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August 24, 2017

The Risk of Fraudulent Bidding in the FCC Connect America Fund Auction

When I was hired at the FCC in 2012, I was asked to work on reforms of various FCC spending programs. The FCC administers over $11 billion in annual spending through several programs, the largest of which include support for rural and high cost areas, schools and libraries, rural health care institutions, low-income households, and services for people who are deaf and hearing disabled. Over the years, each of these programs has been subject to fraud totaling hundreds of millions of dollars. My experience with the FCC taught me that fraud in the FCC programs is so prevalent mainly because of poor program design. Sympathy for schools, or for persons who are deaf, or for the poor leads the Commissioners to compromise on program integrity and those compromises manifest themselves in sloppy and imprecise rules. Program participants, both those with scruples and without, take advantage of the rules. Sometimes, fraud is detected, sometimes fraud is prosecuted, sometimes funding is recovered. But usually, the Commission points to the inadequacies of its predecessors and moves on.

You would think, given its history, that the FCC would be attentive to the potential for fraudulent bidding in the design of the Connect America Fund auction scheduled to be held next year. Unfortunately, the FCC’s proposed auction procedures are more of an invitation to fraud than a protection against such bidding. The FCC has set out four possible tiers of internet access service: 1 Gbps, 100 Mbps, 25 Mbps and 10 Mbps. My concern, based on my review and experience of past FCC auctions, is that there are those who will bid beyond their capability in order to win at the auction. In particular, if the FCC permits certain technologies, such as fixed wireless and satellite, to bid at the 100 Mbps tier or higher, the FCC will reap the whirlwind.

If there were such a legal procedure as an anticipatory qui tam lawsuit, I would bring one now based on the information I had while at the FCC. Instead, I will use this blog and other forums to identify these and other indicia of fraudulent bidding:

  1. The FCC should reject bidders that claim to offer voice service with a Mean Opinion Score of 4.0 or greater when latency in a call is 0.5 to 1.5 seconds. Quality voice service is not optional under Sec. 214 and 254 of the Communications Act. Tests necessary to check the quality of voice service should be conducted by the FCC, not the bidder, and open to public inspection.
  2. The FCC should reject bidders that have never served at least 70% of the homes in any market that is at least as large as the size of their bidding area. The FCC’s cost model that provides the outputs for the CAF auction reserve prices is based on a subscribership of 70% of the locations. The FCC has access to data on the levels of subscribership reported by different carriers and different types of companies. There are very few types of companies that provide universal service, which is a wholly different capability than merely being able to provide service. The FCC should be attentive to those bidders who appear to be punching far above their weight. A bidder, for example, that has publicly stated the impossibility of achieving 32% market share within a couple of years after service launch is not prepared to be a universal service provider.
  3. The FCC should reject bidders whose Form 477 filings indicate one speed of service while their websites advertise far slower speeds, and where the actual delivered speed is slower still. The 477 filings are already submitted under the penalty of perjury, so a company that claims speeds of 100 Mbps service, but advertises speeds of 3-10 Mbps, might be prepared to bid at the 100 Mbps tier and not deliver.
  4. The FCC should reject bidders whose service availability is dependent on conditions, such as terrain or foliage or weather. Such companies are, by definition, not qualified as a carriers of last resort, which is the sine qua non of this type of Universal Service program. As one example of an unacceptable condition where a company is the recipient of FCC funding:  “Service Availability – The Service is subject to availability as it is contingent on available Company facilities and unique signal path conditions between such facilities and the User premises. Due to the nature of the Service technology, the Company reserves the right to deem the Service unavailable to the User up to, including, and after the installation. The Company assumes no liability whatsoever for any claims, damages, losses or expenses arising out of or otherwise relating to the unavailability of the Service in User’s geographical area, for any reason, even where such unavailability occurs after installation of the Service.”
  5. The FCC should reject bidders that rely on spectrum and do not have exclusive use of spectrum necessary to deliver last mile telecommunications services. A company that has been licensed by the FCC for exclusive use of its frequencies can manage that asset to protect its customers from interference. Users of unlicensed bands have no such ability to protect against interference and the degradation of service. As in point number 3 above, the carrier of last resort obligation of this program is not a “nice to have” condition. It is the condition. A company cannot guarantee a level of service if its service is dependent on factors beyond its control, such as the availability and sufficiency of spectrum.

 

There are a lot of clever attorneys and economists at the FCC with great experience in designing auctions. To guard against unqualified bidders, the FCC intends to rely on its review of applications to participate in the auction. Yet, the FCC simply does not have the manpower nor technical expertise to perform the necessary due diligence, and that has been the case in program after program.

There is an obvious fix, one which the FCC has eschewed. The fix would be to limit disbursement of public funds to the number of a company’s subscribers at their winning service tier. For example, if a company bids at the 100 Mbps tier, they should only be compensated for serving customers who subscribe at 100 Mbps internet service. This approach only works if all eligible telecommunications carriers have access to the same level of support in the same geographic area – a form of subsidy portability. Otherwise, while the public funds would be protected from unscrupulous bidders, the rural areas would not be. With post-auction portability, rural consumers will police the companies by their choice of internet service. If the FCC wants to allow winning bidders an initial year or two of funding before portability, the protection afforded by consumer choice would still work.

In geographic markets we work, the coops who deploy fiber-to-the-home services start with zero market share. They build market share as they build their network, usually achieving 30-40% share within months of deployment. Once fiber services are available, coop members switch away from DSL and satellite and fixed wireless services. So, of course, we are willing to compete for consumers and for the attendant subsidies in rural areas. Consumer choice would better regulate the expenditure of public funds. I have no illusions about the FCC adopting a consumer choice proposal, but I hold out hope that the FCC will limit bidders to the services they have proven they can deliver and so avoid the worst abuses of fraudulent bidding.

 

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About Jonathan Chambers

Jonathan has worked for over twenty-five years at start-up companies, large corporations and the U.S. Government. For the past four years, Jonathan was Chief of the Office of Strategic Planning for the Federal Communications Commission. Jonathan was part of the senior leadership at the FCC that reformed $12 billion in annual federal spending, including the rural and high-cost fund, e-rate, telecommunications relay services and the lifeline programs. Jonathan also conceived of the Rural Broadband Experiment and was involved in the auction design for the Connect America Fund. Prior to the FCC, Jonathan worked in the cable and telecommunications industry in the U.S. and Europe. He was one of the original employees at Sprint PCS, where he was Vice President of Public Policy and Associate General Counsel. In Europe, he worked with Telenet (Belgium), Ono (Spain) and Ish (Germany). He was General Counsel of TVGateway, a company formed by Comcast, Cox and Charter to develop an electronic program guide. Jonathan was Chief Strategy Officer, General Counsel and a founder of Movida Communications, Inc., an MVNO focused solely on the US Hispanic market. At the start of his professional career, Jonathan spent eight years in the U.S. Senate, as staff director for the Commerce Committee, staff member of the Intelligence Committee and legislative director to Senator Jack Danforth (R-MO). Jonathan holds a BA in economics from Yale College, an MA in international affairs from Columbia University and a JD from Georgetown University Law Center. In March 2016, Jonathan left the FCC to join Conexon to help electric cooperatives bring FTTH broadband to rural areas throughout the country. He is currently a member of the board of directors of the Nicholville Telephone Company in upstate New York.

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