Introducing ICC Reform: New Rules to Reduce Arbitrage

FCC Puts Providers “Exploiting Loopholes” Under Fire (Finally)

JSI Capital Advisors continues its detailed analysis of the 759-page USF/ICC Reform Order by looking at the FCC’s new rules for curbing access stimulation and phantom traffic—two forms of access charge arbitrage, which together have likely cost the telecom industry and consumers hundreds of millions of dollars per year. The new rules to reduce arbitrage are not especially drastic, and for the most part reflect the FCC’s initial recommendations in the USF/ICC NPRM. The intention is that these new rules, in conjunction with the overall transition to bill-and-keep, will eventually eliminate access stimulation and phantom traffic…and hopefully not give rise to new forms of arbitrage along the way.

Access Stimulation – A Two-Prong Definition  

Access stimulation is a pervasive problem that “occurs when a LEC with high-switched access rates enters into an agreement of high call volume operations such as chat lines, adult entertainment calls, and ‘free’ conference calls.” The FCC explains, “the arrangement inflates or stimulates the access minutes terminated to the LEC, and the LEC then shares a portion of the increased access revenues resulting from the increased demand with the ‘free’ service provider, or offers some other benefit to the ‘free’ service provider….Meanwhile, the wireless and interexchange carriers (collectively IXCs) paying the increased access charges are forced to recover these costs from all their consumers.” The FCC claims that access stimulation “imposes undue costs on consumers,” has cost IXCs over $2b in the last five years, and harms competition especially in the conference calling market.

A sudden jump in traffic can equal a boon for the LEC because “they are currently not required to reduce their access rates to reflect their increased number of minutes.” Not all situations that result in drastically increased traffic are a result of an access stimulation scheme, and may occur if a new call center or other call-heavy business moves into the area. However, the FCC is hoping that the new rules will weed out the “bad actors” and ensure that access rates are not “unjust and unreasonable under section 201(b) of the Act.”

The FCC adopts a definition of access stimulation that includes two conditions, and “if both conditions are satisfied, the LEC generally must file revised tariffs to account for its increased traffic:”

  1. A revenue sharing condition
  2. An additional traffic volume condition, achieved by either a 3:1 interstate terminating-to-originating traffic ratio in one month; or a greater than 100% growth in interstate originating and/or terminating traffic compared to the same month in the previous year

To help identify LECs who may be engaging in access stimulation, IXCs can file “complaints based on evidence from their traffic records.” Following a complaint, the LEC has the burden of proof to “establish that it has not met the access stimulation definition and therefore that it is not in violation.” The FCC explains that it adopted the two-prong definition for access stimulation because “the use of a revenue sharing approach alone was criticized by some as being ambiguous, circular, or a poor indicator of access stimulation.” The definition that the FCC adopts for revenue sharing arrangements is contingent on a net payment from the LEC to its revenue sharing-partner. The FCC believes that this definition “best identifies the revenue sharing agreements likely to be associated with access stimulation and thus those cases in which an LEC must re-file its switched access rates.”

The traffic volume condition has two triggers in order to “address the shortcomings of using either component separately.” The FCC intends for the 100% growth trigger to act as backup insurance in case a carrier tries to “game” the 3:1 ratio trigger: “The traffic growth component protects against this possibility because increasing originating access traffic to avoid tripping the 3:1 component would likely mean that total access traffic would increase enough to trip the growth component.”

Once it has been determined that a LEC is engaged in access stimulation, the carrier must file a revised tariff “except under limited circumstances.” RLECs and CLECs cannot file a new tariff again until their revenue sharing agreements are terminated, even if the 3:1 or traffic growth conditions are no longer met. Access stimulating RLECs are also no longer able to base rates on historical costs and demand, and cannot participate in NECA tariffs. Carriers who are currently engaged in access stimulation have a bit of a window to end this behavior before facing the consequences: “If a carrier sharing access revenues terminates its access revenue sharing agreement before the date on which its revised tariff must be filed, it does not have to file a revised tariff,” because “traffic patterns should return to levels that existed prior to the LEC entering into the access revenue sharing agreement.”

One last point worth mentioning about the access stimulation rules is that CLECs engaged in access stimulation have to benchmark their interstate switched access rates to the lowest in the state, and the FCC concludes “the lowest interstate switched access rate of a price cap LEC in the state” is the appropriate benchmark.

Overall, the FCC anticipates that “the approach we adopt will reduce the effects of access stimulation significantly, and the intercarrier compensation reforms we adopt should resolve remaining concerns.”

Phantom Traffic – “Gamesmanship is Rife”

Phantom traffic in the most basic sense, “refers to traffic that terminating networks receive that lacks certain identifying information.” The FCC further explains, “In some cases, service providers in the call path intentionally remove or alter identifying information to avoid paying the terminating rates that would apply if the call were accurately signaled and billed.” The FCC estimates that the problems are “widespread,” and anywhere from 3-20% of all traffic is missing identifying information. This costs carriers and consumers “potentially hundreds of millions of dollars annually.”

The FCC is taking a straightforward approach to reducing phantom traffic—simply requiring that certain identifying information be included in PSTN and VoIP calls. As with access stimulation, the FCC is adopting its recommendations from the NPRM with some minor modifications. The new rule is as follows, which the FCC anticipates “will assist service providers in accurately identifying billing for traffic terminating on their network, and help guard against further arbitrage practices:”

Service providers that originate interstate or intrastate traffic on the PSTN, or that originate inter- or intrastate interconnected VoIP traffic destined for the PSTN, will now be required to transmit the telephone number associated with the calling party to the next provider in the call path. Intermediate providers must pass calling party number (CPN) or charge number (CN) signaling information they receive from other providers unaltered, to subsequent providers in the call path.

The FCC believes that requiring all telecommunications providers (PSTN and interconnected VoIP) to maintain the integrity of the calling party information, and prohibiting the stripping or alternation of such information, is in the public interest. The FCC is not allowing any general exceptions to the phantom traffic rule, for example if a carrier does not have the technical feasibility to comply. However, “parties seeking limited exceptions or relief” can file a waiver.

Simple and straightforward, right? The FCC maintains that the phantom traffic rule “is consistent with our goal of helping to ensure complete and accurate passing of call signaling information, while minimizing disruption to industry practices or existing carrier agreements;” and “should significantly reduce the amount of unbillable traffic that terminating carriers receive.”

Do you think that the FCC’s access stimulation and phantom traffic rules will get to the root of the problems? Will the rules provide necessary relief for the carriers and consumers who are pulled into these costly arbitrage schemes, and prevent future arbitrage schemes from arising? The rules appear to be very uncontroversial, obvious and easy remedies; and it is almost surprising that they have not been adopted sooner.

Coming up next, we will take a look at the new bill-and-keep ICC transformation regime that surely has some RLECs quite concerned.

The full FCC Order is available here, with access stimulation and phantom traffic rules covered on pages 209-240.


Introducing the Mobility Fund: “A National Priority”

FCC Acknowledges Complementary Nature of Fixed and Mobile Broadband

Earlier this week, JSI Capital Advisors gave a first look at the overall Universal Service Fund reforms for price cap and rate-of-return LECs, but now we are switching gears and diving into the newly-established, first-of-its-kind Mobility Fund intended for both rapid and longer-term mobile network deployment and recovery. Overall, the Mobility Fund text contained some surprises, some departures from last year’s Mobility Fund NPRM and some potential opportunities for small wireless carriers.

The first phase of the Mobility Fund, expected to be implemented before the end of 2012, “will provide one-time support through a reverse auction, with a total budget of $300 million, and will provide the Commission with experience in running reverse auctions for universal service support.” Reverse auctions are uncharted waters, and the precise methodology will primarily be determined by the Wireless and Wireline Bureaus in forthcoming proceedings. However, the FCC did lay down some ground rules which are discussed at greater detail below. Perhaps the biggest “win” in the Mobility Fund comes in Phase II, which will distribute up to $500m annually (including $100m specifically for Tribal Lands). The initial Mobility Fund NPRM recommended a one-time investment of $100-300m only, but due to outcries from the wireless industry the FCC decided to implement a dedicated annual mobile broadband fund.

Phase I – A “Jump Start” to Reducing Mobility Gaps

The one point that the FCC emphasizes repeatedly about Phase I is that it is one-time funding intended for one provider per unserved area to rapidly deploy mobile voice and broadband. This does not mean that Phase I funding is specifically intended to go to the highest-cost areas—those problems will be solved with Phase II and the new $100m/year Remote Areas fund. The FCC intends to support only one carrier per unserved area (based on census blocks), because “permitting multiple winners as a routine matter in any geographic area to serve the same pool of customers would drain Mobility Fund resources with limited corresponding benefits to consumers.” However, there may be occasional overlaps in supported service areas so long as the separate carriers are adding to the number of road miles served in an unserved area and not both serving the same customers. The FCC is ardently hoping to avoid a repeat of the current CETC situation, where multiple carriers receive funding without actually improving service in unserved areas. Mobility funding is also not intended for carriers to use to complete existing deployment plans or other regulatory commitments.

The FCC attacks many of the arguments presented in last year’s Mobility Fund NPRM comments, including the argument that Phase I will not provide “sufficient and predictable support.” The FCC contends that “Bidders are presumed to understand that Mobility Phase I will provide one-time support, that bidders will face recurring costs when providing service, and that they must tailor their bid amounts accordingly.” The FCC also defends the reverse auction mechanism: “we believe it is the best available tool” for identifying areas in need of mobile voice and broadband deployment “in a transparent, simple, speedy and effective way.”

Many small wireless carriers showed great concern that the reverse auction process would unfairly favor large companies, with some commenters even requesting that Tier I carriers, like Verizon Wireless, be barred from participating. Unfortunately, the FCC was “unpersuaded” by these arguments and insists that there will be “opportunities for smaller providers to compete effectively at auction.” Furthermore, parties such as the Blooston Rural Carriers argued that reverse auctions would “lead to construction and equipment short-cuts due to cost cutting measures,” but the FCC held that there will be “clear performance standards and effective enforcement of those standards.”

So what are the standards, methodologies and enforcement measures? Much of the auction methodology will be determined via future proceedings, but the FCC set a fairly clear framework. Some of the Mobility Fund Phase I rules and guidelines include:

  • Unserved areas will be determined on a census block basis, support can be offered for groups of unserved census blocks (census tracts).
  • Road miles are the unit of measurement, not population.
  • American Roamer data will be used to determine unserved areas: “American Roamer data is recognized as the industry standard for the presence of service.” Although it is not perfect, the FCC felt that American Roamer data was better than the National Broadband Map, where “inconsistencies with respect to wireless service have been noted.”
  • The Bureaus will decide if census blocks can be aggregated, or if there will be a minimum eligible area for bidding.
  • There will be no prioritization of unserved areas, and all unserved areas are equally eligible.
  • Recipients are required to provide 3G or 4G service. The 3G floor is 200/50 kbps and the 4G floor is 768/200 kbps throughout the entire cell area (edge included). However, speeds will most likely be much higher near the base station to reflect the 4/1 Mbps CAF standard.  
  • Recipients will have 2 years to deploy 3G or 3 years to deploy 4G; in either case at least 75% of the road miles must be covered. The percent of support received will also be contingent on the percent of road miles that must be served, as determined by the Bureaus.
  • Recipients who build new towers with the funding must allow for collocation, they must also comply with voice and data roaming requirements. Noncompliance could result in sanctions, penalties, and ineligibility for future funding.
  • Rates and data capacity must be reasonably comparable to urban areas.
  • Eligibility will be based on 3 criteria: ETC designation, access to spectrum for at least five years, and demonstrated financial and technical capability. There will be a short-form and long-form application process akin to spectrum auctions.
  • Funding to winners will be distributed in 3 installments: one-third when the long-form application is approved, one-third when 50% of the recipient’s minimum requirement is served, and the final one-third once the project’s requirements are fully met.

One aspect that was particularly positive was that the FCC seemed to acknowledge the complementary nature of fixed and mobile broadband by not excluding census blocks served by fixed services from receiving Phase I support. According to the FCC, “The ability to communicate from any point within a mobile network’s coverage area lets people communicate at times they may need it most, including during emergencies. The fact that fixed communications may be available nearby does not detract from this critical benefit.”

Phase II - Hello $500m Annual Budget, Goodbye Identical Support Rule

Although many of the details of Phase II are yet to be worked out, the FCC explains that Phase II will include “a budget of $500 million to promote mobile broadband…where a private sector business case cannot be met without federal support.” $100m will be dedicated specially to Tribal Lands (which will be discussed in a future article). The FCC believes that this budget is appropriate. Although it is less than CETC Identical Support in recent years, the $500m/year “will be sufficient to sustain and expand the availability of mobile broadband.” Furthermore, “mobile providers may also be eligible for support in CAF 1 areas where price cap carriers opt not to accept the state-level commitment, in addition to Mobility Phase II support.”

The trade-off of course is that the much-maligned Identical Support Rule will be eliminated. The FCC explains that in 2010, “about $611 million went to one of the four national wireless providers,” and $579m went to small and mid-sized wireless carriers (out of $1.2b total). According to the FCC, “identical support does not provide appropriate levels of support for the efficient deployment of mobile services in areas that do not support a private business case for mobile voice and broadband.”

The intention is that the Mobility Fund will revamp support for competitive wireless carriers so that funding reflects the efficient costs of providing service in unserved and underserved areas, not the costs of overbuilding already highly competitive and well-served areas. As we saw in the details about Phase I CAF, the FCC is definitely dedicated to making sure support goes where it is needed most—areas that have little or no fixed or mobile broadband today.

What are your thoughts on the Mobility Fund and the elimination of the Identical Support Rule?

The full USF Reform Order is available here, with pages 108-174 covering the Mobility Fund.


Introducing the Connect America Fund – USF Reform Overview 

FCC Releases 759 Page Document Late Friday Nov. 18 (Saving Thanksgiving, but not the Weekend)

Since October 27 the telecom industry has been on pins and needles awaiting the release of the document detailing the landmark decision reforming the Universal Service Fund and Intercarrier Compensation system. Rumors have swirled about the release date, and many feared that the FCC would post the document, expected to run anywhere from 500 to 2,000 pages, the day before Thanksgiving. Well, the FCC decided to release the 759 page Report and Order and FNPRM just as many were heading home for the weekend… At least Thanksgiving was spared!

Over the coming weeks, JSI Capital Advisors will analyze and report on many facets of the Order and FNPRM from CAF to mobility to phantom traffic and everything in between; as well as the reactions from different sectors of the industry. An initial look at the document indicates that there will be no shortage of reporting on this topic for the next year, as there will be many follow-up comment cycles, proceedings, public notices and Wireline Competition Bureau decisions.  

So, let’s get down to business! Today we will look at the introduction and overview of the Connect America Fund, including the budget and some broad high-cost support reforms for price cap and rate-of-return companies. ICC will be addressed in future articles.

Introduction and Executive Summary - Why is the FCC Doing This?

The FCC contends that the current USF/ICC programs “are based on decades-old assumptions that fail to reflect today’s networks, the evolving nature of communications services, or the current competitive landscape, [and] are ill equipped to address the universal service challenges raised by broadband, mobility, and the transition to Internet Protocol (IP) networks.” Furthermore, the FCC has a statutory obligation to “update our mechanisms to reflect changes in the telecommunications market.” The FCC has determined that USF and ICC need to be more modern, accountable, fiscally responsible, and market-based—we have been hearing this since the National Broadband Plan in early 2010.

The FCC sets up the USF reform framework with five general goals:

  1. Preserve and advance universal availability of voice service
  2. Ensure universal availability of modern networks capable of providing voice and broadband service to homes, businesses and community anchor institutions
  3. Ensure universal availability of modern networks capable of providing advanced mobile voice and broadband service
  4. Ensure that rates for broadband service and rates for voice services are reasonably comparable in all regions of the nation
  5. Minimize the universal service contribution burden on consumers and businesses

It was interesting that “ensuring reasonably comparable service” was not on the list of primary goals, although the FCC does address reasonable comparability in some interesting ways later in the document. For example, CAF recipients must ensure reasonably comparable data capacity and the FCC suggests that 250 GB per month is an adequate target.

The FCC draws its legal authority for the reforms from Section 254, Section 706, the 2008 Farm Bill, the Broadband Data Improvement Act, and of course, the American Recovery and Reinvestment Act from which the National Broadband Plan was born.

Public interest obligations play a very large role in the USF reforms, as do various benchmarks, ceilings, and floors. One of the most significant requirements is that CAF recipients must provide at least 4/1 Mbps actual speed: “This conclusion was based on the Commission’s examination of overall Internet traffic patterns, which revealed that consumers increasingly are using their broadband connections to view high-quality video, and want to do so while still using basic functions such as email and web browsing.” (Note that temporary waivers can be granted for extreme situations where the CAF recipient cannot provide 4/1 Mbps, but this will be discussed in greater detail in a future article). In addition to the 4/1 Mbps requirement, CAF recipients will be required to offer “sufficiently low latency to enable use of real-time applications, such as VoIP,” preferably less than 100 milliseconds. Finally, capacity must be reasonably comparable, as mentioned above, where “250 GB appears to be reasonably comparable to major urban broadband offerings,” although the FCC is not adopting a specific requirement at this time.

The Budget - $4.5b/year for at Least Six Years

The Order establishes “for the first time a firm and comprehensive budget for the high-cost program,” of $4.5b to “best ensure that we will have in place ‘specific, predictable and sufficient’ funding mechanisms to achieve our universal service objectives.” The budget will remain in place for at least six years and will require a Commission vote to change. The $4.5b breaks down in the following:

Price Cap CAF Overview – Phases I and II

The Order frequently repeats that “More than 83 percent of the approximately 18 million Americans who lack access to fixed broadband live in price cap study areas.” However, the FCC is not outright punishing the price cap carriers for their broadband build-out straggling; instead the FCC is freezing their existing high-cost support and allocating an additional $300m in “incremental support” in the first phase of CAF. The FCC argues that the $300m will “provide an immediate boost to broadband deployment in areas that are unserved by any broadband provider.” The Wireline Competition Bureau will calculate how much of the $300m each price cap carrier is eligible to receive, and the carriers “may elect all, none, or a portion of the incremental support.” Carriers who accept the support will be required to “deploy broadband to a number of locations equal to the amount it accepts divided by $775.” Carriers will have 90 days to decide if they want the incremental support, and how much they will accept. Incremental support has strings attached, too, including aggressive build-out requirements. Carriers cannot use incremental support for existing deployment plans or merger commitments, and “carriers failing to meet a deployment milestone will be required to return the incremental support…and will potentially be subject to other penalties.”

CAF Phase II will tentatively begin January 1, 2013. At least one-third of a carrier’s frozen high-cost support will be required to go towards building broadband networks in unserved areas with no unsubsidized competitor. The intricacies of the price cap CAF methodology are worth a read, but a few points jumped out. First, the FCC is not adopting the ABC Plan Rights of First Refusal proposal as recommended by six price cap ILECs (see The ILEC Advisor: Six ILECs Defend Rights of First Refusal Proposal)—at least not entirely. The incumbent price cap carriers will have the option to accept CAF support for five years “in exchange for a commitment to offer voice across its service territory within a state and broadband service to supported locations within that service territory, subject to robust public interest obligations and accountability standards.” If the ILEC declines the support, a competitive bidding mechanism will be implemented. The FCC decided to adopt a state-level commitment in order to prevent the ILECs from cherry picking “the most attractive areas within its service territory, leaving the least desirable areas for a competitive process.” Additionally, the FCC is not adopting the ABC Plan’s CQBAT forward-looking cost model because the industry did not have adequate time to analyze the model. The Wireline Competition Bureau will soon release a public notice to begin the process of developing an appropriate cost model.

Rate-of-Return Reform – Laying the Foundation

The USF reforms for rate-of-return carriers focus on eliminating “waste and inefficiency and [improving] incentives for rational investment and operation by rate-of-return LECs.” In this spirit, the FCC will eliminate Safety Net Additive support, Local Switching Support (although some LSS support will move to the ICC recovery mechanism), and “support for rate-of-return companies in any study area that is completely overlapped by an unsubsidized competitor.” RoR support will also be capped at $250 per line per month with possible future reductions, and there will be funding consequences for RoR companies with artificially low local rates.

The FCC is taking a “more flexible approach” with RoR carriers than with price cap carriers by refraining from adopting “a mandatory requirement to deploy broadband-capable facilities to all locations.” Instead, RoR carriers must provide 4/1 Mbps broadband to consumers upon reasonable request—for now anyway. The FNPRM will deal with future requirements for rate-of-return CAF recipients as well as capital and operating expense benchmark methodologies. The FCC recommends that the methodology to be developed by the Wireline Competition Bureau “require companies’ costs to be compared to those of similarly situated companies,” which “will provide better incentives for carriers to invest prudently and operate efficiently than the current system.” This methodology will be analyzed in greater detail in future ILEC Advisor articles.

The FCC comes down hard on RLECs who have artificially low local telephone rates, which they call “inappropriate.” Although the national urban average is $15.47 per month, “there are local rates paid by customers of universal service recipients as low as $5 in some areas of the country.” The FCC establishes a 3-phase rate floor starting at $10 in July, 2012 and increasing to $14 in 2013 and then to be set by the Wireline Competition Bureau in 2014 and after. The FCC notes that they could actually set the rate floor above the national average, but “In the present case, we are expecting to set the end point rate floor at the national average rate.” Carrier’s whose local rates are below the benchmark will have their support reduced by the difference between the rate and the benchmark.

Overall, the FCC is confident that “rate-of-return carriers on a whole will have a stronger and more certain foundation from which to operate, and, therefore, continue to serve rural parts of America.” Furthermore, the FCC is “equally confident that these reforms, while ensuring significant overall cost savings and improving incentives for rational investment and operation by rate-of-return companies, will in general not materially impact the ability of these carriers to service their existing debt.”

Coming up Next…

There is definitely much more ground to cover regarding rate-of-return carriers, ICC, Mobility and Tribal funding, the extremely high-cost fund, the waiver process, competitive bidding, access rate arbitrage, and the FNPRM. Stay tuned for analysis of these exciting topics and more!

What are your initial reactions to the Order?

The full text of the Connect America Fund Report and Order and FNPRM is available here.


NARUC Committed to Broadband-Boosting Merger Commitments 

Resolution Stirs up Thoughts on USF-Related Merger Conditions

Are recently-merged Internet service providers meeting their various public interest commitments to deploy broadband and increase adoption? We know that Comcast is certainly working hard, with great fanfare, to offer broadband to low-income households for $10 per month—this was indeed a merger commitment, not a “warm fuzzy” gift to the public. Comcast’s required move into affordable broadband for low-income households has been applauded by FCC Chairman Genachowski, who also recently unveiled the FCC’s low-income broadband initiative Connect to Compete. Now, many other large cable providers are jumping on the $10 per month broadband bandwagon—including companies who are not obliged to do so due to a merger condition.

Comcast’s slightly fulsome, PR-friendly efforts aside; are other recently merged telecom providers (large and small, cable and DSL, wireless and wired) meeting their merger conditions to deploy broadband to rural, low-income and other unserved populations? The National Association of Regulatory Utility Commissioners (NARUC) is concerned that “some commitments to deploy additional broadband infrastructure made to secure merger approvals are not being fully met.”

On November 16, 2011, NARUC approved a resolution to “Request that the [FCC] undertake a public inquiry to assess the extent to which public interest broadband deployment and adoption obligations imposed on previously approved merger applicants are being met.” NARUC’s Resolution on Accountability for FCC Imposed Merger Public Interest Commitments to Deploy Broadband Infrastructure and Adoption Programs recognizes that the FCC can (and often does) impose obligations that merged companies increase broadband adoption and deployment, sometimes with an aggressive deadline. The resolution also recognizes that the FCC can require merged companies to use private capital to meet these obligations, “without reliance on federal Universal Service Fund (USF) financial support.”

This resolution stirs up some interesting, and slightly touchy, ideas about whether the FCC should prevent merged companies from receiving USF post-merger to meet public interest requirements. According to the NARUC resolution, “Some carriers have made voluntary public interest commitments to deploy broadband infrastructure on the basis that USF financial support would enable them to satisfy the FCC approved merger obligation and the FCC has approved those commitments.”

NARUC resolved “That the FCC consider, on a case-by-case basis whether to approve the use of federal financial support from the Connect America Fund or the Mobility Fund for expenses related to supplementing an applicant’s public interest obligations in the FCC order approving such applicant’s merger to deploy broadband infrastructure and/or to implement broadband adoption and usage programs.”

On one hand, two companies’ demonstrated need for USF to deploy broadband in rural areas is not likely to change significantly just by a merger. Their service area’s geography and demographics certainly don’t change due to a merger, and the reasons that small companies decide to merge are diverse and not always just because one company has a stockpile of cash. The addition of a lofty build-out commitment may make the case for needing USF even stronger, especially for capital-strapped rural carriers. On the other hand, one can’t help but think that if companies have enough money to afford a merger, then perhaps they should use that money to pay for broadband deployment. This argument may apply more strongly to large companies, for example AT&T. It would be hard to argue that AT&T should be allowed to receive Mobility Fund support if the T-Mobile merger is approved—which will quite likely include major rural deployment conditions (if it is approved by the FCC, that is—a big if!).

Whether companies should receive CAF or Mobility Fund support to help finance merger commitments is probably best determined on a case-by-case basis, like NARUC recommends. A blanket restriction on support may serve as a significant deterrent for small companies who wish to merge—which might be the exact opposite of what the FCC wants. The FCC has repeatedly dropped hints throughout the USF Reform proceeding that it wishes to encourage RLEC consolidation, so tactically speaking the FCC probably would consider taking a cautious approach to restricting support. Furthermore, the FCC is strongly committed to improving rural and low-income broadband deployment and adoption, so a merger obligation to extend services in low ROI areas without any federal support seems contradictory.

Then there is Connect to Compete, which adds a layer of complexity to the USF-or-no-USF merger condition debate. National Cable and Telecommunications Association (NCTA) members will offer eligible, school-lunch program families two years of cable broadband service for $9.95 per month with no installation, activation or modem rental fees. This program apparently will enable 15-25 million Americans to have high-speed broadband, but keep in mind this is in large cable company territory. Whether Connect to Compete will extend into RLEC territory is unknown at this point, but it is definitely an issue to watch. RLECs competing with Connect to Compete cable participants might encounter some challenges with retaining their low-income consumers.  

Going forward, it will be interesting to see if the FCC takes up the NARUC-approved challenge to conduct on inquiry into how well companies are meeting merger commitments and if they should be using CAF/Mobility Fund support to meet said merger commitments. Are these various market and regulatory forces a deterrent for RLEC mergers? What do you think about merged companies using CAF or Mobility Fund support to help finance broadband deployment and adoption requirements?

The NARUC resolution is available here, on pages 7-8.


From Appalachian Stereotypes to Broadband Connectivity

Transforming a Region: Horizon Telcom Partners to Connect Appalachia

In nearly every study conducted on broadband penetration rates, one region of the U.S. is consistently listed as behind the times—Appalachia. Still, despite its debilitating stereotypes and rambling topography, some areas of the region are quietly growing with industry, education, scientific research, and health care. But none of these sectors can thrive without broadband availability, a fact that inspired Ohio Congressman Zach Space to advocate for widespread connectivity in the region. Space collaborated with other smaller broadband advocacy groups in the area and, after several years, Connecting Appalachia finally found public and private sector support to make it a reality. Construction of the middle-mile project began this spring, thanks to combined funding from the NTIA and Chillicothe, Ohio-based Horizon Telcom. Many other organizations, businesses, academic institutions, and healthcare providers joined the effort, and as Brooke Eiselstein, public relations specialist for Horizon, describes it, Connecting Appalachia is “a testimony to partnership.”

The project is also a testimony to perseverance. Originally, Eiselstein said, Horizon Telcom worked with Congressman Space and a group of consultants to obtain an NTIA Broadband Technology Opportunity Program grant that would be a last-mile network. “We wanted every person in Southeast Ohio to receive broadband,” Eiselstein said. “Our grant was denied. They didn't find it practical to fund a broadband network that would carry aerial fiber several miles out to the middle of nowhere when only three houses could get it, and who's to say they [these residences] would even sign with us?”

Eiselstein said they re-grouped and “wrote the grant a second time, although this time we were asking for money to build the network to only the middle mile consortium. This entailed hanging fiber on existing utility poles all down major highways to hit large businesses, K-12s, colleges, hospitals, health care entities, government agencies, MARCS [multi-agency radio communication system] towers, and industrial parks.” The NTIA then agreed to fund 70% of the $100m middle-mile project, and Horizon stepped in to pick up the remaining 30%. The group was formally awarded the grant on August 18, 2010, and they will have exactly three years to have the 10MB synchronous connection network up and running.

But the process of securing funding was just one aspect of Connecting Appalachia's evolution. In many ways, the project is a mosaic of smaller, local efforts, starting with three hospitals that came together and decided they needed a broadband network for health care in southeastern Ohio. “Adena, O’bleness, and Holzer [the hospitals] joined together to form the Southern Ohio Health Care Network, and received a grant for $18 million from the FCC,” Eiselstein said. “Later, Horizon was awarded the contract to construct the network.” News of their efforts spread, and soon, Eiselstein said, local districts came together with Congressman Space to “develop a vision for what would become Connecting Appalachia.”

Eiselstein said that the project enjoyed a lot of press in local, regional, and even national press, and as a result their list of partners is quite extensive: the three lead healthcare providers; educational partners across the state; several state government agencies and the Appalachian Regional Commission; federal groups including the FCC, USDA, NTIA, and BTOP; local development districts; and Connecting Appalachia's consultants, Reid Consulting Group.

Such a wide variety of early partnerships paved the way for a larger broadband backbone, while also ensuring a customer base. Eiselstein said, “While we were writing the grant we had to identify 592 Community Anchor Institutions (CAIs). However, many of those customers needed services 'now' (then) and have already signed with other providers. Some have signed monthly contracts so they can switch providers after the network is built.” 

Before the BTOP grant was awarded, Eiselstein said, “We were awarded the Southern Ohio Healthcare Network grant. This allowed us to connect all rural hospitals in 13 counties. Most of these have already been connected. Now, the BTOP grant allows us to connect another 21 counties, totaling 34.”

When asked about cost and Horizon's concerns for return-on-investment, Eiselstein said “absolutely” the group will bring in new customers, adding, “We have to keep in mind that the grant was awarded because Appalachian Ohio has been left behind in regards to technology. This area has suffered because of the lack of broadband, and this was a great opportunity for Horizon to continue its 116-year tradition of providing good service to its neighbors. Horizon cares about putting Appalachian Ohio on equal footing with other areas of the state.” In order to elevate the area's residents and provide more advanced opportunities, Eiselstein said, “It truly is essential that a fiber optic network be built that would provide world-class, high speed Internet. Customers will finally be able to be on the same playing field as colleagues in more urban areas. New customers will be able to purchase internet connections, point-to-point connections, PRIs, and VOIP lines. We are also offering a business video package in many of the counties.”

As an investment opportunity for Horizon, Eiselstein underscored that the network “has the potential to reach 11m customers with up to 10GB synchronous connection. Of course we will not be reaching this many customers, but that is the potential it has.” She added that it was actually a strength for Horizon to be a small company, making it more “nimble and flexible when it comes to creating a solution-based service specific to our customers’ needs.”

Eiselstein has been an ambassador for Connecting Appalachia, tasked with “going to all the counties, joining the chambers, meeting the business owners, elected officials, mayors, commissioners, chamber executives, and so on. We go to trade shows, luncheons, and banquets. We usually have a table where we can distribute our annual reports, brochures, and giveaways that explain the project and who we are. Our response has been very positive. Everyone agrees there is not nearly enough broadband in the region.”

While the project itself will only affect the Appalachian regions of Ohio, Eiselstein notes that the broadband gap expands to other areas of Appalachia as well. “People in this region have been starving for Internet for years,” Eiselstein said. “When people see our trucks on the side of the roads hanging fiber, they immediately call into the office, or even stop to talk to the technicians about availability. The people of Appalachia are extremely excited and relieved to finally have access to Internet speeds and bandwidths that allow them to run their businesses and their lives more efficiently.”

As for the project's current phase, Eiselstein said the group has begun to construct the network's backbone, and are primarily hanging fiber on existing pole routes. A very small portion will be buried. Connecting Appalachia will be providing some last-mile connectivity to businesses. “These last mile costs are typically built into the quote for the business either in an up-front cost or amortized over the life of the contract,” according to Eiselstein. “We are also providing the last mile connection to the community anchor institutions who sign contracts for services. We are also partnering with WISPs to reach residential customers” since the BTOP grant did not fund the last-mile piece of the project.

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