EATEL “Shocked” to Find Support Reduced 2,360% More than in First QRA Model

Now that rural telecommunications providers have had a little more than a week to grapple with the impacts of the FCC’s “new and improved” quantile regression analysis model (QRA 2.0), it’s time for someone to take the plunge and file an ex parte letter questioning the results of the new model. Southern Louisiana’s East Ascension Telephone Company (EATEL) is that company: EATEL found something shocking when it analyzed the impact of QRA 2.0 on its high-cost support levels. According to EATEL’s letter, “In the previous version of QRA, EATEL recognized that its annualized federal USF appeared to be reduced by $540,968…In the new version of QRA, EATEL’s management was shocked to discover that the company would be impacted inexplicably and disproportionately through an annualized federal USF reduction of $12,766,889.”

EATEL continues, “The magnitude of the change, especially in light of EATEL’s efficient operations, is difficult to understand. Based on the new QRA, EATEL’s annualized federal USF receipts will be reduced by a figure that is 2,360% higher than was computed under the previous QRA.”  EATEL cannot figure out why its support is plummeting by 2,360%, and the company asks the FCC to explain. As the amount of clipped support for all companies equals about $65m, EATEL is naturally perplexed about why it is seemingly responsible for 19.6% of the total fund-wide support reduction. EATEL believes the reduction “is so dramatic that there must be some mistake in either the underlying data or the functionality of the new QRA, especially in light of EATEL’s diligence in providing efficient services.” EATEL therefore requests the FCC share detailed information about the study area boundary maps, the number of road miles and crossings, census blocks, soil data, and other data used in the QRA 2.0 independent variables.

EATEL, a 27,000-line family-owned company, recently completed its purchase of BV Investment Partners’ Vision Communications in one of the very few RLEC deals of late. In its letter, EATEL explains that it “has worked conscientiously for many years to provide efficient and effective advanced telecommunications solutions to a region still recovering from the effects of Hurricane Katrina, Hurricane Gustav and the problems resulting from the British Petroleum oil still in the Gulf of Mexico.” EATEL is actively expanding broadband service in its own service territory and its newly-acquired Vision territory.

Perhaps the FCC made a mistake in QRA 2.0 with regards to EATEL; it will be interesting to find out for sure. In the Benchmarks Order released last week (which contains the new QRA model), the FCC said it would be accommodating for RLECs who believe study area boundaries used in the model are incorrect, and that RLECs can file special waivers to get the information corrected. It appears as though EATEL could be on its way to filing a waiver, but first needs some basic guidance and explanations from the FCC. EATEL notes that it “respects the FCC’s efforts to be responsive to certain problems in the previous version of the QRA model and methodology,” but the shocking results of QRA 2.0 warrant a logical explanation as soon as possible.

In the coming weeks, we should see more companies coming forward with their concerns about QRA 2.0.

FCC Should Focus on USF/ICC Reform - Extending Freeze Would Minimize Uncertainty

Last month, the FCC sought comment on a FNPRM which proposed to extend the current freeze of jurisdictional separations category relationships and cost allocation factors in Part 36 of the FCC’s rules for two more years (until June 30, 2014). Reply comments were due last week, and a group of rural association allies including NTCA, OPASTCO, WTA, NECA, ITTA, and ERTA urged the FCC to extend the freeze. Not extending the freeze, the associations argue, could have negative impacts on broadband. Furthermore, there will be “few benefits for basic voice service customers” if the freeze is not extended.

The associations continue, “Moreover, as the Commission is well aware, the rates for some customers, where not constrained by competitive or other countervailing regulatory forces, are likely to be subject to significant changes as a result of the ICC/USF Transformation Order. It makes no sense to create additional rate churn and uncertainty at this point by imposing new separations rules without fully examining the impact of changes in ICC and USF mechanisms.”

The associations point to support for extending the freeze from parties such as CenturyLink and USTelecom. CenturyLink argued that failing to extend the freeze would create “uncertainty and instability,” while USTelecom added that it would be wise for the FCC to wait. Parties urging the FCC not to extend the freeze included NASUCA and Sprint. NASUCA argued that “the frozen factors are creating significant mismatches between revenues and costs,” and the FCC should “implement the interim separations proposal presented in March 2010 by the State Members of the Federal-State Joint Board.” Sprint argued that the separations freeze creates market distortions.

The associations further argued that the FCC should consider allowing rate-of-return carriers “that have had their category relationships frozen since 2001 a one-time option to ‘unfreeze’ or recalculate and ‘re-freeze’ their Part 36 category relationships based on current investment and expense levels.” The FCC should also “permit carriers that did not elect to freeze their category relationships in 2000 to do so now based on category relationships developed in 2011 cost studies.”

For more than a decade, the FCC has periodically concluded that a freeze “would provide stability and regulatory certainty for incumbent LECs by minimizing any impacts on separations results that might occur due to circumstances not contemplated by the Commission’s Part 36 rules, such as growth in local competition and new technologies.” The ongoing freeze also reduced regulatory burdens. The FCC has essentially been extending and re-extending the freeze since 2001 because the FCC has not undertaken comprehensive reform of separations. Separations reform was referred to the Joint Board in 2009, and the issue is still under analysis. Meanwhile, the FCC acted on USF and ICC reform, which it believes “significantly affect the Joint Board’s analysis of interim and comprehensive separations reform.” The FCC explains that extending the freeze for two more years may help the Joint Board complete its recommendations, ultimately leading to comprehensive separations reform.

Letter to FCC Requests Immediate Acknowledgement and Response

Nineteen Senators backed declarations by the RLEC industry about the unintended consequences of the FCC’s USF/ICC Transformation Order, scoring rural carriers some much-needed encouragement. The Senators sent a letter to FCC Chairman Julius Genachowski on April 3, 2012 stating, “Unintended consequences on all carriers serving in rural areas can and should be alleviated by a formal FCC clarification that the Order will not be implemented in a manner that perpetuates unintended consequences.” The Senators ask the FCC to “be continually mindful of the need to encourage rural communications network investment,”—investments which have been made “in accordance with standards established by the Rural Utilities Service and in line with national policy objectives established by Congress in the Communications Act.”

The Senators note the importance of balancing the costs of the fund with the need to support rural carriers, and they list five areas of particular concern. They request the FCC to clarify:

1. It will not implement additional reductions in USF and ICC support pursuant to the Further Notice until the implications of the reforms and reductions adopted in the recent Order can be properly evaluated and understood;
2. It will ensure that lawfully incurred investments and operating expenses are not jeopardized by retroactive rule changes;
3. It will not deem any investments or expenses unlawful, imprudent or not ‘used and useful’ when such investments have been made in accordance with federal agency standards and mandates;
4. It will adopt a clear-cut and non-burdensome waiver mechanism that will allow cost recovery for carrier investments made in line with federal standards and mandates;
5. It will adopt a sustainable and predictable broadband oriented Connect America Fund for rural areas served by smaller rural carriers as it did for those served by larger carriers.

At the conclusion of the letter, the Senators “ask that the FCC immediately acknowledge and appropriately respond to the outline above to ensure all rural consumers are able to fully participate in the universal communications network Congress has envisioned through a long history of statutory actions in this regard.”

The letter hits at the core of the RLEC industry’s concerns with the Order and especially the FNPRM. Of utmost importance is that the FCC takes the necessary time to evaluate the impacts of the Order before adopting additional cuts and caps to high-cost support—the Senators clearly get this. The added emphasis on wanting an immediate response from the FCC is certainly promising—I know many of us will be anxiously awaiting the FCC’s response, and hoping it will be more comprehensive than some FCC responses to Congressional members have been on USF reform and other issues (as an example, Genachowski recently responded to Congressional concerns about rural call termination issues by simply telling them to read the February 6 Declaratory Ruling).

NTCA members played a vital role in this letter, as these concerns were communicated to members of Congress at the Legislative and Policy Conference last month. NTCA ceo Shirley Bloomfield released a statement about the letter, stating: “We welcome the interest of these Congressional leaders in ensuring that the substantial changes to essential Universal Service Fund (USF) and intercarrier compensation (ICC) support mechanisms announced last fall by the FCC will be implemented correctly and well-understood, prior to adopting additional changes that may reduce such support even further for small rural carriers. We’re encouraged that these leaders understand the vital role that USF and ICC support mechanisms, together with Rural Utilities Service and other financing, play in making sure that consumers have access to affordable advanced communications services in hard-to-serve areas, and that rural networks can be upgraded over time, as federal law mandates.”

Bloomfield continued, “These letters to Chairman Genachowski demonstrate the clear support in Congress for ensuring that small, community-based telecommunications providers can continue to attract capital, make sound investments in sustainable broadband networks, and offer advanced services that create jobs and bring needed economic development to our nation’s rural communities.”

Senator John Tester (D-MT) signed the letter, and commented on his website, "Montana needs a broadband plan that offers our rural and frontier communities the same economic opportunities as urban areas. Access to broadband service means access to new and bigger markets for Main Street businesses and job opportunities. That's why I'm fighting to make sure any national plan doesn't discriminate against Montana and rural America." In addition to Sen. Tester, the bipartisan letter was signed by Senators Harkin (D-IA), Grassley (R-IA), Begich (D-AK), Thune (R-SD), Hatch (R-UT), Barasso (R-WY), Chambliss (R-GA), Hoeven (R-ND), Conrad (D-ND), Johnson (D-SD), Risch (R-ID), Crapo (R-ID), Baucus (D-MT), Merkley (D-OR), Levin (D-MI), Enzi (R-WY), Lee (R-UT), and Inhofe (R-OK).

And now we wait for the FCC to respond…