FCC Must Not Force-Feed RLECs Any Further Access Recovery Reductions  

On February 24, 2012, parties filed comments with the FCC in response to the USF/ICC Transformation Order FNPRM, Sections L-R, which dealt with various intercarrier compensation issues. While the theme of the previous round of FNPRM comments—dealing with quantile regression analysis and rate of return represcription—was USF uncertainty and unpredictability; the theme in Round 2 was clearly USF insufficiency. In both rounds, rural stakeholders have been building a strong case against the Order for violating the long-standing USF principles of sufficiency and predictability. The ICC reforms suggested in FNPRM are especially troubling because some recommendations give the impression that the FCC is planning to flip the kill-switch on several ICC recovery mechanisms before the industry and the FCC even has an opportunity to evaluate them. Comments filed by the Rural Associations (NTCA, NECA, OPASTCO and WTA), the Nebraska Rural Independent Companies (NRIC), management consulting firm GVNW, and financial consulting firm Moss Adams all explicitly warn the FCC to at least study the impacts of the November 2011 Order before implementing any further cuts, caps, or phase-outs to intercarrier compensation revenue recovery mechanisms.

The Rural Associations proclaim that the FCC should “proceed with caution before enacting additional ICC reforms that would only foist yet greater costs onto the backs of rural rate-payers.” Additional ICC reforms, like migrating originating access and additional rate elements to the much-maligned bill-and-keep methodology, could wipe out important sources of revenue for RLECs creating a further need to cut investment spending and raise rates. The Rural Associations explain, “In theory, a carrier might be able to recoup some ‘additional costs’ associated with originating access or tandem switching and transport from end users—but when that recovery from end users is bundled with rate increases arising out of earlier ICC reform and rate increases occasioned by diminishing USF, the pressures on end-user rates will strain, if not snap, any notion that rural rates are ‘reasonably comparable.’”

The Rural Associations urge the FCC not to require bill-and-keep for originating access and additional rate elements until “the impacts of the changes already adopted in the Order—that is, terminating end office switched access reforms, the adequacy of the Recovery Mechanism, and all other changes to high-cost support—can be evaluated.” The Rural Associations believe that driving originating access, tandem switching and transport rates to zero could seriously disrupt the already-fragile ICC recovery system and create new forms of arbitrage—something the FCC has repeatedly pledged to squash. With an access rate of zero for transport and tandem rate elements, the Rural Associations anticipate that large IXCs would leverage their power to dictate terms of interconnection that are unfavorable and expensive for RLECs.

The FNPRM asks whether the mechanisms established in the Order to help RLECs recover some access charges lost through the transition to bill-and-keep, like the consumer-paid Access Recovery Charge (ARC) and the CAF-paid Recovery Mechanism (RM) should be subjected to a specific phase-out and eventually eliminated. Additionally, the FCC asks if RLEC Eligible Recovery should decline faster than 5% per year after five years. Merely suggesting these drastic reforms without even analyzing the impact of the Order for at least one year really questions the FCC’s commitment to rational, data-driven policy… But then again, the FCC has repeatedly stated that access recovery mechanisms are not intended to make carriers “whole,” and of course there is the issue of the capped $2b RLEC CAF budget and the fact that rural consumers cannot be expected to bear ever-increasing rate burdens with a $30 benchmark and ARC ceilings in place. Taken together, RLECs should basically accept rapidly shrinking access charge recovery opportunities unless some of these reforms are successfully appealed in court.

The Rural Associations emphasize that “All of these proposed changes are highly premature and have the potential to be very harmful to rural consumers in RLEC areas.” The Rural Associations provide an example of what might happen if the 5% annual reduction in Eligible Recovery is accelerated without any regards for the actual costs of maintaining and upgrading networks: “Even if a carrier attempts to move to a softswitch during this phase-down and makes every effort to minimize its operating expenses, the procurement of that softswitch—a result specifically desired by the Commission—will almost certainly yield costs that are unrecoverable through the Recovery Mechanism or otherwise.” The perceived threat to investment recovery will almost certainly deter investments in IP and broadband facilities too, for “all the revenue certainty and predictability in the world will not result in needed capital investment if those revenues are insufficient to do so and there is no reasonable expectation of cost recovery.” The Rural Associations urge the FCC to “confirm that it will neither phase-out nor reduce either component of RoR carriers’ ICC recovery mechanism for the foreseeable future.”

The Nebraska Rural Independent Companies likewise expressed great concern about moving originating access and additional rate elements to bill-and-keep and phasing-down or eliminating access recovery mechanisms for RLECs. Although NRIC recommends that originating access reform should proceed promptly, NRIC clearly opposes migrating originating access to bill-and-keep—any reforms should be legal, rational, and ensure proper cost recover, which bill-and-keep does not accomplish. NRIC explains that originating access revenues are essential for Nebraska RLECs and comprise 5-20% of total regulated revenue. Therefore, “timely and lawful action regarding originating access is required to ensure the viability of long distance services in the rural areas served by those companies that compromise NRIC.” For 8YY traffic, NRIC argues, “The RLEC should receive compensation for the use of its local facilities.” With bill-and-keep, RLECs would not receive compensation for origination and transport of 8YY traffic, essentially giving 8YY traffic a pass to free-ride on the network. NRIC asserts, “Any notions of such windfalls or free rides should be eliminated. An IXC must pay for the network it uses but does not own.”

As for the ARC and RM phase-out threat, “NRIC cannot envision a future scenario in which some or all of these mechanisms will not need to continue in order to provide for the recovery of the cost of any network capable of providing voice and broadband service.” NRIC argues that the FCC must justify ARC, RM and Eligible Recovery phase-downs with facts, and “NRIC knows of no such facts.” If the FCC were to justify this drastic and premature decision, it would need to show that “each ROR ETC is recovering its costs and earning a reasonable return;” and at this point in time “The Commission cannot simply assume that future revenues or efficiencies somehow make up all the deficits as support or ICC revenues decline.”

GVNW recommends that the FCC “use at least the remainder of 2012 as a pause point and carefully assess the impacts stemming from its Transformation Order.” GVNW explains, “Early empirical analysis of the financial impacts indicates that the Commission is turning a blind eye to the very real costs of operating in rural areas and the heavy use of rural networks by carriers who make no contribution to the backbone network.” Moss Adams suggests that the FCC wait at least five years and thoroughly analyze the transition of terminating switched access rates before making further changes. It is way too early to determine if the ARC and RM will provide sufficient recovery, or whether the annual 5% reduction in Eligible Recovery will be too much or not enough for RLECs. Moss Adams is opposed to the phase-outs and reductions, and comments, “We struggle to understand the rationale for planning to tear down the home, just as it is being finished and prepared for paint.”

Moss Adams also provides some interesting data about originating access for 65 RLECs. Moss Adams estimates that these RLECs collected over $26m in intrastate and interstate originating access in 2011, or an average of $414,393 per company. If originating access is migrated to bill-and-keep, “Such a reduction would have a significant, negative impact on rural rate of return carriers.” Moss Adams also illustrated how the combined impact of regression analysis and bill-and-keep could push RLECs to a negative rate-of-return (-2.8%), which “would be devastating to rural carriers and would significantly impair a company’s ability to service debt and may lead to insolvency. All of which does not bode well for the provision of voice and broadband services in rural America.”

Many topics raised in the FNPRM comments fit into the broader question of whether or not the FCC will ultimately impose a specific sunset date for the PSTN. Comments also skip around one key question that policymakers and the industry are constantly grappling with: who is going to pay for the broadband network of the near future? Although not related to ICC reform, AT&T incited both praise and contempt earlier this week when it announced an experimental mobile data pricing strategy where mobile content and app providers would pay the price of bandwidth in exchange for letting consumers use certain apps without dinging their data allowances. This is a wild question, but what if Google or Netflix chipped in to help wireline ISPs offset the costs of network upgrades and new switching facilities—assuming Net Neutrality rules don’t get in the way, of course? Could a version of AT&T’s new mobile app pricing model, which some are comparing to 1-800 number pricing, ever work in the ILEC world? RLECs are likely going to be stuck between a rock (the CAF budget), a hard place (not being able to raise end-user rates), and another hard place (reduced access charges) in the very near future, with constantly increasing pressure for faster data and greater capacity. It is time to start thinking about new sources of revenue—including from content providers that generate billions of dollars by using the networks that ILECs deploy. Is Google essentially a free rider? If so, why not make them pay?

What do you think of the FCC’s proposals to shoot ICC recovery before it even kicks in? What creative cost recovery mechanisms just might be crazy enough to work if RLECs can no longer rely on CAF, ICC and traditional end-user rates to cover investments in broadband networks? Share your ideas on JSICA’s LinkedIn USF Forum.