Entries in USF Reform (49)

Tuesday
Sep272011

Former Commissioner Questions FCC’s Desire for RLEC Mergers

FCC has no Authority to Encourage Consolidation, Says Harold Furchtgott-Roth

On September 23, NTCA, OPASTCO and WTA (the Rural Associations) filed an ex parte notice in the USF reform proceeding which included a paper written by former FCC commissioner Harold Furchtgott-Roth entitled “Why the FCC Should Not Hold a Position with Respect to Consolidation Within the Rural Telephone Industry.” This paper addressed a critical issue that has largely been passed over in the most recent round of comments on USF/ICC reform, but is still very much a hot topic within the rural telecom industry: RLEC consolidation. The FCC raised the issue in the February 2011 USF reform NPRM, and Furchtgott-Roth “found troubling the apparent unprecedented discussion of ‘consolidation’ of small telephone companies in the NPRM.”

In his paper, Furchtgott-Roth generally avoids taking a specific position for or against RLEC consolidation (at least organically-grown consolidation); rather he challenges the fact that the FCC is trying to encourage consolidation in the first place. He refers to the following passage, paragraph 217 of the NPRM, as particularly troubling:

“Our current universal service rules may have the unintended consequence of discouraging beneficial consolidation of small carriers by subsidizing inefficient operating structures and limiting the ability of small companies to acquire and upgrade lines from other providers that have little interest in the rural market…. Although we recognize the benefits of local firms serving local markets, it may not serve the public interest for consumers across the country to subsidize the cost of operations for so many very small companies, when those companies could realize cost savings through implementation of efficiencies of scale in corporate operations that would have little impact on the customer experience.”

Furchtgott-Roth explains that this section of the NPRM conveys that the FCC thinks it has authority “to hold a view and perhaps even promulgate regulation” regarding consolidation; signals that the FCC believes small companies are less efficient than large companies and have “insufficient operating structures;” implies that there are too many small companies; and suggests that consolidation would be beneficial. He interprets that, “The FCC believes that the American consumer is punished by the very existence of at least some of the small rural telephone companies.”

Furchtgott-Roth provides nine main arguments about why the FCC should not attempt to take a pro-consolidation position regarding the RLEC industry. Most convincing is that the FCC has no evidence by way of economic studies covering the entire RLEC industry that consolidation would result in economies of scale and scope “for every possible combination of telecommunications companies across every geographic market.” Furthermore, “The FCC does not explain a compelling need to address consolidation in the rural telephone industry;” and, “Other than vague assertions that the operation of small companies is insufficient, the FCC offers no reason for its involvement. Nor does the FCC offer, as an example, evidence of even one rural telephone company where a possible merger would be efficient, let alone for each of the hundreds of small rural companies in existence.”

In addition to a lack of evidence concluding that consolidation would be the best outcome for most RLECs; the FCC has no authority to specify what size company should be.  Taking a pro-merger position also contradicts FCC precedents and the overall Federal government’s attitude towards small businesses. Furchtgott-Roth asserts, “There are no statutory thresholds of what constitutes a telecommunications company that is too large or one that is too small; no statutory thresholds determine what constitutes too few telecommunications companies or too many. “He argues that any decisions to consolidate and the size of companies “will be determined by market forces, not government diktat.”

The conversation about RLEC industry consolidation is scary, controversial, emotional…and yes, necessary to have right now as the industry faces some of its greatest challenges ever. It may very well be the case that USF/ICC reform will naturally nudge some companies towards consolidation if they indeed find it an attractive option after thorough, meticulous market studies and planning. However, Furchtgott-Roth warns that a specific  pro-consolidation tone the final rules could have unintended negative consequences: “If rules reduce cost recovery, there will be less incentive for consolidation ‘as such companies become less profitable and less attractive acquisition targets.’” Additionally, “Government encouragement of consolidation could lead to a misallocation of resources as businesses make investments in consolidation artificially to meet government expectations.” Basically, decisions to consolidate should be for the right reasons, and the right reasons are market and competitive forces and real, proven economic efficiencies.

No matter how you feel personally about RLEC industry consolidation, this paper is an excellent description of why it is not the FCC’s place to say that small telephone companies should consolidate. If widespread consolidation is to occur in the rural telephone industry as a result of USF/ICC reform, it should be organic and a result of recognizable market efficiencies –not a result of FCC pressure or vague rules that attempt to encourage it. I think it is possible that FCC encouragement of consolidation could even produce some ill-matched mergers hastily thrown together for the wrong reasons.

What do you think—should the FCC take a position on RLEC consolidation or should consolidation come purely from market forces?  How would a specific pro-consolidation position by the FCC impact the decision-making process when small companies study merger or acquisition possibilities?

Furchtgott-Roth’s paper is available to read here.

Tuesday
Sep272011

New Mexico Study Depicts Life without USF

“Substantial” Economic Impact of Eliminating USF: Job, Income and Tax Loss in NM

The New Mexico Exchange Carriers Group (NMECG) released an economic impact study to illustrate how jobs, income and tax revenue in the state would be harmed by drastic changes to the Universal Service Fund. Earlier this summer, a similar study was conducted in Kansas, which also concluded that eliminating USF support for RLECs would have a ripple effect of negative consequences in the state. The NMECG study, conducted by New Mexico State University’s Arrowhead Center, found that eliminating $35.4m in USF would ultimately result in the loss of 3,146 jobs, $200.3m in personal income and $13.6m in tax revenue over a ten year period (2012-2021). According to NMECG, “the estimated impacts are substantial,” and would most significantly hurt rural areas of the state.

NMECG provided some background and demographic information about its 11 RLEC members—these companies have 31,542 access lines covering 80,281 square miles. The NM RLECs have deployed 5,000 miles of fiber, employ 518 people and pay $23.5m in wages annually. 90% of their lines are broadband-capable, and they cover an average of 1.8 access lines per square mile. NMECG comments that “significant rural to urban migration has been a pattern in New Mexico (and nationally) since the early part of the 20th century,” and “New Mexico’s non-metropolitan counties generally exhibit a stagnant or declining population base with low income and high poverty rates.” Population density across the state ranges from 0.5 people per square mile in Catron County to 567 people per square mile in Bernalillo County. Unemployment overall in New Mexico, at 8.4%, is lower than the national rate, but some rural counties have very high unemployment (18.7% in Luna County and 15.7% in Mora County).

The study utilized economic impact analysis “to measure the net change in economic activity in a given geographic area that results from an exogenous change in economic activity,” in this case, the elimination of USF support to 11 RLECs. NMECG explains, “The main idea behind economic impact analysis is that one more (less) dollar spent in a local or regional economy results in greater than one dollar in economic activity in the area.” The authors used an input-output model, REMI PI+, “designed to capture the effects of a change in one industry on other industries and households.”

The $34.5m in USF support makes up about 32% of the NM RLEC’s revenue, and “the estimation approach taken in this report reduces the USF revenue source by the reported amount beginning in calendar year 2012.” NMECG anticipates that 99 telecommunications industry and 261 private sector jobs would be lost in the first year alone. In the first five-year period (2012-2016), a total of 452 telecommunications and 1,315 private sector jobs would be eliminated. By the second five-year period (2017-2021), the rate of job loss would be slightly less as a result of “industry adjustment to the loss of USF funds.” At the end of the ten year period, NMECG estimates that 805 telecommunications jobs would be lost at a rate of about 80 jobs per year, and 2,400 other private sector jobs would be lost.

I think it is interesting to note that the NM RLECs only employ 518 people, but the study estimates that 805 telecommunications industry jobs would be lost over 10 years. They do not explain if this means that literally every NM RLEC job will vanish (and then some), or if the “telecommunications jobs” at risk in the state extend to non-RLEC jobs in manufacturing, construction, customer support, wireless retail, etc. The study also does not explain if, or how, these lost jobs could be replaced within the state’s broader telecommunications technology and information communications industry. Furthermore, the study presumes that USF funds would be eliminated completely, without any replacement mechanism for lost access revenue or CAF funding for broadband. Although the RLEC industry is anticipating reductions to USF support, it is quite a stretch to assume that all USF funding will disappear abruptly in the next year, and not be replaced at all over the next 10 years. Perhaps the NMECG was just trying to prepare for the worst possible outcome of USF reform?

Regardless of the input used in this economic model, it is still important to understand how USF supports more than just telephone lines in high cost areas, and the NMECG study definitely depicts a dire situation in the state if USF were to vanish. A similar June 2011 study by Wichita State University, Kansas Rural Local Exchange Carriers: Assessing the Impact of the National Broadband Plan concluded that the FCC’s proposed modifications to USF would result in annual funding reductions of $28.7m between 2012 and 2016 for a total of a $143.5m decrease in USF for 35 RLECs. The Kansas study explains, “The proposed loss of over $143m of USF will require Kansas RLECs to dramatically change their operations and likely cause defaults on loan obligations owed to the federal government and other lending institutions.” The Kansas RLECs would lose an estimated 140 jobs and $29m in wages, and the total state impact would be 367 jobs and over $51m in wages by 2016.

The results of this study also signal that it might not be a bad idea for RLECs to start looking for other sources of revenue to make up for that 30% + chunk derived from USF and ICC. Even if USF is not eliminated completely, reductions are almost guaranteed especially in the access revenue component if access rates are reduced to a uniform $0.0007 rate, which is likely. Even with the best possible outcome in the new USF rules, RLECs should expect to have to make cutbacks in the next few years.  Planning, preparation and a forward-looking mentality definitely wouldn’t hurt at this point.

The NMECG study, The Potential Economic Impact of the National Broadband Plan on the New Mexico Exchange Carriers Group, is available here.

Thursday
Sep152011

Rural Associations Urge FCC to Reject Last-Minute USF “Wish Lists”

The Consensus Framework is an Opportunity for Pragmatic and Meaningful Reform

In reply comments filed last week, NTCA, OPASTCO, WTA and NECA encouraged the FCC to adopt the RLEC Plan without modification, and reject various alternative plans filed in this last comment cycle on USF/ICC reform. The Rural Associations argue that the last-minute alternative plans “provide little, if anything, in the way of detail and even less in terms of how consumers would benefit by their enactment,” and are based mostly on “broad policy statements recast from earlier phases of these proceedings.” The Rural Associations believe that the FCC has in its hands a reasonable, realistic and practical framework for thorough reform with the Consensus Framework (RLEC and ABC Plans), and “The time for concepts and theories is long past. Reform will go nowhere if the industry continues to spiral around high-level policy debates and the grinding of ‘old axes’ in lieu of delving into the gritty details that are essential to complete the reform process.”

The Rural Associations explain that the RLEC Plan has received widespread support, and it presents a much less radical solution than some of the alternatives which propose hard caps on the fund, reverse auctions, and total elimination of access revenue. Furthermore, the Rural Associations explain that “The Consensus Framework represents a detailed, balanced and pragmatic approach to comprehensive reform that is capable of getting the Commission and industry beyond the seemingly endless stalemate.”

Although the Consensus Framework has been criticized by cable, wireless, and other industry sectors as being far from an industry consensus, the Rural Associations make the important distinction that “some of the largest contributors to the USF as well as those who depend the most upon the Fund” participated in the negotiations. In other words, the destiny of the Fund should probably be determined, to some degree anyway, by those companies who keep the fund in existence and use it successfully, like RLECs. At the very least, RLECs should have a primary say in how RLEC funding is distributed, and “The RLEC Plan seeks to preserve the past and present successes of RLECs in bringing quality, affordable voice and broadband services to their high-cost markets.” In addition to maintaining stability for RLECs, the Rural Associations also explain that the RLEC Plan abides by the FCC’s USF/ICC reform guiding principles of responsibility, modernization, fiscal accountability and market-driven policy.

The Rural Associations point to the National Cable and Telecommunications Association’s “Amended ABC Plan” and the Google, Skype, Sprint-Nextel and Vonage “Tech/User Plan” as two examples of late filed, “potentially dangerous” proposals.  The Rural Associations assert that NCTA’s proposal to reduce rate of return to 8.5% and eliminate it completely in 2019 “provides no analysis whatsoever of the impact of this proposal on consumers or the USF itself.”  Throughout this proceeding, the Rural Associations have advocated “methodical and surgical” reforms, and they warn the FCC that “A particular policy approach that may seem ‘visionary’ or ‘progressive’ could turn out to be disastrous if put into practice without a thorough understanding of its implications.”

By contrast, the Rural Associations submitted the RLEC Plan months ago, and the FCC and industry have had ample time to consider the benefits, consequences and estimated short- and long-term impacts of an entire suite of reforms, from the size of the fund to access rates to arbitrage.  The opportunity for heavy-duty analysis does not exist with the late-filed plans, nor do most of the alternative plans cover the entire range of USF/ICC reform topics in great detail.  The FCC’s Public Notice, which specifically asked questions about three alternatives plans (RLEC and ABC Plans, and the Joint Board Plan) should have been a fairly clear hint that the time was up presenting new, radical plans—some members of the industry are even speculating that the FCC had already begun writing the final rules before the Public Notice was released last month.  The Rural Associations recognize that at this stage in the game, it is time to focus on how the plans outlined in the Public Notice will work for the industry at large: “In lieu of leaping into the unknown based upon undeveloped proposals and last-minute plans for purportedly-groundbreaking (and equally damaging) policy shifts, the Commission should adopt the RLEC Plan, as modified by the Consensus Framework.”

The question now is will the FCC accept the Consensus Framework “as is,” or will it be modified in light of the opposition that has emerged in this comment cycle?  The Rural Associations believe that many of the suggested modifications are “unworkable” and would significantly threaten the “delicate balance” that was achieved through ILEC-RLEC negotiations.  One particular area where the Rural Associations are not willing to budge is the proposed $4.5b Fund budget.  Cable industry commenters are calling for a “hard and durable permanent cap” on the fund; but the Rural Associations insist that the $4.5b budget, which could be modified as needed in the future, is a “far more effective approach for driving and demanding efficiency in the reform and operation of these programs, while avoiding the legal quagmire that would arise in adopting a firm (and potentially permanent) cap notwithstanding the statutory mandates.”

The Rural Associations argue that a hard cap is contrary to the Telecommunications Act, it would discourage new investment, and challenge the ability of carriers to recover current investments in broadband networks.  They assert that Comcast provides no data or evidence to illustrate that a hard cap at today’s funding levels will be sufficient in the future, and imposing a hard cap would require a separate rulemaking proceeding which could take years.  Furthermore, a permanent cap may have “unintended and unforeseen consequences,” since nobody can predict with certainty what the future holds.  Rather, “All that anyone can know at this point is that budget targets are more flexible than permanent hard caps, and can be much more readily modified to address economic and industry changes (probably substantial) that are likely to take place at any given point in the future.”

Some critics of the RLEC and ABC Plans believe the Consensus Framework solutions are too focused on the wireline industry, despite the fact that the wireline industry market share is under constant attack from wireless and cable.  However, the Rural Associations insist that the RLEC Plan is not “backward-looking.” They explain, “It constitutes a pragmatic way to preserve and promote access to high-quality, affordable broadband services that many rural consumers enjoy only because the existing High Cost program for RLEC service areas has been so effective.”

While it may have been exciting for some members of the industry to draft radical and completely transformative proposals for USF/ICC reform—which we have definitely seen no shortage of—the fact remains that there must be specific and predictable universal service support going forward in accordance with statutory requirements.  If adopted, the Consensus Framework could help facilitate further, more dramatic changes down the road as the industry transforms to all-IP, as consumer broadband technology demands and trends become more predictable, and as ubiquitous broadband becomes a reality.  The Rural Associations make some very interesting points about the importance of flexibility and stability, because we definitely do not know for certain what the future holds.  This is only the first significant step in transforming USF for a broadband world, and it may be the best option for the FCC to err on the side of caution while still ensuring that outdated and insufficient policies are modernized.

The Rural Associations' reply comments are available here.

Thursday
Sep082011

Six ILECs Defend Rights of First Refusal Proposal

ABC Plan Participants Respond to Challenges from Opponents 

On September 6, the six price cap ILECs who developed America’s Broadband Connectivity Plan (ABC Plan) for USF/ICC reform filed reply comments which addressed a range of criticism that has emerged from different corners of the industry.  Since the ABC Plan was released on July 29, it has been hailed by some as a great compromise between industry parties who are normally rarely in agreement, and it has been challenged by others as extremely flawed and geared towards cementing ILEC competitive strongholds on the broadband industry.  The ABC Plan’s authors -- AT&T, CenturyLink, FairPoint, Frontier, Verizon and Windstream -- open the reply comments by insisting, “The comments filed in this proceeding demonstrate the unprecedented breadth of support for the ABC Plan and the Consensus Framework,” and urge they the FCC to adopt this proposal.  They add, “It would be futile for the Commission to continue to wait for a perfect consensus, as one will never emerge.”

One of the highly debated issues in the ABC Plan throughout the initial comments to the FCC’s Universal Service-Intercarrier Compensation Transformation Proceeding Public Notice was the ILECs’ proposal for rights of first refusal (ROFR) of broadband support in unserved areas.  Basically, the ABC Plan would allow ILECs who have made “substantial existing broadband investments” to at least 35% of a wire center where there are no other unsubsidized competitors to either accept or decline CAF support for that wire center.  According to the ABC Plan, “If [the ILEC] accepts the offer of the baseline support, then the incumbent LEC assumes all of the broadband service obligations for the ten-year term of CAF support.”  If the ILEC declines the offer, any other provider can compete for the CAF support in a reverse auction, and presumably the most cost-efficient competitor would win the support.

Opposition to the ROFR proposal primarily consisted of arguments that the proposal is anticompetitive and would result in a windfall for ILECs at the expense of consumers.  US Cellular comments that the ABC Plan in general is “a blueprint for a heist,” and “Allowing ROFR will reverse over a decade of Congressional and Commission focus on consumers, rather than carriers, as the beneficiaries of support.”  US Cellular argues that ROFR is not competitively neutral and would give the providers the power to decide which technology is deployed in rural areas, even if it is not the most cost-efficient, fastest, or most desired broadband technology. US Cellular further argues that if 80% of ILECs exercise their ROFR as anticipated, the ILECs will essentially be “catastrophically stunting entry by competitive wireless carriers for at least ten years.”

Additional noteworthy examples of opposition to ROFR come from Free Press, Alaskan telecommunications provider General Communications Inc. (GCI), and Cox Communications.  Free Press argues “The self-interested nature of this plan on the price cap side is perfectly illustrated by their proposal to have a Rights of First Refusal that allows them to insulate themselves from the competition that reverse auctions are supposed to create.” Cox also argues that ROFR would distract from the purported benefits of reverse auctions in totally unserved areas: “there is no public policy rational for preferring any provider;” and only if price cap ILECs are determined to be the most efficient provider via a competitive bidding process, “then the bidding process will award them the subsidies.”  Cox also adds that, “There is no evidence at all that granting a right of first refusal would lead to any consumer benefits.”

GCI argues against ROFR from its unique perspective as a rural Alaskan broadband provider.  GCI insists that ROFR “would be disastrous for ETCs like GCI and the customers they serve, would turn back the clock on rural wireless and broadband deployment, and more importantly, would harm public safety.”  GCI insists that both wireless and wireline services should be supported in Alaska.  GCI explains that wireless is particularly important for Alaskan public safety and the state’s job market, which “is characterized by a significant transient workforce” of individuals who relocate seasonally, work on fishing boats and oil pipelines, and “cannot depend on wireline service.”

The six ABC Plan ILECs defend the ROFR proposal and insist that its purpose is not to entrench their positions in the market; rather, “It is a narrowly-targeted means of accelerating broadband deployment and preventing inefficient duplication of existing facilities.”  The ILECs point to the limitations of the proposal -- that ROFR is not allowed unless the ILEC has deployed broadband to 35% of the wire center, and ROFR is not allowed if there is a single unsupported competitor -- as evidence that ROFR will not “tilt the competitive landscape” in favor of ILECs.

The ILECs believe that ROFR will help price cap carriers leverage existing investments to provide broadband in nearby unserved areas, and “It is essential to take advantage of existing investments in ILEC infrastructure to leverage those facilities in a way that will deliver ubiquitous access to broadband while working within the current budget for high-cost funding.”  The ILECs further argue against criticism that ROFR is not competitively or technologically neutral by insisting that the unserved areas could feasibly be served by any competitor with any technology if the ILEC refuses the support.

Do you think ROFR is intended to prevent stranded investment and help the price cap ILECs deploy broadband in unserved rural areas -- the areas where price cap ILECs have long been criticized for not making a very good effort to serve -- or is ROFR a means for the ABC Plan participants to strengthen their market power at the expense of consumer benefit and competition?  Both sides make persuasive arguments, and the ROFR proposal has gained support from other mid-sized ILECs who did not participate in the ABC Plan, such as members of the Independent Telephone & Telecommunications Alliance (ITTA).  In its joint comments with Cincinnati Bell, Hargray Telephone Company and Hickory Tech Corporation, ITTA urges the FCC to adopt the ROFR proposal as presented in the ABC Plan.

Your position in the industry will likely dictate whether you think the ROFR proposal is a boon or a bust, but one could get the impression that the ROFR opponents like cable and wireless providers are also trying to secure their competitive positions by attempting to block this proposal from being adopted.  It is possible that the FCC could impose further limitations on ROFR, such as requiring the ILEC to serve substantially more than 35% of the wire center.  A higher threshold may calm some of the opponents and even increase the number of unserved areas where support could be determined by reverse auctions, but the ABC Plan participants have warned that they will not support drastic modifications to the plan by the FCC. The ROFR issue seems to be one of the more dramatic topics, and it is also an area that may require the “shared sacrifice” that the FCC has been asking for since the NPRM was released in February—one possible outcome being that the ILECs would have to sacrifice their desired low deployment threshold. Hopefully, the rural consumers in unserved price cap ILEC areas will not have to sacrifice their need for high quality, reasonably comparable and affordable broadband service.

The reply comments by the six ILECs are available here.

Wednesday
Sep072011

Transitioning to CAF: RLEC Plan Steps and Impact

NTCA Outlines RLEC Plan’s Steps, NECA Calculates Preliminary Impact on RLECs' Slice of USF Pie

Last week, rural telecom association NTCA and the National Exchange Carriers' Association (NECA) held ex parte meetings with members of the FCC to provide additional details about the associations’ RLEC Plan for USF/ICC Reform—NECA submitted a chart illustrating how legacy USF support for RLECs may transition to the Connect America Fund (CAF) coupled with a Restructure Mechanism (RM); and NTCA presented a condensed summary of the steps in the RLEC Plan.

As shown below, NECA’s Preliminary RLEC CAF + RM Computation chart starts at $2b and accounts for modest growth of $50m per year up to “a total annual budget of $2.3b” by the sixth year.  By the eighth year, Legacy USF support is reduced by more than half, with CAF + RM support replacing the legacy funds without increasing the overall size of the fund by more than $300m.  According to NECA, “incremental funding will be necessary to enable access restructuring, promote further broadband build-out (but only to the extent supported by increases in USF/CAF funding above current levels for any individual company), and provide a reasonable opportunity to recover the costs associated with existing investments in broadband-capable plant.”

NECA’s calculations were produced “using industry-wide assumptions and growth rates, together with preliminary inputs and factors.”  NECA also provided a summary of their calculations and assumptions, and a description of the RM.  NECA explains, “The RM is designed to recover revenue losses as a result of capping interstate originating and terminating switched access rates at the start of access reform as well as revenue losses caused by reducing terminating access rates to targeted levels in three phases,” where the targeted level is ultimately the $0.0007 per minute terminating end office rate.

To calculate the RM, NECA explains, “The total revenue shortfall is the sum of the intrastate and interstate revenue shortfalls…The RM is calculated by offsetting the combined revenue shortfalls by increases in subscriber line charge (SLC) revenue.”  If residential rates in a study area are below the $25 local rate benchmark, the monthly residential SLC can be increased by 75 cents per year until the benchmark is met.  NECA further explains, “if additional SLC revenues in a given step exceed the intrastate RM, the SLC revenue in excess of the intrastate RM is then used to offset the interstate component of the RM;” and “earnings in excess of a 10% RoR for that year will be used to offset the intrastate component of the RM for that year after the SLC revenue offset has been taken into account.” 

Also helpful for understanding the potential road ahead for USF is NTCA’s summary of the steps in the RLEC Plan.  The four steps explained in NTCA’s August 26 ex parte filing are as follows:

Step 1: “Implement short-term ICC reform measures that confirm intercarrier compensation is due for all traffic originating from or terminating to the PSTN regardless of technology; VoIP pays established interstate access rates for all interexchange traffic and reciprocal compensation for local.”  The FCC should also address phantom traffic and access stimulation in this step.

Step 2: Short-term USF reform, beginning January, 1, 2012, including “a limitation on recovery of prospective RLEC capital expenditures,” and “cap recovery of corporate operations expenses by applying the current HCLS corporate operations expense cap formula to all federal high cost support mechanisms.”

Step 3: This step would initiate the process of capping interstate access rates with an 8-step “realignment program,” that includes unifying RLEC intrastate terminating access rates at interstate levels; reducing RLEC terminating local switching rates to $.005 per minute; and finally “unless the FCC determines otherwise, terminating local switching rates would be reduced to $.0007 per minute in 3 equal installments for RLECs.”  Step 3 would also see the implementation of the $25 rate benchmark (as described above in the summary of the NECA calculations).  NTCA emphasizes that “ICC rate reduction will be deferred in any year in which, for any reason, there is insufficient high-cost support and/or restructure mechanism funding available.”

Step 4: The final step in the RLEC Plan is to “implement an RLEC-specific CAF mechanism designed to re-focus existing RLEC USF support on broadband.”  As illustrated by the NECA chart above, legacy funding would decline as CAF funding is phased in.  NTCA explains that RLEC CAF support is determined “by subtracting the product of an urban broadband transmission cost benchmark times broadband lines in service, from actual RLEC network broadband transmission costs.”

If the RLEC Plan is implemented, NTCA recommends that the FCC review and modify the plan as needed after 3-5 years.  NTCA also presents several “overarching principles” that the FCC should keep in mind as the final rules are drafted; such as not imposing a hard cap on high cost support, allowing the RLEC portion of the fund modified growth of $300m by the sixth year, removing the high cost fund budget after 2017, allocating $300m for mobile broadband service, and targeting $2.2b for areas served by price cap carriers consistent with the Consensus Framework proposals.

In this final comment cycle, the RLEC Plan has gained considerable support from statewide telecom associations and a number of individual RLEC commenters, but not all RLECs are completely on board. With reply comments due this week, it will be interesting to see how the Consensus Framework parties react to the questions and critiques posed in the comments. Although not all RLECs advocate the same reform plan, the RLECs who have participated in this proceeding have presented a tremendous amount of evidence and commentary to illustrate how harmful the FCC's initial USF/ICC Reform NPRM proposals would be for these companies and for the rural Americans they serve. It is now up to the FCC to ensure that RLECs have reasonable opportunities for existing broadband investment and lost access revenue recovery, and ample opportunities to continue bringing the benefits of broadband to high-cost rural areas.

NECA’s chart and calculation explanation is available here, and NTCA’s ex parte filing is available here.

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