Rural Groups Respond to ICC Foes in FNPRM Reply Comments

NRIC: “Maintaining Reasonable ICC Revenues is a Matter of Survival”

The USF/ICC Transformation Further Notice of Proposed Rulemaking covered a wide range of topics in sections L-R pertaining primarily to intercarrier compensation and IP-to-IP interconnection. In the initial comment round, the Rural Associations and the Nebraska Rural Independent Companies (NRIC) asserted that the FCC should refrain from imposing further drastic changes, such as reducing originating access to bill-and-keep and phasing-out the Recovery Mechanism, until the impact of the Order can be fully analyzed. Reply comments were due on March 30, 2012. The Rural Associations and NRIC held their ground on these issues and struck down comments from opposing parties—primarily cable, wireless, and large ILECs.

The Rural Associations (NTCA, OPASTCO, NECA, and WTA) insist that “substantial confusion and disputes already surround [the] interpretation and implementation” of the new USF and ICC reforms, and “It is essential that the FCC gather data and evaluate the impacts of the reforms just adopted prior to taking further steps.” The Rural Associations believe that “Consumers, lenders, investors, service providers, and the Commission itself would all be better served by a ‘data-driven’ reform process.” Furthermore, they argue that rural consumers could be left with “unaffordable and/or substandard services or, in some cases, with no services at all” if any additional ICC reductions are not matched with “a meaningful alternative for revenue replacement.”

The Rural Associations take a no-nonsense tone with their replies to commenters who argue that originating access and other rate elements should be transitioned to bill-and-keep along with terminating access. The Rural Associations name Time Warner, XO Communications, Leap and Cricket, T-Mobile, Bandwidth.com, CTIA, Google, VON, and MetroPCS as the “few parties supporting the hasty reduction of ICC rates beyond measures adopted in the Order.” The Rural Associations argue that these parties disregard the FCC’s commitment to a data-driven process; ignore the mandate of reasonably comparable services and rates; and prioritize their own policy needs over the needs of consumers in high-cost areas.

The Rural Associations likewise reject arguments from CTIA, NCTA, and T-Mobile that the Access Recovery Charge (ARC) and CAF ICC recovery mechanism should be phased out rapidly. The Rural Associations explain, “The few commenters that support a phase-out or accelerated reduction of the ARC and/or CAF ICC mechanism for RoR carriers advance a number of oft-repeated arguments regarding the alleged inefficiencies in the current ICC system or RoR carriers’ supposed above-cost rates. What none of these commenters consider, however, is the critical role that these revenues—which are derived from providing other carriers and their customers with access to ubiquitous and highly reliable COLR networks—have had on the deployment and affordability of basic and advanced service to rural consumers. Here again, such parties rely upon overly broad and self-serving policy pronouncements without pausing for even a moment to even consider the potential quantitative impacts of their proposals (other than the quantitative impact to their own budgets and profit margins).”

NRIC took a no-holds-barred approach with their foes in their reply comments as well. NRIC argued that the largest carriers will benefit the most from the transition to bill-and-keep, and “These same large carriers now seek to expand that windfall by urging the Commission to expand bill-and-keep to originating access, 8YY traffic, and transport.” NRIC explains that the supporters of bill-and-keep for originating access are “wireless carriers and other large carriers that may not have the same commitment as RoR ETCs to serve sparsely populated, rural areas.” NRIC adds, “Maintaining reasonable ICC revenues is a matter of survival” for small companies.

NRIC sees the debate over bill-and-keep for originating access and other rate elements falling on two “crystal clear” lines: on one side, there are companies who are committed to serving rural areas. These companies—which include both RoR and price cap carriers—call for the FCC to continue ICC compensation and evaluate the impacts of the Order before making further changes. On the other side are the companies who do not “have a business priority of serving rural areas.” These companies, NRIC argues, “line up behind elimination of…ICC fees.” NRIC categorizes the two sides as “rural network builders” versus “rural network users.”  

One of the more memorable quotes from the initial round of comments was Verizon’s claim that “there are no incumbent IP network providers.” NRIC disagrees, responding that “Verizon is simply wrong.” According to NRIC, “While the technology has changed, that change does not render their ILEC classification and attendant regulatory obligations obsolete, and Verizon cannot be exempted from such obligations.” Although the explicit topic of transitioning the PSTN to all-IP networks was not directly addressed in the FNPRM, it is directly intertwined with the ICC and IP-to-IP interconnection debates. NRIC weighed in on the PSTN-IP transition, arguing that it should be an evolutionary transition and “Efforts to eliminate existing TDM networks of RoR ETCs at a date certain and thereby eliminate cost recovery would create industry chaos and should be rejected.”

The overall theme of the comments by the Rural Associations and NRIC is that ICC is a critical revenue component that helps build and maintain telephone and broadband networks in rural America. RLECs use this revenue to be “rural network builders,” using NRIC’s terminology. RLEC infrastructure in rural areas is Congressionally-mandated and complies with the goals of the FCC and the National Broadband Plan. If the ICC base continues to shrink with no corresponding and equitable recovery mechanism, rural consumers will suffer and large telecom carriers will profit—but will they invest in rural areas, or will the fundamental principles of Universal Service be forsaken?

NTCA has Busy Week Blasting Harmful USF/ICC Rules at the FCC

Multiple Ex Parte Filings Communicate Urgency of RLEC Concerns

Between March 8 and 12, 2012, representatives from NTCA along with individuals from OPASTCO, WTA, NECA, Fred Williamson Associates, and Vantage Point Solutions (collectively the Rural Representatives) spoke to around 20 different individuals at the FCC in at least five separate ex parte meetings on USF/ICC reform. Judging by the filings, it appears that no disparaged USF topic was off-limits, from quantile regression analysis to the waiver process to maintaining rate of return and everything in between.  Here’s a rundown of the ex parte meetings:

March 8 (filed on March 12): This telephone meeting with 11 members of the Wireline Competition Bureau focused on regression analysis, a Connect America Fund for RLECs, reporting requirement concerns, unsubsidized competition, rate of return represcription, and the waiver mechanism. First, the Rural Representatives reiterated that “even the ‘father’ of the Commission’s preferred quantile regression analysis has provided a report indicating that the proposed methodology lacks statistical discipline and introduced arbitrariness into the potential caps.” The Rural Representatives believe the FCC should scrap quantile regression analysis and “consider the alternative submitted by the Rural Representatives last year, which would limit investment based upon a schedule tied to replacement of deprecated plant;” or at the very least, revise the regression caps “in light of the current record.” The Rural Representatives emphasized that regression analysis has discouraged investment, “and has all but frozen broadband investment in early 2012—contrary to the very purpose of the National Broadband Plan and the Commission’s reforms.”

Moving on, the Rural Representatives also argued that the USF/ICC Order does not establish a Connect America Fund for RLECs, rather it “consists entirely (from a USF perspective) of cuts, caps and constraints to existing high-cost mechanisms.” Again, the Rural Representatives urged the FCC to implement the RLEC Plan. As for reporting requirements, the Rural Representatives believe that all RLECs should be allowed to utilize a simple form, “akin to RUS Form 479,” not just RUS borrowers. Furthermore, they do not believe that RLEC financial information should be “placed into the public record”—this requirement is “wholly inappropriate and contrary to standard Commission and federal agency practice.”

The Rural Representatives brought up an important issue regarding the identification of an unsubsidized competitor in a given area: “while the National Broadband Map could be a tool in this process, it was clearly informational and could not be considered dispositive in identifying the precise presence of an ‘unsubsidized competitor’ due to the lingering flaws and the fact that it does nothing to identify where subsidy may or may not exist with respect to a given area.”

Finally, the Rural Associations expressed concern about the burdensome waiver process, explaining how they “observed that the cumbersome nature of the process spelled out in the Order, together with the uncertainty surrounding when the rules (and resulting reductions in support) would be final, was deterring many RLECs from filing waivers at this time notwithstanding substantial concerns about the apparent cuts arising out of the Order.”

March 8 (filed on March 12): The same group participated in another telephone meeting on March 8 with six additional members of the Wireline Competition and Wireless Telecommunications Bureaus. This conversation included originating access charges, IntraMATA calls routed through interexchange carriers, additional ICC reforms, local rate benchmarking clarifications, and Recovery Mechanism clarifications.

Of note, the Rural Representatives talked about the presumed revenue loss that would occur “from applying the originating interstate access rate in lieu of originating intrastate access rates for calls placed to VoIP customers on the distant end within the same state.” Forty percent of approximately $253m (2010) in originating intrastate access revenues is likely from calls to VoIP customers, so “$101.2m of such revenues would be subject to potential reduction.” The debate over originating access rates has been heating up over the last few weeks, and one can certainly expect that the Rural Associations will continue to pressure the FCC to protect this important stream of revenue.

March 9 (filed March 12): In NTCA’s third ex parte meeting in two days, senior vice president of policy Michael Romano met via telephone with Christine Kurth, policy director and wireline counsel to Commissioner Robert McDowell. Romano “highlighted that numerous questions and substantial confusion continue to surround implementation of the Order, and that end users already appear to face the prospect of significant rate increases as a result of the actions just taken.” The FCC should evaluate and respond to the impacts of the USF/ICC Transformation Order before taking any more drastic steps, like reducing rate of return or extending regression analysis to ICLS. Romano stated, “Racing forward to consider yet more changes when those reforms adopted last fall have yet to be implemented or even fully understood undermines the fundamental tenets of universal service, runs contrary to the objectives of promoting broadband deployment, and only perpetuates regulatory uncertainty.”

March 9 (filed March 13): Also on March 9, NTCA ceo Shirley Bloomfield spoke to Michael Steffen, legal advisor to Chairman Julius Genachowski. Bloomfield reiterated many of the issues discussed in the earlier meetings, like the lingering confusion over the new rules. Bloomfield also asserted that the FCC should evaluate the impact of the current rules before making further changes. Bloomfield argued that a thorough evaluation of the current rules would benefit rural consumers, service providers, lenders, and investors.

March 12 (filed March 13): NTCA’s Michael Romano spoke with Angela Kronenberg, wireline legal advisor to Commissioner Mignon Clyburn, where he repeated arguments from the earlier meetings about regression analysis, concerns about further ICC and USF reductions discussed in the FNPRM, and the need for a true RLEC CAF. Romano referenced the recently-released peer reviews of quantile regression analysis, which he believes constitute “a laundry list of concerns and questions with respect to the development of the caps that are ostensibly to be implemented on July 1.”

NTCA and other Rural Representatives appear to be taking a bold strategy of flooding the FCC with information about how both current and proposed USF/ICC reforms will devastate the RLEC industry. At the American Cable Association Summit in DC on Wednesday, March 13, Genachowski mentioned that rural stakeholders should provide data and input to the FCC about broadband deployment and specific concerns. The RLEC industry has been doing this for well over a year, but as evident in the USF/ICC Transformation Order, many of the rural industry input was ignored or otherwise rejected. What more does the FCC want?

The issues discussed in NTCA’s numerous ex parte filings will likely be front-and-center issues at next week’s Legislative and Policy meeting in DC. With hundreds of representatives from the RLEC industry traveling to DC to meet in person with Congressional staff and members of the FCC, the message will hopefully get through loud and clear. JSICA’s Cassandra Heyne will attend this meeting and report on keynote speeches by FCC Commissioner McDowell and Representative Don Young (R-Alaska).

For IP-to-IP Interconnection, FCC Faces Thorny Regulatory Decision

Big Players Stress Hands-off Approach to Fledgling IP-to-IP Market

In the still-developing IP world, the mere possibility of heavy-handed IP-to-IP interconnection regulation is enough for some companies to jump to doomsday conclusions and insist that such regulations would derail innovation and unnecessarily intervene in a market that isn’t far enough along to have experienced any notable failure. In response to the FCC’s USF/ICC Reform FNPRM, powerful telecom industry players like Verizon, Comcast and Google commented that IP-to-IP interconnection should be achieved through individual commercial negotiations, not regulatory directive. Although these commenters bring up some valid objections to regulating IP-to-IP interconnection, the Rural Associations (NECA, NTCA, OPASTCO and WTA) express concern that the large players could abuse their market power when negotiating IP-to-IP interconnection with RLECs. When the time finally comes for the FCC to embark on an IP-to-IP interconnection rulemaking (and that time will come), the agency will definitely face the daunting task of balancing new market momentum with market power protection for small carriers.

In the FNPRM, the FCC asks various questions about IP-to-IP interconnection with the hopes of developing a more complete record—which is highly desired before any drastic regulations are considered. The USF/ICC Transformation Order establishes “the duty to negotiate in good faith has been a longstanding element of interconnection requirements under the Communications Act and does not depend upon the network technology underlying the interconnection, whether TDM, IP, or otherwise.” The FCC seeks comment “on the implementation of good faith negotiations, and…on any additional actions the Commission should ‘take to encourage transitions to IP-to-IP interconnection.’”

Although the FCC has required interconnection in situations where “network owners have incentives to refuse reasonable interconnection to other network operators,” the FCC has also taken a hands-off approach with newer markets like Internet backbone service, where “regulation might impose structural impediments to the natural evolution and growth process which has made the Internet so successful.” Somewhere in between these two extremes, IP-to-IP interconnection questions are lingering unanswered. According to the FCC, “There are conflicting views regarding what role interconnection requirements should play in an increasingly IP-centric voice communications market.” Therefore, the FCC is seeking input from the industry. The rubble was cleared from the road in the Order, but now the FCC wants directions to the final, all-IP destination. Specifically, the FCC wants to know if IP-to-IP interconnection should fall under existing policy frameworks (like Section 251), if a new policy framework should be developed, or if IP-to-IP interconnection should be negotiated purely through unregulated commercial agreements.

Verizon strongly asserts that IP-to-IP interconnection should not be regulated, and voluntary commercial agreements are completely sufficient. According to Verizon, “New regulations—even ones that may at first seem innocuous—by contrast would disrupt the transition [to IP] and harm consumers.” Verizon reasons, “Regulatory history amply demonstrates that, especially in industries marked by rapid technological change, rules based on static assumptions about technology and markets quickly become obsolete—and worse, can lead to unintended negative consequences, including stifling investment and innovation.”

Verizon points to the rapid emergence of cable companies as competitors in the VoIP market as proof that investment and innovation occur without regulatory constraint. In fact, cable VoIP has completely changed the market and turned upside-down traditional incumbent/competitor distinctions: “No longer does one technology or platform dominate over another. Neither the business model or the technologies underlying the Communications Act of 1934 and the Telecommunications Act of 1996 exist as they did when those laws and the resulting regulations came into being. In this innovative new world of IP networks, there are no incumbents. Everyone is a new entrant, and it makes no sense to regulate these new networks and technologies based on a regulatory model that developed around a very different set of circumstances.” Although Verizon’s “everyone is a new entrant” comment might sound prolific and egalitarian, it doesn’t change the fact that there is still a distinction between powerful and powerless when it comes to commercial negotiations between companies of vastly different sizes.

Google likewise favors a more hands-off approach to IP-to-IP interconnection and believes that “The obligation adopted in the Order requiring carriers to negotiate agreements in good faith for IP-to-IP interconnection will help to unlock the full potential of IP networks and will encourage their continued deployment.” Google believes that the FCC should avoid an “overly prescriptive approach,” and let the industry develop effective standards for IP-to-IP interconnection. However, Google does mention that the FCC could develop a “backstop” for cases where voluntary commercial agreements are unviable. Google also believes that “it is in the best interest for all for an industry-led body to take a leading role, at least initially” (translation: it is in the best interest for Google if a Google-led industry body takes a leading role). Industry-led bodies, or multi-stakeholder groups, have become popular for grappling with broad Internet topics; however, there is some concern that the most powerful multi-stakeholder groups are too exclusive and self-serving. John Staurulakis Inc. vice president Valerie Wimer commented to JSICA that she disagrees with Google’s recommendation that industry-led groups like the Technical Advisory Committee should set rules. According to Wimer, “There are not a lot of network owners on the current committee, only Google, programmers, and equipment vendors. The equipment vendors want a fast move to IP-to-IP so they can sell more equipment.”

Comments from Comcast further explain why IP-to-IP interconnection should not be regulated, from a big VoIP player perspective. Comcast argues that regulating IP-to-IP interconnection would be “counterproductive with far-reaching consequences,” particularly the threat that the FCC “could easily slip into broader regulation of the Internet backbone,” causing “serious distortions of that vibrant ecosystem.” Comcast also supports voluntary commercial agreements, insisting that “The Commission should allow market forces to continue to determine the pace and evolution of IP voice interconnection before rushing to impose regulations.” Comcast further argues that there is no evidence of market failure; therefore the FCC has no basis to regulate this area. Comcast does note that some companies are moving faster than others with IP-to-IP interconnection, but this is only because the negotiations and technical decisions are difficult, costly, and at this stage, still highly experimental. Comcast explains, “Experimentation is beginning to produce a variety of answers to these questions, but the questions themselves illustrate why this process is not happening overnight or as quickly as some marketplace participants might wish.” Regulatory intervention, however, is not the way to speed up market experimentation—“The Internet has thrived in the absence of regulation because this marketplace supplies its own checks and balances.”

The Rural Associations do not completely disagree with their large competitors regarding the dangers of premature regulation. The Rural Associations recommend that the FCC develop a more complete record before making a decision, for “detailed rules enacted at too early a stage are more likely to lead to unforeseen twists and consequences that may delay IP evolution or divert it down less than optimal paths.” Until the FCC has had an opportunity to establish a complete record, the Rural Associations recommend a few “simple rules and policies:”

1. Reliance primarily upon the existing and well-tested interconnection procedures of section 251 and 252 of the Act;
2. Monitoring of interconnection negotiations and the rules governing them, particularly to make certain that carriers with substantial bargaining power (e.g. large carriers negotiating with small carriers) are not misusing or abusing it;
3. Clarification that any ‘additional costs’ of IP-to-IP interconnection must be borne by those seeking to obtain such interconnection where it cannot be accommodated today.

The Rural Associations primarily seem concerned about the potential for large carriers abusing their power in commercial negotiations with RLECs. JSI’s Wimer concurred, arguing that “Rural carriers will get squashed by the large players if there is no basic set of rules. Currently, RLECs can barely enforce their rights under 251 let alone have real peer-to-peer negotiations. Verizon and AT&T just dictate what they want.” The Rural Associations further explain the problem: “To date, larger carriers have shown minimal interest in negotiating IP interconnection agreements with RLECs or other small carriers. Essentially, the perceived attitude is ‘you need us more than we need you.’” Given these market realities, the Rural Associations are rightly worried that commercial agreements alone might lead to unfavorable outcomes for small carriers.

RLECs are still in the early stages of transitioning to all-IP networks, and it certainly seems very premature for the FCC to swoop in with overly-stringent regulations. Until the market has had more time to develop, there are other options available to ensure economic and technical parity among players. JSI’s Wimer explains one option, “IP-to-IP is technically feasible but there is still much negotiation to make it happen and work in a manner that traffic does not get blocked. The FCC should not set rules on how this is ultimately done, but should depend on standards committees.”

IP-to-IP interconnection is one of the biggest emerging issues facing the RLEC industry right now, as the FCC continually pressures telecom providers to transition from PSTN to all-IP. What kinds of interconnection challenges and opportunities do you think await RLECs just around the corner along the road to all-IP?

Rural Groups Fear FCC Will Shoot ICC First, Ask Questions Later

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.  

Rural Associations Refute USF/ICC Order Petitions for Reconsideration

Definition of "Unsubsidized Competitor" Hotly Debated in Opposition to USF/ICC Petitions

Opposition to Petitions to Deny various aspects of the USF/ICC Transformation Order were due February 9, 2012, and the Rural Associations NTCA, OPASTCO, WTA and NECA took the opportunity to refute arguments made by WISPA, wireless provider NTCH, USTelecom, Verizon, and satellite provider ViaSat, Inc. The Rural Associations’ opposition centered primarily on issues related the definition of “unsubsidized competitor,” phantom traffic call signaling rules, and intercarrier compensation reform elements.

Petitioners including fixed wireless broadband association WISPA and ViaSat argued the definition of “unsubsidized competitor” should somehow be expanded or modified such that fixed wireless and satellite broadband are able to knock Carrier of Last Resort RLECs out of Connect America Fund support if these providers exist in the same service area. The Rural Associations shot back with a lecture about the importance of COLR obligations, stating, “COLR obligations require RLECs and other ILECs to design and operate integrated networks that serve not only rural population centers (‘donut holes’) but also outlying customers and customer clusters that are unprofitable or otherwise economically unattractive due to distance, terrain, climate and similar factors that increase construction and operating costs.” Unlike fixed wireless and satellite providers, COLR RLECs cannot select which customers they wish to serve, “but must extend service to all or virtually all potential customers within such areas.”

The Rural Associations contend that changing the definition of “unsubsidized competitor” runs the risk of reducing support for COLRs, and “the consequent undermining of the quality and affordability of the COLR services upon which their rural customers rely.” With respect to satellite service specifically, the Rural Associations argue that satellite broadband still suffers from capacity constraints, latency problem, and weather-related unreliability. Even though satellite service can be received by millions of people, “the problem is…only a small fraction thereof can be served at any given period without creating a massive traffic jam.” The Rural Associations agree that satellite might serve as a last resort for customers with no other service options, but including satellite service as an unsubsidized competitor is currently premature—although it could be considered once satellite broadband providers improve their service offerings and provide quality, reliable voice services too.

In response to WISPA’s petition, the Rural Associations further point out how WISPs do not universally offer voice services and “fall short of ensuring a robust full-service competitive alternative to COLRs.” Rather than changing the definition of unsubsidized competition, the Rural Associations recommend that WISPS “upgrade their networks and service offerings to add quality voice services;” and “unless and until they offer the full complement of vital voice and broadband services provided by COLRs and other eligible telecommunications carriers (ETCs) and satisfy all applicable criteria in the Commission’s rules, standalone fixed wireless broadband service providers should not be permitted to seek the reduction or elimination of high-cost support furnished to COLRs.”

Although the Rural Associations make a strong case for keeping the definition of unsubsidized competition as is, WISPs would likely argue that they do indeed focus on improving their networks but face considerable challenges in access to spectrum and backhaul services. This also brings up an interesting debate about what level of voice service is functionally equivalent to traditional wireline voice service. Does a WISP provide voice service if its network supports Skype, or must it provide a stand-alone voice service too? The Rural Associations correctly point out that some of these issues will require further consideration and the FCC could always change definitions in the future based on market forces, customer behavior and technological improvements to some of the networks considered “less than” in comparison to COLRs.

Also of note, in addition to the unsubsidized competition arguments, the Rural Associations respond to Verizon’s petition pertaining to the phantom traffic rules,  specifically where Verizon argues that “the entire call signaling rule is unnecessary because the Commission’s larger intercarrier compensation goal is to transition to a bill-and-keep regime in which intercarrier compensation payments are eliminated entirely, and at that point all data in the call signaling stream used for intercarrier billing purposes will be ‘unnecessary and useless.’” The Rural Associations reject this argument and explain that the call signaling rules will indeed be very important for at least 9 years—the length of time for the bill-and-keep transition. Furthermore, if Verizon’s suggested “work-arounds for gaps in call signaling information” really worked; then “the Commission and industry would not be faced with hundreds of disputes over phantom traffic.”

Other opposition comments focused on a USTelecom recommendation “that calls for capping of RLEC intrastate originating access charges at current rates;” and an NTCH petition “that asks, without support or consideration of the consequences, that RLECs accepting high-cost support be required to cap their access charges in a ‘flash cut’ manner.” The Rural Associations’ full opposition comments can be read here.