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USF Reform - Their Two Cents: Hargray Telephone Company

Hargray Proposes Broadband Incentive Plan as an Alternative to FCC’s NPRM

On June 9 and 10, 2011, representatives of Hargray Telephone Company (“Hargray”) met with members of the FCC to discuss their alternative plan for USF Reform, the Broadband Incentive Plan (“BIP”). Hargray outlined the BIP in an ex parte filing and in reply comments filed on May 23 in the USF Reform proceeding. The BIP proposes to consolidate high-cost USF support and freeze per-line subsidies at 2011 levels, then tie future support to the number of telephone and broadband lines with a weighting factor based on broadband speeds. I find that this proposal is simple, forward-looking, and market-driven; and it does not discount the accomplishments that RLECs have made thus far in broadband deployment, nor does it leave traditional telephone subscribers in the dark.

Hargray’s ex parte filing describes how the BIP could provide a reasonable transition to a completely broadband-centric USF methodology.  Support distributed under the BIP would be contingent upon the number of broadband and voice access lines per carrier, not how much money the carrier spends. According to Hargray, “due to declining trends in voice access lines, only those carriers that are aggressively building out infrastructure and delivering affordable broadband to their residents and businesses will be able to sustain levels of support at or near their current levels.” Hargray believes this will act as an incentive for RLECs to invest in broadband facilities and keep consumer prices low in order to stimulate demand and adoption.  With per-line support frozen at 2011 levels, a carrier would lose support for each cord-cutter, but then have an opportunity to reclaim a slightly higher level of support for each new high-speed broadband customer.

Hargray’s reply comments outline the possible benefits of the BIP: it could “promote broadband investment, economic stimulus and job growth;” “allow consumer choice to direct what services the fund supports;” and “manage the size and burden associated with the fund.” As for the mechanics of the BIP, Interstate Common Line Settlement support (ICLS), Interstate Access Support (IAS), High Cost Loop Support (HCLS), Local Switching Support (LSS) and Safety Net Additive support (SNA) would be combined, and per-line support would be frozen at 2011 levels. Each recipient of support would become a Carrier of Last Resort (COLR) in their study area. I believe the most interesting aspect of the BIP is the weighting factor for broadband lines. Hargray proposes that a broadband line between 768 kbps and 1.5 Mbps would receive support equal to one telephone line, but as speeds increase so would the support level. For example, broadband lines between 1.5 and 3 Mbps would be equal to 1.2 telephone lines, and broadband lines exceeding 25 Mbps would be equal to 2 telephone lines. The weighting factors could be easily adjusted in the future as the market dictates. Hargray illustrates how support administered under the BIP would reduce over time, assuming providers continue to lose landline customers. The following data was included in Hargray’s ex parte filing:

I believe the broadband speed weighting factor is an excellent alternative to the FCC’s proposed broadband support speed limit of 4 Mbps download, 1 Mbps upload (“4/1”). Although 4/1 may be a sufficient definition of broadband in the very near term, customer demands will rapidly outgrow this definition. I also think it would be very unfortunate if RLECs failed to upgrade broadband infrastructure because they could not receive support for speeds higher than 4/1, but the BIP may effectively solve this dilemma by encouraging RLECs to upgrade networks based on demand and likely customer take rates.

Another benefit of the BIP is that it will not undermine the still-relevant landline business in rural areas. According to Hargray, the BIP does not compromise the progress and investments that RLECs have made in both voice and broadband so far, and it “leverages the benefits provided by the existing [High Cost Support] program by establishing a mechanism that enables recipients to make additional investment in reliable and robust broadband services throughout America.”  Instead of abruptly ending support for landlines, RLECs would continue to receive support based solely on the number of landline subscribers. As customers continue to migrate away from landlines, “the amount of support associated with voice-only services would drop over time consistent with the industry trend of declining voice lines.” Hargray proposes that BIP would act as a bridge to the Connect America Fund and potentially eliminate some of the risks associated with implementing a sweeping reform that could potentially leave RLECs without any USF support—or private investment opportunities. Hargray argues that the FCC “should adopt a structure that does not represent a risky start over.”

I agree with Hargray that the BIP might incentivize some RLECs who have been slow to invest in broadband infrastructure to finally step up their game. Although RLECs have traditionally been leaders in broadband deployment in rural areas, not every RLEC has modernized—this has been a significant source of criticism from the FCC and others, who claim that many rural providers are inefficiently utilizing USF. I think it is very unfortunate that the inefficiencies of a very small number of RLECs have been projected onto the collective RLEC community, and I think Hargray’s BIP could help overcome some of the negative sentiments about RLECs. Hargray shows their concern about this situation, and they argue that the BIP could “encourage companies to not only build broadband networks, but also to build them where customers want them and to price services on those networks so as to spur adoption.”

I applaud Hargray for submitting an alternative proposal because the FCC said from the very beginning of the USF Reform proceeding that they wanted to see solid models and data from the industry. I am particularly impressed with the BIP because it is forward-looking, practical, and logical. Hargray also argues that the BIP will reduce administrative burdens on the FCC, USAC and NECA because support would be based on estimated line counts rather than complex cost recovery calculations. I encourage RLECs to utilize the model illustrated above to calculate how much support they may receive in the future based on frozen 2011 per-line levels and a weighted broadband speed factor. Would your overall support decrease under the BIP, and would the BIP serve as an incentive to invest in broadband facilities capable of higher speeds?

Hargray Telephone Company is an RLEC serving Jasper and Beufort Counties in South Carolina with 41,000 telephone access lines and 16,400 broadband lines. Hargray’s reply comments are available here, and their ex parte filing is available here.


USF Reform -Their Two Cents: Satellite Broadband Providers

Debating the Role of Satellite Broadband in the Connect America Fund

DISH Network (Nasdaq:DISH), EchoStar Technologies (Nasdaq:SATS), Hughes Network Systems, ViaSat Inc. (Nasdaq:VSAT), and WildBlue Communications (“The Satellite Broadband Providers”) filed joint reply comments in the Universal Service Fund Reform proceeding, arguing that satellite broadband providers should be allowed to receive direct support through the proposed Connect America Fund. The Satellite Broadband Providers also argue in favor of reverse auctions, and they claim that the technological advances of next-generation satellite broadband will make satellite broadband a competitive alternative to terrestrial wireless and wireline services.

The Satellite Broadband Providers claim that there is a role for all broadband technologies in the Connect America Fund.  They cite broad support for satellite broadband in the USF Reform proceeding and argue that “a wide range of commenters concur that satellite is the least expensive way to bring broadband to many consumers.” The Satellite Broadband Providers contend that $21b could be saved if 47% of unserved households are served with satellite broadband instead of terrestrial broadband. The Satellite Broadband Providers reference support from comments by the California and Ohio Public Utility Commissions and Comcast (Nasdaq:CMCSK), and they dispute criticism by the Federal State Joint Board and RLECs. They insist that the criticisms are “based on outdated and incorrect information,” because their opponents do not consider the benefits of next-generation satellite broadband, which is expected to be launched this summer.

One of the most common criticisms of satellite service is latency, but the Satellite Broadband Providers claim “satellite broadband performs just as well as terrestrial wireless broadband for highly latency-sensitive applications such as gaming.” They add that next-generation satellite broadband will enable 12/3 Mbps with moderate latency, coupled with low deployment costs and competitive consumer rates. A May 2011 report by Stephen Cobb for the Rural Mobile & Broadband Alliance (RuMBA) entitled “Satellite Internet Connection for Rural Broadband” is not nearly as optimistic about the technical capabilities of satellite service. This report questions whether satellite is a viable broadband service for rural areas, and it outlines four “satellite service gaps:” latency, bandwidth, price/performance, and service. Based on these critical gaps, this report concludes that satellite service does not enable basic broadband functionality, and “satellite Internet service is an amazing technological achievement but it is not broadband.” I highly recommend this report as a technical critique of satellite broadband, as it provides some interesting analysis which refutes many of the claims made by the Satellite Broadband Providers.

The Satellite Broadband Providers also support reverse auctions, but warn that RLECs should not receive any “rights of first refusal” or preferential treatment in reverse auctions. The Satellite Broadband Providers call RLEC comments in favor of preferential treatment “self-interested attempts to advance private interests at the expense of the public.” The Satellite Broadband Providers add that preferential treatment would violate competitive and technological neutrality, and RLECs should only win reverse auctions if they present the most efficient case—if not, they insist that “RLECs should lose.”

In their reply comments, AT&T (NYSE:T) argues “the Commission should permit CAF recipients to satisfy their service obligations via satellite in extremely high-cost areas.” AT&T and other large price cap carriers wish to be able to partner with satellite providers to deploy broadband in rural areas that would be unprofitable to serve alone. I interpret this argument as a means for the large carriers to secure USF support without actually having to commit to serving rural areas or put forth the investment to do so. The way I see it, the CAF recipient partnered with a satellite provider would receive support to serve a high-cost area.  The recipient would pass along some of this support to their satellite partner, but also probably keep a share of the support for themselves. I believe the additional cost of providing support to a satellite provider plus their partner would inflate the bidding price in a reverse auction, defeating the purpose of finding the lowest-cost and most efficient broadband provider. Why is it necessary to direct support through an intermediary if the satellite provider will be doing all the heavy lifting?

I do believe there is a limited opportunity for satellite providers to reach the most uneconomical unserved households with broadband. In some cases is it literally not technologically possible or fiscally practical for a wireline or terrestrial wireless carrier to reach certain locations in remote and rugged areas.  However, I do not condone large price cap carriers using satellite broadband providers as a crutch to lean upon only when it is conveniently uneconomical to reach the extremely remote households with terrestrial broadband.  If satellite providers participate in CAF, I believe they should be the direct recipients of CAF support, without using a price cap carrier as an intermediary.

Many questions remain regarding the role of satellite broadband providers in the reformed Universal Service Fund:  Should satellite providers become direct recipients of CAF, possibly to compete with RLECs, or should they become indirect recipients of CAF support on behalf of price cap carriers? Do extremely rural customers actually want satellite broadband service, even if it is the only option? Will the alleged improvements in satellite technology really make this service a competitive alternative to cable, DSL and wireless broadband? Hopefully some of these issues will be worked through in time for the FCC’s final decision on USF Reform, or extremely rural households may be treated as second-class broadband citizens and the FCC will fail to achieve the goal of reducing the rural-rural digital divide.

The Satellite Broadband Provider’s reply comments are available here, and AT&T’s reply comments are available here.


USF Reform - Their Two Cents: FTTH Council 

Fiber-to-the-Home Council Recommends 25 Mbps for Rural Broadband

On May 23, 2011, The Fiber-to-the-Home Council (“FTTH Council”) filed reply comments in the Universal Service Fund Reform proceeding, where they expressed concern about the FCC’s proposal for a broadband speed target of 4 Mbps download, 1 Mbps upload (“4/1”) in rural and unserved areas. Although the FTTH Council agrees that a relatively low speed target may be sufficient in the immediate near term, it would ultimately “deprive rural residents and businesses of broadband performance comparable to that found in urban areas.” The FTTH Council recommends 25 Mbps (in both directions) by 2015, and argues that FTTH is the most efficient and financially prudent broadband technology for high-cost areas—therefore, the revamped High Cost Fund should ensure support for rural FTTH deployment.

The FTTH Council points to the rapidly growing demand for Internet content and applications, such as distance learning, enhanced video conferencing, and HD telemedicine, as evidence that high-performance broadband networks need to be supported by USF.  I believe that in rural and remote areas, high-bandwidth applications can literally mean the difference between life and death, business or no business, and education or no education. The FTTH Council clearly understands the importance of high speed broadband to rural residents, businesses and communities as broadband users increasingly require “Next-Generation Access” (NGA) broadband service.  The FTTH Council cites a report by consulting firm CSMG on consumer adoption of NGA broadband applications, which supports “the conclusion that consumer demand for symmetrical bandwidth is likely to exceed 25 Mbps by 2015.”

In addition to thinking about future demands for high-performance broadband, I believe it is also important to look to the past for examples of why broadband speeds must be forward-looking and well beyond the minimum requirement. Advocates of the 4/1 Mbps target claim that most broadband consumers do not actually need higher speeds because they primarily use broadband to check e-mail and browse the Web. However, this assumption does not consider the adoption and use of future broadband-enabled applications, and according to the FTTH Council, “it is highly likely that innovative applications development will lead to as-yet undefined applications with significant public benefit.” Now-common applications like YouTube, Netflix streaming video, Google maps, Skype and Apple iTunes skyrocketed in popularity as a result of increased broadband speeds over the last 10 years, but continued investment in high performance broadband is necessary so that consumers can continue to benefit from new applications. The FTTH Council provides an interesting infographic on page 14 of the reply comments to illustrate the relationship over time between broadband speeds and “killer apps.” Clearly, as the FCC moves towards reforming the Universal Service Fund to support broadband, the power of innovation must not be underestimated.

In the USF Reform docket, there is prevailing criticism that FTTH is not a financially viable solution for broadband deployment in rural and unserved areas, but the FTTH Council argues that rural FTTH is well worth the private and federal investment in the long term. The FTTH Council urges the FCC to “encourage the rapid deployment of FTTH because it will enable rural telephone companies to more expeditiously meet consumer needs and thereby receive higher revenues and lower operating costs, which then translates into an eventual reduction in universal service support.”  Not only does fiber enable “virtually unlimited throughput capabilities,” FTTH networks also offer “lifetime operating expenditure savings” of $100-$250, which makes the actual cost of FTTH on par with other technologies, savings included. 

The FTTH Council calculates the cost of deploying FTTH to the “last 5%” of rural households as $44b, nearly half of the total $94b cost to deploy FTTH to the last 20%. However, the cost to deploy fiber in the eightieth to ninetieth percentile is roughly $29b, and the FTTH Council urges rural telephone companies serving the that percentile of unserved households to upgrade to FTTH.

The financial aspects of FTTH are definitely attractive from an RLEC perspective, but will the FCC agree that FTTH is the best broadband technology for rural areas? Comments in the USF proceeding show that RLECs are extremely concerned about access to private capital right now, as regulatory uncertainty over USF hovers over lenders like a dark cloud. Private lenders have reservations about lending to companies that may not be able to repay loans if USF support is reduced or eliminated completely in some cases. The FTTH Council argues that the current High-Cost Support program significantly reduces the risks associated with private lending for broadband deployment in rural areas. If the FCC’s USF Reform proposals are adopted, the risk of investing in RLECs will increase, and “investors will demand a higher premium or higher interest rate on debt or loan,” and some investors may refuse capital to RLECs altogether. As a result, the “hurdle rate” for determining if an investment is viable will increase significantly, and some planned FTTH projects may not “get over the hurdle.”  The FTTH Council compares the stability of the current High-Cost USF system to a low-risk structured settlement, but the future CAF support model makes investing in RLEC FTTH projects more akin to a risky startup venture. 

Private lending and USF support go hand-in-hand for RLECs, and are clearly representing a double-edged sword as the USF Reform rulemaking nears decision time. Without continued USF support, private lenders may shy away from RLECs. Without private lending for broadband and FTTH deployment, rural communities will either continue to fall behind in broadband development, or they will lose their broadband provider altogether. The FTTH Council recommends that the FCC combine the current High-Cost Fund with the proposed Connect America Fund to achieve ubiquitous broadband. According to the FTTH Council, the FCC should “preserve and build upon the success of the High-Cost fund and meld the aim of this fund with CAF’s new objective to reach unserved areas.”

The FTTH Council’s reply comments are available to read here.