Competitive Wireless Carriers Suggest the FCC Lower the RLEC Rate of Return

While the FCC is likely hard at work on Mobility Fund Phase I auction rules, mid-sized competitive wireless carriers are already looking ahead to Phase II.  Representatives from the Rural Cellular Association (RCA), U.S. Cellular, and Cellular One held ex parte meetings with members of the FCC on April 17, 2012 to discuss various concerns about the Mobility Fund, namely that they believe “the existing support allocated for Phase II of the Mobility Fund will be inadequate to achieve vital universal service goals and that the Commission should use the further rulemaking to make additional funding available to competitive wireless providers.”

RCA argued that because Mobility Fund Phase I support is nonrecurring, some carriers might be discouraged from participating in the reverse auction without assurance that their ongoing operating expenses will be recoverable. In the jont meeting, RCA alone proposed one solution to help ensure that future funding in the Mobility Fund is sufficient—or at least more sufficient than $500m per year: “Support foregone by price cap carriers that decline to exercise their statewide right of first refusal with respect to Connect America Fund support should be reallocated to the Mobility Fund.” Additionally RCA advocated that the FCC “should free up additional funds to support mobile wireless services by eliminating excessive support flowing to rural incumbent LECs, including by lowering the prescribed rate of return and limiting permissible recovery levels for capital and operating expenses.”

These recommendations may stir up a negative reaction from wireline RLECs, and it really shows how the interests of rural independent providers diverge across different technologies. With some RLECs being closely tied to either rural wireless or cable companies, balancing the different interests can be quite challenging even within the industry. Small and mid-sized cable, wireless, and wireline carriers will be vying for limited funds without guarantee of future recovery for ongoing operating expenses once we finally reach the Phase II stages of the Mobility Fund and CAF—and we don’t even know what opportunities might exist in the Remote Areas Fund. Many RLECs are likely anxiously awaiting information about CAF Phase II, which some see as a real opportunity for RLECs to pick up new service areas rejected by price cap ILECs. After all, some price cap ILECs are very publicly trying to back out of obligations to provide telephone service in rural areas. It would be inconsistent for a price cap ILEC to push state legislation for ending COLR and simultaneously accepting state-wide broadband support with landline telephone “strings attached.”

RCA did bring up an issue that small carriers of any technology can likely relate to: the FCC should ensure that large carriers don’t engage in “foreclosure strategies and other anticompetitive conduct” to prevent smaller competitors from winning reverse auctions. Other rural wireless representatives, like the Blooston Rural Carriers, have gone as far as recommending that Tier 1 wireless carriers be excluded from Mobility Fund reverse auctions. With the Tier 1 carriers willing to throw around billions of dollars for acquisitions and spectrum, and Verizon boasting double-digit earnings in Q1 2012…you can’t help but wonder whether  giving Mobility Fund support to Tier 1 carriers is just a little bit like giving food stamps to a millionaire.

Montana Telecom Association Cautions that FCC “Puts the Cart Before the Horse”

On February 27, 2012, the FCC released a Public Notice about the seldom-discussed USF Rural Health Care (RHC) program, and comments were due on April 18. For consideration is whether the FCC should transition 50 projects from a pilot program to a more permanent funding mechanism. The FCC has studied this issue in the past, but now seeks “more focused comment on supporting select Pilot Program participants at their current funding levels to ‘bridge’ the disparity in funding and application requirements between the Pilot Program and Primary Programs for the 2012-2013 funding year.”

The FCC proposes to use existing funds that “were previously designated for projects that withdrew from the Program or otherwise failed to meet the June 30, 2011 deadline,” about $30m, as the bridge fund. The pilot program was created in 2006 “to examine ways to use the RCH support mechanism to enhance public and non-profit health care providers’ access to advanced telecommunications and information services.” The FCC initially selected 69 projects, but that number was whittled down to 50 over time as projects merged or pulled out of the program. The FCC explains that now 484 individual health care providers, who participate as consortia, will reach their funding cap in 2012. The FCC believes that these health care providers may find it difficult to obtain funding from the permanent RHC fund do to “significant differences…regarding eligibility and funding.”

The Montana Telecommunications Associations filed comments in this proceeding where it argued the FCC’s Public Notice “puts the cart before the horse.” MTA elaborates, “[The FCC] assumes that pilot projects that will run out of funds in 2012 should continue to be funded despite the temporary nature of the Pilot Program, questions raised about the Rural Health Care Program by the U.S. Government Accountability Office (GAO), and still-unresolved questions about contour of the Rural Health Care support mechanism itself as discussed in the 2010 Rural Health Care Program Notice of Public Rulemaking.” MTA further states that there is no clear evidence that the FCC is required to provide ongoing funding to participants at the conclusion of the Pilot Program. Also, the FCC was supposed to release a report about the results of the program, which it has not yet done.

MTA points out a potential flaw of the pilot program: by funding infrastructure projects, the Pilot Program “puts rural health care providers in the business of telecommunications construction, which is not the expertise of health care providers and places them in competition with commercial providers of broadband service.” MTA also argues that the program encourages overbuilding and reselling of excess capacity to non-healthcare providers. Overall, MTA recommends that the FCC resolve these issues (and others) and “process the lessons learned from the Pilot Program before it adopts ‘bridge funding’ or a transition mechanism to bring pilot programs into the permanent funding mechanism, especially if such bridge funding or transition mechanisms involve the perpetuation of projects whose funding is not justified in the absence of any performance measurement or other due-diligence scrutiny.”

MTA’s response to the RHC Pilot Program Public Notice is interesting because it addresses the issue of non-telecom entities using government subsidies to compete with, or bypass, commercial telecom businesses. It also sheds some light on potential problems that may occur once the Lifeline broadband pilot programs kick off—such as the tendency for “pilot programs” to drag on indefinitely while an agency has more pressing issues to deal with than studying and making choices about pilot programs. The proposed Lifeline pilot program has already encountered some criticism for being beyond the scope of the FCC’s authority, and for targeting a problem that is largely being solved by the commercial market and existing public-private partnerships. On the grand scale of the entire USF, these pilot programs don’t make up a very large slice…but with the FCC’s constant nagging about sticking to a budget, every little bit matters.

Message is Clear: If QRA Adopted Unchanged, FCC Will be Swamped with Waivers

In public appearances of late, members of the FCC have seemed fairly pleased that “only” a small handful of waivers have been filed for various USF/ICC rules. Most of the waivers have been for call signaling rules, and only a few have been for high-cost support caps. Of the small group of waivers filed for high cost support caps, the companies filing the waivers seem to have extremely dire hardships due to geography and demographics above all else. The waiver club could swell mightily very soon if the FCC adopts the quantile regression analysis (QRA) methodology outlined in the USF/ICC Transformation Order and FNPRM.

On April 16, 2012, five more RLECs filed letters of intent to file waivers if the FCC adopts QRA unchanged; joining Valley Telephone Cooperative and PBT Telecom who previously filed similar letters of intent. Companies filing letters of intent include:

• Chibardun Telephone Cooperative dba Mosaic Telecom, Wisconsin (letter)
• Peoples Telecommunications,  Kansas (letter)
• Tri-County Telephone Association, Kansas (letter)
• Kanokla Telephone Association, Kansas/Oklahoma (letter)
• Heart of Iowa Communications Cooperative, Iowa (letter)

Each letter explains the anticipated loss of funding that each RLEC expects if the FCC adopts its proposed QRA caps. Chibardun anticipates a funding loss of 177% of its net income in 2013, Peoples 96%, Tri-County 221%, Kanokla 28%, and Heart of Iowa 91%. This shows how inconsistent the regression caps are, and each company explains that these losses are “primarily due to a flaw in the QRA caps that penalizes companies who have been diligent to bring advanced services to rural areas.”

Another common denominator for each of these companies is an RUS loan. The companies state that when applying for RUS loans, they each “demonstrated that we would have the ability to repay those loans relying on existing rules established in the Communications Act of 1934 and the Telecommunications Act of 1996 and the network was constructed to RUS standards.” The QRA methodology would “seriously impact our ability to repay our RUS loans,” according to each letter. The companies mention that although filing a waiver will be a tremendous burden for a small company, they will have “no other option but to pursue it in light of the magnitude of the anticipated loss in federal universal service funding.”

The clock is ticking on the FCC’s timeframe to release a final decision on QRA. The caps are supposed to become effective on July 1. If the FCC releases an Order on May 1, companies will only have two months reanalyze the caps (assuming the FCC changes the methodology) and get their affairs in order to file a waiver. The letters of intent certainly send a clear message to the FCC, but it is hard to say if the FCC really cares at this point—it appears to see the absence of a large number of waivers as a signal that the industry accepts the rules, but comments in response to the FNPRM and the letters of intent indicate the exact opposite.