Entries in Connect America Fund (27)

Thursday
Dec292011

2012 Regulatory Outlook: New Year, Same Basic Goals  

FCC Agenda Likely to Stay Laser-Focused on Broadband, Spectrum

2011 was undoubtedly a landmark year for Julius Genachowski & Friends, but will 2012 include great leaps forward as USF/ICC reform, Connect to Compete and the White Spaces? The FCC certainly has its work cut out tying up loose ends on all three of these seminal issues.  We can likely anticipate further powerful thrusts to improve wired and wireless broadband deployment and adoption in 2012, as well as initiatives to alleviate the spectrum crunch.

2012 might be the Year of the Reverse Auction. Reverse auctions could be spectacularly disastrous or sensationally effective, depending on a variety of factors including auction design and industry participation. Two other issues that RLECs should watch for in 2012 are solutions for the rural call termination problems and the PSTN transition—I would expect proceedings on both in 2012, and hopefully a swift resolution to the call termination problems. 

A December 8 speech by Commissioner Robert McDowell to the Federal Communications Bar Association titled “2012: The Year of the U.N. Regulation of the Internet?” revealed some clues about what may come in 2012 at the FCC. I was most excited about this possibility: “Until it actually happens, I will keep talking about launching and concluding a proceeding to reform our Universal Service program’s contribution methodology by mid-year.” As the USF contribution rate reaches an all-time high of nearly 18%, the FCC should have adequate pressure to make a move on contributions reform. Additionally, USF contributions reform is basically the last box left to check under the National Broadband Plan goals for modernizing USF. The question is: who will have to contribute under the new methodology? Will all broadband service providers and consumers be on the chopping block? What about major content providers like Google and Netflix? I expect that the contributions reform proceeding will be every bit as action-packed and controversial as the 2011 USF/ICC reform proceedings.

We aren’t nearly finished grappling with the November 18 USF/ICC Reform Order either—not by a long shot. Comments in response to the FNPRM are due in several rounds throughout January, February and March. Following these comment cycles, we will possibly get some resolution on 2011 rural telecom cliff-hangers like rate-of-return re-prescription, CAF methodologies for RLECs, broadband public interest obligations, IP interconnection, and the Remote Areas Fund.

A Policy “Roulette Wheel”

The dreaded HCLS regression analysis will cause no end of headaches for RLECs in 2012 as these companies will need to play a rather sadistic guessing game with their costs in order to avoid placement at or above the ninetieth percentile. The precise regression analysis methodology will be finalized through the FNPRM—it is very concerning that the proposed methodology inserts such a great deal of unpredictability in HCLS because RLECs will not know in advance if they will fall above the ninetieth percentile—this level of unpredictability is far greater than the rather constant artificial increases in the NACPL used to cap current HCLS.

The FCC appears to protect itself from legal challenges by adopting a regression analysis methodology that will be used, predictably, but the methodology itself is where things get murky. In other words, it is predictable that the FCC will use the regression analysis, but it is unpredictable as to how individual companies are impacted by the model. The unfortunate carriers who fall in or above the ninetieth percentile of similarly situated carriers may face a double-whammy punishment: clipped support and ineligibility to receive redistributed support.    

John Staurulakis Inc. economic and policy director Douglas Meredith provided the following statement about the regression analysis: “The FCC regression methodology proposed to limit capital and operational expenditures is fraught with policy and technical challenges.  This method is an order of magnitude less predictable for individual carriers than the current HCLS mechanism—even with the current capping procedure.  This method has been summarized as a ‘race to the middle.’  If adopted, we should consider whether a capital expenditure race to the middle will promote and advance universal service in high-cost and remotely populated areas of the nation.” 

Meredith continues, “I submit that the proposed method fails to achieve the Congressional goals for universal service.  In addition to serious policy concerns, the technical aspects of the proposed method are also suspect: study areas that are missing from the FCC’s analysis, descriptive independent variables missing from the model, relatively low goodness of fit measures and a high reliance on covariance relationships among carriers makes the application of this regression method look more like a roulette wheel in Las Vegas than well-established public policy.”

There’s a First Time for Everything

As mentioned above, I expect 2012 to be the Year of Reverse Auctions. The FCC is responsible for designing—for the first time ever—reverse auctions for second phases of the Mobility Fund and the wireline broadband Connect America Fund. Furthermore, if Congress releases under-utilized government spectrum in 2012, the FCC may also be tasked with designing auctions for this spectrum too. According to McDowell’s December 8 speech, “If that were to occur in 2012, suddenly the Commission could be working furiously on auction and service rules, band plans and such throughout the year.”

Voluntary incentive auction legislation has passed in the House, which Genachowski praised as a “major achievement.” Genachowski’s December 13 statement explains that the legislation “would authorize the Federal Communications Commission to conduct voluntary incentive auctions as recommended in the FCC’s National Broadband Plan. This would free up new spectrum for mobile broadband, driving investment, innovation, and job creation; generating many billions of dollars in revenue; and helping foster U.S. leadership in mobile broadband.” Genachowski insists that FCC incentive auction authority “needs to become law;” but warns that the House bill “could be counterproductive” by downplaying FCC policies to promote unlicensed spectrum and limiting the FCC’s ability to develop band plans and auction structures “in ways that maximize the value of licensed spectrum.”

How will the FCC avoid pitfalls associated with reverse auctions, which have been implemented internationally with less-than-stellar results? How will the FCC ensure that small rural carriers have a fair shot in future auctions? The Mobility Fund Phase II proceeding may provide an excellent opportunity for small carriers to state their demands and recommend a methodology that is fair for companies of all shapes and sizes. But... will the FCC listen, or pull a Consensus Framework 2.0, demanding industry input then essentially ignoring it?

Broadband for President in 2012

The FCC built up considerable momentum in 2011 with broadband adoption and deployment initiatives; but the U.S. has a whole lot of work to do before reclaiming #1 in the world for broadband adoption, deployment and speed—a spot in the top ten would be a nice goal for now. You can debate how important international broadband rankings are in the grand scheme of things, but with a presidential election on the horizon it probably wouldn’t be out of line to speculate that America’s sub-par international broadband ranking could become a hot-button issue in 2012.

A December 14 FCC blog post by Josh Gottheimer and Jordan Usdan includes a line that could easily be inserted into any run-of-the-mill campaign sound-byte: “Closing the digital divide isn’t just an economic issue, it’s one of the great civil rights challenges of our time. Broadband can be the great equalizer – giving every American with an Internet connection access to a world of new opportunities that might otherwise be beyond their reach.” The common assumption among politicos is that more broadband means more jobs, so increasing broadband will surely make it into multiple presidential-hopefuls’ campaigns. As a result, the FCC could be pressured to take further drastic steps to influence broadband adoption and deployment, even if 2011 initiatives (like Connect to Compete, for example) prove unsuccessful at actually adding percentage points to deployment and adoption rates.

The Legislative and Legal Fronts

2012 is also looking to be a significant year for telecom and Internet-related legislation and legal decisions. The Internet ecosystem is in an uproar over House and Senate legislation to combat online piracy and “rogue” foreign websites, to the extent that the uproar over net neutrality almost pales in comparison. Given the public outcry, it seems unlikely that SOPA or PIPA will pass as they stand, but we can probably expect similar legislation to go through in 2012—hopefully it won’t kill the Internet as we know it.

A House bill to actually reform the FCC is still a live wire on the Hill, so we might continue to see a power struggle between Congress and the independent agency charged with regulating telecom that we all love so much. According to a December 20 Politico article, Senator Jim DeMint (R-SC) “called the FCC ‘way out of control,’” and stated, “’We need to reign them in and remind them that their job is not to manage the industry but to provide just a light hand of regulation to make sure there is fairness.’”

Additionally, courts in DC and Denver will hear appeals cases on net neutrality and USF/ICC reform, respectively. Although it is too early to tell how these cases will conclude, we can’t rule out the possibility that the decisions could throw a wrench into the regulations and reforms that the FCC spent the better part of the last 3 years bringing to fruition.

If the regulatory theme of 2010 was the National Broadband Plan (with net neutrality a close second) and USF/ICC reform dominated 2011; what will be the one thing that we will remember the 2012 FCC for accomplishing? You know my guess is designing and implementing reverse auctions for the Mobility Fund, CAF and re-released spectrum, but what do you think?

Wednesday
Dec282011

Digging Deep: Palmetto Rural Looks to Bury Its Competition

When Chuck Crabtree joined Palmetto Rural Telephone Cooperative as its Director of Marketing this year, he was attracted to the co-op's commitment to broadband and advanced services like IPTV. Right now he says PRTC is making great progress towards an extensive fiber build-out that will cover most of Colleton County, South Carolina. And PRTC has been able to fund this upgrade to FTTH “without any big grants. We're mostly doing it ourselves, utilizing business loans,” Crabtree said. With many ILECs and cooperatives counting on broadband, PRTC's story may not seem like a unique one—but the provider's embrace of services like IPTV and advanced video platforms, is. According to Crabtree, PRTC is fighting “formidable competitors” like Comcast and Frontier by offering richer, dependable services through fiber. In underserved areas of the county, PRTC is the first to lay fiber and, in doing so, hopes to better serve its entire territory.

Crabtree characterized PRTC's service area as a combination of Low Country rural lands and small- to mid-sized towns. “Currently we've completed roughly 15% of our fiber build-out, but the overall fiber-to-the-home plan will take longer,” he said. “It's a lot of work. They don't call us the Low Country for nothing— we have a lot of wetlands and it can be very swampy, but we're absolutely committed to getting fiber to every home, even the most remote areas.”

Of course, fiber builds can be tricky for smaller companies and co-ops, with cost often exceeding return on investment. But Crabtree says that PRTC has taken great measures not to just provide broadband services, but to do so with media platforms that rival those from large competitors. Earlier this year, PRTC announced it was transitioning its IPTV-based video services to Alcatel-Lucent's starter pack end-to-end solution, which included the Microsoft Mediaroom 2.0 software platform. Mediaroom, created specifically for Tier 1 service providers, “helped get rid of some traditional IPTV problems, but also opens up new opportunities,” Crabtree said. “Some telcos deploy IPTV and then really aren't thrilled with what they're able to provide. But for us, Mediaroom was really a great choice for the consumer. It really is a very slick, great interface,” he said, noting that the platform makes it possible to introduce VOD, whole-home DVR, caller ID over the TV, and even remote DVR services. Right now, the co-op's IPTV services are about 10% penetrated, but Crabtree says that Mediaroom should dramatically increase marketability and will allow PRTC to “ratchet up marketing for this particular service. We're already seeing great responses, and we believe it's going to be successful.”

But for PRTC, the fiber build-out is about much more than just IPTV services alone. It's about “future-proofing,” as Crabtree put it. “The more fiber you have, the more you can do with it. Fiber-to-the-home provides almost limitless bandwidth capacity, allowing our customers to share multi-media content, watch videos on any device, and so on.” In other words, PRTC is looking to provide the bells-and-whistles that the Big Guys provide, but they plan to bring it to even the most remote areas where subscribers live and do business.

In some areas, DirecTV and Dish Network provide stiff competition, Crabtree acknowledged, but when it comes to providing the whole package of services, PRTC still maintains an edge. In Colleton County, Comcast provides TV and Internet services, but no voice service, and Frontier offers voice and broadband in small pockets of coverage. “We keep hearing rumors of improvements coming down from the Charleston area [in regard to Comcast], but right now they have a pretty standard offering. Our TV service is much richer, according to what we offer, and of course we have a whole package of services we provide.”

Crabtree noted the importance of broadband in small communities and rural areas—something that he says is threatened by recent changes to USF funding. When asked about how the Connect America fund will impact cooperatives like PRTC, Crabtree said, “We stand with everyone at NTCA and the other ILECs who have voiced their opposition to these changes. We're working fast and furious to run fiber and offer as high a service level as possible, and the cutting of USF funds hurts our efforts to do that in the fashion we'd like. We're not happy about the changes in the way they're distributing funds.”

Despite these federal battles, like most cooperatives, PRTC is committed to improving its community, Crabtree said. “We are very involved in the area, and are especially excited about the advanced services that the Colleton County Medical Center is able to offer through our broadband connection.” He explained that, in the past, the facility had to rely on its sister hospital in Charleston for difficult diagnoses, advanced technologies, and specialist services. This often included transporting patients via helicopter or a one-and-a-half hour drive. But now, in seconds, doctors at CCMC can send data to physicians in Charleston and get a detailed diagnosis right away. Doctors at CCMC are also making use of iPads to collect patient information; hospital management will soon rely on “hot boards” to streamline providers and get physicians to the hospital when demand increases, and the hospital website will offer online updates on emergency room wait times. Crabtree said, “These are super patient-friendly services and, while they've had our [PRTC's] broadband for years, they're now really expanding the utilization of its functionality.”

In addition to medical services, Crabtree said that PRTC's broadband has been “a real game-changer” for Colleton County High School and Colleton Preparatory Academy. “We offer broadband connections to each school in a way that fits their needs very well... and we partner with the local schools all the time—to sponsor athletic departments and support recreational teams. We really try to have a local presence in a variety of ways,” Crabtree said, explaining that PRTC also provides telecommunications services to the police and fire departments and sponsors fundraisers for March of Dimes. “That personal connection is really important,” he said.

One of PRTC's smaller business divisions is its wireless service, which Crabtree said is branded PRTC Wireless but also accesses one of the largest networks in the country. PRTC has offered wireless for the last 2-3 years and hopes to more aggressively promote “a quad play in the future,” Crabtree said. “It's not an easy business to grow in, but we're doing it, slowly but surely.”

As for the regional area surrounding PRTC's base in Walterboro, South Carolina—the county seat of Colleton County—there is plenty of growth to go around. PRTC's service area sits outside the main competitive markets of the Charleston area, but the county enjoys growth from nearby economic expansion. Early this month a new aerospace company, Colleton Aerospace LLC, announced it would construct a $15m plant in the county, bringing 300 jobs to the area and hopefully spurring development in the Low Country. PRTC is already scheduled to be the telecommunications supplier to Colleton Aerospace, and Crabtree noted that this was just one of the ways that the area is continuing to see growth in jobs, residential expansion, and population increases. Recently Boeing opened a new facility in North Charleston and tire manufacturers Bridgestone, Continental, and Michelin have all made significant investments in the surrounding area. Likely this growth will spill into PRTC's service area, and Crabtree says the company has already been active in Charleston media markets. “We can't help but think our region's growth will help us, and we hope to enjoy some of its success.”

Tuesday
Dec272011

November – December 2011: The Dawn of the Winter of our Discontent

2011 Ends with RLECs, Small Cablecos and AT&T Searching for a Bright Light

Part 4 of “2011: The Regulatory Year in Review.” When you look at everything that has happened in telecom in the last two months alone, the entire rest of the year seems almost inconsequential in comparison. The whirlwind of activity in the past six weeks was one part culmination of several longstanding regulatory-industry entanglements and one part FCC commissioners wanting to get things done before two new commissioners take their seats at the table in 2012. No matter how you mix it up, the FCC served up a smorgasbord of prime cuts and rotten left-overs for both Thanksgiving and Christmas.

November 2011: We endured most of the year with only four FCC commissioners, and the knowledge that Commissioner Michael Copps would be departing at the end of the year. I had some personal objections to a four-member commission approving something as monumental as the USF/ICC Order, but it is unlikely the outcome would have been different even with the full five. Still, one can wonder…

On November 1 President Obama nominated Jessica Rosenworcel and Ajit Pai to fill the empty seats starting in 2012. Rosenworcel will replace Copps; she hails from the Senate Commerce Committee and has served the FCC as senior legal advisor to Copps and Wireline Competition Bureau chief. Pai will fill Baker’s seat and was formerly a partner at Jenner & Block. Pai’s resume also includes the Senate Judiciary Committee’s Subcommittee on Civil rights, the Office of Legal Policy at the Justice Department and the FCC.

Pai might be a much-needed advocate for rural telecommunications as he was raised in Kansas. According to Senator Jerry Moran (R-KS), “Ajit is a humble and hard worker – just what you would expect from a Kansan. He is the type of person you would like to have as your neighbor.“ Moran’s statement continues, “The FCC also needs commissioners who are committed to the needs of all Americans, including those who live in rural America, so its innovators can compete in the marketplace along those in urban areas. A native of Parsons, Kansas, Ajit will bring an understanding of the challenges facing our part of the country at this vital time for the future of telecommunications.” One major criticism of the FCC this year has been that they simply do not understand rural America (even though Genachowski visited Diller, NE), so Pai may bring a welcome and necessary perspective to the urban-centric Commission.

On November 9, Genachowski announced “Connect to Compete,” a broadband adoption initiative focused on low-income families. Connect to Compete and its cousin Comcast Internet Essentials promise to provide broadband to qualifying low-income families for $9.95 per month as well as access to digital literacy training and low cost computers. Dozens of big-name tech companies have signed on to participate in Connect 2 Compete. As these low-income programs pick up steam in 2012, there may be some market pressure for RLECs to respond in kind. However, reports are already coming in that very few low-income families are even qualifying for Comcast’s Internet Essentials program—one requirement is that participants cannot have outstanding bills with the company. (The ILEC Advisor: The FCC’s Egalitarian Cable Broadband Initiative: What does it Mean for RLECs?).

As Thanksgiving drew closer, the entire telecom industry was watching FCC.gov like a hawk waiting for the USF/ICC Order. Rumors swirled regarding the release date, length of the document, and changes that may have been made after the October 27 Open Meeting vote. On November 19 around 6:30 PM EST, I was planning my weekend and looking forward to a relaxing evening when I received the news that the order was released, and it was a doozy at 759 pages long. The Order more closely resembled the February NPRM than the industry’s Consensus Framework, which has caused more than a few to wonder if the FCC’s insistence that the industry draft an alternative was just a smoke-and-mirrors diversion. The Order has received criticism from the Hill for being released late, extremely long, and likely modified after the vote contrary to the open and transparent principles that the Commission is supposed to abide. Criticism aside, the USF/ICC Reform Order is certainly one of the most significant events for RLECs since the 1996 Act. (The ILEC Advisor: Introducing the Connect America Fund – USF Reform Overview).

Many of us were pleased that the USF/ICC Order was released a week before Thanksgiving, thus saving the holiday (although I spent most of the holiday reading it). However, AT&T/T-Mobile merger groupies got their fill of Thanksgiving goodness when the FCC announced on November 23 that it was opposed to the merger and an administrative hearing would be held to further consider the facts—the kiss of death, according to some experts. Following this decision, things got really ugly between AT&T and the FCC for a few weeks. (The Deal Advisor: FCC Calls for Hearing on AT&T/T-Mobile Combo).

December 2011: December has seen RLECs struggling to comprehend the USF/ICC rules, AT&T battling with the FCC and DOJ, small cablecos fighting with local broadcasters over outrageous retransmission fees, and the FCC grappling with when and how to abandon the PSTN.

The best drama unfolded before my very eyes on December 1, 2011. Not 15 hours earlier, the FCC had released its staff report detailing why it was opposed to the AT&T//T-Mobile deal—including AT&T’s egregious jobs claims and questionable economic analysis and engineering models. Needless to say, the staff report was the talk of the town in DC the following morning, when AT&T’s senior executive vice president for external and legislative affairs Jim Cicconi released a sharply-worded blog post damning the staff report as “obviously one-sided” and “an advocacy piece.”

Immediately after Cicconi’s blog post was released, he was a panelist at the Phoenix Center’s 2011 Annual U.S. Telecoms Symposium, which I attended—I was surprised that he even showed up. At the Symposium, Cicconi made some strange remarks comparing consumer behavior with cell carriers to religion; and at one point he commented that he was glad there weren’t any hard questions about the merger or the FCC staff report. He also made a comment about how telecom regulation is designed to protect companies, not consumers, which sent shock-waves through the city. This initiated a day of he-said-FCC-said PR battles on Twitter and the AT&T Public Policy blog. But at the end of the day, the AT&T/T-Mobile merger was still essentially doomed…and just over two weeks later AT&T announced that the deal was, in fact, dead. (The Deal Advisor: The Deal is Dead! Now What?)

Court challenges to the USF/ICC Order predictably rolled in throughout the month, with 13 lawsuits to date from small telephone companies, NTCA, state public utility commissions, a couple wireless companies, and AT&T. A judicial panel selected the Tenth Circuit Court of Appeals in Denver, CO as the venue—apparently a good court for this particular subject matter. The issues in the lawsuits range from states’ loss of power to bill and keep. I got the impression that the FCC protected itself from legal challenges quite thoroughly in the Order, so it will definitely be interesting to see how this case unfolds next year. (The ILEC Advisor: Let the Challenges Begin! USF/ICC Order under Attack as Parties Turn to Courts).

Finally in December the FCC held two informative public workshops on transitioning the PSTN to all-IP; but the workshops left plenty of uncertainty regarding the path forward. Despite gathering over 50 experts from all corners of the industry, there was still not a clear definition on what the PSTN actually is or why it should be forcibly transitioned since it is already clearly in transition. Questions aside, the PSTN workshops were extremely informative and likely signaled the beginning of what is surely to be a high-priority initiative at the FCC in the next year. (The ILEC Advisor: The PSTN is Already in Transition… What is the PSTN, Anyway?, The PSTN: Sunset, Transition, Rebirth, or Just Leave it Alone?).  

Well, that about does it for 2011… It has been an exciting year! Coming up next, JSI Capital Advisors will speculate on several big regulatory topics for 2012.

Monday
Dec192011

January – April 2011: USF NPRM, AT&T/T-Mobile Merger Dominate Headlines

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!

Tuesday
Dec132011

Introducing ICC Reform: RM, ARC, and Eligible Recovery

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?