FCC Adopts Greenfield Cost Model in Key CAF Policy Call
The FCC Wireline Bureau sided with advocates of using a greenfield Connect America Fund cost model rather than a brownfield one for estimating costs. Industry officials have characterized this choice as the most important before the commission as it develops a forward-looking cost model to estimate the support necessary to serve areas where costs are above a specified benchmark, but below a second “extremely high-cost” benchmark (CD Jan 16 p3). Monday’s order is a win for the ABC Coalition, made up of USTelecom and several ILECs, which support the greenfield approach. Commission officials signaled earlier this month they would endorse a greenfield approach over the alternative approach (CD April 5 p3). A greenfield approach estimates the full cost of constructing and operating a network from the ground up, while a brownfield approach takes into account the existing infrastructure already in the ground.
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Under CAF, the FCC hopes to expand broadband coverage to millions of unserved locations over a five-year period, at an annual cost of up to $1.8 billion, the order said (http://bit.ly/11faL02). The bureau said that by using the model it approved, the per-location costs for the highest cost areas are expected to be 20-25 percent lower than in the cost model submitted by the ABC Coalition prior to the FCC’s adoption of its USF/intercarrier compensation order.
"We find that using a green-field model is more appropriate than using a brown-field model,” the order said. “First, a green-field model is consistent with Commission precedent, including the USF/ICC Transformation Order. Second, a green-field model provides an estimate of costs that creates appropriate incentives to invest -- that is, it best approximates the discipline provided by a competitive market. And finally, a green-field model can be implemented in a straightforward and timely manner.” The bureau wasn’t persuaded by arguments that a brownfield approach would be less expensive over the next five years, it said. “The Commission previously has concluded that forward-looking economic costs -- not actual costs -- are the proper framework for determining universal service support."
The bureau also said its cost model will be based on the costs of installing fiber-to-the-premises (FTTP) rather than a twisted copper-pair DSL network. “Although some price cap carriers may choose to extend broadband to unserved areas in the near term by shortening copper loops, rather than deploying FTTP, the most efficient wireline technology being deployed today in new builds is FTTP,” the order said. “Network construction costs are essentially the same whether a carrier is deploying copper or fiber, but fiber networks result in significant savings in outside plant operating costs over time.”
The greenfield approach “will help minimize CAF expenses by modeling the costs of providing voice and broadband service that a most-efficient competitor would experience,” said USTelecom Senior Vice President Jon Banks. “This approach is consistent with commission precedent and broadly accepted economic principles. For example, the commission used this approach in its current high-cost program for larger carriers. We believe this order can bring an economically rational approach to determining the right amount of CAF support to ensure essential voice and broadband services are available to consumers and businesses in areas of the country where there would be no service otherwise."
American Cable Association President Matthew Polka was disappointed in the decision. ACA was a leading proponent of a brownfield approach. “The Bureau’s chosen approach will provide large telephone companies, the so-called price cap carriers, with excess support while millions of households will remain without broadband for the foreseeable future,” Polka said. “Highlighting this inefficiency, all else being equal about the location, the greenfield model will provide the same level of support per location to price cap carriers, whether or not the carrier is already offering 4/1 Mbps broadband in the location. It is puzzling to see how a so-called efficient model can provide the same level of annual support over five years both to areas that require substantial infrastructure upgrades and to those that do not, especially when so many of the areas that will be supported already have this level of broadband service."
Some key decisions remain, the bureau acknowledged. “Subsequently, the Bureau expects to adopt a second order addressing input values for the model, for example, the monthly cost of network components such as fiber and electronics, plant mix, various capital cost parameters, and network operating expenses,” the bureau said. “Together, the two orders should resolve all of the technical and engineering assumptions necessary for the [model] to estimate the cost of providing service at the census block and state level.”