Genachowski’s Potemkin Rural Visit; RLECs and ILECs Suck it up and Play Nice

Part 2 of “2011: The Regulatory Year in Review.” The summer months had a fairly slow start, with some tepid FCC activities and a short lull in the USF/ICC Reform chronicle.  Drama with AT&T/T-Mobile was ongoing, with controversies coming to light regarding AT&T’s paid-for support of the merger. Organizations completely unaffiliated with the telecommunications industry nevertheless waved the AT&T/T-Mobile flag with pride; which rose more than a few eyebrows and even led to a few shakeups and firings in said organizations.  Given the news yesterday that AT&T and T-Mobile will drop the merger completely, it is actually a little funny to look back at the year and all of the bickering and moaning that occurred over this doomed betrothal (more to come on that topic the next installment). The stand-out event of the summer was without a doubt the ILEC-RLEC “Consensus Framework” for USF/ICC Reform, which like AT&T/T-Mobile, seemed like a sure-bet to the parties involved at first but slowly dissolved largely due to the FCC’s stern agendas.

May 2011: May was a big month for USF/ICC Reform reply comments and ex parte filings, but little else. Republican FCC Commissioner Meredith Attwell Baker announced early in the month her intent to leave the Commission for a lucrative lobbying position at Comcast, just months after she voted in favor of the Comcast-NBCU merger. Naturally, watchdogs cried foul and even demanded a Congressional investigation. The “revolving door” is nothing new as prominent FCC staff circle back and forth around the DC telecom lobby scene, but Baker’s announcement definitely had a bitter taste given the large public opposition to the Comcast-NBCU deal.  In her official farewell statement, Baker explained that she had not been contacted by Comcast until mid-April, long after the deal was done, and “I have not only complied with the legal and ethical laws, but I have also gone further. I have not participated or voted any item, not just those related to Comcast or NBCUniversal, since entering discussions about an offer of potential employment.” Meanwhile, the revolving door keeps spinning…

Chairman Genachowski’s May 18 trip to Diller, Nebraska topped my Hot List for the year, but largely because I was endlessly entertained by the big kerfuffle made out of this beltway-insider visiting fly-over country for all of a couple hours. “It’s Nebraska, not the moon,” I said. In late 1700s Russia, the story goes that “Potemkin villages”—fake settlements with all the bells and whistles—were constructed for the sole purpose of impressing Empress Catherine II when she visited the rural countryside. Genachwoski’s visit was the opposite of a Potemkin village—it was a Potemkin visit. The whole ordeal seemed like the FCC’s way of satiating the rural telecom industry (and rural Americans) by saying, “Hey, we understand what you are going through every day, and your unique needs, because we visited one of your communities!” Personally, I saw right through the façade, but nonetheless it was a nice effort. Genachowski visited locally-owned businesses and an RLEC, where he even posed for photo-ops in the CO. His overall messages was that rural businesses require broadband in order to succeed, which is absolutely no surprise for the RLECs who have been providing broadband to local businesses for years.

June 2011: The month with the longest days can basically be summed up in one word: reports. In the span of a few weeks, the FCC released three “big” reports of varying significance and quality. The first, “Information Needs of Communities: The Changing Media Landscape in a Broadband Age” (by Steve Waldman), I admit I did not pay much attention to. The gist was that broadband is important for a vibrant media experience and “a free democracy comprised of important and empowered citizens.” In response to this report, resident media champion Commissioner Copps proclaimed that “it is imperative that the FCC play a vital role in helping to ensure that all Americans have access to diverse and competing news and information that provide the grist for democracy’s churning mill.” Copps zoomed in on an alleged “crisis” identified in the report that “more than one-third of our commercial broadcasters offer little to no news whatsoever to their communities of license.” Basically, we need more local news and more ways to protect local media from Big media—Copps explained, “Localism means less program homogenization, more local and less canned music, and community news actually originated in the market where it is broadcast.”

The June 22 report, “Bringing Broadband to Rural America: Update to Report on a Rural Broadband Strategy” was more relevant to RLECs but generally lacked substance.  This 29-page document from the FCC and USDA was a Congressionally-mandated update to a much more comprehensive 2009 report “describing a ‘comprehensive rural broadband strategy.’” Again, the gist of this report was fairly straightforward—all Americans should have access to broadband, and we just aren’t doing a good enough job in rural America despite making “significant progress” in the last two years. The key take-away of this report was that it provided some extra ammunition for the FCC’s USF/ICC Reform decision, as it self-served the FCC’s reform principles of accountability, fiscal responsibility, and market-driven incentives.  Genachowski proclaimed that it was “not acceptable” that 28% of rural Americans lack broadband, as found in the report.

Ending the month was the ironically-titled “Fifteenth Annual Mobile Wireless Competition Report,” where the FCC made no definitive conclusion (in 308 pages) about the state of competition in a report where the FCC was explicitly directed to make a definitive conclusion about the state of competition in the wireless market…. So much for that goal… Nevertheless, the Big 4 (and others) used the report to prop up their own agendas—be it proof that the industry is totally competitive or totally not competitive. AT&T cherry-picked certain data from the report to depict a vibrantly competitive wireless industry to boost their assertion that the merger with T-Mobile would not be anticompetitive. Lack of conclusion aside, this report did contain some interesting factoids about the wireless market in general. (The ILEC Advisor: How do You Measure Wireless Competition?).

July 2011: July was all about reaching an industry consensus for USF/ICC reform. The FCC asked for it, and RLECs/ILECs delivered, albeit too late for the FCC’s impossibly high standards of time. At the beginning of July, it still appeared as though a consensus was a million light-years away—reply comments, ex parte filings, and a series of high-profile events on the topic in DC did little to ease my mind even though a comprehensive “Consensus Framework” kept being promised. Mid-month, the Rural Associations came out swinging with a far-reaching advocacy campaign called “Save Rural Broadband,” aimed at getting consumers to contact their Congressional offices  with their concerns about being left behind in the Great Broadband Race of the 2010s. (The ILEC Advisor: Comments Show Little Consensus on USF Reform Issues, Rural Associations Launch “Save Rural Broadband”).

On July 29, the long-awaited Consensus Framework was finally released for public inspection. Called America’s Broadband Connectivity Plan (ABC Plan), this proposal was the baby of the 6 largest price cap ILECs, but “supported” by the Rural Associations.  It presented what the involved parties believed was a reasonable and appropriate framework for price cap ILECs, if used in conjunction with the RLEC Plan for rate-of-return companies. Both sides made compromises—including the Rural Associations’ reluctant acceptance of a $0.0007 access rate. The ABC Plan was widely criticized by basically any party who wasn’t directly involved in its creation. (The ILEC Advisor: Price Cap Carriers Release “ABC Plan” for USF with Rural Support).

Finally, the FCC attended one of those pesky consumer issues in July- “mystery fees,” and “cramming”—“the illegal placement of an unauthorized fee onto consumer’s monthly phone bill.” The FCC proposed rules that would require telecommunications providers to clearly notify consumers how to block third-party charges on their bills, among other measures. Between the mystery fee crackdown, July proposals to improve VoIP E911 availability and reliability, and the December rules barring uber-loud TV commercials, the FCC certainly stepped up in response to various consumer pressures throughout the year.

Coming up next in “2011: The Regulatory Year in Review,” we will reminisce about all the fun we had in that tumultuous time between when the Consensus Framework was released and the USF/ICC Order was approved—you don’t want to miss this!

A Veritable "Spring Awakening" of Blockbuster Agendas

Looking back over the year, there were so many exciting telecom regulatory decisions, actions and mishaps that I just had to do a “2011: Regulatory Year in Review” series, in part to keep it light before the holidays and in part to help predict what might be on the “hot list” next year. 2011 kicked off with the FCC’s controversial late-December approval of the Net Neutrality rules still stinging for many telecom providers, and 2011 is ending on a similar controversial note with the Stop Online Piracy Act debate in Congress (which, ironically, is almost the direct antithesis of Net Neutrality). But in between these groundbreaking Internet policy and legislation bookends, there was definitely no shortage of drama in all areas of telecom regulation.

January 2011: The stage was set for the year-long flurry of merger, joint-venture and consolidation activity with the FCC’s Jan. 18 approval of the massive Comcast-NBC Universal deal. According to the FCC’s Memorandum Opinion and Order, “The proposed transaction would combine, in a single joint venture, the broadcast, cable programming, online content, movie studio, and other businesses of NBCU with some of Comcast’s cable programming and online content businesses.” For those of you who were a little uneasy about a vertical and horizontal (depending on who you talk to) merger of this magnitude, the FCC imposed a variety of conditions including the “voluntary commitment” that Comcast provide broadband for $9.95 to low income consumers—we’ll see this pop up again towards the end of the year. Commissioner Michael Copps dissented, claiming the merger “confers too much power in one company’s hands;” and “The potential for walled gardens, toll booths, content prioritization, access fees to reach end users, and a stake in the heart of independent content production is now very real.”

Also in January, Verizon and MetroPCS jumped the gun on Net Neutrality appeals… but they fired before locking in a target that could actually be appealed. Eager parties had to hold tight for 10 more months before the rules were finally published in the Federal Register.  (The ILEC Advisor: Verizon Appeals FCC’s Net Neutrality Rules, MetroPCS Joins Verizon in Suing FCC Over Net Neutrality Rules)

February 2011: I clearly recall at around this time last year expressing frustration (putting it nicely) that the USF/ICC Reform NPRM was pushed back when Net Neutrality took center stage. Well, we didn’t have to wait very long in 2011 for the 350-plus page NPRM that set in motion an entire year’s worth of anxiety and insomnia for the RLEC industry. Once the NPRM was released, the FCC pressed forward with the reforms at lightning speed (well, for the FCC anyway), and it almost seems surreal that we are now ending the year still trying to make sense of all changes to USF and ICC. Anyway, FCC Chairman Julius Genachowski demanded that USF/ICC reforms conform to four guiding principles: modernized to support broadband networks, fiscal accountability, accountability, and market-driven incentive-based policies. When the NPRM was revealed, Genachowski made sure to emphasis how the current USF/ICC system is fraught with waste, fraud and abuse; and he arguably made RLECs seem like Public Enemy #1. The FCC essentially insisted that the industry develop a consensus proposal in response to the NPRM, but as we will see, that didn’t work out so well… (The ILEC Advisor: Wireless Excess Highlights Needs for Universal Service Reform).  

Not ten days later, we got another zinger- the NTIA’s National Broadband Map was released. RLECs scurried to check the data and make sure speeds and coverage were accurately portrayed in their service areas, only to find… A LOT of mistakes. My initial response to the map was “For $200m, why couldn’t they get it right?” JSICA’s Richelle Elberg wrote that the map was “disappointing, buggy, and the data incomplete;” and “it was a year in the making, it cost an awful lot of money, and it doesn’t seem to be fully baked just yet.” The biggest disappointment was that wireless providers like Verizon seemed to blanket extremely rural areas with 3-6 Mbps broadband, even though I know from experience in at least one such area that this is not an accurate representation—you see, it only takes one household in a census block to be served at that level for the entire block to be reported “served” on the map. Unfortunately, this is only one of the problems with the map, and nearly a year later it hasn’t improved much. (The ILEC Advisor: National Broadband Map Not All it’s Cracked Up to Be).

March 2011: Early in the year, there were a lot of rumors swirling that T-Mobile might be up for grabs—possibly by Sprint, which seemed like a long shot—would Sprint really want to repeat the technology incompatibility mess it had with its Nextel merger (The Deal Advisor: Sprint and T-Mobile in Talks (Again))? The telecom world shuddered on Sunday evening of March 20 when AT&T announced its intentions to abolish T-Mobile from the wireless market for a cool $39b—I was walking home from dinner and getting ready for the NTCA Legislative Conference when I got the news, and it is not an exaggeration to say that I nearly fell over. Anyway, there’s nothing like talks of ol’ Ma Bell reclaiming its monopoly to incite gut reactions from everyone—and I mean everyone. When the FCC comment cycle began, tens of thousands of consumers chimed in with very colorful opinions, one even likening the merger to rape (a comment that has literally haunted me all year…and don’t even get me started on the bizarre “interest groups” like the International Rice Festival who wrote in with questionable favor of the merger). Although many analysts initially assumed that the deal would fly through, JSICA was skeptical from the get-go, warning that the antitrust and FCC reviews would be harsh—and we were right. (The ILEC Advisor: AT&T to Acquire T-Mobile for $39b, Sprint Says it Will Vigorously Oppose AT&T Buy of T-Mobile, What’s Really Behind AT&T’s Acquisition of T-Mobile).

April 2011: USF/ICC Reform started heating up in April, with the first round of comments in response to the NPRM due on April 1 (ICC) and April 18 (USF), and two corresponding public FCC workshops held on April 6 and 27. On the ICC front, rural carriers were fairly unified in insisting that the FCC immediately adopt rules to curb arbitrage and classify VoIP as functionally equivalent to PSTN traffic. One highlight from the April 6 ICC workshop was when the panelist from AT&T (of course), asked sarcastically, “Does Iowa really need 200 small carriers?” The RLEC panelists expressed concern that ICC uncertainty contributes to low valuations for RLECs looking to sell or consolidate, which is contrary to the FCC hopes that the little guys will just consolidate once and for all.

The Rural Associations (NTCA, OPASTCO, WTA, NECA and state associations) released the RLEC Plan for USF/ICC reform, which many expected would be adopted by the FCC in the final rules—maybe not entirely, but at least in some capacity. The RLEC Plan focused on careful, “surgical” transitions for rural carriers to ensure reasonable cost recovery as well as continued broadband deployment, but without back-peddling the tremendous progress that rural carriers have made as a result of the original USF/ICC regime. Hundreds of other rural telecom stakeholders weighed in on the NPRM, many calling for Rate-of-Return stability, keeping the High-Cost Fund (now Connect America Fund) uncapped, and ensuring sufficient and predictable cost recovery. (The ILEC Advisor: Universal Service Reform – Their Two Cents: Nebraska Rural Independent Companies, Universal Service Reform – Their Two Cents: CoBank).

Finally, April also brought a sensible, well-received FCC Order on data roaming that “requires facilities-based providers of commercial mobile data services to offer data roaming arrangements to other such providers on commercially reasonable terms and conditions, subject to certain limitations.”  Naturally, Verizon argued that the FCC overstepped its authority, but overall this Order signaled an important step forward for the FCC’s realization that voice and data are well on the road to becoming one and the same. Smaller rural wireless carriers applauded the decision, arguing that it will help reduce barriers to competition with the large wireless carriers. (The ILEC Advisor: FCC Adopts Order on Automatic Data Roaming).

As the mercury started rising in DC, so did the tension in the USF/ICC Reform proceeding. Stay tuned for more “2011: The Regulatory Year in Review” posts throughout the week!

“Sunset the Phrase ‘Sunset the PSTN’”

The first thing you should probably know about the FCC’s second “The PSTN in Transition” workshop, held on December 14, is that it was long—I’m talking 8 hours of economic, technical, legal and regulatory perspectives, debates, statistics and countless questions along the way. More importantly, it was extremely engaging and interesting. I was glued to my computer the entire day, opting not to sit in the FCC Open Meeting room in a suit with a short-lived laptop battery for 8 hours. Keeping this in mind, it was quite challenging to narrow down the key take-aways from the day, but there were certainly several important underlying themes as well as particular questions that rural providers might want to think about, including:

• Regulatory lag is a notorious problem, so would an FCC mandate for a PSTN sunset cause more harm than good considering how far along we are in the transition already?
• Are we assuming that IP is the end-all-be-all for communications networks, and we won’t possibly evolve beyond IP in the next decade or so?
• What minimum speed, capacity, and quality of broadband will be good enough for a ubiquitous, non-discriminatory, affordable IP network? What basic services and applications should it support—Facebook? Over-the-top video?
• What are the consequences for locking-in a particular technology, or “picking winners and losers?”
• How will we manage the conversion to IP and the coexistence of technologies during the transition?
• Should the end-date for the PSTN be targeted toward the early adopters or the hold-outs?
• Does there need to be a “termination fund” to support the transition? If so, how on earth will that be funded? How would you convince Congress—and taxpayers—to support a fund that essentially kills the network that the very same taxpayers (as well as the industry) have spent billions of dollars building? Personally, I think this could be the greatest challenge.

Now that you have some food for thought, let’s look at some stand-out points by specific speakers.

In the first panel, “Impact of the Transition on the Technology and Economics of the PSTN,” Richard Shockey (SIP Forum) and Joe Gillan (Gillan Associations) both expressed frustration with the term “sunset the PSTN.” Shockey noted that the term is confusing, and should instead be a “renewal of our communications systems.” He also added, “We are not taking away grandma’s phone.” Gillan recommended that we “sunset the phrase ‘sunset the PSTN,’” and rather think of it like a “rebirth.” Dale Hatfield (University of Colorado) and William Lehr (MIT) continued the theme of the first workshop by stating that the definition of the PSTN in this context is really unclear. Hatfield asked if the PSTN was a service, a network, a regulatory construct, or a social contract; and he recommended creating multi-stakeholder groups to rely on the industry as much as possible to come up with solutions. He also warned against picking technology winners or losers.  

The third panel, “Implementing the Transition to New Networks,” brought thought-provoking comments from participants from Verizon, Comcast, Carnegie Mellon and XO Communications. David Young (Verizon) pointed out that even if companies, technologies and markets are in transition, regulations and laws do not usually transition very rapidly or easily. Marvin Subu (Carnegie Mellon) argued that transitions take time, for example the IPv4 to IPv6 transition will likely take decades. Therefore, it is important to manage technical aspects like conversion and coexistence, but also let market forces determine the pace of the transition. Young later added that some remnants of the PSTN will likely hang around for a long time, but there is no real reason to pick an artificial date to kill them—they will probably just go away on their own once they become too costly to maintain.

There was a very creative and apropos analogy in the fourth panel, “Expectations, Emerging Technologies and the Public Good.” Kevin Werbach (University of Pennsylvania – Wharton) applied transitioning the PSTN (“the death of an old friend") to the Kübler-Ross Five Stages of Grief, broken down as follows:

1. Denial: We can’t plan for things we don’t anticipate. Werbach recommended that the FCC initiate a proceeding to identify conflicts, opportunities, ambiguities, and what should be preserved.
2. Anger: Werbach predicted that there would be indeed losers in the process, and some “will throw themselves across the tracks.” Objections should be addressed sooner, rather than later.
3. Bargaining: Werbach warned that “those who can game the regulatory process will do just that.” It is important to know upfront what should be mandatory and what is up for negotiation.
4. Depression: Knowing something is going to happen doesn’t necessarily mean it will happen. We should have “energy and enthusiasm” and a “bias for action.”
5. Acceptance: Werbach recommended developing a common visulaization for ending the PSTN, which will help the goals become more tangible.

The final panel, on economic issues, brought a forceful perspective from Lee McNight (Syracuse University)—he recommended a rapid “graceful exit,” from PSTN regulations as soon as 2015. He argued that creative destruction is driving the transition, and there is no point in delaying the obvious. Regarding the PSTN, McNight provided a short eulogy: “It’s been a nice run. It’s over…Thanks for the memories. It’s been nice. Let’s have a big party.”

Should we celebrate the swift demise of the PSTN or allow it to gradually shrivel to insignificance, and then yank out the cord to the respirator? Will the PSTN end with a whimper or a bang? I’m not sure these workshops helped answer the fundamental questions of when, why and how this needs to happen, but they certainly provided plenty of fodder for the coming months while the industry and regulators try to figure out the path forward.

If you have 8 hours to spare, it is well worth the time to watch the full workshop, available here.

Panelists Discuss Challenges for Public Safety, Disabled Individuals and Rural Networks

The FCC held two informative public workshops on December 6 and 14 to help itself and the industry better understand the recommendation that the PSTN ultimately be transitioned to an all-IP network. The FCC gathered around 50 experts to share insight on the transition from the perspective of ILECs, RLECs, mobile and fixed wireless, cable, consumer electronics, numbering, public safety, disability services, consumer protection, home security, VoIP, economics, engineering, academia, backhaul, and many more. If you think this sounds complicated with so many stakeholders—it was. But, it is necessary to understand how transitioning the PSTN will impact all of these industry sectors, because each one is deeply involved.

The first workshop, on December 6, included four sessions. The first two covered public safety and disability access issues, the third discussed rural network challenges, and the final session was focused on edge device functionality. This workshop set the stage for some of the broader, high-level issues that carriers and consumers will face if the PSTN is transitioned at a specific date—2018 was the popular target initially. Many of the panelists stated what their respective companies or organizations provide, what their customers or constituents need in terms of communications, and how their customers or constituents would be impacted if access to the PSTN vanished.

The public safety panelists seemed to agree that although many public safety networks are already transitioning to IP, many are still deeply entrenched on the PSTN. Allan Sadowski (North Carolina State Highway Patrol) explained that public safety is not necessarily about having the newest communication technology, it is about first response. Networks and communications equipment must be extremely reliable in every possible emergency situation, and public safety entities also face budget constraints as well as technical staff constraints. Challenges aside, the public safety panelists seemed excited about and interested in dynamic IP communications technologies that will benefit the public safety community. Brian Fontes (National Emergency Number Association) added that he approves of the 2018 PSTN sunset, but 911 services must continue to be available and reliable.

The disability services panelists were generally more concerned about how transitioning the PSTN to all-IP would impact their constituents—individuals who are blind, hearing impaired, physically challenged, elderly, etc., who might not willing or capable of adopting new technologies by a specific date.  Jenifer Simpson (Coalition of Organizations for Accessible Technology) explained that there are 15 million people who rely on disability communications services, and “most don’t know what the PSTN is.” There seemed to be some fear that the individuals in the disability community would be left behind in a PSTN-to-IP transition without proper consumer education coupled with easily available and affordable IP technologies. However, it was also acknowledged that there will be numerous new technologies for disability communications that are much better than today’s PSTN technology.

The third panel, “Technical Capacity, Capabilities and Challenges Facing Rural Networks” included representatives from ViaSat, Rural Cellular Association, Wireless Internet Service Providers Association, Vantage Point Solutions, Midcontinent Communications and OPASTCO; and it was moderated by Commissioner Anne Boyle from the Nebraska Public Service Commission. Although the panelists covered a wide range of rural communications perspectives, a few did not dig very deep into the issue at hand—transitioning the PSTN to IP networks. Rather, some focused more on promoting their respective services. Steven Berry (Rural Cellular Association) discussed the importance of ensuring basic interconnection “regardless of technology.” Berry added that “The PSTN as we know it is probably going away;” and “The future is coming faster than we otherwise may think.” He is also concerned about how such a transition would impact competition, because “some may view this as an opportunity…to essentially eliminate competition.”

Larry Thompson (Vantage Point Solutions) provided some interesting input about the engineering challenges and opportunities for small rural providers. He asserted that the transition will not work if narrowband POTS service is still the only option in some areas, and broadband IP networks must be completely deployed end-to-end. Tom Simmons from northern midwest rural cable provider Midcontinent also added that broadband adoption is “a big part of the equation,” especially in very rural areas that have a high population of low-income and Native American households.

John McHugh (OPASTCO) argued that it is not really important to set a “date certain” to end the PSTN because the transition of technology is natural and “occurs on an orderly fashion.” He described how many rural carriers already have softswitches and extensive fiber networks, over 90% of OPASTCO’s members provide broadband, and RLECs “have gone above and beyond the call of duty to provide their customers with the latest technologies.” McHugh noted that some challenges in the transition include public safety, ensuring all consumer devices are IP-enabled, and converting the customers who simply don’t want broadband. He also added that it is financially and strategically challenging for RLECs to build broadband to everyone and then the consumer decides to get VoIP service from a 3^rd party instead of the traditional telephone company.

The final panel focused on transitioning edge functionalities and consumer devices.  One question that was asked repeatedly throughout both workshops—and was never fully answered—was “What is the definition of the PSTN?” Brian Daly (AT&T) insisted that this is a fundamental question that must be addressed before the transition can occur. Once this is determined, we can look at all of the other aspects on the user end, like devices. Daly explained that many alarm systems, ATM machines, faxes, credit card transactions, pay phones, and other devices still rely on the PSTN and will continue to do so for many years, even if their numbers are low. Harold Feld (Public Knowledge) argued, “There will always be surprises” and “you have to design any transition mechanism to handle surprises,” such as the wireless microphone debacle in the digital TV transition.

Overall, this first workshop was a good introduction to the myriad issues at hand, and an insightful look at where certain industry sectors stand on the debate over whether or not the PSTN should be transitioned at a specific date. At an industry workshop I attended back in July, I got the impression that most of the participants were in favor of sunsetting the PSTN in 2018. However, I got a slightly different impression from both of the FCC’s workshops (the second workshop will be recapped tomorrow). The bottom line is that there needs to be a specific definition of the PSTN before the PSTN can be killed, and the longer this fundamental question goes unanswered, the longer the transition will take. On the other hand, if the transition to IP is indeed well underway already, do we really need a specific end date? What do you think? How do you define the PSTN?

You can watch this FCC workshop here.

FCC Drops Heavy Hints about its Preference for RLEC Consolidation (In Switching, at Least)

ICC reform: it’s perplexing, frustrating and complicated! If only that was all that needed to be said on this daunting topic…The FCC’s new rules for access revenue recovery are supposedly designed to “eliminate the uncertainty carriers face under the existing ICC system, allowing them to make investment decisions based on a full understanding of their revenues from ICC for the next several years.” Whether this desired outcome will ring true for RLECs, however, remains to be seen. For now, JSI Capital Advisors is here to help you try to understand the new rules (as we try to understand them ourselves).

Adding to the complexity, there are different rules for price cap and rate-of-return carriers—this article will only address rate-of-return carriers. Overall, it is important to add three new terms to your telecom vocabulary: Recovery Mechanism (RM), Access Recovery Charge (ARC), and Eligible Recovery.  Understand what these terms mean, and how they will impact your companies, and you will be well on the way to understanding this bristly, convoluted web of changes we call ICC reform.

The Recovery Mechanism (RM) – Two Roads Lead to Access Recovery for ILECs

The RM is the overall framework “to facilitate incumbent LECs gradual transition away from ICC revenues.” In addition to reducing access rates to an end-state of $0 with bill-and-keep, the RM component of ICC reform gradually decreases the amount of access recovery that carriers may receive—and it sounds like the FCC eventually wants to eliminate the RM altogether. ILECs—but not CLECs—have two ways to mostly recover lost ICC revenues: by charging a limited fee to end-users (called the Access Recovery Charge, detailed below), and through CAF support (for RLECs, coming out of their $2b slice of the CAF pie). Note that CLECs can only recover access revenue by increasing end-user rates, which may create some challenges for RLECs with substantial CLEC operations.

The FCC argues that the RM will help eliminate uncertainty and allow ILECs “to make investment decisions based on a full understanding of their revenues from ICC for the next several years.” Driving the sweeping rule changes are some industry trends that both price cap and RoR carriers know all too well: declining demand for voice service and the related decline in minutes of use (MOU). Under the current system, access rates remain steady even though the market forces dictate otherwise. As a result, opportunities for arbitrage arise and incentives are distorted.

The FCC continues by arguing, “Ultimately, consumers bear the burden of the inefficiencies and misaligned incentives of the current ICC system, and they are the ultimate beneficiaries of ICC reform.” ICC reform is about benefiting consumers (even if rates are increased), not keeping carriers whole. The FCC does not think the entire RM burden should be placed on consumers, which is why the RM has two methods for recovery. What is confusing is that the FCC says consumers should not be responsible for the entire RM burden, yet both the ARC and CAF support come directly or indirectly from consumers. The ARC is a new independent end-user fee, and the CAF is collected through the traditional USF contributions methodology. Either way, consumers are paying.

In addition to consumer benefits like lower costs for long distance telephony and innovative new services, the FCC expects that carriers too will benefit from the RM framework: “Carriers will provide existing services more efficiently, make better pricing decisions for those services, and innovate more efficiently. Carriers’ incentives to engage in inefficient arbitrage will also be reduced, and carriers will face lower costs of metering, billing, recovery, and disputes related to intercarrier compensation.” This all sounds pretty great, but it definitely remains to be seen if RLECs and their rural customers will see any of these benefits.

Eligible Recovery – A 5% Annual “Haircut” and Pressure to Consolidate Switching

Determining Eligible Recovery is “the first step in [the] recovery mechanism.” The FCC contends that determining Eligible Recovery will help RLECs know with some certainty “their total ICC and recovery revenues for all transitioned rate elements, for each year of the transition.” The details for calculating Eligible Recovery are explained in the Order (starting on page 313), but essentially RoR carriers start with a “Rate-of-Return Baseline” equal to the carrier’s “2011 interstate switched access revenue requirement, plus FY2011 intrastate switched access revenues and FY2011 net reciprocal compensation revenues.” The baseline will be adjusted “to reflect trends in the status quo absent reform,” such as declining MOU and switching costs. The various access revenue components, illustrated below, have been projected to decline at different rates over the next six years, and the FCC has determined that an overall 5% decrease in baseline support for Eligible Recovery is “appropriately conservative.”  The baseline amount is then recovered by three sources: traditional ICC revenue (which is decreasing in the move to bill-and-keep), the ARC, and the CAF.

It is important to discuss one seemingly passive-aggressive element of Eligible Recovery: the FCC’s apparent desire for RLECs to consolidate switching operations. On one hand, it might be entirely appropriate for some small carriers to share switches. On the other hand, this almost sounds like yet another situation where the FCC is dropping hints that RLECs should consolidate. One could get a feel that they are saying “consolidate switching today, merge tomorrow;” but this section of the Order is certainly open to interpretation. The FCC explains, “Our framework allows rate-of-return carriers to profit from reduced switching costs and increased productivity…For example, small carriers may be able to realize efficiencies through measures such as sharing switches, measures that preexisting regulations, such as the threshold for obtaining LSS, may have deterred.”

The FCC later takes a slightly harsher dig at RoR carriers: “Retaining rate-of-return regulation as historically employed by the Commission risks ‘perpetuat[ing the] isolated, ILEC-as-an-island operation,’ thus increasing the costs subject to recovery to the extent that, for example, each individual incumbent LEC purchases its own facilities, rather than sharing infrastructure with other carriers where efficient.” While it may be true that small carriers could realize efficiencies by sharing facilities, is it the FCC’s place to encourage sharing arrangements or should carriers come to this conclusion based on their unique market forces and cost structures?

Access Recovery Charge – “All End Users Should Contribute…”

The ARC, the direct end-user component of the new ICC recovery regime, is probably what consumers will be most interested in learning about. Some basic “rules of the road” for the six-year RoR ARC include:

• Residential ARC cannot increase by more than $0.50 per year, and cannot be increased further once a company hits the $30 per month Residential Rate Ceiling—this protects consumers in states with reformed rates, but provides very little wiggle-room for carriers who already charge close to, or above, $30 per month.
• Multi-line business ARC cannot be increased by more than $1.00 per year, and cannot be increased further once a company hits a $12.20 maximum per-line SLC plus ARC ceiling.
• The ARC revenue in one year cannot be greater than a carrier’s Eligible Recovery for that year.
• The ARC cannot be charged to Lifeline customers.
• ARCs must be allocated to a mix of business and residential customers, to “spread the recovery…among a broader set of customers, minimizing the increase experienced by any one customer.”
• Carriers do not have to charge the ARC; but if they don’t, the full amount that could be charged will be imputed from Eligible Recovery.

The FCC predicts “the average actual increase across all consumers to be approximately $0.10-$0.15 each year, peaking at approximately $0.50 to $0.90 after five or six years, and declining thereafter.” Carriers will need to study the costs vs. benefits of charging an ARC based on their unique competitive environment as well as the threat of reduced Eligible Recovery if the full ARC is not charged.

Still not Enough? Return to CAF.

If Eligible Recovery is not met though the mechanisms described above, carriers will have an opportunity to supplement their support from the CAF. The FCC “anticipates[s] that end user recovery alone will not provide the full recovery permitted by our mechanism for many incumbent LECs, particularly rate-of-return carriers.” Any supplemental CAF disbursements are subject to the same public interest obligations, like deploying 4/1 Mbps broadband upon reasonable request, as regular CAF support.

If this is still not enough, there is always the waiver process—however, carriers have to show serious financial harm and will be subject to a total company cost and earnings review. The FCC attempts to protect itself from carriers invoking the takings clause by insisting that the RM “goes beyond what might be strictly required by the constitutional takings principle underlying historical Communications regulations.” In other words—carriers should take what they get and be happy with it, because things could be worse. Keep in mind that all this ICC recovery is intended to be “truly temporary in nature.”

Well there you have it—ICC in all its anxiety-inducing glory! What do you think about these significant changes?