Federal Communications Commission Releases Rural Digital Opportunity Fund Auction Procedures Public Notice, Spells Out Specifics of Requirements for Short-Form Versus Long-Form

In the lead up to the Federal Communications Commission’s Rural Digital Opportunity Fund (“RDOF”) reverse-auction on October 29, 2020, the Commission released its draft Auction Procedures Public Notice (“Auction Procedures”) on May 19, 2020. The procedures for this auction, Auction 904, are expected to be approved by the Commission during its June 9 public meeting.

These auction procedures spell out the deadlines and rules that entities must follow in order to prepare for, successfully bid and receive universal service funding through RDOF, Phase I. Up to $16 billion in funding, over 10 years, is expected to be made available through Phase I. The second phase of RDOF is expected to offer $4.4 billion in funding, also over 10 years, although the details of that auction are far in the future. Phase II is expected to provide financial support for additional areas, including those locations unserved by Phase I.

Many of the Auction Procedures refer and contrast the RDOF, Phase I auction with the Connect America Fund, Phase II auction that took place in 2018. That was the last Federal Communications Commission (“FCC”) program to provide subsidies for rural broadband. By way of contrast, CAF II offered $1.48 billion over 10 years. RDOF’s Phase I is expected to be more than 10 times as large as the widely-heralded CAF II auction.

Additionally, 713,176 locations – homes or offices – were funded through CAF II.  RDOF’s Phase I is expected to provide support for nearly 6 million locations – more than eight times the number of locations in CAF II.

Deadlines

The draft Auction Procedures of May 19 lays out the specific deadlines for participation in RDOF, Phase I. The most important one of these is the deadline for the so-called “short-form” application (FCC Form 183), which is due no later than 6 p.m. ET on Wednesday, July 15, 2020. The FCC has repeatedly expressed its unwillingness to accept any late short-form applications. The window to submit short-form applications opens on July 1, 2020.

In the Public Notice, the FCC also announced that the auction will take place on October 29, 2020, only a one-week delay from its previously-scheduled time for the auction’s beginning.

Additionally, the Commission announced that it would publish an application tutorial on June 15, that an auction bidding tutorial would be available by October 14, and that the mock auction (allowing new and returning bidders to experiment with the mechanics of the online auction) will take place on October 26.

No timeframe is set for how long the auction is to run, but the CAF II auction ran for nearly four weeks.

The FCC already approved the general parameters for the auction in a Report and Order on February 7, 2020. On March 2, 2020, the agency sought comment on the auction procedures that it has now published. On March 17, 2020, the agency released an initial map of 5,907,896 locations – within about 66,000 census block groups — that are expected to be available for bidding. A final list of locations will be made available before the auction, following a challenge process.

Short-Form Versus Long-Form

For potential bidders preparing for the auction, there is a crucial distinction between information that must be included in the short-form (by July 15), and information that must be provided or included with the so-called “long form” (Form 683), following a successful bid in Auction 904.

Entities don’t need to submit this long form unless after the FCC’s closing public notice following the auction, and only if they are winners in the auction. Further, it is on the long form that consortium bidders and joint ventures bidders will spell out the details of which of their joint entities will receive funding for which areas of a successful bid. This process, called “Divide Winning Bids,” enables entities to assign winning bids – within certain restrictions – to related parties that they disclose on the short-form. This will be discussed below.

Additionally, among the most important long-form elements include audited information, proof of Eligible Telecommunications Carrier status, and a letter of credit from a bank or other financial institution. These will also be discussed below.

The short-form does require the submission of some financial and operational information. In particular, applicants must comply with the ownership disclosure requirements in sections 1.2112(a) and 54.804(a)(1) of the Commission’s rules. Specifically, in completing the short-form application, an applicant must fully disclose information regarding the real party or parties-in-interest in the applicant or application and the ownership structure of the applicant, including both direct and indirect ownership interests of 10 percent or more. (Para. 37 of Auction Procedures)

This rule means that consortia, joint venture and limited partner arrangements must make such disclosure at the short-form stage.

In regards to operational information, the RDOF Order in February established two pathways for an applicant to demonstrate operational experience. If the applicant has two years of experience in the provision of voice broadband or electric distribution or transmission, the applicant can so certify, but most also provide proof that the applicant (or its parent) has filed the FCC Form 477 during that time. (Para. 51) It must also provide details on the technologies, network topology, and services offered.

In the circumstance of this first pathway from eligibility, the applicant must submit its fiscal year-end 2019 audited financial statement. If, however, the applicant is not audited in the ordinary course of business, it does not need to submit audited financial statements with the short-form. However, it must submit its (or its parent company’s) fiscal year-end 2018 unaudited financial statements with its short-form application, including balance sheet, net income, and cash flow, and certify that the long-form applicant will obtain and submit its (or its parent company’s) audited financial statements from the prior fiscal year within 180 days after being announced as a winning bidder. (Para. 54)

In regard to the second pathway for eligibility, an applicant that does not have at least two years of operational experience must submit with its short-form application its (or its parent company’s) financial statements that are audited by an independent certified public accountant from the three most recent fiscal years (i.e., 2016, 2017, and 2018). Such an applicant must also submit, with its short-form application, a letter of interest from a qualified bank stating that the bank would provide a letter of credit to the applicant if the applicant becomes a winning bidder and is selected for bids of a certain dollar amount. For applicants taking the first pathway, the letter of credit is required with the long form, and not with the short-form.

Divide Winning Bids

In the public notice issued following completion of the auction, the deadlines for a process called “Divide Winning Bids,” also a section of the long form (Form 683), will be announced.

A winning bidder in Auction 904 may only assign its winning bids to a related entity that is named in its short-form application or that was formed after the short-form application deadline (i.e., July 15, 2020). A related entity is an entity that is controlled by the winning bidder or is a member of (or an entity controlled by a member of) a consortium/joint venture of which the winning bidder is a member. Thus, if a holding company/parent company is a winning bidder, the winning bidder may designate at least one operating company that it controls to complete the long-form application to receive Rural Digital Opportunity Fund support for some or all of the winning bids in a state. If a consortium/joint venture is a winning bidder, the entity may designate at least one member of (or an entity controlled by a member of) the consortium/joint venture to complete the long-form application to receive Rural Digital Opportunity Fund support for some or all of the winning bids in a state. (Para. 286)

The FCC Auction Procedures order provides some further guidance on how a consortium/joint venture bidder may “assign” their winning bids:

A winning bidder may assign winning bids to more than one entity in a single state, but it cannot assign a single winning bid to more than one entity. Thus, a winning bidder may not split among multiple entities either: 1) eligible census blocks within a winning bid for an individual CBG, or 2) separate CBGs within a winning package bid. (Para. 287)

Each entity that is assigned a winning bid through the Divide Winning Bids process is the entity that must file the long-form application portion of FCC Form 683 in its own name. Except for one limited exception (the limited exception permits that a winning bidder holding company with multiple operating companies in a state may choose one such entity to be the lead operating company), that long-form applicant must be designated as the eligible telecommunications carrier to serve the relevant area(s), be named in the requisite letter(s) of credit, and fulfill the public interest obligations associated with receiving Rural Digital Opportunity Fund support. (Para. 288)

As an example, the Commission explains in footnote 489:

Assume a winning bidder has three winning bids—package bid A, package bid B, and single bid (i.e., one CBG) C. The winning bidder could assign package bid A to one related entity, package bid B to another related entity, and single bid C to a third entity. The winning bidder could not assign some CBGs from package bid A to one related entity and then the remaining CBGs from package bid A to another entity. The entire package bid must be assigned to one related entity. Similarly, the winning bidder could not assign some eligible census blocks from single bid C to one entity and then the remaining eligible census blocks from single bid C to another related entity. The entire CBG covered by the single winning bid must be assigned to one related entity.

Entities, to whom a winning bidder assigns some or of its winning bids, need to be a “related entity” that were either named on the short-form or were formed subsequent to the short-form filing deadline of July 15, 2020.

Audited Financials, Eligible Telecommunications Carrier Status, and Letters of Credit

As discussed above in the section on the short-form, audited financial statements are not necessarily required at the short-form stage. They are, however, required of winning bidders on the long form – 180 days after the closing public notice.

Within 180 days after the release of the Auction 904 closing public notice, a long-form applicant that did not submit audited financial statements in its pre-auction short-form application must

submit the financial statements from the prior fiscal year that are audited by an independent certified public accountant. (Para. 315)

Also within 180 days of that closing public notice, long-form applicants are required to submit documentation of their designation as an Eligible Telecommunications Carrier in all the areas for which they will receive support. However, even then, the FCC notes:

In the event a long-form applicant is unable to obtain the necessary ETC designations within this timeframe, the Commission explained that it would be appropriate to waive the 180-day timeframe if the long-form applicant is able to demonstrate that it has engaged in good faith efforts to obtain an ETC designation, but the proceeding is not yet complete. We will presume that a long-form applicant acted in good faith if it files its ETC application with the state commission or this Commission as applicable within 30 days of the release of the Auction 904 closing public notice. Absent a waiver of the deadline, a long-form applicant that fails to obtain the necessary ETC designations by this deadline will be subject to an auction forfeiture and will not be authorized to receive Auction 904 support. (Para. 314)

The letter of credit requirement has also been a concern of many potential bidders. Winning applicants must submit the letter to the Commission within 10 business days of the closing public notice, and it must follow the model letter of credit provided in the February 7 RDOF Order. The first letter of credit must cover the first year of support. The value of the letter of credit must increase each year until it has been verified that the support recipient has met its operational milestones. The Auction Procedures also refers back to regulation, codified at 47 CFR 54.803(c) after the Commission’s February 7 Order, that:

(1) Value. Each recipient authorized to receive Rural Digital Opportunity Fund support shall maintain the standby letter of credit in an amount equal to, at a minimum, one year of support, until the Universal Service Administrative Company has verified that the recipient has served 100 percent of the Connect America Cost Model-determined location total (or the adjusted Connect America Cost Model location count if there are fewer locations) by the end of year six.

(i) For year one of a recipient’s support term, it must obtain a letter of credit valued at an amount equal to one year of support.

(ii) For year two of a recipient’s support term, it must obtain a letter of credit valued at an amount equal to eighteen months of support.

(iii) For year three of a recipient’s support term, it must obtain a letter of credit valued at an amount equal to two years of support.

(iv) For year four of a recipient’s support term, it must obtain a letter of credit valued at an amount equal to three years of support.

(v) A recipient may obtain a new letter of credit or renew its existing letter of credit so that it is valued at an amount equal to one year of support once it meets its optional or required service milestones. The recipient may obtain or renew this letter of credit upon verification of its buildout by the Universal Service Administrative Company. The recipient may maintain its letter of credit at this level for the remainder of its deployment term, so long as the Universal Service Administrative Company verifies that the recipient successfully and timely meets its remaining required service milestones.

The minimum length for the letter of credit required of auction winners is one year. This amount rises unless the winning bidder undertakes to verify its buildout by USAC. And if it fails to meet its required service milestones, the length of the letter of credit rises to up to three years of service support.

Our firm stands by ready to answer your questions about how to bid in the Rural Digital Opportunity Fund, Phase I. For questions, please contact Michael Donahue, at (703) 714-1319 or mpd@commlawgroup.com, or Robert H. Jackson, at (703) 714-1316 or rhj@commlawgroup.com or Andrew “Drew” Clark, at (703) 714-1323, or apc@commlawgroup.com.

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