Entries in Reverse Auctions (4)

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
Jul052011

Comments Show Little Consensus on USF Reform Issues

A Comparative Matrix Illustrating Diverse Viewpoints on Key USF Reform Decisions

The Universal Service for America Coalition (“USA Coalition”) summed up the dominant attitude towards the FCC’s proposed Universal Service Fund reform with the statement, “the voluminous record in this proceeding reflects widespread agreement that comprehensive universal service reform is necessary, but no consensus about the appropriate replacement mechanism.” Essentially, every major stakeholder agrees that some type of USF reform is necessary in order to bring America’s telecommunications network into the twenty first century broadband era. However, alternative solutions for reform span the spectrum of possibilities from moderate, gradual changes to rapidly eliminating high-cost support and basically everything in between the extremes. In order to keep track of the vast array of perspectives on USF reform, I have created a comparative matrix to illustrate viewpoints on key issues such as reverse auctions, fund caps, supported broadband speeds, transition periods and preferred alternative plans. The chart below only addresses one half of the overarching USF reforms—Intercarrier Compensation rightfully deserves a comparative matrix of its own.

The challenge in this project was picking the issues to compare across the different stakeholders represented—as a result, this is by no means a complete snapshot of the entire USF reform ecosystem. Issues like eliminating rate-of-return, size of geographic areas for targeted support, how many and what types of broadband providers to include in CAF, and nuanced perspectives regarding the different components of the high-cost fund are all equally important aspects of USF reform.  I believe that the topics represented in this matrix represent the “hot topics,” and are therefore the issues that most stakeholders provided commentary about in the proceeding. I also believe that reverse auctions and fund caps represent the most critical threats to RLECs, so it is especially important to illustrate the diverse opinions from stakeholders on these topics in order to possibly predict how the FCC may respond in final rules.

The data in the comparative matrix was collected from comments and reply comments from 57 USF stakeholders including small RLECs, Tribal telecommunications providers, state utility commissions, large price-cap carriers, consumer associations, capital lenders, state and national rural telecommunications associations, wireless providers and associations, satellite companies, cable companies, and legal and consulting firms. In some cases, the answer was clear as to whether or not a stakeholder supported or opposed a specific area of USF reform, and in some cases it was necessary to draw my own conclusion based on the comments about a specific topic—like whether or not a stakeholder specifically supports the FCC’s NPRM (surprisingly, this was not always clear).

Overall, I believe that there is overwhelming concern about the potential impact of the FCC’s proposals. In their comments, the Telecommunications Association of Maine insists that the FCC must “First, Do No Harm” with FCC reform. Unfortunately, the definition of “harm” varies greatly depending on which stakeholder is complaining about how unfair the current USF system is or how unfair the FCC’s proposals are. I believe it is clear from the comments that reverse auctions are not popular. Furthermore, there is widespread concern that the FCC’s support of reverse auctions is based on shaky theory with no solid foundation for a workable auction mechanism. Another common trend in the comments was large carriers (and basically any non-RLEC stakeholder) accusing RLECs of being wasteful, yet there were no solid, quantitative examples of RLECs abusing or wasting high-cost funds.  However, there were more than a few examples of RLECs utilizing the current USF system effectively and efficiently to deploy broadband in uneconomic rural areas, and there were ample quantitative examples of financial harms that will befall RLECs if the FCC’s proposals are adopted. Opinions on capping the high-cost funds ranged across the board, as did opinions on the appropriate transition period from the current system to the new USF methodology. Preferred transition periods ranged from immediately to over 10 years, and commenters disagreed mightily over capping, reducing, eliminating or increasing specific parts or the whole high-cost fund. Not surprisingly, there was also little consensus about the broadband speeds that should be supported with USF subsidies—as you can see in the chart below, the range is from 200 kbps to 100 Mbps.  

How will the FCC interpret all of these differing viewpoints? The FCC must properly address the concerns demonstrated by stakeholders, and hopefully the FCC will thoroughly consider some of the alternative plans presented in the proceeding. When the NPRM was first released back in February, Chairman Genachowski specifically said that he wanted to see alternative plans from the industry, and I believe the RLEC industry stepped up to this challenge.  A variety of rural stakeholders submitted interesting and attractive alternative plans that would each bring significantly less harm upon the RLEC industry than the FCC’s proposal. One thing is for sure based on the comments in this proceeding—there is basically no way that the entire industry is going to be satisfied with the final rules. The question is; which stakeholders will be harmed the most? I can only hope that it will not be RLECs.

Monday
Jun132011

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.