As I write this, Federal Communications Commission Chairman Julius Genachowski and long-standing FCC (News - Alert) Commissioner Robert McDowell have packed their offices and departed from the FCC. While President Obama has nominated Tom Wheeler to replace Genachowski, we will likely have to wait for Senate Republican leaders to nominate McDowell’s replacement so both candidates can go through Senate confirmation hearings at the same time. This is typically not a quick process. In the interim, Acting Chairwoman Mignon L. Clyburn and our two newest commissioners, Jessica Rosenworcel and Ajit Pai, will carry on the work of the FCC.

While having only three FCC commissioners is not completely unusual, I had feared that the painfully slow progress on the Universal Service Fund to Connect America Fund transition would grind to a screeching halt. Fortunately, this proved not to be the case. Within a few short days of Commissioner Clyburn taking over the reigns as interim FCC Chairwoman, she issued the long-awaited CAF Phase 1 round 2 order. Hallelujah! The leadership of the FCC has finally taken the action needed to free our country’s frozen broadband capex from the heavy shackles of regulatory uncertainty and complex rules and conditions.

The 2013 CAF Phase 1 order is a godsend for rural communities across our nation for a number of reasons. First, this order addresses many of the issues that prevented price cap carriers from accepting the 2012 CAF Phase 1 funding, which resulted in nearly $2 out of every $3 being left unclaimed. Secondly, this order provides a mechanism for price cap carriers to request funding beyond their allocation. This will help safeguard that the entire fund is available to the full pool of price cap carriers, which will ensure that this money gets used to build out broadband facilities reaching the maximum number of rural communities. Most importantly, this order stimulates private capex investment, with the three largest rural carriers committing to match CAF funding dollar for dollar. While CAF Phase 1 is a price cap carrier program, its momentum provides the desperately needed tailwinds to restart capex investment and new broadband projects in the tier 3 rate-of-return markets as well.

Easing Frustrations over CAF Phase 1 Restrictions and CAF Phase 2 Delay

The 2013 CAF Phase 1 order, coupled with several other recent developments with the FCC, are providing a sense of restrained optimism in the telecommunications industry that the wheels are finally in motion to enable as many Americans as possible to enjoy the benefits of broadband. A key indication has been the FCC’s release of the CAF Phase 2 Greenfield Model in April. This is a model for estimating the monthly cost of operating and maintaining a fiber-to-the-premises network. It is important for carriers to understand that the FCC is not telling them which technology to use during construction or upgrades, but just providing a model for estimating costs. Footnote 61 to the FCC order explicitly states: “Adoption of a model platform that incorporates this network technology does not imply, and this Report and Order does not dictate, that carriers must necessarily extend fiber out to the premise. The requirements laid out in the USF/ICC Transformation Order focus on the services delivered, not the technology used.”

While this model does not dictate technology, it does provide a reasonable cost model that can be applied to any technology, removing previous concerns and uncertainty. While this is just one of many steps toward defining the CAF Phase 2 program, it does provide optimism that the FCC is on track to getting this program in place by the end of the year, albeit a year past the original plan. It is critically important that CAF Phase 2 is finalized this year and that funding gets launched for 2014 as CAF 2 provides $1.8 billion per year of broadband funding (vs. $1 billion of frozen support + $300 million CAF Phase 1 funding). The USF transition phases out the implicit support from Intercarrier Compensation, with the intent for this funding to be replaced with the explicit support from CAF Phase 2. The ICC phase out began last year, but CAF Phase 2 has been delayed a year, leaving a significant gap in price cap carrier subsidies. The recent FCC progress on CAF Phase 2 is very encouraging, and hopefully we will see this funding flowing by this time next year.

Strong Tailwinds for Rural Broadband Capex Investment

While the 2013 CAF Phase 1 order will be a strong catalyst to fuel rural broadband capex investment in tier 1 and tier 2 territories, we are also seeing positive momentum in the tier 3 rate- of-return carrier territories. Earlier this year, the FCC issued the Sixth Broadband order, which addressed issues with the Quantile Regression Analysis benchmarks. Previously, under the CAF program, the subsidies of the more than 600 rate-of-return carriers were subjected to an annual adjustment based on how their spending compared against that of their peers. This was based on a 90^th percentile QRA benchmark for capex and for opex.

Evaluating capex and opex individually versus combined resulted in a serious overcorrection, negatively impacting the funding of more than 170 of these rural service providers. As a result, these rural service providers stopped spending on new broadband deployment projects. The lack of visibility into their ability to fund multi-year projects due to annual adjustments further slowed projects. The FCC realized this flaw in the rules and has now made an adjustment for the QRA benchmark to evaluate total spending (capex + opex). This significantly reduces complexity and the number of rural service providers that are negatively impacted with funding reductions. In addition, the FCC Wireline Bureau has been asked to evaluate going from annual adjustments to multi-year adjustments to provide greater funding visibility and stability to allow for multi-year broadband projects.

I am very encouraged by the recent progress and momentum from the FCC on the Connect America program. As a result of these efforts, I am hopeful that we will finally start seeing positive momentum on capex investment for broadband infrastructure for the rural communities that desperately need it.

Gary Bolton (News - Alert) is vice president of global marketing at ADTRAN Inc. (www.adtran.com).