The New CRTC Broadband Fund – Also comparing with the FCC’s market mechanism & the GO Act

The CRTC issued Telecom Notice of Consultation CRTC 2017-112 on April 25, 2017 to “examine matters related to the establishment of the broadband funding regime”. The CRTC is looking for inputs regarding both the governance, evaluation criteria and functioning of this new regime as well as which organizations would be eligible to receive funds. Comments are due for June 28, 2017.

The new funding regime is being put in place to close the gap between connectivity services between urban and rural as well as remote areas. It is expected to yield a maximum of $750 million in broadband financing in its first 5 years, with up to a maximum of  $200 million spent in the fifth year, double the current annual amount for telephone subsidies, and is to be managed at arm’s length, but with the CRTC making the final decisions.

While incumbent telephone companies have been the recipients of subsidies to provide telephone service over the years, the new regime should expand the list of recipients to a broader range of organisations for both wireless and wireline network upgrades and new builds.

In its earlier Telecom Regulatory Policy 2016-496 on the Basic Service Objective, the CRTC determined that applicants for funding must fulfill three requirements: (1) that they have secured funding from a government entity in addition to (2) investing their own funds, and (3) demonstrating the non financial viability of the proposed build-out or network upgrade.

We note that, as stated in 2016-496, “The Commission expects that governments will continue to fund, and will create new funding programs to support, broadband infrastructure projects in underserved areas”, but there is no guarantee that it will be so. The CRTC also proposes in the assessment criteria that: “Applications will be given more weight the greater the level of financial contribution of the total project costs from a government entity.”

We are somewhat puzzled by the requirement for applicants to have secured government funding and of how this helps to ensure that the best projects meeting the most urgent needs are approved.

The new fund would issue a call for applications covering multiple years. A pool of pre-approved applications may also be set up to provide funding in the future for projects as more funds become available.

The CRTC is also looking for inputs regarding the eligible areas for these subsidies and on what constitutes a geographic area, basing its proposal on ISED’s 25 sq. km. hexagons. Areas outside LTE coverage would be tagged as eligible including major roads but a criterion of fixed download speed of 50 Mbps is also highlighted to determine eligibility. While there is no mention of average speeds obtained by the users, we note that independent testing of the networks of Canada’s largest mobile carriers recently reported average speeds of 30.5 Mbps or less for 4G LTE, well below the 50 Mbps threshold.

The CRTC’s notice lists a number of other issues to be fleshed out including where focus should be placed, for example on network upgrades or new builds to expand the reach of broadband services in Canada. Choosing or putting emphasis on one or the other would yield materially different evaluation criteria. New build projects are very likely to yield a much higher cost per subscriber or household than network upgrades. And since total funding is limited, this will also limit the number of projects.

CRTC is also silent on the need for identifying funding for the far North where it became apparent during its BSO proceeding that substantial needs were far from being met.

The market based approach selected by the FCC

The FCC in the US has a similar overall objective to that of the CRTC – to bring broadband speeds up to a minimum of 10 Mbps or greater universally. The US plan was a result of the 2010 National Broadband Plan, with Phase 1 funding having been awarded in 2012.

The FCC is now poised to launch Phase 2 of the Connect America Fund and award funding via two multi-round auction processes – one for wireline and another for mobile service. While details of the auction processes will be subject to future procedures notices, key elements of the wireline auction will include: ranking of bids based on performance commitments distinguishing speed, usage allowances and latency. Bidders proposing to meet one set of standards will compete directly with bidders proposing to meet other standards. Bids will be scored relative to a reserve price, with lowest bids selected first. The mobility fund auction is focused on deployment of 4G LTE service to underserved areas, with similar performance metric objectives, and will also be a multi-round auction, possibly including package bidding.

The FCC is a step beyond where the CRTC is at in terms of an award process for broadband funding, and is more focused on using a market mechanism (auction) to sort out the best approach. The use of bid ranking based on different operator performance commitments combined with monetary bids is a potentially innovative way of reducing the need for the regulator to prescribe overly specific service objectives, while at the same time ensuring subsidy funds are put to their best use.

The FCC’s direct funding is also likely to be complemented by fiscal incentives focused on economically challenged areas. Introduced by the FCC in 2016, there is a proposal to create “Gigabit Opportunity Zones”, that would be areas of the country where average household income falls below 75% of the national median. Tax incentives and credits would be provided to spur private sector investment and new employment in gigabit broadband. This idea has now been taken up in the US Senate, where a “Gigabit Opportunity” of “GO” Act was introduced on May 3, 2017.