USF Reform - Their Two Cents: FTTH Council 
Wednesday, June 8, 2011 at 2:33PM
Cassandra Heyne in Broadband Speed, Connect America Fund, FCC, FCC Filings, FTTH, Fiber Deployment, Regulatory Update, Reply Comments, USF Reform

Fiber-to-the-Home Council Recommends 25 Mbps for Rural Broadband

On May 23, 2011, The Fiber-to-the-Home Council (“FTTH Council”) filed reply comments in the Universal Service Fund Reform proceeding, where they expressed concern about the FCC’s proposal for a broadband speed target of 4 Mbps download, 1 Mbps upload (“4/1”) in rural and unserved areas. Although the FTTH Council agrees that a relatively low speed target may be sufficient in the immediate near term, it would ultimately “deprive rural residents and businesses of broadband performance comparable to that found in urban areas.” The FTTH Council recommends 25 Mbps (in both directions) by 2015, and argues that FTTH is the most efficient and financially prudent broadband technology for high-cost areas—therefore, the revamped High Cost Fund should ensure support for rural FTTH deployment.

The FTTH Council points to the rapidly growing demand for Internet content and applications, such as distance learning, enhanced video conferencing, and HD telemedicine, as evidence that high-performance broadband networks need to be supported by USF.  I believe that in rural and remote areas, high-bandwidth applications can literally mean the difference between life and death, business or no business, and education or no education. The FTTH Council clearly understands the importance of high speed broadband to rural residents, businesses and communities as broadband users increasingly require “Next-Generation Access” (NGA) broadband service.  The FTTH Council cites a report by consulting firm CSMG on consumer adoption of NGA broadband applications, which supports “the conclusion that consumer demand for symmetrical bandwidth is likely to exceed 25 Mbps by 2015.”

In addition to thinking about future demands for high-performance broadband, I believe it is also important to look to the past for examples of why broadband speeds must be forward-looking and well beyond the minimum requirement. Advocates of the 4/1 Mbps target claim that most broadband consumers do not actually need higher speeds because they primarily use broadband to check e-mail and browse the Web. However, this assumption does not consider the adoption and use of future broadband-enabled applications, and according to the FTTH Council, “it is highly likely that innovative applications development will lead to as-yet undefined applications with significant public benefit.” Now-common applications like YouTube, Netflix streaming video, Google maps, Skype and Apple iTunes skyrocketed in popularity as a result of increased broadband speeds over the last 10 years, but continued investment in high performance broadband is necessary so that consumers can continue to benefit from new applications. The FTTH Council provides an interesting infographic on page 14 of the reply comments to illustrate the relationship over time between broadband speeds and “killer apps.” Clearly, as the FCC moves towards reforming the Universal Service Fund to support broadband, the power of innovation must not be underestimated.

In the USF Reform docket, there is prevailing criticism that FTTH is not a financially viable solution for broadband deployment in rural and unserved areas, but the FTTH Council argues that rural FTTH is well worth the private and federal investment in the long term. The FTTH Council urges the FCC to “encourage the rapid deployment of FTTH because it will enable rural telephone companies to more expeditiously meet consumer needs and thereby receive higher revenues and lower operating costs, which then translates into an eventual reduction in universal service support.”  Not only does fiber enable “virtually unlimited throughput capabilities,” FTTH networks also offer “lifetime operating expenditure savings” of $100-$250, which makes the actual cost of FTTH on par with other technologies, savings included. 

The FTTH Council calculates the cost of deploying FTTH to the “last 5%” of rural households as $44b, nearly half of the total $94b cost to deploy FTTH to the last 20%. However, the cost to deploy fiber in the eightieth to ninetieth percentile is roughly $29b, and the FTTH Council urges rural telephone companies serving the that percentile of unserved households to upgrade to FTTH.

The financial aspects of FTTH are definitely attractive from an RLEC perspective, but will the FCC agree that FTTH is the best broadband technology for rural areas? Comments in the USF proceeding show that RLECs are extremely concerned about access to private capital right now, as regulatory uncertainty over USF hovers over lenders like a dark cloud. Private lenders have reservations about lending to companies that may not be able to repay loans if USF support is reduced or eliminated completely in some cases. The FTTH Council argues that the current High-Cost Support program significantly reduces the risks associated with private lending for broadband deployment in rural areas. If the FCC’s USF Reform proposals are adopted, the risk of investing in RLECs will increase, and “investors will demand a higher premium or higher interest rate on debt or loan,” and some investors may refuse capital to RLECs altogether. As a result, the “hurdle rate” for determining if an investment is viable will increase significantly, and some planned FTTH projects may not “get over the hurdle.”  The FTTH Council compares the stability of the current High-Cost USF system to a low-risk structured settlement, but the future CAF support model makes investing in RLEC FTTH projects more akin to a risky startup venture. 

Private lending and USF support go hand-in-hand for RLECs, and are clearly representing a double-edged sword as the USF Reform rulemaking nears decision time. Without continued USF support, private lenders may shy away from RLECs. Without private lending for broadband and FTTH deployment, rural communities will either continue to fall behind in broadband development, or they will lose their broadband provider altogether. The FTTH Council recommends that the FCC combine the current High-Cost Fund with the proposed Connect America Fund to achieve ubiquitous broadband. According to the FTTH Council, the FCC should “preserve and build upon the success of the High-Cost fund and meld the aim of this fund with CAF’s new objective to reach unserved areas.”

The FTTH Council’s reply comments are available to read here.

Article originally appeared on JSI Capital Advisors (http://jsicapitaladvisors.com/).
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