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Universal Service Reform – Their Two Cents

Nebraska Rural Independent Companies

By now the FCC has received thousands of filings and comments regarding Universal Service Reform; it seems everyone and his brother has an opinion as to whether, how, to what degree and when the USF should be changed.  In this new series, entitled “Universal Service Reform – Their Two Cents,” I will provide a summary of the comments filed by various companies, groups of companies and advocacy associations.

For this first installment, I took a look at the comments filed by a group dubbed the Nebraska Rural Independent Companies (NRIC), or the “Nebraska Companies.”  The group is comprised of 30 rural Nebraska companies, including Arlington Telephone Company, The Blair Telephone Company, Cambridge Telephone Company, Clarks Telecommunications Co., Consolidated Telephone Company, Consolidated Telco, Inc., Consolidated Telecom, Inc., The Curtis Telephone Company, Eastern Nebraska Telephone Company, Great Plains Communications, Inc., Hamilton Telephone Company, Hartington Telecommunications Co., Inc., Hershey Cooperative Telephone Co., K. & M. Telephone Company, Inc., The Nebraska Central Telephone Company, Northeast Nebraska Telephone Company, Rock County Telephone Company, Stanton Telecom Inc., and Three River Telco.

Not surprisingly, the group calls for USF reform to maintain rate-of-return regulation and suggests that it would be unfair to drastically change the rules when companies have already made investment decisions based on the existing system: “Rural telephone companies should continue to be provided with a reasonable opportunity to recover their costs of providing service to these rural areas. Likewise, existing investments must also be recovered based on the fact that such investments were made in reliance on existing Commission rules and regulations; any “mid-course” change in recovery levels and policies would be tantamount to “changing horses in mid-stream;” and any such change would improperly undermine the reasonable and proper reliance upon the existing rules and decisions.”

The carriers call for a reformed system to combine Local Switching Support with High Cost Loop Support and suggest that the Safety Net Additive qualification procedures should be modified rather than completely eliminating safety net support.  NRIC argues that corporate expenses need to be factored into the system “since such expenses are necessary for carriers to deploy, operate and maintain voice and broadband networks. Eliminating this recovery for small and rural carriers will only further reduce these companies’ operating cash flows, ultimately leading to a reduction in the human resources necessary to make strategic decisions for network deployment, to operate network upgrades and to conduct the maintenance of the network, all in direct contravention of the ubiquitous broadband deployment goals contained in the National Broadband Plan.”

The group has also commissioned extensive study of the actual costs to deploy fiber in rural communities and proposes that additional data be collected in order to refine the regression analysis formula that the group has developed.  The study found that 86% of the costs associated with fiber deployment can be predicted by its model, although the data relied upon was highly concentrated in Midwestern markets.  The Nebraska Companies suggested that if the FCC proactively gathers additional data from all regions of the country, the model could be used for determining reasonable support as well as timing of builds so as not to over tax the fund in any given year. The proposal also offers an “out”:  “As the Nebraska Companies proposed, if the Commission is to use CapEx data to constrain support for capital investment, it should include an administratively efficient and timely waiver mechanism since any regression analysis will not capture all of the variables associated with the cost of broadband deployment.”

The companies argue that Intercarrier Compensation charges should be maintained, and that “Elimination of this revenue stream will harm rural broadband providers if others are permitted to use the providers’ networks for free, which will occur if services originating or terminating on rural PSTN facilities are allowed for virtually no charge or on a bill-and-keep basis, thus creating more pressures for USF cost recovery. A more constructive approach would be to undertake efforts to move intrastate and interstate access rates to uniformity, and thus help to eliminate incentives for access rate avoidance. The Nebraska Companies submit that the Commission should consider the impact of both special and switched access in rural markets as both are essential to rural broadband deployment and to reasonably priced access to broadband-based Internet services.”

The Nebraska group proposes that federal funds should be made available to states that establish their own Universal Service Fund, in the form of “matching funds,” and the group suggests that such a system would encourage individual states to establish and maintain funds where they haven’t previously done so.

Finally, the group believes that more stringent requirements need to be established for designation of ETC status, and that a two-year service period should be required, along with stricter minimum service provision standards to ensure that ETCs can’t “cherry pick” the portions of a service area that they cover.

The filing is lengthy, but I’ve pulled out a few more passages of note:

"Regarding the ICC issues, the Nebraska Companies draw the Commission’s attention particularly to the potential harm that will occur if services originating or terminating on rural PSTN facilities are allowed to do so for virtually no charge or on a bill-and-keep basis. The revenue being generated by per-minute ICC services (and specifically intrastate and interstate exchange access services) are significant and reflect the use of (and thus the value of) a telecommunications carrier’s existing network vis-à-vis the ability of other service providers to originate and terminate traffic through the use of such network. Migrating to bill-and-keep will simply create more pressures for USF recovery, resulting in a vicious, and potentially irreversible, downward spiral to the detriment of universal service in rural areas served by the RLECs. Understandably, the current per-minute rate structure for ICC may change, but the concept of bill-and-keep (or rates that effectively result in bill-and-keep such as $0.0007) understate and effectively ignore the value of the PSTN to providers that use the RLECs’ networks.

“The decision the Commission reaches regarding the appropriate rate for Voice over Internet Protocol (“VoIP”) traffic could effectively eliminate the ability of the Commission to reasonably deal with ICC and universal service reform. A decision to adopt a separate VoIP rate or bill-and-keep will create an overwhelming incentive for carriers to declare all voice traffic to be VoIP, resulting in chaos and the almost immediate elimination of ICC revenues that support broadband deployment in rural markets. The Nebraska Companies urge the Commission to maintain the existing ICC regime for all services that use the PSTN and to affirm the application of existing Commission rules, as well as mandate additional rules for call signaling and billing.”

“The Nebraska Companies support the migration of LSS and HCLS into one mechanism for the support of broadband in high-cost areas. This can be most effectively accomplished by combining the local switching costs with loop costs into one high-cost mechanism, which the Commission has proposed to define as the Local High Cost Support mechanism (“LHCS”). The Nebraska Companies recommend that LSS be transitioned to LHCS over a period of four years. This would allow time for existing recipients of LSS to recover sunk costs. The Nebraska Companies also believe merging LSS with HCLS into one program will remove the incentive for carriers not to merge study areas within the same state.”

“When addressing increases in SNA support the Commission should consider the amount of the SNA support directed to competitive ETCs and the impact of the SNA increase on the size of the USF. In its evaluation of the SNA, the Nebraska Companies respectfully request that the Commission quantify the amount of such increase nationally that has been due to the identical support rule or competitive ETC support. Based on this quantification, the Commission may ultimately determine that it is appropriate to consider elimination or revision of the identical support rule as a means to substantially address much of the past growth of SNA support and more importantly future growth.”

“In an effort to address the Commission’s issues relating to investment levels, the Nebraska Companies engaged several consulting firms to produce a statistical regression analysis designed to predict outside plant capital expenditures for a high-capacity terrestrial wireline broadband network using publicly available variables. Rather than using hypothetical costs, the regression study was based on the engineered construction costs of rural, rate-of-return companies. The resulting study was described in the Nebraska Companies’ Capital Expenditure Study, Predicting the Cost of Fiber to the Premise…The regression study included 167 data points, representing nine states. Using data from public sources as independent variables and inflation-adjusted construction costs per household as the dependent variable, regression equations were developed. The analysis indicated that 86% of the variation in construction costs could be explained by six variables, with the primary driver being linear density.”

The NRIC study considered the following in its analysis:  Fixed cost, Linear Density, Households, Frost Index, Wetlands Percent, Soils Texture and Road Intersections Frequency.  “The r-squared of the seven-term regression was 0.86, meaning that if the regression variables are known for a particular area, 86% of the variation in the cost of constructing FTTP facilities can be explained…Because the predictive power of the equation was so high, the Nebraska Companies concluded that the study would be useful to the Commission in developing a mathematically supported upper limit on “safe harbor” capital expenditures. Such an analysis could also be used as a means to moderate the pace of investment to not unduly place demand on the Universal Service Fund. Finally, if the data set were expanded, the analysis could be used to estimate the cost of deploying high-capacity terrestrial broadband networks nationwide.”

“The Nebraska Companies respectfully submit that the Commission must ensure that its actions to encourage the deployment of broadband in all areas of America do not undermine the continuation of the successful cost-recovery policies and mechanisms that have provided the basis for the current broadband availability in the areas served by Rural Local Exchange Carriers such as each of the Nebraska Companies. It would be unfortunate for all consumers in this country if the Commission were to forsake the gains by the RLECs in deploying networks that provide advanced services in the hopes that other providers will now make a commitment to serve sparsely populated areas that they have chosen not to serve over the last decade.”

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