FCC Issues Guidance On Federal Broadband Funding Defaults, Rejects Amnesty Proposal

With the goal of ensuring as many locations as possible remain eligible for future federal/state broadband grant funding, agency clarifies for RDOF and CAF II support recipients processes and potential penalties for defaulting on deployment obligations

The FCC's Wireline Competition Bureau (WCB) issued a Public Notice on July 3 providing guidance to internet service providers (ISPs) that have received broadband grant funding but may default on deployment obligations under the FCC's Rural Digital Opportunity Fund (RDOF) and Connect America Fund II (CAF II) Programs. Issued in response to a request from certain fund recipients to grant a limited "amnesty period" for all ISPs that may not complete deployment projects within mandated timelines, WCB denied the recipients' request because "there is no demonstrated need for widespread relief" from penalties for potential defaults. However, WCB has committed to consider ISPs' individual circumstances in reviewing default requests and advised ISPs that are contemplating default to do so as early as possible to limit the providers' costs and ensure defaulted areas become eligible for funding under other federal and state broadband deployment initiatives, including through states' Broadband Equity, Access, and Deployment (BEAD) programs.

Background

More than 60 organizations, including ISPs, trade associations, state and local officials, school districts, unions, and civil society organizations submitted a proposal in February requesting the FCC to adopt a one-month "amnesty period" for RDOF and CAF II award recipients. Specifically, the petitioners asked the FCC to grant an emergency petition filed in 2023 by a coalition of RDOF recipients to allow those that "cannot or choose not to fulfill their obligations" to relinquish all or a portion of their awarded footprint funding with little or no default penalties. The petitioners also urged the FCC to consider increasing penalties for those award recipients that default on their RDOF or CAF II obligations after the end of the proposed amnesty period.

FCC Denies Amnesty Request But Provides Guidance on Default Procedures

In denying the petitioners' proposed blanket amnesty request, WCB focused on the significant progress being made by support recipients toward meeting broadband deployment milestones and a lack of a demonstrated need for relief for the majority of those recipients. Instead, WCB directed carriers concerned about meeting deployment milestones to follow the FCC's existing rules and default processes. WCB believes these regulatory mechanisms are sufficient to provide relief where appropriate and will preserve the FCC's interest in maintaining the integrity of its funded broadband deployment programs.

Specifically, WCB highlighted a range of actions taken in recent months where it acted quickly to respond to default requests, approve transfers of deployment obligations between support recipients, and provide limited waivers of its rules to reduce support payment recovery and default penalties. WCB also noted it can waive other noncompliance rules for defaults if an individual recipient can demonstrate good cause under the ISP's unique circumstances. For example, WCB has already granted:

• Limited waivers of RDOF and CAF II rules to support recipients that gave the FCC advance notice that not all locations in an awarded area would be served. Specifically, the FCC waived pre-authorization default forfeitures when it was shown that another federal agency had planned to fund a different service provider's deployment in the same area. The FCC is likely to grant similar waivers if an ISP can demonstrate that federal or state funding has been awarded for the same locations.
• A limited waiver of CAF II rules related to the FCC's recovery of support funds for locations that will remain unserved but that permit a defaulting ISP to provide voice and broadband service in the remaining funded areas. This waiver permitted the defaulting ISP to pay a portion of its defaulted support recovery early in exchange for removing the defaulted locations from the ISP's compliance obligations, thereby ensuring that the ISP can come into compliance and successfully build out the remaining locations.
• Approval for several transactions involving voice/broadband service provider assets, including Section 214 authorizations and auction support award/obligations, through which the FCC permitted certain RDOF and CAF II support recipients to transfer their obligations to a qualified service provider, enabling accelerated private sector deployment to unserved and underserved areas.
• A limited waiver of its letter of credit ("LOC") rules to temporarily allow award recipients to maintain their LOCs issued by banks that no longer qualify under the bank safety qualifying rules, in addition to proposing changes to those rules that could substantially alleviate some of the burden on providers in securing and maintaining LOCs.

Finally, WCB strongly encourages ISPs considering a default in one or more locations to reach out as soon as possible to work with WCB and relevant federal and state entities to discuss the provider's proposed default strategy and timing, noting that "[e]arlier defaults can limit the support recovery and penalty costs to the carrier," "ensure that states and territories timely receive the necessary information for their [BEAD] planning," and ensure the FCC's sister agencies "timely receive this information to target funding for their broadband deployment programs."

Potential Penalties and Other Considerations in Reaching a Default Decision

Given WCB's rejection of the blanket amnesty proposal, ISPs that choose to fully or partially default on their deployment projects and awarded support could face severe penalties. And while ISPs can attempt to reduce or eliminate some of these penalties through the FCC's cure process or an early default submission, it is still critical for providers to be aware of the potential full range of consequences at play.

Under the FCC's rules, if an ISP withdraws fully from the RDOF or CAF II program (i.e., by defaulting on all awarded locations) prior to the end of the deployment period, the awarded support will be immediately suspended and WCB will begin to recover all monetary support the ISP has received to date. Critically, though, the FCC's penalty rules do not require immediate repayment of any disbursed support if the ISP only partially defaults, with WCB delaying recovery of any disbursed support until the end of the program's buildout term.

If an ISP remains in default at the end of the deployment period and then the FCC's cure period, the agency has the authority to recover the ISP's awarded support for all defaulted locations. Regardless of the funding program (RDOF or CAF II), the FCC's default recovery will be calculated in each state where the ISP defaults and be based on the average support received per unserved location.

In addition to these monetary support recovery efforts, the FCC's rules also authorize it to impose various additional forfeiture penalties on defaulting ISPs based on their total awarded support. This penalty amount will vary depending on which funding program (RDOF or CAF II) the ISP is engaged in, the amount of monetary support the ISP received, and the number of funded locations the ISP defaulted on.

Each of these potential penalty scenarios is relevant to deciding if, when, and exactly how much of awarded funding (and funded locations) an ISP may choose to default on. Moreover, considering potential default scenarios and assessing the status of funded deployment projects would entail:

• Analyzing the projects' buildouts to consider how locations funded under these programs might be reflected on upcoming Broadband Data Collection maps and categorized by federal/state agencies tasked with allocating other sources of broadband infrastructure funds;
• Considering any potential issues that might arise in meeting future deployment milestones; and
• Determining whether a default may be necessary due to any unforeseen project constraints or concerns in light of default penalties that are based on the amount of support actually received.

Additionally, WCB notes that, if an ISP anticipates that a default will or should occur, the provider should:

• Contact WCB, state broadband offices, and Tribal governments as early as practicable;
• Consider how the ISP can best explain to federal/state authorities why a default must occur; and
• Closely monitor any notices or requests for information from WCB, which are sent to providers at risk of failing to meet milestone obligations pursuant to the Rural Broadband Accountability Plan.

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