Entries in FCC Rulemaking (11)


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!


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?


Let the Challenges Begin! USF/ICC Order under Attack as Parties Turn to Courts

NTCA Files Petition for Judicial Review

As many of us are still trying to read and digest the 750-page USF/ICC Order, at least 3 parties have moved forward with court challenges—perhaps hoping that the judicial branch will alleviate some of the threats to various stakeholders as the December 29 start-date for the rules looms dangerously close. Earlier this week, small Virginia provider Core Communications and the Pennsylvania Public Utility Commission filed lawsuits in their respective states.  On Friday December 9, NTCA announced that it has filed a petition for judicial review of the USF/ICC Order with the U.S. Court of Appeals for the Fourth Circuit (in Richmond, VA, where Core filed its lawsuit).

NTCA’s press statement by senior vice president of policy Mike Romano explains, “To be clear, we appreciate the FCC’s attempt to loosen, if not untie altogether, the Gordian knots that have existed around the USF and ICC program for years. The order represents a historic step forward, and a significant achievement for the… stakeholders who worked to shape the reforms.” The court filing gets right down to business, however: “Portions of the FCC’s decision in the FCC Order are arbitrary, capricious, an abuse of discretion, contrary to statute and to the Fifth Amendment of the United States Constitution, in excess of or contrary to statutory authority, a departure from reasoned decision-making, and otherwise unlawful."

The press statement further explains that NTCA is specifically concerned with provisions in the order that “put at risk the ability of small, rural, community-based providers to access capital and invest in broadband-capable networks in their hometowns and surrounding countryside.” Specifically, NTCA points to the bill-and-keep access methodology that will ultimately price all switched access and reciprocal compensation at 0; the $250 cap on per line USF support; and provisions “blurring the lines between regulated and nonregulated operations.” According to NTCA, “These provisions will harm rural communities, and will not help to advance the availability and affordability of services for all rural consumers.”

Let’s talk about bill-and-keep for a moment.

Throughout the numerous comment cycles, rural stakeholders warned that bill-and-keep or access rates of 0 would be extremely harmful. The rural associations settled on an end-rate of $0.0007 in the Consensus Framework, but this rate was still considered by many to be too low. Despite the warnings and pleadings, the FCC still decided on bill-and-keep, which it claims in the Order “has significant policy advantages over other proposals in the record. A bill-and-keep methodology will ensure that consumers pay only for services that they choose and receive, eliminating the existing opaque implicit subsidy system under which consumers pay to support other carriers’ network costs…A bill-and-keep methodology also imposes fewer regulatory burdens and reduces arbitrage and competitive distortions inherent in the current system, eliminating carriers’ ability to shift network costs to competitors and customers.”  The FCC continues by arguing that bill-and-keep is less burdensome, and “reduces the significant regulatory costs and uncertainty associated with” a specific rate, like $0.0007.

Price cap carriers have a 6-year transition to bill-and-keep, and rate-of-return RLECs have a longer 9 year transition, illustrated below:

Rural carriers have shown concern that bill-and-keep is more favorable for carriers that exchange relatively equal traffic volume, and that this methodology will prevent small companies from recovering costs. The FCC rejects the argument that bill-and-keep is only appropriate for balanced traffic exchange. Furthermore, the FCC responds in the Order, “To the extent carriers in costly-to-serve areas are unable to recover their costs from their end users while maintaining service and rates that are reasonably comparable to those in urban areas, universal service support, rather than intercarrier compensation, should make up the difference.”

Except…. Per-line USF is capped per month at $250 (an amount which some fear could be arbitrarily lowered in the future, making even carriers who are “safe” today subject to drastic cuts), which appears to be NTCA’s other major concern in their petition to review filing. If you remember the pie chart from JSI Capital Advisor’s first article on USF reform which shows such a large slice of support going to RLECs ($2b of the $4.5b total), it begins to look like meager crumbs when you consider all of the elements in both USF and ICC support that are being reduced, capped, or otherwise manipulated by the new rules.

It will be very interesting to watch how NTCA’s petition for review, as well as the lawsuits filed by Core and the Pennsylvania PUC, progress in the coming months. Do you think the courts will make a reasonable decision? Are there any other major issues in the FCC’s Order that should be reviewed by the courts?

Read NTCA’s press statement here.


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.