Entries in USF Reform (49)

Thursday
May122011

Universal Service Reform - Their Two Cents

The Rural Carriers Supporting State Universal Service Funds

Nearly 100 RLECs in five states joined together to file comments with the FCC last month to express support for continued state involvement as the Commission moves to overhaul Universal Service Funding and Intercarrier compensation.

The so-called “Rural Carriers” made the filing “because of the important role that state high-cost universal service funds play in maintaining, and hopefully expanding broadband service availability in the areas that they serve.”

The filers note that they all operate in states where high-cost universal service programs have either been implemented or are under consideration, and point out that in its February Notice of Proposed Rulemaking on the topic, the Commission also cited several states with existing or developing USF programs.  The filers go on to conclude that “Such widespread existence of state universal service fund programs makes it apparent that explicit state funding of high-cost areas is essential to continuing voice service and to maintaining and expanding broadband availability.”

The Rural Carriers argue that the FCC would be wasting time and resources should it pursue a strategy of trying to determine “how to bring intrastate rates under the reciprocal compensation framework if states do not act within a certain timeframe.”  They urged the Commission to recognize the jurisdictional authority of the states and to “recognize the limits of its authority.”

The filing suggests that the Commission should therefore work closely with states to bring intrastate access charges in line with interstate rates, to eliminate arbitrage and to provide revenue where necessary for continued broadband deployment. 

The Rural Carriers add that the Commission should not only provide guidance, but also financial incentives to states to undertake state universal service programs.  Specifics proposed by the group include: “Customers in so-called net payer states should only be asked to contribute to other states’ universal service costs after net recipient states have taken appropriate actions, such as lowering access rates and allowing recovery of the reduced revenue through the establishment of high-cost universal service funds to support service in rural, high-cost and insular areas.”

The group concludes that failure to establish a mechanism whereby individual states share in the responsibility for universal service funding “would place continued provision of universal service to rural, high-cost areas at substantial risk, and would likely result in substandard or unavailability of broadband service in rural, high-cost areas.” 

Monday
May022011

Universal Service Reform - Their Two Cents

CoBank Can Increase RLEC Access to Capital by 30%-40% if CAF Structured Like USF

In this installment of “USF – Their Two Cents”, I’m taking a look at the comments filed last month by CoBank, ACB.  CoBank, based in Denver, has been financing rural telcos for more than four decades, and today has more than $3.5b in loan commitments to more than 200 rural communications companies.

CoBank’s filing emphasizes its commitment to rural America and that it supports the transition of Universal Service support from telephone to broadband service:  “Americans have prospered from the principle that universally available and affordable telephone service benefits rural, urban and suburban residents – it is now time to transition from universal telephone to universal broadband. The cost of not supporting universal service for broadband will far exceed the cost of providing it.”

The filing goes on, however, to chide the FCC’s Notice of Proposed Rulemaking (NPRM) on USF/ICC Reform, saying that it insinuates that rural telephone companies are “wasteful and inefficient.”  CoBank continues, “As a lender to this specific sector of the communications industry, we do not believe a fair assessment of the factual data bears this conclusion.”

CoBank points out that deploying broadband in rural areas can cost 10 – 20 times more than in urban markets and adds “In high-cost rural areas, subscriber densities are rarely high enough to ensure the level of cash flow needed for a return on capital from the equity and debt associated with deployment and maintenance of broadband; therefore, a sufficient and sustainable cost recovery mechanism is imperative to support the financing of ubiquitous broadband.”  The filing adds that one-time loans or grants aren’t sufficient; that ongoing maintenance costs remain high for rural broadband systems and that some form of cost-recovery program remains imperative.

The cooperative bank believes that rather than limit the size of the fund, the FCC should focus on broadening the base of contributors: “The Commission should not worry about growth in the Connect America Fund (CAF), but rather, concentrate on widening the contribution base to include companies who use rural networks to generate income, yet do not pay into the fund to support those networks. CoBank believes that the CAF should be uncapped and per-line support should not be frozen. Only by allowing the CAF to grow as needed to support investments in rural broadband networks will the goal of ubiquitous broadband at speeds and rates reasonably equivalent to urban subscribers be achieved.”

Additional points made in the CoBank filing:

  • “Access to the CAF should be limited to one fixed broadband network with both voice and broadband carrier of last resort (COLR) obligations, and one mobile broadband network in each high-cost area.”  The filing continues, “If private financing is expected to assist in deploying broadband to high-cost areas, then the Commission should tie the receipt of the CAF with the obligation of being the COLR for broadband and voice and continue the cost recovery mechanism based on rate-of-return (RoR) regulation.”  CoBank suggests that incentive regulation only works for companies with a larger subscriber base and that RoR regulation is needed for the smallest operators.  CoBank adds that it considers RoR regulation as an important component of its lending practices and that “If the Commission eliminates RoR regulation, CoBank would view that as a serious threat to an RLEC’s ability to continue to obtain access to debt capital.”
  • CoBank asserts that legacy networks need continued support, because much of existing copper infrastructure is used to deliver broadband.
  • The filing suggests that CETC support should be eliminated and that receipt of CAF should be tied to the obligations of being the COLR.
  • The bank added that it does not support reverse auction because of “concerns about the ability to finance and maintain the rural broadband backbone without a stable, consistent source of cost recovery.”

The filing concludes that the proposed CAF should be structured in a “similar fashion to the USF model to support broadband” and adds that under these circumstances, “CoBank would immediately be able to increase our rural incumbent local exchange carrier’s access to capital by 30-40%.”

Thursday
Apr212011

Universal Service Reform – Their Two Cents

Nebraska Rural Independent Companies

By now the FCC has received thousands of filings and comments regarding Universal Service Reform; it seems everyone and his brother has an opinion as to whether, how, to what degree and when the USF should be changed.  In this new series, entitled “Universal Service Reform – Their Two Cents,” I will provide a summary of the comments filed by various companies, groups of companies and advocacy associations.

For this first installment, I took a look at the comments filed by a group dubbed the Nebraska Rural Independent Companies (NRIC), or the “Nebraska Companies.”  The group is comprised of 30 rural Nebraska companies, including Arlington Telephone Company, The Blair Telephone Company, Cambridge Telephone Company, Clarks Telecommunications Co., Consolidated Telephone Company, Consolidated Telco, Inc., Consolidated Telecom, Inc., The Curtis Telephone Company, Eastern Nebraska Telephone Company, Great Plains Communications, Inc., Hamilton Telephone Company, Hartington Telecommunications Co., Inc., Hershey Cooperative Telephone Co., K. & M. Telephone Company, Inc., The Nebraska Central Telephone Company, Northeast Nebraska Telephone Company, Rock County Telephone Company, Stanton Telecom Inc., and Three River Telco.

Not surprisingly, the group calls for USF reform to maintain rate-of-return regulation and suggests that it would be unfair to drastically change the rules when companies have already made investment decisions based on the existing system: “Rural telephone companies should continue to be provided with a reasonable opportunity to recover their costs of providing service to these rural areas. Likewise, existing investments must also be recovered based on the fact that such investments were made in reliance on existing Commission rules and regulations; any “mid-course” change in recovery levels and policies would be tantamount to “changing horses in mid-stream;” and any such change would improperly undermine the reasonable and proper reliance upon the existing rules and decisions.”

The carriers call for a reformed system to combine Local Switching Support with High Cost Loop Support and suggest that the Safety Net Additive qualification procedures should be modified rather than completely eliminating safety net support.  NRIC argues that corporate expenses need to be factored into the system “since such expenses are necessary for carriers to deploy, operate and maintain voice and broadband networks. Eliminating this recovery for small and rural carriers will only further reduce these companies’ operating cash flows, ultimately leading to a reduction in the human resources necessary to make strategic decisions for network deployment, to operate network upgrades and to conduct the maintenance of the network, all in direct contravention of the ubiquitous broadband deployment goals contained in the National Broadband Plan.”

The group has also commissioned extensive study of the actual costs to deploy fiber in rural communities and proposes that additional data be collected in order to refine the regression analysis formula that the group has developed.  The study found that 86% of the costs associated with fiber deployment can be predicted by its model, although the data relied upon was highly concentrated in Midwestern markets.  The Nebraska Companies suggested that if the FCC proactively gathers additional data from all regions of the country, the model could be used for determining reasonable support as well as timing of builds so as not to over tax the fund in any given year. The proposal also offers an “out”:  “As the Nebraska Companies proposed, if the Commission is to use CapEx data to constrain support for capital investment, it should include an administratively efficient and timely waiver mechanism since any regression analysis will not capture all of the variables associated with the cost of broadband deployment.”

The companies argue that Intercarrier Compensation charges should be maintained, and that “Elimination of this revenue stream will harm rural broadband providers if others are permitted to use the providers’ networks for free, which will occur if services originating or terminating on rural PSTN facilities are allowed for virtually no charge or on a bill-and-keep basis, thus creating more pressures for USF cost recovery. A more constructive approach would be to undertake efforts to move intrastate and interstate access rates to uniformity, and thus help to eliminate incentives for access rate avoidance. The Nebraska Companies submit that the Commission should consider the impact of both special and switched access in rural markets as both are essential to rural broadband deployment and to reasonably priced access to broadband-based Internet services.”

The Nebraska group proposes that federal funds should be made available to states that establish their own Universal Service Fund, in the form of “matching funds,” and the group suggests that such a system would encourage individual states to establish and maintain funds where they haven’t previously done so.

Finally, the group believes that more stringent requirements need to be established for designation of ETC status, and that a two-year service period should be required, along with stricter minimum service provision standards to ensure that ETCs can’t “cherry pick” the portions of a service area that they cover.

The filing is lengthy, but I’ve pulled out a few more passages of note:

"Regarding the ICC issues, the Nebraska Companies draw the Commission’s attention particularly to the potential harm that will occur if services originating or terminating on rural PSTN facilities are allowed to do so for virtually no charge or on a bill-and-keep basis. The revenue being generated by per-minute ICC services (and specifically intrastate and interstate exchange access services) are significant and reflect the use of (and thus the value of) a telecommunications carrier’s existing network vis-à-vis the ability of other service providers to originate and terminate traffic through the use of such network. Migrating to bill-and-keep will simply create more pressures for USF recovery, resulting in a vicious, and potentially irreversible, downward spiral to the detriment of universal service in rural areas served by the RLECs. Understandably, the current per-minute rate structure for ICC may change, but the concept of bill-and-keep (or rates that effectively result in bill-and-keep such as $0.0007) understate and effectively ignore the value of the PSTN to providers that use the RLECs’ networks.

“The decision the Commission reaches regarding the appropriate rate for Voice over Internet Protocol (“VoIP”) traffic could effectively eliminate the ability of the Commission to reasonably deal with ICC and universal service reform. A decision to adopt a separate VoIP rate or bill-and-keep will create an overwhelming incentive for carriers to declare all voice traffic to be VoIP, resulting in chaos and the almost immediate elimination of ICC revenues that support broadband deployment in rural markets. The Nebraska Companies urge the Commission to maintain the existing ICC regime for all services that use the PSTN and to affirm the application of existing Commission rules, as well as mandate additional rules for call signaling and billing.”

“The Nebraska Companies support the migration of LSS and HCLS into one mechanism for the support of broadband in high-cost areas. This can be most effectively accomplished by combining the local switching costs with loop costs into one high-cost mechanism, which the Commission has proposed to define as the Local High Cost Support mechanism (“LHCS”). The Nebraska Companies recommend that LSS be transitioned to LHCS over a period of four years. This would allow time for existing recipients of LSS to recover sunk costs. The Nebraska Companies also believe merging LSS with HCLS into one program will remove the incentive for carriers not to merge study areas within the same state.”

“When addressing increases in SNA support the Commission should consider the amount of the SNA support directed to competitive ETCs and the impact of the SNA increase on the size of the USF. In its evaluation of the SNA, the Nebraska Companies respectfully request that the Commission quantify the amount of such increase nationally that has been due to the identical support rule or competitive ETC support. Based on this quantification, the Commission may ultimately determine that it is appropriate to consider elimination or revision of the identical support rule as a means to substantially address much of the past growth of SNA support and more importantly future growth.”

“In an effort to address the Commission’s issues relating to investment levels, the Nebraska Companies engaged several consulting firms to produce a statistical regression analysis designed to predict outside plant capital expenditures for a high-capacity terrestrial wireline broadband network using publicly available variables. Rather than using hypothetical costs, the regression study was based on the engineered construction costs of rural, rate-of-return companies. The resulting study was described in the Nebraska Companies’ Capital Expenditure Study, Predicting the Cost of Fiber to the Premise…The regression study included 167 data points, representing nine states. Using data from public sources as independent variables and inflation-adjusted construction costs per household as the dependent variable, regression equations were developed. The analysis indicated that 86% of the variation in construction costs could be explained by six variables, with the primary driver being linear density.”

The NRIC study considered the following in its analysis:  Fixed cost, Linear Density, Households, Frost Index, Wetlands Percent, Soils Texture and Road Intersections Frequency.  “The r-squared of the seven-term regression was 0.86, meaning that if the regression variables are known for a particular area, 86% of the variation in the cost of constructing FTTP facilities can be explained…Because the predictive power of the equation was so high, the Nebraska Companies concluded that the study would be useful to the Commission in developing a mathematically supported upper limit on “safe harbor” capital expenditures. Such an analysis could also be used as a means to moderate the pace of investment to not unduly place demand on the Universal Service Fund. Finally, if the data set were expanded, the analysis could be used to estimate the cost of deploying high-capacity terrestrial broadband networks nationwide.”

“The Nebraska Companies respectfully submit that the Commission must ensure that its actions to encourage the deployment of broadband in all areas of America do not undermine the continuation of the successful cost-recovery policies and mechanisms that have provided the basis for the current broadband availability in the areas served by Rural Local Exchange Carriers such as each of the Nebraska Companies. It would be unfortunate for all consumers in this country if the Commission were to forsake the gains by the RLECs in deploying networks that provide advanced services in the hopes that other providers will now make a commitment to serve sparsely populated areas that they have chosen not to serve over the last decade.”

Thursday
Mar312011

FCC and USTelecom Webinar on USF Reform

Like It or Not, Here It Comes 

On February 9th, the FCC released a Notice of Proposed Rulemaking calling for comprehensive reform of the Universal Service Fund as well as Intercarrier Compensation reform.  The 300-page tome goes into exhaustive detail, but for those who actually have work to do, USTelecom hosted a one-hour webinar yesterday in which two senior policy advisors from the FCC, Rebekah Goodheart and Carol Mattey, gave an overview of the contents and proposals in the NPRM.

In my mind, the most striking takeaway after listening to the ladies’ comments was that, while it will take some time to work out the details of HOW to do it, the FCC WILL reform the system, probably this year.  And while both Ms. Goodheart and Ms. Mattey assured there will be no “flash cuts”, make no mistake, for some of you, existing support levels may be at risk.  The following is an overview of the comments made by Mattey on USF reform.

She began by saying that “Universal service has been at the core of the FCC’s mission since its inception, to make vital communications services available to all Americans…In the 21st century, high speed internet, not telephone, is becoming our essential communications platform…We’re in the process of reforming USF and ICC to transition to a Connect America Fund (CAF) to ensure that networks capable of offering voice and broadband are deployed in all areas of the country.”

Mattey noted that the National Broadband Plan which was released last year provided a blueprint for USF and ICC reform and the NPRM released in February begins that process.  She outlined four “Pillars of Reform” that the FCC Commissioners unanimously agreed to when they adopted the NPRM:

  1. Reform USF and ICC to focus on modern networks:  Explicitly support universal availability of broadband and voice service, target the funds to areas that are otherwise uneconomic to serve, and accelerate transition to IP networks;
  2. Fiscal responsibility:  Eliminate waste, inefficiency and redundancy, create incentives for efficient operations and prudent investment, and constrain the size of the fund;
  3. Demand accountability:  Require improved performance metrics and obligations
  4. Market-driven and incentive-based policies: Facilitate deployment of technologies and services providing maximum value to consumers at the lowest possible cost.

She added that the Commissioners are committed to providing predictable transition mechanisms, i.e.  no flash cuts, but that they are also committed to a fast time frame for reform. 

As support for the need to reform the existing system, Mattey cited the FCC’s latest report on Internet Access Services, which found that 28% of voice communication lines are now VoIP and that there has been a 27% increase in mobile broadband subscribers in the past six months, bringing the total to 71m.  “These trends are putting pressure on traditional services and the existing USF.”

“The intent of the NPRM is to take immediate, specific steps to identify inefficient spending under current rules and use the savings realized to fund a new Connect America Fund as well as ICC recovery and a Mobility Fund.”  The total amount of funding would remain the same, but over time, all funds would be transitioned to the CAF. 

Mattey noted that today, while some rural consumers have access to good broadband services (defined as 768 Mbps download speeds), others have no broadband at all.  She also said that under the current system there are widely disparate amounts of funding going to areas which have similar population density and geographies. “You can have one company with little or no support, one next door getting $50-$100 per line, and a company on the other side may be getting $300 per line.”  She suggested that the current system doesn’t create the right incentives for broadband deployment in all areas, and said that the “NPRM takes a hard look at existing rules that aren’t working as intended and proposes to eliminate support that is going to areas that already have unsubsidized broadband service.”

Mattey said the FCC plans to use the national broadband map and FCC data to determine areas that have no broadband service, and she acknowledged that the broadband map has flaws at this time, but said that another update will be done in six months, which will ideally improve the map’s accuracy.

The plan is to conduct a reverse auction for carriers that wish to receive funding in order to construct broadband networks in unserved areas.  The bidding will be done on a technology neutral basis.  “We are looking to see where there is broadband today and where we can edge out broadband through the auction.”  She emphasized that the auction would result in additional support overlaid on top of existing support , “We’re not suggesting we’ll eliminate current funding.”

She also summarized numerous near-term reforms planned to improve efficiencies of the USF system:

  1. Establish specific benchmarks for capex and opex for companies that today receive support based on their own costs..."For some companies there appears to be little relationship between how costly the carrier's area is to serve and how much support it gets…the current rules provide no limit on total funding and no benchmarks for reasonable expenditures. As a result, some rural areas have state-of-the-art broadband while other rural areas are being left behind.”
  2. Adjust the current formula for high cost loop support while maintaining the current cap. This would redistribute funds within the pool of companies who are eligible for HCLS.  She said that under the current system a company has to spend more than the national average in order to receive funds. “We’re looking to redistribute funds within that pool and figure out ways to target it more efficiently.”
  3. Eliminate recovery for corporate operations expense.  Mattey acknowledged that many companies have already said that they need funding for corporate costs in order to run their companies, but she suggested that caps need to be imposed. “Today there are no limits to how much overhead can be claimed...we need to take a hard look at this and make sure that funding is used for infrastructure deployment.”
  4. Eliminate local switching support. She pointed out that $275m in local switching support went to ILECs last year, including some of the largest companies nationwide, because the system currently is based on the number of lines in a study area. “It was never intended to support large companies; particularly with the migration to IP/soft switches, it doesn’t make sense.”  Mattey suggested that one solution might be to look at switching and high cost loop expenses on a combined basis to determine who really needs the support.
  5. Eliminate Safety net additive support.  The way the system is set up today, companies may become eligible for safety net funding  if they’re losing lines.  “That wasn’t the intent, it was meant  to reward investment.”
  6. Establish a cap of $3,000 in total support per line for companies in the lower 48 states. For anything higher, Mattey said that the FCC would need detailed financial and broadband deployment reports from the company. She noted there aren't many companies whose support exceeds $3,000.
  7. Eliminate interstate access support for large, price cap companies.  Mattey said that IAS was originally a five year transition plan, established in 2000, but that no action was taken by the FCC in 2005 and “It has outlived its use.”
  8. Phase down and rationalize support for CETCs.  CETCs, mostly wireless companies, received  $1.3b last year, Mattey said, and less than $100m (7%) went to areas where there is a small wireless provider serving an area alone. She added that in some areas, support goes to four or more companies.  The plan is to use the reclaimed funds to target the availability of fixed and mobile broadband.

Finally, Mattey discussed accountability for recipient firms, which she characterized as a “key component of our reform proposals.”  “We’re looking to establish clear, enforceable public interest obligations for all recipients of support. We are mindful that these obligations should not be overly burdensome, but at the same time we recognize that accepting government funding comes with responsibilities.”  She added that the Commission is seeking comments on requirements that companies report both financial data as well as broadband deployment milestones to the FCC as a condition of receiving Universal Service Funds.

The Public Comment Period for USF/ICC Transformation NPRM (FCC 11-13) are as follows, with the final rules to follow:

  • ICC arbitrage issues (4/1 initial, 4/18 replies)
  • General comment period (4/18 initial, 5/23 replies)
  • State Members of USF Joint Board (5/2)

The Commission also has planned three workshops on USF/ICC issues: 

  • Intercarrier Compensation, 4/6 at the FCC 
  • Connect America Fund, later in April at the FCC 
  • Connect America Fund/Intercarrier compensation, in May outside of DC

For a copy of the entire NPRM on USF/ICC reform, click here.

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