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Thursday
Sep082011

Six ILECs Defend Rights of First Refusal Proposal

ABC Plan Participants Respond to Challenges from Opponents 

On September 6, the six price cap ILECs who developed America’s Broadband Connectivity Plan (ABC Plan) for USF/ICC reform filed reply comments which addressed a range of criticism that has emerged from different corners of the industry.  Since the ABC Plan was released on July 29, it has been hailed by some as a great compromise between industry parties who are normally rarely in agreement, and it has been challenged by others as extremely flawed and geared towards cementing ILEC competitive strongholds on the broadband industry.  The ABC Plan’s authors -- AT&T, CenturyLink, FairPoint, Frontier, Verizon and Windstream -- open the reply comments by insisting, “The comments filed in this proceeding demonstrate the unprecedented breadth of support for the ABC Plan and the Consensus Framework,” and urge they the FCC to adopt this proposal.  They add, “It would be futile for the Commission to continue to wait for a perfect consensus, as one will never emerge.”

One of the highly debated issues in the ABC Plan throughout the initial comments to the FCC’s Universal Service-Intercarrier Compensation Transformation Proceeding Public Notice was the ILECs’ proposal for rights of first refusal (ROFR) of broadband support in unserved areas.  Basically, the ABC Plan would allow ILECs who have made “substantial existing broadband investments” to at least 35% of a wire center where there are no other unsubsidized competitors to either accept or decline CAF support for that wire center.  According to the ABC Plan, “If [the ILEC] accepts the offer of the baseline support, then the incumbent LEC assumes all of the broadband service obligations for the ten-year term of CAF support.”  If the ILEC declines the offer, any other provider can compete for the CAF support in a reverse auction, and presumably the most cost-efficient competitor would win the support.

Opposition to the ROFR proposal primarily consisted of arguments that the proposal is anticompetitive and would result in a windfall for ILECs at the expense of consumers.  US Cellular comments that the ABC Plan in general is “a blueprint for a heist,” and “Allowing ROFR will reverse over a decade of Congressional and Commission focus on consumers, rather than carriers, as the beneficiaries of support.”  US Cellular argues that ROFR is not competitively neutral and would give the providers the power to decide which technology is deployed in rural areas, even if it is not the most cost-efficient, fastest, or most desired broadband technology. US Cellular further argues that if 80% of ILECs exercise their ROFR as anticipated, the ILECs will essentially be “catastrophically stunting entry by competitive wireless carriers for at least ten years.”

Additional noteworthy examples of opposition to ROFR come from Free Press, Alaskan telecommunications provider General Communications Inc. (GCI), and Cox Communications.  Free Press argues “The self-interested nature of this plan on the price cap side is perfectly illustrated by their proposal to have a Rights of First Refusal that allows them to insulate themselves from the competition that reverse auctions are supposed to create.” Cox also argues that ROFR would distract from the purported benefits of reverse auctions in totally unserved areas: “there is no public policy rational for preferring any provider;” and only if price cap ILECs are determined to be the most efficient provider via a competitive bidding process, “then the bidding process will award them the subsidies.”  Cox also adds that, “There is no evidence at all that granting a right of first refusal would lead to any consumer benefits.”

GCI argues against ROFR from its unique perspective as a rural Alaskan broadband provider.  GCI insists that ROFR “would be disastrous for ETCs like GCI and the customers they serve, would turn back the clock on rural wireless and broadband deployment, and more importantly, would harm public safety.”  GCI insists that both wireless and wireline services should be supported in Alaska.  GCI explains that wireless is particularly important for Alaskan public safety and the state’s job market, which “is characterized by a significant transient workforce” of individuals who relocate seasonally, work on fishing boats and oil pipelines, and “cannot depend on wireline service.”

The six ABC Plan ILECs defend the ROFR proposal and insist that its purpose is not to entrench their positions in the market; rather, “It is a narrowly-targeted means of accelerating broadband deployment and preventing inefficient duplication of existing facilities.”  The ILECs point to the limitations of the proposal -- that ROFR is not allowed unless the ILEC has deployed broadband to 35% of the wire center, and ROFR is not allowed if there is a single unsupported competitor -- as evidence that ROFR will not “tilt the competitive landscape” in favor of ILECs.

The ILECs believe that ROFR will help price cap carriers leverage existing investments to provide broadband in nearby unserved areas, and “It is essential to take advantage of existing investments in ILEC infrastructure to leverage those facilities in a way that will deliver ubiquitous access to broadband while working within the current budget for high-cost funding.”  The ILECs further argue against criticism that ROFR is not competitively or technologically neutral by insisting that the unserved areas could feasibly be served by any competitor with any technology if the ILEC refuses the support.

Do you think ROFR is intended to prevent stranded investment and help the price cap ILECs deploy broadband in unserved rural areas -- the areas where price cap ILECs have long been criticized for not making a very good effort to serve -- or is ROFR a means for the ABC Plan participants to strengthen their market power at the expense of consumer benefit and competition?  Both sides make persuasive arguments, and the ROFR proposal has gained support from other mid-sized ILECs who did not participate in the ABC Plan, such as members of the Independent Telephone & Telecommunications Alliance (ITTA).  In its joint comments with Cincinnati Bell, Hargray Telephone Company and Hickory Tech Corporation, ITTA urges the FCC to adopt the ROFR proposal as presented in the ABC Plan.

Your position in the industry will likely dictate whether you think the ROFR proposal is a boon or a bust, but one could get the impression that the ROFR opponents like cable and wireless providers are also trying to secure their competitive positions by attempting to block this proposal from being adopted.  It is possible that the FCC could impose further limitations on ROFR, such as requiring the ILEC to serve substantially more than 35% of the wire center.  A higher threshold may calm some of the opponents and even increase the number of unserved areas where support could be determined by reverse auctions, but the ABC Plan participants have warned that they will not support drastic modifications to the plan by the FCC. The ROFR issue seems to be one of the more dramatic topics, and it is also an area that may require the “shared sacrifice” that the FCC has been asking for since the NPRM was released in February—one possible outcome being that the ILECs would have to sacrifice their desired low deployment threshold. Hopefully, the rural consumers in unserved price cap ILEC areas will not have to sacrifice their need for high quality, reasonably comparable and affordable broadband service.

The reply comments by the six ILECs are available here.

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