellite providers' 
bids will be above $185 per customer per month in the 25/3 Mbps tier,'' 
and that there was no data in the record to contradict its showing. 
Assuming that Hughes could receive from subscribers a reasonably 
comparable rate of $88 per month for offerings at 25/3 Mbps, Hughes 
claims that the lower bound for satellite providers' bids in this tier 
will be above $185 per customer per month. In the example, Hughes 
compares a fiber-based provider bidding a reserve price of $250 in the 
Gigabit tier to a satellite provider bidding $187 in the Baseline tier 
under two scenarios. Under the hypothetical, the Gigabit bid would win 
using the Commission's adopted weights; using Hughes' proposed weights, 
the satellite provider would win. If the fiber-based provider and the 
satellite provider required $250 and $187 in support per location, 
respectively, neither would win given the Commission's decision to 
adopt a per location funding cap of $146.10. Notwithstanding the 
reserve price, the Commission is not convinced that awarding $187 per 
customer for high-latency, lower-speed satellite service would be the 
preferred outcome, or particularly cost-effective, if it could fund a 
Gigabit network for only $63 more per customer. Lowering support 
amounts is not the Commission's only goal. Rather, the Commission must 
balance--within a finite budget--its goal of lower support amounts and 
wider coverage with its goal of service at higher speeds and lower 
latency.
    4. Hughes has not presented any analysis or data that persuades the 
Commission that it should alter the balance it sought to achieve with 
the adopted weights. The Commission previously concluded that adopting 
smaller weight differences between tiers, as Hughes advocates, would be 
inappropriate. The Commission was concerned that minimal weighting 
could deprive rural consumers of the higher-speed, lower-latency 
services that consumers value and that are common in urban areas. The 
Commission predicted that minimal weight differences would likely 
result in bids in lower tiers prevailing, leaving all consumers with 
minimum service even though some service providers might be able to 
offer increased speeds for marginally more support.
    5. The Commission is not persuaded that it should reconsider the 
weights adopted by the Commission to reflect the consumer preference 
data cited by Hughes. In the Phase II Auction FNPRM Order, 82 FR 14466, 
March 21, 2017, the Commission concluded that ``establishing weights 
based on specific data is likely to be a drawn out and complicated 
process that may further delay the Phase II auction and may not produce 
an improved outcome in the auction.'' Hughes argues that the Commission 
adopted weights that provide ``too great of a bidding advantage to 
high-speed, high-capacity, low-latency services,'' and claims that 
``[s]atellite broadband customers are just as satisfied as the 
customers of other types of broadband providers, notwithstanding the 
inevitable latency resulting from the data travel time to and from a 
geostationary satellite.'' Hughes now claims that ``changing the 
bidding weights would require simply changing numeric values in the 
Commission's existing auction software and result in no delay.'' Even 
if it were true that changing the auction software would be easy, there 
would only be no delay if the Commission simply accepted Hughes values 
and ignored data cited by other parties. Nothing in Hughes' reply 
comments fundamentally changes the Commission's prior conclusion.
    6. The Commission previously rejected arguments that it should 
adopt a narrower weight for latency than for speed tiers to account for 
claims that consumers value higher speed over latency. The Commission 
emphasized that ``these claims do not address the concerns raised by 
commenters about the inherent limitations of high latency services--
particularly for interactive, real-time applications and voice services 
given that high latency providers may be the only voice providers in 
the area.'' Hughes does not address the inherent limitations of 
satellite voice service, particularly in rural areas, and argues that 
there is no valid policy reason to provide such an advantage to low-
latency bids. The Commission disagrees. In areas where winning bidders 
begin receiving Phase II support, the incumbent price cap carriers not 
receiving such support will be immediately relieved of their federal 
high-cost eligible telecommunications carrier (ETC) obligation to offer 
voice telephony in those census blocks, and the winning bidder will 
have the responsibility of providing the supported service: voice 
telephony. The potential savings to the Fund of supporting non-
terrestrial broadband services must be balanced with the fact that 
providers of such services will have the obligation to provide the 
supported service--voice telephony--to rural consumers as well.
    7. The Commission also is not persuaded by Hughes' argument that it 
should reduce the speed and latency weights to ``account for satellite 
broadband systems' more expedited deployment capabilities.'' Hughes 
argues that satellite service is ``quicker to market'' because it is 
not affected by obstacles faced by terrestrial broadband providers such 
as lengthy permitting processes, construction delays, limited consumer 
demand, or geographical isolation. Although satellite service may 
theoretically be available sooner in rural areas, it is not clear that 
satellite providers will be meeting the needs of rural and underserved 
communities any sooner than other providers. The Commission granted a 
petition for reconsideration regarding re-auctioning areas served by 
high-latency service providers, filed by ViaSat and supported by 
Hughes, because it agreed that it may be difficult for high-latency 
service providers to obtain enough subscribers

[[Page 15984]]

to meet a 35 percent subscription threshold by the end of the third 
year of support. In doing so, the Commission was persuaded by comments 
suggesting that many of the factors related to low adoption are likely 
to be present in more rural high-cost areas of the country. The 
Commission has no reason to think these factors have changed and 
decline to modify the weights to account for ``speed to market.''
    8. For the reasons stated above, the Commission declines to 
reconsider the weights the Commission adopted for bids in the Phase II 
auction for the varying performance tiers and latency levels.
    9. Discussion. As an initial matter, the Commission clarifies that 
it has not yet specified which of the methods for subjective 
determination of transmission quality identified in ITU-T 
Recommendation P.800 should be used to demonstrate compliance with the 
second part of the two-part standard (MOS of four or higher). Based on 
the sparse record before the Commission, it declines to do so at this 
time. ADTRAN proposes that the Commission specify use of a 
conversational-opinion test and argues that this is preferable to a 
listening-opinion test, or the ITU's other recommended option: 
interview and survey tests. The Commission finds that there is 
insufficient information in the record to specify which of the ITU's 
recommended options applicants should be prepared to use to demonstrate 
an MOS of four or higher. The Commission expects that the specific 
methodology will be adopted by the Bureaus and Office of Engineering 
and Technology (OET) by June 2018, consistent with the Commission's 
previous direction to refine a methodology to measure the performance 
of ETCs' services subject to general guidelines adopted by the 
Commission.
    10. The Commission also clarifies that recipients of Phase II 
support awarded through competitive bidding should use the same testing 
methodologies for measuring peak period roundtrip latency adopted for 
price cap carriers accepting model-based Phase II support. That is, the 
same testing methodologies should be used by Phase II recipients 
whether they are demonstrating compliance with the 100 ms requirement 
or the 750 ms requirements. As set forth in the Phase II Service 
Obligations Order, 78 FR 70881, November 27, 2013, providers can rely 
on existing network management systems, ping tests, or other commonly-
available measurement tools, or on the alternative Measuring Broadband 
America (MBA) program results if they have deployed at least 50 white 
boxes in funded areas throughout the state.
    11. Discussion. The Commission adopted the standalone voice 
requirement in 2011. When it adopted the separate standalone broadband 
reasonable comparability requirement in 2014, the Commission explained 
that ``high-cost recipients are permitted to offer a variety of 
broadband service offerings as long as they offer at least one 
standalone voice service plan and one service plan that provides 
broadband that meets the Commission's requirements.'' Setting aside the 
untimeliness of these requests, the Commission would not reconsider the 
requirement that Connect America Fund recipients offer voice 
telephony--the supported service--at rates that are reasonably 
comparable to rates for voice service in urban areas. The Commission is 
not persuaded by arguments that, because VoIP is provided over 
broadband networks and over-the-top voice options are available, 
broadband service providers need only offer broadband as a standalone 
service. Phase II auction recipients may be the only ETC offering voice 
in some areas and not all consumers may want to subscribe to broadband 
service. To comply with Connect America Fund service obligations, 
support recipients can offer VoIP over their broadband network on a 
standalone basis, but they must offer the service at the reasonably 
comparable rate for voice services.
    12. Discussion. The Commission clarifies that it will permit Phase 
II auction support recipients to bring to the Commission's attention 
disparities between the number of locations estimated by the CAM and 
the number of locations actually on the ground in the eligible census 
blocks within their winning bid areas in a state. If a support 
recipient can sufficiently demonstrate that it is unable to identify 
enough actual locations on the ground across all the eligible census 
blocks to meet its total state requirement, its obligation will be 
reduced to the total number of locations it was able to identify in the 
state and its support will also be reduced on a pro rata basis. 
Specifically, within one year after release of the Phase II auction 
closing public notice, a recipient that cannot identify enough actual 
locations must submit evidence of the total number of locations in the 
eligible areas in the state, including geolocation data (indicating the 
latitude/longitude and address of each location), in a format to be 
specified by the Bureau, for all the actual locations it could 
identify. The Commission directs the Bureau to establish the procedures 
and specifications for the submission of this information, such as 
collecting the data through the Universal Service Administrative 
Company's (USAC) High Cost Universal Service Broadband (HUBB) online 
location reporting portal. Relevant stakeholders would have the 
opportunity to review and comment on the information and to identify 
other locations, following which the Bureau shall issue an order 
addressing the recipient's showing and any such comments. The evidence 
submitted by a support recipient will also be subject to potential 
audit.
    13. The Commission directs the Bureau to implement this process, 
consistent with the Commission's prior direction to the Bureau 
concerning model location adjustments. Specifically, in cases where the 
Bureau has determined by a preponderance of the evidence that there are 
no additional locations in the relevant eligible census blocks in the 
state, the Commission directs the Bureau to adjust the support 
recipient's required state location total and reduce its support on a 
pro rata basis for that state. The Commission directs the Bureau to 
specify the types of information that a support recipient should submit 
to demonstrate that it could not locate additional locations on the 
ground, specify the types of evidence that commenters should submit to 
dispute the evidence provided by the support recipients and set the 
parameters of this review process, set the parameters for the audits, 
and adopt any other necessary implementation details. The Commission 
directs the Bureau to issue a public notice or order (following its 
issuance of a notice and opportunity for comment) detailing 
instructions, deadlines, and requirements for filing valid geolocation 
data and evidence for both support recipients and commenters.
    14. The Commission adopts this process because it is persuaded that 
potential bidders may be reluctant to bid on census block groups if the 
number of locations estimated by the CAM is substantially different 
from the number of actual locations currently on the ground, leaving 
those areas without an opportunity to get served through the Phase II 
auction. While parties claiming that there are discrepancies between 
the CAM and the facts on the ground have not demonstrated that the data 
and analyses they are relying on are necessarily more accurate than the 
CAM, the Commission agrees that support recipients should not be 
penalized if the actual facts on the ground differ from the CAM's 
estimates. Accordingly, the Commission has

[[Page 15985]]

decided to require support recipients seeking to adjust their required 
locations to gather and submit geolocation data to demonstrate that 
they have done the necessary legwork to identify locations within their 
service areas. By requiring applicants to submit geolocation data and 
demonstrate that there are no additional locations in the relevant 
areas, providing an opportunity for relevant stakeholders to comment on 
the findings, and conducting audits, the Commission also intends to 
prevent any cherry picking that might occur if support recipients only 
identify the easiest-to-serve locations and ignore harder-to-serve 
locations. The Commission also emphasizes that applicants are required 
to conduct the necessary due diligence prior to submitting their short-
form applications, including identifying locations they will serve 
within the eligible areas, so that they can certify that they will be 
able to meet the relevant public interest obligations when they submit 
their applications.
    15. The Commission declines to permit support applicants to 
identify additional locations to serve above their required state total 
with an accompanying increase in support. The Commission has a finite 
Phase II budget that will be allocated through the auction. 
Accordingly, the Commission would be constrained from giving support 
recipients more support.
    16. The Commission is also not convinced that it should take the 
further step of broadening the Commission's existing definition of 
locations for all Phase II auction recipients so they have more 
potential locations that they can serve in their winning census blocks. 
The focus of Phase II has been on serving housing units and businesses 
that receive mass market service, with areas being designated as high-
cost by the CAM based on the cost to serve these types of locations. 
Moreover, reserve prices are being set using the CAM, and the 
Commission proposed awarding no more support than the CAM calculates is 
needed to serve housing units and businesses receiving mass market 
services in high-cost areas, with a cap on extremely high-cost 
locations. Accordingly, the Commission declines to permit all 
recipients to divert Phase II support away from housing units and 
businesses receiving mass market services to other types of locations 
because some recipients may find it difficult to serve the number of 
locations identified by the model.
    17. Finally, the Commission declines to monitor a support 
recipient's compliance at a census-block level or to allow a support 
recipient to count toward meeting its deployment obligation locations 
that do not exist. In comments filed on specific bidding procedures for 
this auction, several parties propose allowing recipients that make 
service available to all actual locations in a census block to receive 
credit for making service available to all model-indicated locations 
within that census block. For instance, under this proposal, if a 
census block had only six actual locations to be served, and the CAM 
indicated there were 14 locations to be served, a recipient would 
receive credit for serving 14 locations in that census block after 
serving only six. Such a system could create perverse incentives to 
focus deployment on the types of census blocks in the example, leading 
to fewer consumers receiving broadband overall. The Commission already 
decided it would monitor compliance at the state-level so that a 
support recipient would have to serve locations in other eligible 
census blocks in the state if it cannot locate enough actual eligible 
locations within a census block, and the opportunity to petition the 
Commission to reconsider this decision has passed. The commenters' 
challenge to this statewide approach is untimely. To the extent there 
are discrepancies between the number of actual locations on the ground 
and the CAM-estimated statewide location totals, a support recipient 
can take advantage of the process adopted above.
    18. Discussion. The Commission denies Verizon's request. The 
Commission is not persuaded that it should reduce the service 
obligation to give recipients 90 percent flexibility. The Commission 
acknowledges that, because costs will be averaged at the census block 
level, all the locations the CAM identified in each census block in the 
authorized bids will count towards Phase II auction recipients' funded 
location total, unless adjusted using the process adopted above. While 
this differs from the Phase II model-based support requirements, in 
which some of the locations in some of the census blocks do not count 
toward the state-required location totals, Phase II auction bidders 
will have the advantage of choosing which eligible census blocks to 
include in their bids. Because compliance will be determined on a 
state-wide basis, the bidder can identify additional locations in the 
other eligible census blocks within the census block group or choose to 
bid on additional census block groups where it is able to identify more 
locations in eligible census blocks than the CAM had identified to meet 
its statewide total. As the Commission explained above, if a support 
recipient sufficiently demonstrates that it is unable to identify 
enough locations to meet its total support obligation statewide, it can 
also have its location total adjusted with an accompanying reduction in 
support.
    19. If the Commission were to permit Phase II auction recipients to 
use up to 90 percent flexibility in each state, the result could be as 
much as an additional five percent of locations potentially remaining 
unserved in Phase II auction-funded census blocks. Because these 
unserved locations would be in census blocks where Phase II auction 
recipients are receiving support, targeting support to these locations 
through another mechanism could prove difficult. Instead, the 
Commission concludes that 95 percent flexibility is a more reasonable 
balance between ensuring that as many locations as possible get served 
in Phase II auction-funded areas and giving recipients some flexibility 
in the case of unforeseeable circumstances.
    20. The Commission acknowledges that some bidders may bid for more 
support to compensate for the risk of having to return support if they 
cannot meet the 100 percent service milestone. But the Commission 
concludes that this potential increase in costs is outweighed by the 
benefits of ensuring that at least 95 percent--as opposed to 90 
percent--of the required number of locations in Phase II-funded areas 
are served, particularly given that unserved locations in Phase II-
funded areas would be difficult to target with another support 
mechanism. Additionally, the Commission expects that the competitive 
pressure imposed by competing for a finite budget in the Phase II 
auction will help mitigate bid inflation. Finally, any support that is 
returned by a Phase II recipient that serves less than 100 percent of 
the required number of locations can be repurposed to support broadband 
through other universal service mechanisms.
    21. For these reasons, the Commission also is not persuaded that it 
should permit Phase II auction recipients to take advantage of the 95 
percent flexibility without returning an associated amount of support. 
Moreover, the Commission is not convinced by claims that it is 
unnecessary for such recipients to return support because bids will 
``already reflect the cost of building out to the minimum number of 
locations.'' Instead, the Commission expects that all Phase II auction 
bidders will bid with the intention of serving 100 percent of funded 
locations, will factor the cost of serving 100 percent of the locations 
into their bids, and will take advantage of

[[Page 15986]]

the flexibility only if necessary. Indeed, if the Commission lowered 
the flexibility to 90 percent, under Verizon's logic, the Commission 
would be conceding that even more locations within eligible blocks 
could be unserved following the auction. Because Phase II auction 
bidders are required to conduct due diligence prior to bidding, the 
Commission explained that it adopted the flexibility to address 
``unforeseeable challenges'' that Phase II auction recipients may have 
in meeting their deployment obligations. If a Phase II auction bidder 
initially plans to build to only 95 percent of the required number of 
locations and then later in the support term experiences unforeseeable 
events, it will be subject to non-compliance measures if it is unable 
to serve at least 95 percent of locations and is unable to obtain a 
waiver. The Commission expects it would be difficult for a recipient to 
meet its burden of demonstrating good cause to grant a waiver of the 
deployment obligations if it did not plan to build to 100 percent of 
funded locations at the outset of its support term.
    22. Discussion. The Commission declines to reconsider the 
Commission's decision not to adopt an accelerated payment option for 
recipients of Phase II auction support. The Commission is not convinced 
that the benefits of an accelerated payment option would outweigh any 
potential additional burden on rate payers. Moreover, as the Commission 
explained, service providers already have the incentive to build out 
their networks more quickly so that they can begin earning revenues to 
help with their costs. They also have an incentive to meet the final 
service milestone as soon as possible because once it has been verified 
that they have met their deployment obligations, they can further 
reduce costs by no longer maintaining a letter of credit. While Crocker 
Telecommunications suggests that the requirement that Phase II auction 
recipients offer the required services at rates that are reasonably 
comparable to those offered in urban areas means that revenues may not 
offset the higher costs of building in rural areas, nothing precludes a 
recipient from securing other funding options that can help with the 
upfront costs of building out and maintaining its network before it 
receives its full ten years of support.
    23. Additionally, the Commission is concerned about its ability to 
accurately predict the amount by which the Phase II auction budget 
could be exceeded and, in turn, the potential impact of an accelerated 
option. Crocker Telecommunications suggests that, given the size of the 
Phase II auction budget relative to the entire universal service 
budget, and taking into consideration the additional contributions from 
providers that will be offering VoIP over their Phase II-funded 
networks, an accelerated payment option would not result in ``dramatic 
swings in the contribution factor'' if the Commission exceeds its 
annual Phase II auction budget. Whereas in the rural broadband 
experiments, the Commission had access to the entire $100 million 
budget at the start of the program, and thus could make an accelerated 
payment option available because the Commission could cover any upfront 
payment requests without needing to increase the contribution factor or 
wait for the following year's budget, here, however, the Commission 
will have only the annual Phase II auction budget available each year. 
Too many unknowns remain about the Phase II auction--including the 
number of bidders that will participate, the number of bidders that 
would request and qualify for an accelerated support option, the size 
of those bidders' bids, and the timing for when the bidders would be 
eligible to receive accelerated support--to predict with any degree of 
certainty how much the Commission could potentially exceed the annual 
budget if it were to adopt an accelerated option.
    24. Even if the Commission could determine that giving Phase II 
auction recipients the option of receiving accelerated support would 
not dramatically increase the contribution factor, the Commission is 
not convinced that it would serve the public interest to do so. The 
Phase II auction is one of many universal service programs, and the 
Commission is responsible for making decisions that balance the 
objectives of all of the programs with the burdens on the end-user rate 
payers that fund the programs. The Commission is not persuaded that 
increasing the contribution factor by even a small margin for the Phase 
II auction would be justified for the sole purpose of providing more 
support earlier in the term, given the Commission's efforts to also 
remain within a budget for other universal service programs.
    25. Discussion. The Commission dismisses as untimely NRECA and 
UTC's petition for reconsideration of the Commission's decision to 
exclude from the Phase II auction RBE census blocks that are served by 
an unsubsidized competitor with broadband at speeds of 10/1 Mbps. The 
Commission decided in the December 2014 Connect America Order, 80 FR 
4446, January 27, 2015, that ``any area'' served by an unsubsidized 
competitor offering 10/1 would be excluded from the Phase II auction. 
The Commission also stated that shortly before the Phase II auction it 
expected to ``update the list of census blocks that will be excluded 
from eligibility'' from the Phase II auction ``based on the most 
current data'' so as to ``take into account any new deployment that is 
completed'' prior to the auction. The Commission did not indicate that 
there would be any exceptions to this decision. The Commission's 
decision not to offer support in areas served by an unsubsidized 
competitor is one of the fundamental principles of the Connect America 
Fund, so it is reasonable to expect that the Commission would make 
explicit any exceptions to this policy.
    26. Because the Commission made the decision to exclude all census 
blocks served by an unsubsidized competitor from the Phase II auction 
in the December 2014 Connect America Order, NRECA and UTC should have 
filed a petition for reconsideration of this decision within 30 days of 
publication of that order in the Federal Register. NRECA and UTC failed 
to do so. Instead, NRECA and UTC filed a petition for reconsideration 
of this decision after the May 2016 Phase II Auction Order, 81 FR 
44414, July 7, 2016. In that order, the Commission took steps to 
implement the decisions it had already made about Phase II auction 
eligible areas in the December 2014 Connect America Order, including 
its decision to exclude areas served by unsubsidized competitors, by 
deciding that it would: (1) Rely on the most recent publicly available 
FCC Form 477 data for identifying eligible Phase II auction census 
blocks, (2) conduct a limited challenge process, (3) average costs at 
the census block level, and (4) direct the Bureau to release a 
preliminary list of eligible census blocks. NRECA and UTC do not take 
issue with these implementation decisions. Because NRECA and UTC 
instead seek reconsideration of the Commission's underlying decision in 
the December 2014 Connect America Order to exclude from the Phase II 
auction census blocks served by unsubsidized competitors, the 
Commission dismisses this portion of the petition as untimely.
    27. Notwithstanding the untimely nature of this portion of the 
petition, the Commission denies it on the merits. The Commission 
similarly denies the timely filed portion of the petition asking it to 
reconsider its decision to exclude from the auction RBE census blocks 
served by

[[Page 15987]]

price cap carriers at broadband speeds of 10/1 Mbps. In both instances, 
the Commission concludes that its decision to exclude these census 
blocks reasonably balances the Commission's objectives in furtherance 
of the public interest. The Commission has repeatedly emphasized that 
while it has a preference for higher speeds, higher data usage, and 
lower latency, it must balance these preferences against its objective 
of maximizing its finite budget to serve as many unserved consumers as 
possible and not overbuilding locations served by private capital. For 
this reason, the Commission adopted different performance tiers for the 
Phase II auction starting with 10/1 Mbps speeds, and for this reason 
the Commission decided to make ineligible census blocks already served 
by unsubsidized competitors and price cap carriers at broadband speeds 
of 10/1 Mbps. Although the decision to exclude these census blocks 
means that these areas may not have access to higher speeds through the 
Phase II auction, the Commission found that using the Phase II auction 
budget to address the digital divide by targeting those areas that lack 
a provider offering even 10/1 Mbps speeds to at least one residential 
location was a more effective use of the limited Phase II budget.
    28. UTC and NRECA are asking the Commission to use its finite 
budget to fund census blocks where either an unsubsidized competitor 
using private capital or a price cap carrier has already deployed 
broadband at speeds meeting or exceeding the Commission's minimum 10/1 
Mbps speeds. The Commission recognizes that all locations in these 
census blocks may not be served with 10/1 Mbps or higher speeds, as 
they would have been if the blocks were included in the Phase II 
auction. Nevertheless, the Commission concludes that, on balance, it 
better serves the public interest to focus its finite budget on areas 
that lack any broadband provider offering speeds that meet the 
Commission's requirements than on areas that have such a provider 
somewhere in the block. This approach will ensure that the Commission's 
budget will be used to serve consumers that completely lack access to 
broadband meeting its minimum speed requirements rather than diverting 
funds to potentially overbuild areas where consumers already have 
access to such service.
    29. The Commission is not convinced by UTC and NRECA's arguments 
that the ``cost efficiencies that would be gained by removing [the 
rural broadband experiment] census blocks are greatly outweighed by the 
public interest benefits that would be lost if [the] census blocks go 
unfunded.'' Although it is possible that the current provider offering 
10/1 Mbps in these areas may cease offering service at these speeds, it 
also is possible that the current provider could improve its offerings 
without Connect America support. Similarly, it is possible that some 
price cap carriers or unsubsidized competitors may target only one 
location in the RBE census blocks with 10/1 Mbps broadband service to 
make them ineligible for the Phase II auction. But consumers overall 
may benefit if such service providers take this opportunity to expand 
their 10/1 Mbps broadband offerings without Phase II auction support 
because that support then could be directed to areas that are totally 
unserved. There is also a possibility that service providers that were 
interested in bidding in RBE census blocks that are now ineligible may 
still win support in surrounding eligible areas. Such recipients may be 
able to leverage their funded networks in eligible areas so that it 
becomes cost-effective to deploy higher speeds in the ineligible census 
blocks absent support. Finally, if an area that was excluded from the 
Phase II auction does subsequently become unserved, either because the 
provider ceases offering service in that area or the provider does not 
upgrade its broadband service speeds to meet the Commission's current 
definition of ``served,'' the Commission could make that area eligible 
for the Remote Areas Fund or for other future competitive bidding to 
the extent it remains unserved.
    30. The Commission also is not persuaded by NRECA and UTC's claims 
that potential applicants ``acted in good faith'' in assuming that all 
RBE census blocks would be made eligible for the Phase II auction or 
that the Commission's decisions ``penalize[[hairsp]]'' those potential 
applicants for moving forward and deploying broadband prior to the 
Phase II auction. As the Commission explains below, all potential 
bidders have known since at least April 2014 that the Commission 
contemplated excluding certain census blocks from the Phase II auction, 
and it had been the Commission's longstanding policy to exclude census 
blocks served by unsubsidized competitors for its programs since the 
Connect America Fund was created. But even if the Commission were to 
agree that it was reasonable for applicants to assume that all RBE 
census blocks would be included, the Commission is not convinced that 
applicants that intended to bid on these blocks are worse off than 
applicants that intend to bid on other census blocks. Any census block 
that is on the preliminary eligible census block list could 
subsequently become ineligible if it is reported as served in the most 
recent publicly available Form 477 when the final list of eligible 
census blocks is released. This means that any applicant could invest 
resources to get ready to bid for an area, only to later discover that 
it is no longer eligible. The Commission took measures to reduce this 
possibility by directing the Bureau to release the final census block 
list three months prior to the short-form application filing deadline 
so that applicants have time to plan and prepare for bidding. The 
Commission also concludes that the potential costs applicants incur in 
planning to bid on census blocks that ultimately become ineligible are 
outweighed by the benefits to consumers of using the Phase II auction 
budget efficiently.
    31. Moreover, the fact that some applicants already deployed 
networks in the RBE blocks, even though they acknowledge they had no 
guarantee of winning support through the auction, provides further 
support for the Commission's decision not to make these census blocks 
eligible for the auction. The Commission did not adopt the eligibility 
rules or the public interest obligations for the Phase II auction until 
the Phase II Auction Order in May 2016. Thus, the entities that NRECA 
and UTC cite in their petition as already having deployed broadband to 
these areas in July 2016 did not know, when they deployed broadband to 
these areas, if they could meet the eligibility requirements or what 
public obligations would be required; whether their applications would 
ultimately be approved to participate in the auction; whether they 
would win in the Phase II auction; and, whether they would be 
authorized to receive support. Given these uncertainties, it seems 
unlikely that a broadband provider would deploy to an area if it 
thought it could not sustain the service without support. Because these 
providers could make a business case to serve these areas, even at the 
risk that they would not qualify to participate in the auction or win 
support, the Commission sees no reason why it should use its finite 
funds to support these areas instead of areas where no provider has 
been able to make a business case to serve.
    32. The Commission also disagrees with NRECA and UTC's claims that 
its decisions favor price cap carriers. NRECA and UTC claim that price 
cap carriers were given the ``right of first refusal to model based 
support without

[[Page 15988]]

any removal of census blocks in those areas.'' However, they neglect to 
acknowledge that census blocks that were served by unsubsidized 
competitors at 4/1 Mbps and above (the Commission's minimum speed 
requirement when the decision was made) were removed from the offer of 
model-based support, as were the RBE census blocks that are the subject 
of the petition. Moreover, price cap carriers and other competitive 
bidders are both precluded from receiving Phase II support in 
ineligible RBE census blocks because they were removed from the offer 
of model-based support and from the Phase II auction.
    33. The Commission also does not find it persuasive to compare its 
decisions with respect to the offer of model-based support to price cap 
carriers with its decisions to remove certain census blocks from the 
Phase II auction. NRECA and UTC claim that the Commission's decisions 
are ``arbitrary and capricious'' because they ``disparately den[y] 
competitive providers . . . from being able to receive funding under 
Phase II in areas where they have deployed broadband networks.'' Price 
cap carriers were able to receive Phase II funding in areas where they 
had already deployed 10/1 broadband service. But for the offer of 
model-based support, the Commission offered price cap carriers a state-
wide commitment in high-cost areas so that if they accepted support, 
they would be required to offer voice and broadband at speeds of 10/1 
Mbps to the required number of locations in their service area in the 
state where they were already an ETC, and in most cases they were 
already receiving universal service funding in those areas. The 
Commission decided that it preferred this approach as opposed to one in 
which the Commission would immediately adopt competitive bidding 
everywhere because price cap carriers were ``in a unique position to 
deploy broadband networks rapidly and efficiently'' throughout their 
``large service areas.'' The Commission further concluded that, on 
balance, and in its predictive judgment, its approach ``best serves 
consumers in these areas in the near term, many of whom are receiving 
voice services today supported in part by universal service funding and 
some of whom also receive broadband, and will speed the delivery of 
broadband to areas where consumers have no access today.''
    34. Here, the Commission also used its predictive judgment when 
deciding how to allocate its finite Phase II auction budget to best 
serve consumers, but under different conditions. For the Phase II 
auction, a service provider need not be the incumbent to compete for 
support; bidders can be selective about which eligible areas they 
include in their bids; bidders may not have received universal service 
support in the past to serve the areas for which they intend to bid; 
and, there are likely more areas eligible for support than there is 
support available. For the offer of model-based support, the Commission 
was constrained by the service area of a specific price cap carrier and 
reliant on only one incumbent carrier to reach its objectives of 
maximizing coverage. Here, the Commission is constrained by the Phase 
II auction budget. Therefore, it decided to take a different approach 
in the Phase II auction by targeting support only to those areas that 
are unserved by price cap carriers and unsubsidized competitors at 10/1 
Mbps minimum broadband speeds. Nothing in the record persuades the 
Commission that it would better serve the public interest by 
reconsidering this approach.
    35. Nor is the Commission convinced that its decision to exclude 
certain census blocks from the Phase II auction ``frustrate[s] the 
fundamental purpose'' of the rural broadband experiments. NRECA and UTC 
claim that the purpose of the experiments was to ``challenge status quo 
broadband from the price cap carriers.'' While the Commission may have 
indicated that it expected the rural broadband experiments to provide 
the Commission with information about ``which and what types of parties 
are willing to build networks that will deliver services that exceed'' 
the performance standards the Commission adopted for the offer of 
model-based support, the Commission intended to use what it learned to 
inform the rules it adopted for the Phase II auction. The Commission 
did not decide to exclude the RBE census blocks from the offer of 
model-based support to price cap carriers until after rural broadband 
experiment bidders had placed their bids, suggesting that it was not 
the fundamental purpose of the program to give losing rural broadband 
experiment bidders another opportunity to bid for support in the RBE 
census blocks in the Phase II auction. Instead, the rural broadband 
experiments served their purpose by giving the Commission valuable 
experience and data it could use when determining the public interest 
obligations and eligibility requirements for the Phase II auction. The 
Commission is under no obligation to ensure that all participants in 
the rural broadband experiments have the opportunity to bid for their 
desired census blocks in the auction, particularly when it would 
conflict with the Commission's overall objectives for the Phase II 
auction.
    36. Finally, the Commission disagrees with NRECA and UTC's claims 
that applicants had no notice that the Commission might exclude RBE 
census blocks from the Phase II auction. Consistent with the 
requirements of Section 553 of the Administrative Procedure Act, 
interested parties had an opportunity for meaningful comment on the 
Commission's proposals to exclude certain census blocks from Phase II 
auction eligibility. The Commission noted in the April 2014 Connect 
America FNPRM, 79 FR 39196, July 9, 2014, that, if its proposal to 
establish 10 Mbps as the minimum broadband downstream speed was 
adopted, ``Phase II funds would only be available in a competitive 
bidding process for any area lacking 10 Mbps/1 Mbps.'' In the FNPRM, 
the Commission sought comment on excluding from the Phase II auction 
``any area'' that is served by a price cap carrier that offers fixed 
residential voice and broadband meeting the Commission's requirements, 
and on excluding from Phase II ``those census blocks'' that are served 
by a facilities-based terrestrial competitor offering voice and 
broadband services at 10/1 Mbps.
    37. Although the Commission did not seek comment on applying these 
exclusions specifically to the RBE census blocks, such action is a 
logical outgrowth of the Commission's proposals. Under the ``logical 
outgrowth'' standard, a notice of proposed rulemaking does not violate 
notice requirements under the Administrative Procedures Act if it 
``provide[s] the public with adequate notice of the proposed rule 
followed by an opportunity to comment on the rule's content.'' First, 
the Commission sought comment ``on the broader question of whether 
universal service funds are ever efficiently used when spent to 
overbuild areas where another provider has already deployed service.'' 
Given the broad nature of this question, the parties were on notice 
that the Commission was contemplating eliminating support for served 
areas in any universal service context. Second, while the FNPRM did not 
explicitly propose that the RBE census blocks would be made eligible 
for the Phase II auction if they were removed from the offer of model-
based support, both NRECA and UTC filed comments in response to the 
FNPRM requesting that the Commission make the RBE census blocks 
available for competitive bidding. Because they had the opportunity to 
urge the Commission

[[Page 15989]]

to include the census blocks in the Phase II auction, they also had the 
opportunity to comment on how the Commission's proposals for the Phase 
II auction--including whether to exclude areas served by unsubsidized 
competitors--should or should not apply to the RBE census blocks. In 
fact, those comments also separately discuss the Commission's proposals 
to remove from eligibility the Phase II auction census blocks served by 
price cap carriers and raise similar arguments to those raised in the 
petition. In the section seeking comment on the interplay between the 
Phase II offer of model-based support and the rural broadband 
experiments, the Commission did not suggest that census blocks removed 
from the offer of model-based support would be exempt from its broader 
Phase II auction proposals if the removed blocks were considered 
eligible for the Phase II auction inventory.
    38. Discussion. The Commission declines to reconsider its Phase II 
auction eligibility rules and automatically qualify to participate in 
the Phase II auction those entities that were selected as provisional 
winning bidders for the rural broadband experiments. The Commission is 
not persuaded that provisionally-selected bidders that failed to submit 
all of the required information during the rural broadband experiments 
are necessarily qualified for the Phase II auction. Because 
provisionally-selected bidders that were not ultimately authorized to 
receive support did not submit all of the required technical and 
financial information at the post-selection review stage, Commission 
staff did not fully assess their qualifications once they were named as 
winning bidders.
    39. Furthermore, the Commission is not convinced that it should 
permit provisionally-selected bidders that were ultimately authorized 
to receive rural broadband experiment support to participate in the 
Phase II auction without meeting the eligibility requirements for the 
Phase II auction. Although the Commission acknowledges that such 
entities underwent more extensive vetting than defaulting 
provisionally-selected bidders, eligibility requirements for applicants 
seeking to bid in the rural broadband experiments were not as rigorous 
as those proposed and adopted for the Phase II auction. As the 
Commission previously indicated, the eligibility considerations for 
participation in the rural broadband experiments bidding were different 
than they are for the Phase II auction. The rural broadband experiments 
were intended to award support to discrete experiments, and if the 
bidder defaulted, the area that was included in the bid would be 
eligible for the Phase II auction if it remained unserved. By contrast, 
the Commission seeks to balance maximizing coverage with its preference 
for supporting higher speeds, higher usage allowances, and lower 
latency through the Phase II auction, and if a bidder defaults, it 
would thwart these objectives by leaving the relevant area unserved 
when another qualified bidder may have been able to serve the area if 
it had won the support.
    40. Moreover, because the obligations for the Phase II auction are 
not the same as those of the rural broadband experiment, the Commission 
concludes that it serves the public interest to independently assess 
the qualifications of rural broadband experiment recipients seeking to 
participate in the Phase II auction. The Commission has adopted 
different speed, capacity, and latency requirements and a different 
build-out timeline for the Phase II auction. When the Commission 
authorized provisionally-selected bidders to receive rural broadband 
experiment support, it was authorizing those entities based on the 
specific technologies and networks they intended to use to meet their 
rural broadband experiment obligations. For the Phase II auction, the 
Commission has proposed to determine an applicant's eligibility to bid 
for the performance tier and latency combinations it selects in part 
based on information regarding how it intends to meet the Phase II 
obligations, which may differ from how it intended to meet its rural 
broadband experiment obligations. Finally, the Commission began 
authorizing rural broadband experiment recipients in 2015, and the last 
rural broadband experiment recipient was authorized in 2016. Because 
the Phase II auction will not be held until 2018, an applicant's 
technical and financial qualifications may have changed since the 
Commission last had the opportunity to review them.
    41. Discussion. The Commission grants Broad Valley and Crocker 
Telecommunications' petition for reconsideration in part by permitting 
Phase II auction recipients to reduce the value of their letter of 
credit to 60 percent of the total support already disbursed plus the 
amount of support that will be disbursed in the coming year once it has 
been verified that the Phase II auction recipient has met the 80 
percent service milestone. However, the Commission also denies Broad 
Valley and Crocker Telecommunications' petition for reconsideration in 
part by declining to make further reductions in the value of the letter 
of credit.
    42. The Commission is persuaded by commenters that claim that the 
Commission's existing letter of credit rules may impose significant 
costs on Phase II auction recipients, particularly on small providers. 
The Commission finds that it is reasonable to provide some additional 
relief from these costs by permitting Phase II recipients to reduce 
further the amount of support that a letter of credit must cover for 
Phase II recipients offering the required service to 80 percent of the 
required number of locations in a state. Because the Commission 
requires recipients to submit the geocoded locations that count towards 
their service obligations in an online portal with built-in 
validations, USAC will be able to quickly verify that a recipient's 80 
percent service milestone has been met, thereby enabling the recipient 
to reduce the value of its letter of credit. As the Commission 
acknowledged in the Phase II Auction Order, the Commission expects that 
the risk of default will lessen as a Phase II auction recipient makes 
progress towards meeting its Phase II auction service milestones 
because, as recipients offer service to more locations, they have the 
opportunity to offset more of their deployment costs with revenues.
    43. The letter of credit requirement applies to all winning 
bidders, which simplifies the administration of the letter of credit 
rules. However, the exact costs of obtaining and maintaining a letter 
of credit will affect each potential bidder in the Phase II auction 
differently. The letter of credit costs will likely vary based on the 
amount of support that a Phase II auction winning bidder is authorized 
to receive, and the impact of those costs is likely to vary based on 
the size and creditworthiness of the Phase II recipient. Therefore, the 
Commission cannot reasonably predict the cost of the requirement for 
each potential bidder relative to the benefit to the public of 
protecting the funds from default. However, the costs for a letter of 
credit in the range of several percentage points, when applied to the 
sizable amounts that may be awarded to bidders here, could well be 
considerable, particularly for smaller bidders. The Commission 
concludes on reconsideration that, on balance, the benefits of 
relieving all Phase II auction recipients of some additional costs of 
maintaining a letter of credit later in the term of support, after the 
recipient has met significant deployment milestones, outweigh the risk 
that the Commission will not be able to recover an additional portion 
of the support already disbursed

[[Page 15990]]

if the recipient is unable to repay the Commission in the event of a 
default. Moreover, as the Commission discusses below, an applicant that 
is affected by high letter of credit costs may choose to build out its 
network more quickly so that it can close out its letter of credit 
sooner.
    44. The Commission is not persuaded by claims that it should take 
further steps to reduce the cost of a letter of credit for Phase II 
auction recipients. While Broad Valley and Crocker Telecommunications 
present new proposals that would further reduce costs for recipients, 
the Commission is not convinced that these cost reductions would 
outweigh the associated risks to the public's funds. Under the 
Commission's rules, the Commission is able to recover the full amount 
of support that has been disbursed in prior years and support that will 
be disbursed in the coming year until the fourth year service milestone 
has been met, with only modest adjustments to the value of the letter 
of credit after a recipient has met the significant deployment 
milestones in the fourth and fifth years. In contrast, under Broad 
Valley's and Crocker Telecommunications' proposals, for the first three 
years of support, and prior to a recipient significantly deploying its 
network, the letter of credit would only cover support that had been 
disbursed in the previous year(s). Accordingly, the Commission would 
not be able to recover support that is disbursed in the year that a 
recipient defaults. Moreover, under Broad Valley's and Crocker 
Telecommunications' proposals, more drastic reductions would be made in 
the value of the letter of credit earlier in the support term. As a 
result, throughout the build-out period, the Commission would not be 
able to recover more than two years of disbursements if a recipient 
defaults.
    45. Under these proposed approaches, the Commission would recover 
far less support if the recipient stops offering service and could not 
repay the Commission for the support associated with the locations that 
remain unserved. The Commission noted that the letter of credit will be 
drawn only in situations where the Phase II auction recipient does not 
repay the Commission for the support associated with its compliance 
gap, and that the recipients unable to repay the support are also more 
likely to be at risk for going into bankruptcy and ceasing operation of 
their networks. Without a letter of credit, the Commission has no 
security to protect itself against the risks of default. Accordingly, 
the Commission found that it was necessary to ensure it could recover a 
significant amount of support in such situations. Broad Valley and 
Crocker Telecommunications do not address these concerns in their 
petitions.
    46. The Commission expects that its decision to make a further 
modest reduction in the required value of the letter of credit for 
Phase II auction recipients that have substantially met their 
obligations will help address some of the cost concerns of potential 
bidders, including small entities and new entrants. But the Commission 
is not persuaded that it should address these concerns by further 
reducing the value of the letter of credit. The Commission acknowledges 
that each winning bidder will have to certify in its long-form 
application that it will have available funds for all projects costs 
that exceed Phase II support. The Commission also recognizes that small 
entities and new entrants, which often lack the resources of larger and 
established companies so that letter of credit costs have more of an 
impact on their budgets, may have to factor more of these letter of 
credit costs in their bids, potentially leading to less competitive 
bids. However, all participants in the Phase II auction will have to 
factor in the various costs of meeting the Phase II auction obligations 
when deciding whether to participate in the auction and how much to bid 
to ensure they can cover all of the costs. The Commission took a number 
of steps at the request of small entities to help lessen these costs, 
including expanding the number and types of banks eligible to issue 
letters of credit so that small entities can obtain letters of credit 
from banks with which they have existing partnerships. Although some 
entities may still find that participating in the auction is cost-
prohibitive or that they are unable to place competitive bids, the 
Commission is not convinced that it should put its ability to recover a 
significant amount of support at risk if these same entities were to 
participate and later discover that they are unable to meet the Phase 
II auction obligations and unable to repay the Commission for their 
compliance gap.
    47. The Commission is not persuaded that making large reductions in 
the required value of the letter of credit when a recipient meets its 
service milestones would encourage recipients to build out their 
networks faster. Instead, the Commission expects that the letter of 
credit requirements it adopts today may encourage more rapid 
deployment. By making only modest adjustments for the fourth- and 
fifth-year service milestones, and requiring a recipient to maintain a 
letter of credit only until it has been verified that the recipient has 
met the final service milestone, the Commission expects that recipients 
will move faster to meet the final service milestone so that they no 
longer have to maintain a letter of credit. Indeed, smaller bidders, 
which might be most affected by letter of credit costs, are also more 
likely to have winning bids that can be completed in less than the full 
six-year deployment term. Moreover, if the recipient could instead 
significantly reduce the value of its letter of credit when it reaches 
earlier milestones, it may not have as much of an incentive to meet the 
final service milestone as quickly.
    48. Discussion. The Commission declines to reconsider the formula 
it adopted for applying the weights for performance tier and latency 
combinations to give bids placed in Pennsylvania, in areas where 
Verizon declined Phase II support, an advantage over other bids by 
adding an additional negative weight for such bids. The Commission also 
declines to waive the Phase II auction rules to add such a weight to 
Pennsylvania bids.
    49. Based on the record before the Commission, Pennsylvania has not 
persuaded the Commission that its proposal would more effectively 
balance its Phase II objectives in furtherance of its section 254 
obligations and the public interest. The Commission balanced its 
interest in ensuring that consumers in declined states get access to 
broadband services with its objective of maximizing the finite Phase II 
budget by deciding to award support to cost-effective and higher 
service quality bids through the Phase II auction and then prioritize 
unserved areas in declined states in the Remote Areas Fund. As part of 
this balancing, the Commission determined that its adopted framework 
may encourage bidders to bid in declined areas and incentivize states 
to offer complementary support, so that declined states may still have 
a strong possibility of being served through the Phase II auction 
absent a preference. Bidders might be more interested in bidding in the 
declined areas in the state through the Phase II auction because those 
areas are lower cost. While the ranking of bids on a bid-to-reserve 
price basis, rather than on a dollar-per-location basis, may remove a 
potential bidding advantage for bidders in lower cost areas because 
those areas tend to have more locations, bidders may nonetheless be 
more likely to make a business case to serve such areas because they 
are lower cost. Bidders might also be more attracted to declined areas, 
and may have a higher likelihood of winning such areas, if a state such 
as Pennsylvania made available support

[[Page 15991]]

that bidders could leverage to reduce the amount of Connect America 
support they were requesting, therefore making their bids more cost-
effective when compared to other bidders nationwide.
    50. The Commission is not convinced by Pennsylvania and the 
National Association of Regulatory Utility Commissioners' (NARUC) 
claims that Pennsylvania's proposal would ``provide significant cost 
effectiveness and financial synergies that may not be available absent 
modification.'' In fact, the Commission finds that adopting a negative 
weight could actually thwart its objectives of maximizing the Phase II 
auction budget and incentivizing states to contribute support. First, 
the negative weight would effectively double count the support that 
Pennsylvania offers to bidders because bidders would be able to reduce 
their bids by the amount of Pennsylvania support in addition to a 
negative weight applied to their Connect America bids in proportion to 
the amount of Pennsylvania support they receive. This could result in 
bidders asking for more Connect America support than they might if they 
could only use Pennsylvania support to reduce their bids (i.e., without 
the additional negative weight). With the negative weight applied to a 
Connect America bid that already accounts for Pennsylvania support, 
they could potentially win even though their bid is not as cost-
effective as other bidders. Second, the negative weight could result in 
Pennsylvania making less support available than it would without this 
factor because the weight would give Pennsylvania bidders at least some 
advantage over other bidders, regardless of the amount of support 
provided by Pennsylvania.
    51. The Commission also is not persuaded that the negative weight 
that Pennsylvania proposes would permit the Commission to effectively 
leverage the funds that Pennsylvania does make available to meet its 
Phase II auction objectives. Pennsylvania's petition does not describe 
with specificity the amount of funding that will be made available, and 
how the Commission will have assurance that the funding Pennsylvania 
makes available will actually be provided to the applicant. And 
although Pennsylvania's proposal would allocate federal support through 
the Phase II auction rather than establishing a separate allocation 
mechanism for Pennsylvania, the results of the auction may be skewed in 
a way that conflicts with Phase II objectives if a preference is given 
to bidders based on state support that is allocated in a manner that is 
inconsistent with decisions the Commission made for the Phase II 
auction. For example, Pennsylvania does not describe what specific 
restrictions will be placed on its funding to ensure it is used in 
areas that are eligible for the Phase II auction, how Pennsylvania will 
ensure that its funding is made available on a technology-neutral 
basis, and whether Pennsylvania will be using market-based mechanisms 
to allocate support. Without such information and safeguards, the 
Commission risks giving Pennsylvania bidders an advantage in the Phase 
II auction to the detriment of other cost-effective bidders even though 
state funding may ultimately not be made available, be spent to 
overbuild areas that already have broadband service, or be allocated in 
a manner that conflicts with the Commission's Phase II objectives. 
Unlike New York's NY Broadband Program, where the Commission found it 
could align its stated Phase II objectives with New York's existing 
broadband-funding program by adopting specific conditions to its waiver 
of the Phase II auction rules, here the Commission does not have enough 
specific information about the various programs Pennsylvania intends to 
use to allocate support in order to consider any appropriate conditions 
that might address its concerns.
    52. In addition, the Commission is not convinced by Pennsylvania's 
claims that the negative weight would not ``detract[]'' from the 
Commission's goals of deploying broadband nationwide and would not 
``negatively impact[]'' support that is available to other declined 
states. Due to the finite Phase II auction budget, there is a potential 
that not all interested bidders will ultimately be awarded support. 
Accordingly, any mechanism that would give Pennsylvania bidders an 
opportunity to make less cost-effective bids than other bidders in 
other states, but still win, has the potential to unreasonably skew 
support to the state at the expense of other areas that may be served 
more cost-effectively. Such a mechanism also could result in fewer 
consumers receiving broadband. For New York, the Commission knew the 
maximum amount of support that could be allocated through New York's 
program and it adopted certain measures that could stretch that support 
beyond the census blocks in New York that were eligible for the Phase 
II offer of model-based support. Because Pennsylvania has not provided 
specific information regarding how much support it intends to make 
available, and the value of the negative weight is based on how much 
state support a Pennsylvania bidder will receive, the Commission is 
unable to assess the potential impact of the negative weight on its 
nationwide broadband deployment objectives.
    53. The Commission also disagree with Pennsylvania's claims that 
such a negative weight will not add complexity to the Phase II auction. 
First, a process must be created to determine and verify how much 
support each applicant has received or will receive from Pennsylvania 
state programs to determine how much negative weight to apply. Second, 
an auction system must be designed that uses a different formula for 
calculating bids in only the declined Pennsylvania areas. These steps 
add a significant layer of complexity to the auction and could 
potentially lead to a delay in commencing the Phase II auction.
    54. The Commission acknowledges that Pennsylvania's proposed 
approach could reduce the possibility that Pennsylvania will have to 
wait ``until the finalization of the Remote Areas Fund to make progress 
on its ``intra-county digital divides,'' may make it more likely that 
an amount equivalent to the support that Verizon declined is allocated 
to Pennsylvania through the Phase II auction rather than through the 
Remote Areas Fund, and would give Pennsylvania recognition for its past 
and future contributions to broadband deployment. However, the benefits 
of adopting the approach Pennsylvania recommends are outweighed by the 
drawbacks the Commission has discussed, and it is not persuaded that 
altering the balance already achieved by the Commission through its 
existing Phase II auction and Remote Areas Fund framework would serve 
the public interest. Pennsylvania is one of a number of states, 
including other states where Phase II model-based support was declined, 
that have supported and continue to support broadband deployment. The 
Commission concludes the most effective way to accomplish its Phase II 
objectives and leverage these state programs is to have bidders factor 
any state support that they have received or will receive into their 
bids so that they can place cost-effective bids within the existing 
Phase II auction and Remote Areas Fund auction framework.
    55. The Commission disagrees with the assumption that states are 
entitled to receive the amount of support that the price cap carrier 
declined in the respective states. The Commission has made several 
decisions that contradict this assumption, including comparing all bids 
nationwide, making extremely high-cost census blocks nationwide

[[Page 15992]]

eligible for the Phase II auction, adopting a limited budget, and 
deciding to score bids against each other nationwide on a ratio-to-
reserve price basis. Instead, the Commission has acknowledged the 
importance of connecting a similar number of unserved consumers in the 
states that would have been reached had the Phase II offer been 
accepted and has committed to provide sufficient support to do so 
through both the Phase II auction and the Remote Areas Fund, to the 
extent possible.
    56. The Commission also finds that Pennsylvania has not 
demonstrated good cause for waiving the Phase II auction scoring 
formula. First, Pennsylvania has not established special circumstances 
that warrant deviation from the Phase II auction scoring formula. When 
the Commission waived the Phase II auction program rules for New York, 
the Commission found that the state was uniquely situated to quickly 
and efficiently further its goal of broadband deployment. The state had 
committed a significant portion of its own support as matching support, 
and demonstrated that there were unique timing considerations given 
that it had already implemented its own broadband program and had 
aggressive service deadlines. Such conditions are not present here. As 
explained above, the Commission already intends to address 
Pennsylvania's status as a declined state through the existing 
framework it adopted for the Phase II auction and the Remote Areas 
Fund, and it is able to leverage any support that Pennsylvania makes 
available through that same framework. And while the Commission 
acknowledges and appreciates Pennsylvania's past efforts to encourage 
broadband deployment in the state, Pennsylvania has not demonstrated 
why its past state contributions warrant waiver of rules for the future 
allocation of federal support.
    57. Second, even if the Commission were to find that Pennsylvania 
had established special circumstances, for the reasons explained above, 
Pennsylvania has not demonstrated the public interest would be served 
by waiving the Phase II auction formula to add a negative weight for 
bids placed in declined areas in the state. New York was able to 
demonstrate that waiver of the Phase II auction program rules would 
serve the public interest for a number of reasons including that it 
would result in accelerated broadband deployment, it would enable the 
Commission to use Phase II support efficiently and effectively by 
leveraging matching New York support in Connect America Phase II-
eligible areas and avoiding overbuilding areas served by New York's 
program, and support would be awarded in a technology-neutral manner 
using a market-based mechanism consistent with Phase II auction 
objectives. Such conditions are not present here. For the reasons the 
Commission already discussed, although Pennsylvania's proposed approach 
could result in more declined areas in Pennsylvania being served 
through the Phase II auction, Pennsylvania has not demonstrated that 
its requested modification would necessarily further the Commission's 
objectives of using the finite Phase II auction budget efficiently or 
fully explained how its request would result in a more effective 
federal-state partnership. Instead, the Commission concludes that the 
framework it has adopted for the Phase II auction and the Remote Areas 
Fund will more effectively balance all of these objectives, while still 
leading to widespread broadband deployment across Pennsylvania's high-
cost areas with complementary state support. Thus, the Commission 
concludes it would not serve the public interest to grant Pennsylvania 
a waiver.

II. Procedural Matters

A. Paperwork Reduction Act Analysis

    58. This Order on Reconsideration contains new or modified 
information collection requirements subject to the Paperwork Reduction 
Act of 1995 (PRA), Public Law 104-13. It will be submitted to the 
Office of Management and Budget (OMB) for review under Section 3507(d) 
of the PRA. OMB, the general public, and other Federal agencies will be 
invited to comment on the new or modified information collection 
requirements contained in this proceeding. In addition, the Commission 
notes that pursuant to the Small Business Paperwork Relief Act of 2002, 
Public Law 107-198, see 44 U.S.C. 3506(c)(4), the Commission previously 
sought specific comment on how it might further reduce the information 
collection burden for small business concerns with fewer than 25 
employees.

B. Congressional Review Act

    59. The Commission will send a copy of this Order on 
Reconsideration to Congress and the Government Accountability Office 
pursuant to the Congressional Review Act, see 5 U.S.C. 801(a)(1)(A).
    60. As required by the Regulatory Flexibility Act of 1980, as 
amended (RFA), the Commission prepared Initial Regulatory Flexibility 
Analyses (IRFAs) in connection with the USF/ICC Transformation FNPRM, 
76 FR 78384, December 16, 2011, the April 2014 Connect America FNPRM, 
and the Phase II Auction FNPRM (collectively, Phase II FNPRMs). The 
Commission sought written public comment on the proposals in the Phase 
II FNPRMs including comments on the IRFAs. The Commission included 
Final Regulatory Flexibility Analyses (FRFAs) in connection with the 
December 2014 Connect America Order, Phase II Auction Order and the 
Phase II Auction FNPRM Order (collectively, Phase II Orders). This 
Supplemental Final Regulatory Flexibility Analysis (Supplemental FRFA) 
supplements the FRFAs in the Phase II Orders to reflect the actions 
taken in this Order on Reconsideration and conforms to the RFA.
    61. Need for, and Objectives of, this Order on Reconsideration. 
This Order on Reconsideration considers the remaining issues raised by 
parties challenging the Commission's orders implementing the Phase II 
auction, in which service providers will compete to receive support of 
up to $1.98 billion to offer voice and broadband service in unserved 
high-cost areas. Specifically, the Commission resolves petitions 
challenging the Commission's decisions on the following issues: How to 
compare bids of different performance levels, standalone voice 
requirements, Phase II auction deployment and eligibility, and state-
specific bidding weights, among other matters. The Commission also 
adopts a process by which a support recipient that sufficiently 
demonstrates that it cannot identify enough actual locations on the 
ground to meet its Phase II obligations can have its total state 
location obligation adjusted and its support reduced on a pro rata 
basis. Additionally, the Commission modifies its letter of credit rules 
to provide some additional relief for Phase II auction recipients by 
reducing the costs of maintaining a letter of credit. By resolving 
these issues, the Commission moves a step closer to holding the Phase 
II auction and, in turn, to the goal of closing the digital divide for 
all Americans, including those in rural areas of our country.
    62. Response to Comments by the Chief Counsel for Advocacy of the 
Small Business Administration. Pursuant to the Small Business Jobs Act 
of 2010, which amended the RFA, the Commission is required to respond 
to any comments filed by the Chief Counsel of the Small Business 
Administration (SBA), and to provide a detailed statement of any change 
made

[[Page 15993]]

to the rules as a result of those comments. The Chief Counsel did not 
file any comments in response to the relevant IRFAs.
    63. Description and Estimate of the Number of Small Entities to 
which the Rules Will Apply. The RFA directs agencies to provide a 
description of and, where feasible, an estimate of the number of small 
entities that may be affected by the rules adopted herein. The RFA 
generally defines the term ``small entity'' as having the same meaning 
as the terms ``small business,'' ``small organization,'' and ``small 
governmental jurisdiction.'' In addition, the term ``small business'' 
has the same meaning as the term ``small business concern'' under the 
Small Business Act. A ``small business concern'' is one which: (1) Is 
independently owned and operated; (2) is not dominant in its field of 
operation; and (3) satisfies any additional criteria established by the 
SBA.
    64. As noted above, FRFAs were incorporated into the Phase II 
Orders. In those analyses, the Commission described in detail the small 
entities that might be significantly affected. In this Order on 
Reconsideration, the Commission hereby incorporates into this 
Supplemental FRFA the descriptions and estimates of the number of small 
entities from the previous FRFAs in the Phase II Orders.
    65. Description of Projected Reporting, Recordkeeping, and Other 
Compliance Requirements for Small Entities. The data, information and 
document collection required by the Phase II Orders as described in the 
previous FRFAs in this proceeding are hereby incorporated into this 
Supplemental FRFA. In this Order on Reconsideration, the Commission 
also adopts a process whereby a support recipient can demonstrate there 
are not enough actual locations on the ground to meet its state 
location requirement. The Order on Reconsideration directs the Bureau 
to implement the specific procedures for this filing.
    66. Steps Taken to Minimize the Significant Economic Impact on 
Small Entities, and Significant Alternatives Considered. The RFA 
requires an agency to describe any significant alternatives that it has 
considered in reaching its proposed approach, which may include the 
following four alternatives (among others): ``(1) the establishment of 
differing compliance or reporting requirements or timetables that take 
into account the resources available to small entities; (2) the 
clarification, consolidation, or simplification of compliance or 
reporting requirements under the rule for small entities; (3) the use 
of performance, rather than design, standards; and (4) and exemption 
from coverage of the rule, or any part thereof, for small entities.
    67. The analysis of the Commission's efforts to minimize the 
possible significant economic impact on small entities as described in 
the previous Phase II Orders FRFAs are hereby incorporated into this 
Supplemental FRFA. In addition, by making a modest reduction in the 
required value of the letter of credit for recipients that have 
substantially met their service obligations, the Commission is further 
reducing the costs of this requirement for such entities, including 
small entities. Moreover, the Commission adopted a process by which a 
support recipient can demonstrate that there are not enough actual 
locations on the ground to meet its state location requirement. If the 
support recipient makes a sufficient demonstration, it can have its 
state location obligation adjusted along with a pro rata reduction in 
support. This will particularly benefit entities that bid to serve 
smaller areas, which the Commission expects will include small 
entities. Such entities might not have otherwise been able to locate 
enough locations in the areas where the CAM did not overestimate the 
available locations in their bids to meet their obligation and would 
potentially have been subject to non-compliance measures. The 
Commission also expects that the Bureau will factor in the unique 
challenges faced by small entities in implementing this process.
    68. People with Disabilities. To request materials in accessible 
formats for people with disabilities (Braille, large print, electronic 
files, audio format), send an email to [email protected] or call the 
Consumer & Governmental Affairs Bureau at 202-418-0530 (voice), 202-
418-0432 (tty).

III. Ordering Clauses

    69. Accordingly, it is ordered, pursuant to the authority contained 
in sections 4(i), 214, 254, 303(r), 403, and 405 of the Communications 
Act of 1934, as amended, 47 U.S.C. 154(i), 214, 254, 303(r), 403, and 
405, and Sec. Sec.  1.1, 1.3, 1.427, and 1.429 of the Commission's 
rules, 47 CFR 1.1, 1.3, 1.427, and 1.429, that this Order on 
Reconsideration is adopted, effective thirty (30) days after 
publication of the text or summary thereof in the Federal Register.
    70. It is further ordered that part 54 of the Commission's rules, 
47 CFR part 54, IS amended as set forth in the following, and such rule 
amendment shall be effective thirty (30) days after publication of the 
rule amendment in the Federal Register, except to the extent they 
contain new or modified information collection requirements that 
require approval by the Office of Management and Budget under the 
Paperwork Reduction Act. The rules that contain new or modified 
information collection requirements subject to PRA review shall become 
effective after the Commission publishes a notice in the Federal 
Register announcing such approval and the relevant effective date.
    71. It is further ordered that, pursuant to Sec.  1.429 of the 
Commission's rules, 47 CFR 1.429 the Petition for Clarification or 
Reconsideration filed by ADTRAN, Inc. on July 5, 2016 is denied to the 
extent described herein.
    72. It is further ordered that, pursuant to Sec.  1.429 of the 
Commission's rules, 47 CFR 1.429 the Petition for Reconsideration filed 
by Broad Valley Micro Fiber Networks Inc. on July 20, 2016 is granted 
in part, dismissed in part, and denied in part to the extent described 
herein.
    73. It is further ordered that, pursuant to Sec.  1.429 of the 
Commission's rules, 47 CFR 1.429 the Petition for Reconsideration filed 
by Crocker Telecommunications, LLC on July 18, 2016 is granted in part, 
dismissed in part, and denied in part to the extent described herein.
    74. It is further ordered that, pursuant to Sec.  1.429 of the 
Commission's rules, 47 CFR 1.429 the Petition for Reconsideration filed 
by Hughes Network Systems, LLC on April 20, 2017 is denied to the 
extent described herein.
    75. It is further ordered that, pursuant to Sec.  1.429 of the 
Commission's rules, 47 CFR 1.429 the Petition for Reconsideration filed 
by the National Rural Electric Cooperative Association and the 
Utilities Technology Council on July 21, 2016 is dismissed in part and 
denied in part to the extent described herein.
    76. It is further ordered that, pursuant to Sec. Sec.  1.3 and 
1.429 of the Commission's rules, 47 CFR 1.3, 1.429 the Petition for 
Reconsideration, Modification, or Waiver filed by the Pennsylvania 
Public Utility Commission and the Pennsylvania Department of Community 
and Economic Development on April 19, 2017 is denied to the extent 
described herein.
    77. It is further ordered that, pursuant to Sec.  1.429 of the 
Commission's rules, 47 CFR 1.429 the Petition for Reconsideration filed 
by Southern Tier Wireless, Inc. on July 20, 2016 is granted in part, 
dismissed in part, and denied in part to the extent described herein.

[[Page 15994]]

    78. It is further ordered that, pursuant to Sec.  1.429 of the 
Commission's rules, 47 CFR 1.429 the Petition for Reconsideration filed 
by Verizon on August 8, 2016 is denied in part to the extent described 
herein.

List of Subjects in 47 CFR Part 54

    Communications common carriers, Health facilities, Infants and 
children, Internet, Libraries, Reporting and recordkeeping 
requirements, Schools, Telecommunications, Telephone.

Federal Communications Commission.
Marlene Dortch,
Secretary.

Final Rules

    For the reasons discussed in the preamble, the Federal 
Communications Commission amends 47 CFR part 54 as follows:

PART 54--UNIVERSAL SERVICE

0
1. The authority citation for part 54 continues to read as follows:

    Authority:  47 U.S.C. 151, 154(i), 155, 201, 205, 214, 219, 220, 
254, 303(r), 403, and 1302 unless otherwise noted.

0
2. Amend Sec.  54.315 by revising the section heading and paragraph 
(c)(1)(ii) to read as follows:


Sec.  54.315   Application process for Connect America Fund phase II 
support distributed through competitive bidding.

* * * * *
    (c) * * *
    (1) * * *
    (ii) Once the recipient has met its 80 percent service milestone, 
it may obtain a new letter of credit or renew its existing letter of 
credit so that it is valued at a minimum at 60 percent of the total 
support that has been disbursed plus the amount that will be disbursed 
in the coming year.
* * * * *
[FR Doc. 2018-07509 Filed 4-12-18; 8:45 am]
 BILLING CODE 6712-01-P