Entries in Mobility Fund (8)

Tuesday
Jan032012

Blooston Rural Carriers to FCC: Keep Tier One Wireless out of Mobility Fund

Petition for Reconsideration of USF/ICC Order Focused on Pitfalls of Reverse Auctions  

Eighteen rural wireless stakeholders, collectively the Blooston Rural Carriers, submitted a Petition for Reconsideration of the USF/ICC Transformation Order on December 29, 2011. The law firm of Blooston, Mordkofsky, Dickens, Duffy & Prendergast, LLP wrote arguments against reverse auctions and several aspects of the Mobility Fund Phase I on behalf of these companies. The Blooston Rural Carriers argued that reverse auctions will create a “race to the bottom” and may provide opportunities for deceptively low and anti-competitive bidding. Additionally, the process favors large carriers and does not include sufficient provisions to ensure small rural providers will participate or be successful in winning Mobility Fund support. The Blooston Rural Carriers also argue that the FCC has essentially ignored several of their previous comments (and warnings) about reverse auctions in the Mobility Fund NPRM and CAF proceedings.

The FCC alleges that reverse auctions are the best possible methodology to distribute Mobility Fund Phase I support (and most likely CAF and Mobility Fund Phase II support too), but the Blooston Rural Carriers ask, are reverse auctions really the best way? The petition explains that reverse auctions are “susceptible to a number of shortcomings that ultimately undermine the Commission’s intention of expanding existing coverage to unserved areas in the most economic way possible.”

The Blooston Rural Carriers have made several attempts over the past year to convince the FCC that reverse auctions would be detrimental not only to small carriers, but the goals of USF overall. However, it appears as though many of Blooston’s pleas have gone unacknowledged by the FCC despite the fact that “Courts have long held that an agency must respond to ‘relevant’ and ‘significant’ comments.” The Blooston Rural Carriers snipe, “The opportunity to comment is meaningless unless the agency responds to significant points raised by the public.”

The Blooston Rural Carriers did indeed raise one significant point in their petition that should produce an interesting response from the FCC: Tier One wireless carriers be limited or prohibited from receiving Mobility Fund support. The Blooston Rural Carriers explain, “USF funds are limited, and the Mobility Fund rules must recognize that no Tier One carrier requires financial assistance to complete its buildout.” The USF/ICC Transformation Order makes $300m available in Phase I via reverse auction, where any carrier can participate in the auction and no areas will be prioritized (The ILEC Advisor: Introducing the Mobility Fund: “A National Priority”).  This means that Verizon and Sprint, who voluntarily surrendered USF support in exchange for merger approval, will actually be able to participate in (and possibly win) reverse auctions for support they have allegedly given up.

The Blooston Rural Carriers refer to Verizon, explaining, “Were it not for the Commission’s conditioning the Alltel merger upon a phase-down of USF receipts, it stands to reason that the merged entity would have remained the largest recipient of high-cost funding.” Verizon and AT&T saw profits in 2010 of well over $10b, which certainly begs the question of exactly why the big companies need money to deploy a few extra towers in unserved areas. According to the Blooston Rural Carriers, “Notwithstanding the fact that the recent annual profits of either AT&T or Verizon could fund the entire proposed $4.5b annual high-cost program budget with room to spare…the Commission is looking to give them substantial new CAF and Mobility Fund support…without any reference to their earnings;” which is tantamount to corporate welfare.

Even though the FCC contends that Phase I Mobility Fund support is not intended to go to particular classes of carriers, the Blooston Rural Carriers argue that “The only way to effectively encourage high-quality expansion into unserved areas is to ensure that funding is directed to carriers that have a legitimate interest in building and maintaining high-quality services in those areas;” and rural carriers have a “vested interest” in doing just so. The Blooston Rural Carriers explain that small rural carriers have only been able to achieve mild success in regular spectrum auctions because of special provisions like bidding credits—“without such measures, small carriers would have had no realistic chance.”

There are no bidding credits or special provisions for small companies in the Mobility Fund—at least not in Phase I. The Blooston Rural Carriers warn that “participation in the Mobility Fund will significantly favor large, nationwide carriers whose capital and operating costs are significantly lower than small and rural service providers.” Furthermore, large carries may have opportunities to game the system though unreasonably low and anticompetitive bids, and determining winners based on costs alone might produce undesirable results. The Blooston Rural Carriers insist, “It is important to take into account more factors than simply which entity can claim to do the job for the least amount of money.”

As an alternative, the Blooston Rural Carriers recommend that the FCC “choose a method of distributing funds that takes into account an equitable comparison and evaluation of the differing costs and service characteristics of different technologies, rights of creditors and repayments of outstanding loans, and the treatment of carrier of last resort obligations, costs, as well as past performance and experience providing service in the kinds of areas that generally remain unserved.” In addition to bidding credits for small carriers, the Blooston Rural Carriers’ list of recommendations for improving the Mobility Fund for small rural carriers includes:

  • Ensuring affordable roaming agreements for rural carriers who receive mobility support
  • Facilitating greenfield projects and “economic ‘jump starts’” for RLEC spectrum holders interested in deploying new wireless systems in their service areas,
  • Prohibiting competitively harmful exclusive equipment and handset arrangements
  • Require 3G systems deployed with Mobility Fund support be easily upgradable to 4G

Finally, the Blooston Rural Carriers are concerned about the future direction of the Mobility Fund, since many of the finer details are still unclear and will be left to the Bureaus to determine: “The Commission’s reliance on undetermined further procedures provides little comfort for rural carriers who are routinely at a disadvantage to larger carriers.” The Blooston Rural Carriers hope that the FCC will finally notice and respond to some of the arguments mentioned in this petition—arguments that the Blooston Rural Carriers and other rural stakeholders have been delivering for over a year with little acknowledgement by an FCC determined to make reverse auctions work. However, there is a real threat that the efforts to make reverse auctions work will undermine the goals of the USF and misallocate the precious little funding that is available in the tight $4.5b budget.

The Blooston Rural Carriers recommend that the FCC, “on reconsideration, take real, concrete, active steps to ensure equal opportunity and competitive participation among all carriers.” What do you think the FCC should do to ensure small rural wireless carriers can actively participate in Phase I Mobility Fund reverse auctions?

The full Petition for Reconsideration is available here.

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?

Tuesday
Nov222011

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.

Thursday
Nov172011

NARUC Committed to Broadband-Boosting Merger Commitments 

Resolution Stirs up Thoughts on USF-Related Merger Conditions

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

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

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

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

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

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

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

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

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

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

Thursday
Oct272011

FCC Approves Still-Unseen USF/ICC Reform Order

Executive Summary Released Minus the 493 Pages that Matter

If you were expecting the unveiling of all the juicy details of the USF/ICC-Connect America Fund Order at the FCC’s Open Meeting today, then you, like me, were probably disappointed after the 3 hour meeting that consisted primarily of the Commissioners thanking each other and their staff for all the hard work in drafting this monumental order. That’s not to say that there wasn’t any good information, but many questions will definitely remain until the allegedly 500+ page R&O and FNPRM is released.

A packed house anxiously sat through the first item on the agenda, “Modernizing Television Broadcaster Requirements to Make Information Available to the Public,” which was approved unanimously. After what seemed like an eternal wait, Wireline Competition Bureau Chief Sharon Gillett opened the discussion on USF/ICC Reform. She delivered what I felt was some of the most important information revealed in the entire meeting: the amount of funding that the various industry sectors will receive.

According to Gillett, Rate of Return carriers will receive $2b, price cap ILECs will receive $1.8b, there will be a one-time $300m Mobility Fund plus an additional annual $500m for mobile broadband, $100m for Tribal Lands mobility, and $100m per year for the super-remote households. The funding methodology for this $100m Dedicated Remote Areas Fund will be determined via future proceedings.

According to the Executive Summary that was released during the time it took me to take a cab from the FCC to my house after the meeting concluded; the FCC will establish “a firm and comprehensive budget for the high-cost programs within USF. The annual funding target is set at no more than $4.5 billion over the next six years, the same level as the high-cost program for Fiscal Year 2011, with an automatic review trigger if the budget is threatened to be exceeded.” After 6 years, the budget may be revisited. This appears to be a fairly reasonable compromise between the eternal hard cap supported by some (like the cable industry), and no cap at all supported by others.

The new Connect America Fund (CAF) will “replace all existing high-cost support mechanisms,” and “will rely on incentive-based, market-driven policies, including competitive bidding, to distribute universal service funds as efficiently and effectively as possible.” CAF support for price cap companies will be introduced in two phases. The first phase will include freezing existing support but also infusing an additional $300m to “expediently” deploy broadband to unserved price cap areas. According to the Executive Summary, “Any carrier electing to receive the additional support will be required to deploy broadband and offer service that satisfies our new public interest obligations to an unserved location for every $775 in incremental support. Specifically, carriers that elect to receive this additional support must provide broadband with actual speeds of at least 4 Mbps downstream and 1 Mbps upstream, with latency suitable for real-time applications…” This doesn’t sound much like the “Rights of First Refusal” proposal in the ABC Plan, and it does sound like the FCC is going to put a heavy emphasis on public interest obligations. The second phase of price cap CAF support “will use a combination of a forward-looking broadband cost model and competitive bidding.”

Moving on, it sounds like mobile broadband providers will get a much better deal than originally anticipated—at one point they were looking at a single $300m influx only, and now it looks like they are getting the $300m plus $500m per year. I anticipate that some wireless carriers will still say that this isn’t enough (some associations have asked for $1b per year, and even parity with wireline carriers). One interesting aspect of the Mobility Fund is that “the winners will be required to deploy 4G service within three years, or 3G service within two years, accelerating the migration to 4G.” $100m of the annual $500m will go specifically for Tribal areas, which Commissioner Copps emphasized is especially important. He said that some tribal areas have single-digit broadband adoption levels, which is a “national disgrace.” Overall, this Mobility Fund barely resembles the Mobility Fund NPRM that was released a year ago which satisfied very few stakeholders, especially rural wireless carriers.

What about the RLECs? I didn’t hear anything in the meeting that specifically signaled the immediate death of the RLEC industry which was a relief, but as almost everyone has been saying lately, “The devil is in the details.” Supposedly, the Order will “recognize the unique nature” of small rural carriers and attempt to maintain some of the stability of the current system while reasonably transitioning to CAF. According to the Executive Summary, “Rate-of-return carriers receiving legacy universal service support, or CAF support to offset lost ICC revenues, must offer broadband service meeting initial CAF requirements, with actual speeds of at least 4 Mbps downstream and 1 Mbps upstream, upon their customers’ reasonable request.” Again, the FCC is pushing hard for public interest obligations.

RLECs can likely expect limitations on capital and operating expenses starting July 1, 2012; less support for “carriers that maintain artificially low end-user voice rates;” phase-out of the Safety Net Additive and of support in areas that overlap with an unsubsidized competitor; and a cap on per-line support of $250 per month “with a gradual phase-down to that cap over a three-year period commencing July 1, 2012.” Most of these changes have been anticipated, but it sounds like the FCC will seek comment on some specific aspects of RLEC funding reductions, including the 11.25% rate-of-return, in an FNPRM.

Finally, Intercarrier Compensation: details seemed especially slim on this topic at the Open Meeting, but were explained somewhat better in the Executive Summary. The FCC will “take immediate action to curtail wasteful arbitrage practices,” specifically access stimulation and phantom traffic.  This might be good news, but the bad news comes next: “We adopt a uniform national bill-and-keep framework as the ultimate end state for all telecommunications traffic exchanged with an LEC.” In the give-and-take spirit of this Order, the FCC does “adopt a transitional recovery mechanism to mitigate the effect of reduced intercarrier compensation on carriers and facilitate continued investment in broadband infrastructure, while providing greater certainty and predictability going forward than the status quo.” I will be interested to see the gap between how much revenue RLECs stand to lose with bill-and-keep and how much the FCC is willing to give back via the recovery mechanism. LECs can also charge an Access Recovery Charge (ARC) limited at $0.50 per month for residential/small business and $1.00 per month for multi-line businesses.

At the Open Meeting, the Commissioners all relentlessly praised one another and their staff on all the hard work, and they all seemed very proud of themselves for finally releasing—and approving—this order (despite the fact that nobody has seen it yet). Copps said that today the Commission is “making telecommunications history,” and Genachowski called this a “once in a generation” achievement that will facilitate “new vistas of digital opportunity.” I will continue to hold my applause until I read the order and learn more about how the RLEC industry will be specifically impacted by the sweeping changes. What do you think—is there enough information to determine if this is a good deal for the RLEC industry? What was the biggest surprise, and the biggest disappointment, in today’s Open Meeting and USF/ICC Reform Executive Summary?

The full 7-page text of the Executive Summary is available here.