Transitioning to CAF: RLEC Plan Steps and Impact
Wednesday, September 7, 2011 at 9:29AM
Cassandra Heyne in Connect America Fund, FCC, FCC Filings, ICC Reform, NECA, NTCA, RLEC Plan, Regulatory Update, USF, USF Reform

NTCA Outlines RLEC Plan’s Steps, NECA Calculates Preliminary Impact on RLECs' Slice of USF Pie

Last week, rural telecom association NTCA and the National Exchange Carriers' Association (NECA) held ex parte meetings with members of the FCC to provide additional details about the associations’ RLEC Plan for USF/ICC Reform—NECA submitted a chart illustrating how legacy USF support for RLECs may transition to the Connect America Fund (CAF) coupled with a Restructure Mechanism (RM); and NTCA presented a condensed summary of the steps in the RLEC Plan.

As shown below, NECA’s Preliminary RLEC CAF + RM Computation chart starts at $2b and accounts for modest growth of $50m per year up to “a total annual budget of $2.3b” by the sixth year.  By the eighth year, Legacy USF support is reduced by more than half, with CAF + RM support replacing the legacy funds without increasing the overall size of the fund by more than $300m.  According to NECA, “incremental funding will be necessary to enable access restructuring, promote further broadband build-out (but only to the extent supported by increases in USF/CAF funding above current levels for any individual company), and provide a reasonable opportunity to recover the costs associated with existing investments in broadband-capable plant.”

NECA’s calculations were produced “using industry-wide assumptions and growth rates, together with preliminary inputs and factors.”  NECA also provided a summary of their calculations and assumptions, and a description of the RM.  NECA explains, “The RM is designed to recover revenue losses as a result of capping interstate originating and terminating switched access rates at the start of access reform as well as revenue losses caused by reducing terminating access rates to targeted levels in three phases,” where the targeted level is ultimately the $0.0007 per minute terminating end office rate.

To calculate the RM, NECA explains, “The total revenue shortfall is the sum of the intrastate and interstate revenue shortfalls…The RM is calculated by offsetting the combined revenue shortfalls by increases in subscriber line charge (SLC) revenue.”  If residential rates in a study area are below the $25 local rate benchmark, the monthly residential SLC can be increased by 75 cents per year until the benchmark is met.  NECA further explains, “if additional SLC revenues in a given step exceed the intrastate RM, the SLC revenue in excess of the intrastate RM is then used to offset the interstate component of the RM;” and “earnings in excess of a 10% RoR for that year will be used to offset the intrastate component of the RM for that year after the SLC revenue offset has been taken into account.” 

Also helpful for understanding the potential road ahead for USF is NTCA’s summary of the steps in the RLEC Plan.  The four steps explained in NTCA’s August 26 ex parte filing are as follows:

Step 1: “Implement short-term ICC reform measures that confirm intercarrier compensation is due for all traffic originating from or terminating to the PSTN regardless of technology; VoIP pays established interstate access rates for all interexchange traffic and reciprocal compensation for local.”  The FCC should also address phantom traffic and access stimulation in this step.

Step 2: Short-term USF reform, beginning January, 1, 2012, including “a limitation on recovery of prospective RLEC capital expenditures,” and “cap recovery of corporate operations expenses by applying the current HCLS corporate operations expense cap formula to all federal high cost support mechanisms.”

Step 3: This step would initiate the process of capping interstate access rates with an 8-step “realignment program,” that includes unifying RLEC intrastate terminating access rates at interstate levels; reducing RLEC terminating local switching rates to $.005 per minute; and finally “unless the FCC determines otherwise, terminating local switching rates would be reduced to $.0007 per minute in 3 equal installments for RLECs.”  Step 3 would also see the implementation of the $25 rate benchmark (as described above in the summary of the NECA calculations).  NTCA emphasizes that “ICC rate reduction will be deferred in any year in which, for any reason, there is insufficient high-cost support and/or restructure mechanism funding available.”

Step 4: The final step in the RLEC Plan is to “implement an RLEC-specific CAF mechanism designed to re-focus existing RLEC USF support on broadband.”  As illustrated by the NECA chart above, legacy funding would decline as CAF funding is phased in.  NTCA explains that RLEC CAF support is determined “by subtracting the product of an urban broadband transmission cost benchmark times broadband lines in service, from actual RLEC network broadband transmission costs.”

If the RLEC Plan is implemented, NTCA recommends that the FCC review and modify the plan as needed after 3-5 years.  NTCA also presents several “overarching principles” that the FCC should keep in mind as the final rules are drafted; such as not imposing a hard cap on high cost support, allowing the RLEC portion of the fund modified growth of $300m by the sixth year, removing the high cost fund budget after 2017, allocating $300m for mobile broadband service, and targeting $2.2b for areas served by price cap carriers consistent with the Consensus Framework proposals.

In this final comment cycle, the RLEC Plan has gained considerable support from statewide telecom associations and a number of individual RLEC commenters, but not all RLECs are completely on board. With reply comments due this week, it will be interesting to see how the Consensus Framework parties react to the questions and critiques posed in the comments. Although not all RLECs advocate the same reform plan, the RLECs who have participated in this proceeding have presented a tremendous amount of evidence and commentary to illustrate how harmful the FCC's initial USF/ICC Reform NPRM proposals would be for these companies and for the rural Americans they serve. It is now up to the FCC to ensure that RLECs have reasonable opportunities for existing broadband investment and lost access revenue recovery, and ample opportunities to continue bringing the benefits of broadband to high-cost rural areas.

NECA’s chart and calculation explanation is available here, and NTCA’s ex parte filing is available here.

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