Commissioner McDowell and Representative Young Share Empathy, Encouragement

In D.C., March brings cherry blossoms, warm weather, and hundreds of representatives from rural independent telecommunications companies for their annual pilgrimage to Capitol Hill and NTCA’s Legislative and Policy Conference. This year, RLECs brought an urgent message to DC: the FCC made some errors in the USF/ICC Transformation Order, and the impact of the reforms must be analyzed before further cuts and caps are implemented.

FCC Commissioner Robert McDowell participated in a Q&A with NTCA ceo Shirley Bloomfield on Monday, March 19 where he empathized with RLEC concerns—“I understand the fear and anxiety,” he said. However, he also said that “there is a lot you should be appreciative of” regarding the new USF/ICC rules, for example there are no flash cuts and changes are phased in gradually. He also stressed, “If your company looks like it won’t survive, there is a clear waiver process.” McDowell encouraged RLECs to stay in touch with the FCC and share information, and “the more specific the data, the better.”

McDowell’s most notable comment was that the contributions side of USF should have been addressed in tandem with the other reforms—McDowell has made this clear numerous times, but he appears to be the only commissioner right now who is truly committed to contributions reform and he understands the urgency of this monumental task. McDowell explained that reforming USF and ICC is “like fixing a watch, each part touches all the others, so you have to fix them it all at the same time.”

Moving on from USF/ICC, Bloomfield asked McDowell several questions about the wireless and video markets. McDowell stated, “I think wireless is the future,” and “we certainly need more spectrum” but it will be years until meaningful auctions are ready. He also discussed how the 700 MHz auction was supposed to be structured so that rural carriers could have opportunities to participate, but in the end the high prices “undermined rural carriers in particular, all in the name of being pro-competition and pro-consumer.” In terms of video programming, Bloomfield commented that there appears to be an assumption at the FCC that rural carriers make a significant profit from video service, but in reality the increasing cost of programming prevents many RLECs from seeing much profit on video. McDowell responded that the prices indeed have been increasing, and sports programming in particular has become very expensive. However, he explained that the FCC’s authority over programming costs and retransmission fees is quite limited. He recommended that RLECs continue to bundle voice, video and broadband services.

In his final words of wisdom, McDowell talked about the transition to broadband and urged RLECs to “be nimble, [and] try to adapt.” He suggested that RLECs provide a versatile range of service offerings, and he made clear his stance on usage-based pricing. McDowell stated that telcos should have the “freedom to charge more for bandwidth,” and “the more you use, the more you pay.”

On Tuesday, March 20, Representative Don Young (R-AK) made a short, powerful, and inspirational speech before the RLEC representatives headed off to meet with their members of Congress. Rep. Young proclaimed, “I know what rural means and I know the importance of Universal Service.” He also said that Congress doesn’t widely understand the concept of Universal Service, which is simply to “serve everyone in America.” Rep. Young very poignantly argued that universal service progress may be lost as a result of the FCC’s actions.

One year ago, RLECs attending NTCA’s Legislative and Policy Conference brought an urgent message to the Hill: the FCC must ensure that RLECs’ Universal Service needs are met in the then-unwritten rules. Since last year, RLECs filed hundreds of comments and met with the FCC countless times to provide data and input, which the FCC largely ignored in the Order and FNPRM. The Order gives nothing to RLECs except cuts and caps, and there is no concrete Connect America Fund for RLECs. In one year, hopefully we will be able to look back and say that the RLEC message was finally heard and respected—both at the FCC and Congress.

BBTC Made “Compelling Case” for Waiver

Last month, Big Bend Telephone Company (BBTC) filed a petition for a waiver of three rules in the USF/ICC Transformation Order, including the $250 per line monthly cap and regression analysis limitations (The Daily Monitor: Big Bend Telephone Files USF Waiver Petition, “Bankruptcy Inevitable”). BBTC is one of just a few RLECs who have filed a waiver, which is not surprising considering how cumbersome the FCC’s new waiver process is for small companies. Comments on BBTC’s waiver petition were due last week, and it looks like the West Texas RLEC found some allies at USTelecom and NTCA. Both associations filed comments in support of BBTC receiving its requested waiver.

USTelecom argued, “BBTC made a compelling case that absent relief, it would not be financially viable for BBTC to continue to provide service.” USTelecom cited BBTC’s massive 17k square mile service area including 25% of the U.S.-Mexico border, poor road infrastructure, extreme weather, national security obligations, anchor institution customers, and relationship to other telecommunications carriers as examples of why the FCC should grant the waiver. According to USTelecom, “BBTC has made extraordinary and creative efforts to operate in the most cost-effective manner possible, building its network using a combination of wireline, wireless and satellite technology…But BBTC anticipates that even these efforts will be insufficient to allow the company to operate as an ongoing concern without relieve from some of the new USF rules.”

Regression analysis, for example, would adversely impact BBTC contrary to the goals of Universal Service. USTelecom explains, “It is doubtful that regression analyses can be structured in such a way as to properly take into account networks’ serving areas that, by virtue of unique and unavoidable circumstances, are significant outliers from the cost characteristics that underlie the regression analysis.” USTelecom further insists, “BBTC’s situation is clearly outside the variations that regression analysis is intended to capture.”

NTCA likewise supports BBTC’s waiver petition, and “urges the Commission to grant the relief sought in order to enable the continued provision of vital communications services to the Big Bend end-users.” NTCA cites BBTC’s sparsely populated service area of “less than one customer for every three square miles” as a condition that creates “extraordinary costs to serve the area, and when coupled with certain of new regulations adopted recently by the Commission, a grave risk to Big Bend’s ability to provide service on an on-going basis.”

In the twisted and volatile game of quantile regression analysis, the extremely high-cost outliers are to be besmirched as inefficient spenders and penalized for their alleged wastefulness. What makes regression analysis especially vile is that companies may be very efficient spenders in many areas of the HCLS algorithm, but due to uncontrollable cost-drivers like terrain and weather, be considered inefficient in comparison to other “similarly situated” companies who may have made different investment choices. Other commenters have illustrated how a network technology choice which may be the only rational option will push a carrier over the ninetieth percentile limit, even though any other technology choice wouldn’t have worked in that particular geographic area. Given BBTC’s extremely challenging terrain, weather conditions, and vast territory, the company has surely put considerable thought into its technology choices.

Although it is completely unknown what “similarly situated” companies BBTC is compared to in regression analysis (another fundamental flaw of the methodology), one can anticipate that the company’s costs will probably be considered inefficient at the FCC and BBTC will be subjected to HCLS caps and become ineligible for any redistributed funds. The national security aspect of BBTC’s waiver petition should get the FCC’s attention if nothing else does. NTCA concurs, arguing that “Absent grant of the Petition, as demonstrated by Big Bend, numerous institutions, Federal agencies, and law enforcement and public safety offices will be bereft of critical abilities in less than four years.”

Just imagine the outcry from Congress if critical communications infrastructure used by border patrol went dark.  

FCC Should Not “Reverse Course” on VoIP-PSTN Traffic

A March 8, 2012, joint letter to FCC Chairman Julius Genachowski from NTCA, Cbeyond, Earthlink, Integra Telecom, NCTA, tw telecom and Windstream incited a strong reaction from Level 3, who filed a rebuttal ex parte on March 14. The initial joint letter (explained here) urged the FCC to state that “all originating access charges are subject to the same treatment pending further reform.” A near-term conclusive statement condoning symmetric treatment of originating access would “ensure that reforms do not disrupt further broadband investment by incumbents or competitors,” the joint letter participants argued. The dispute over originating access rates largely centers on the treatment of VoIP-PSTN traffic, which the joint letter companies believe should be treated the same as PSTN-PSTN traffic. This appears to be a source of contention for Level 3.

Level 3’s response to the joint letter explains, “While Level 3 agrees with the compromise concerning a symmetrical compensation scheme for both TDM-based and VoIP-based service providers, it ultimately believes that the Commission should reject the agreed upon proposal, which would require the Commission to reverse course on the VoIP-PSTN traffic rules it adopted in the CAF Order, and apply the legacy access charge regime to VoIP-PSTN traffic.” Level 3 believes that if the FCC followed the urging of the joint letter parties, the USF/ICC Transformation Order rules would be fundamentally changed, not simply “clarified” as the joint letter parties argue.

Level 3 furthermore “strongly disagrees that the intrastate access charge regime should now be applied to VoIP-PSTN traffic,” and any decision that would apply legacy rules to VoIP “only exacerbated the uncertainty surrounding VoIP-PSTN traffic and would ultimately undo much of the Commission’s efforts to reform the intercarrier compensation regime.” Level 3 also believes that legacy rules would “serve as a disincentive to migrate customers to IP platforms in order for carriers to continue charging higher intrastate originating access rates.”

Level 3 concludes its letter asserting that the FCC “should reject calls to reconsider its rules, and decide against injecting additional legal and financial uncertainty into an industry that is already struggling to implement the current rules adopted in the CAF Order.” From an RLEC perspective, Level 3 certainly got that last part correct—the industry is struggling to move forward under the new regime. However, the FCC will likely need to develop a more extensive record on this VoIP-PSTN originating access issue over the coming months. As illustrated by many rural telecom stakeholders in the ICC reform FNPRM comments last month, originating access is an important source of revenue for RLECs. Any action by the FCC to shrink this revenue base should be met with expanded opportunities to recover lost originating access from the Recovery Mechanism. On the other hand, Level 3’s argument that outdated legacy rules should not bog down IP network migration certainly has merit, too.

Both sides argue that their respective positions will prevent IP investment stagnation and ensure certainty regarding originating access rules. Who do you agree with?