Monday, April 18, 2011

USF Reform Comments Showdown: In This Corner, Rural Carriers Stand Somewhat United

Comments on USF Reform and the Connect America Fund were due April 18, 2011, commencing the second round of comments in this proceeding (following April 1st's ICC comments). For your reference, the following comment summaries are in response to:

In the Matter of (emphasized comment summaries in green):
Connect America Fund (WC DN 10-90)
A National Broadband Plan For Our Future (GN DN 09-51)
Establishing Just and Reasonable Rates for Local Exchange Carriers (WC DN 07-135)
High-Cost Universal Service Support (WC DN 05-337)
Developing a Unified Intercarrier Compensation Regime (CC DN 01-92)
Federal-State Joint Board on Universal Service (CC DN 96-45)
Lifeline and Link-up (WC DN 03-109)
I have been anxiously awaiting this day since the FCC released this NPRM, and naturally the comments were due on the worst possible week for me to read them, as I am in the midst of final papers and exams. However, I was prepared and cleared my schedule for two full days to read and summarize key comments in this proceeding. I am planning to divide my comment summaries into two appropriate groups of RLECs/rural associations (in this post), and the "other guys" in the following post. You may wonder why I am spending so much time summarizing these comments (without getting paid anyway), and that is indeed a good question. First, I will be doing my master's thesis on USF reform. My working title is "Will RLECs Survive the New Era of USF?" However, I haven't gotten much further than that. I am hoping these comments will inspire me to move forward with my thesis and refine my topic proposal so I can start writing the paper this summer. Second, I believe it is critically important that all stakeholders in the telecom industry gain a better understanding of rural telecom providers. There is not enough information or understanding about the important role of RLECs within the FCC and within the industry at large, so I am hoping to educate at least a few people on the perspective of the rural telecom industry (which is the overall purpose of this blog) Without further adieu,

 Comments of the Iowa Telecommunications Association (ITA):
ITA was dead on point with their argument that although the National Broadband Plan (NBP) in effect has some very important goals, such as ensuring ubiquitous and robust broadband to all Americans, "the devil is in the details," and in this case, the details are extremely detrimental to Iowa's small telecommunications carriers (ITA, 2011, pg. 5).  Iowa telecom providers have made tremendous progress in deploying quality, high speed broadband to extremely rural areas despite the hardships associated with low population density (the average size of an Iowa community is a mere 3,000 people, and Iowa has over 1,000 communities).  ITA argues that the USF Reform NPRM "erroneously assumes that something significant has changed in Iowa," which would make serving these rural communities attractive to larger carriers in the absence of Iowa's RLECs. I loved that ITA included one of my favorite quotes by Edmund Burke, which I commonly utter in reference to the telecommunications industry: "Those who don't know history are destined to repeat it" (ITA, 2011, pg. 2). History shows that large carriers have not been interested in providing service in rural Iowa, where there is very little economic incentive to invest in broadband networks. History shows that Iowa's RLECs have defied the odds to bring state-of-the-art service to their communities. Those who argue that Iowa doesn't actually need over 100 small companies should note that consolidation will not solve critical economic problems of scope and scale, as is perhaps the case in more densely populated areas. ITA argues that reducing or eliminated the High Cost Fund and ICC support will violate Section 254(b) of the Communications Act which mandates a sustainable and predictable funding mechanism. ITA also provided a really excellent argument regarding the state of rate-of-return carriers in Iowa. Critics of rate-of-return often claim that RLECs are sitting on piles of money and inefficiently utilizing federal funding. ITA cites a study conducted by Keisling Associates which concluded that the average rate-of-return for 111 Iowa regulated RLEC's was actually 1.57% in 2009, down from 3.48% in 2008, and significantly lower than the FCC's authorized rate of 11.25%. Furthermore, 41% of the RLECs actually had negative rates of return, and 85% were below the 11.25% threshold. Another study cited in the comments, by Vantage Point Solutions, described the costs of deploying a FTTH broadband network vs. an LTE wireless network in a hypothetical rural community with a population of 952 (pretty normal for Iowa communities). Although the LTE fixed costs would be less FTTH, the FTTH network would support 70Mbps per customer, whereas the LTE network would only support 0.047Mbps per customer. Even more astonishing is that the LTE network would end up costing $95,556 per Mbps versus $103 per Mbps for the FTTH network. If anyone has doubts about the value and efficiency of FTTH, please read this study. I was really pleased with the arguments in the ITA comments--they accurately reflected the dire concerns that Iowa RLECs have with the NPRM, and they provided some really memorable examples of why continued, sustainable and predictable USF is important for both Iowa RLECs and their rural customers.

Comments of CoBank, ACB: 
CoBank, a cooperative bank for rural businesses, is a critical source of private lending for RLECs. There has been considerable concern that lenders like CoBank will freeze funding resources for RLECs as a result of the regulatory uncertainty plaguing the industry. CoBank provides over $3.5B in loans to 200 rural wireless, wireline, cable and Internet providers; as well as other rural agriculture, energy, water and waste disposal businesses. CoBank supports the NBP and transitioning USF to support broadband, but adds that "there is a troublesome tone in the NPRM that suggests the Commission believes that rural carriers that serve high-cost areas are intrinsically wasteful and inefficient" (CoBank, 2011, pg. 3). CoBank does not believe this is a fair assessment of rural telecom providers, and they stress that rural telecom networks require ongoing capital expenditures which may cost up to 10 times more than comparable urban network expenditures. CoBank also argues that the proposed Connect America Fund (CAF) should not be capped, because "ongoing not subside upon completion of the project" (CoBank, 2011, pg. 5). Furthermore, rate-of-return should not be eliminated because the alternative, price-cap or incentive based regulation, is not applicable for companies that service high cost rural areas. According to CoBank, it is a "basic fact of business" that price cap carriers will not invest in rural areas that will not generate sizable profits. CoBank asks the critical question on every rate-of-return carrier's mind: "Why would the Commission dismantle a successful, efficient method of deploying broadband to high-cost areas?" (CoBank, 2011, pg. 6) That is indeed a very good question... Anyway, CoBank suggests that the FCC consider either lowering the 11.25% rate of return, or examining allegations of inefficiency on a case-by-case basis instead of making everyone suffer. I think these are both really interesting suggestions, and I hope to read more about the merits of a case-by-case analysis of inefficient users of USF. I suspect there are far fewer cases than the FCC assumes exist. I though CoBank's comments reflected some of the points that were made at the NTCA Legislative and Policy Conference about the important of rural America to our nation's economy. Rural America provides the bulk of the country's foods, fibers and fuels, and it is absolutely necessary that rural areas have reasonably comparable access to broadband in order to keep pace with urban America--in order to feed and clothe them as well. CoBank will be less inclined to invest in rural telecom providers if there is no guaranteed rate-of-return, where RLECs would be less likely to repay loans. Very scary!

Comments of the Rural Cellular Association (RCA):
Ah, reverse auctions...This NPRM leaves no stone unturned in terms of telecom issues that give me panic attacks (reverse auctions, monopolies, big government; for example). RCA's comments are from a perspective that is clearly different from the wireline rural associations, but nonetheless they made some interesting and insightful arguments. Like everyone else, RCA applauds the FCC for taking steps toward modernizing USF and ensuring that all Americans have access to broadband, but RCA questions whether the FCC even has the proper authority to mandate USF support for broadband or to mandate reverse auctions. RCA recommends that the FCC seek the proper authority from Congress before moving forward with CAF and reverse auctions, and Congress "should be the arbiter of whether to undertake a sea-change in the distribution of high-cost USF support" (RCA, 2011, pg. 3). Next, RCA argues that the FCC should adhere to the following principles in any major USF reform: efficiency, sufficiency, competitive and technology neutrality (don't pick winners and losers!), success-based funding, appropriately targeted support, and transition to broadband without a premature death to voice support. RCA also argues for equal treatment of wireless and wireline, and that the FCC should avoid funding only one eligible carrier. Rather, the FCC should consider proposing a single subsidy per customer. RCA is critical of the current high-cost/rate-of-return support mechanism because it encourages over-investment, "while deterring [wireline] from pursuing efficient business operations driven by market forces" (RCA, 2011, pg. 10). RCA argues in favor of a competitive and technology neutral, market-focused, and unbiased forward-looking cost model. Regarding reverse auctions (I saved the best for last, sorry), RCA warns that they have not been authorized by Congress, they will undermine competition, result in "government created monopolies" (I shudder at the thought...). RCA emphasizes that the FCC doesn't even know if reverse auctions will work, and "it would make no sense to base the future of high-cost support on an auction framework before ascertaining whether such an approach is even workable" (RCA, 2011, pg. 18). In what I have studies of reverse auctions in countries like India and Chile, they end up being spectacular failures. I've gotten over the fact that the FCC will probably test drive them with the Mobility Fund, but I agree with RCA's warnings about tying future USF support to an unfounded auction mechanism. Finally, RCA argues that the 4/1 Mbps funding baseline should actually be reduced so that 3G wireless carriers are not excluded. While I vehemently disagree with this argument, RCA points out that 3G is the "technology of choice" for many consumers, and the proposed AT&T-T-Mobile merger will not deliver 4G to the "last 5%" unserved areas--in fact, AT&T has no intention whatsoever of providing 4G to these largely rural areas. Although I am not convinced that 4/1 Mbps is sufficient in any way, this is definitely a persuasive argument in light of the controversies surrounding the merger.

Comments of the Rural Independent Competitive Alliance ("RICA," David Cosson):
So far we have looked at the perspective from Iowa rural ILECs, rural telecom lenders, and rural cellular carriers. Now I bring you the perspective from rural CLECs, as communicated by the RICA. Although some of the issues in RICA's comments are outside my scope of knowledge (such as the Identical Support Rule), this association made a variety of really compelling arguments against reverse auctions. RICA described the benefits that rural CLECs have brought to underserved communities, noting that their contributions to broadband deployment and adoption are often undervalued by the FCC. Additionally, rural CLECs took the 96 Act Challenge to bring competition to areas that have low business case for one carrier, much less two. RICA argues that eliminating the already meager support for rural CLECs would "at best [result in a] slow strangulation, more likely...grave financial distress" for these companies (RICA, 2011, pg. 6-7). According to RICA, the fundamental flaw of the NPRM is that it expects to fund a broadband future with exploding demand based on revenue from a declining voice telephony world of the past--therefore, the entire rationale for capping the CAF is unfounded.  RICA urges the FCC to eliminate the Identical Support Rule, because "it bears no relationship to the cost of providing service," and "there is no real way to demonstrate how the funds are used" (RICA, 2011, pg. 10). Alternatively, the FCC should implement a cost-based model for support. I found RICA's best arguments to be in response to Phase 1 CAF and reverse auctions. First, RICA is concerned that Phase 1 CAF will impede rural CLECs from expanding into nearby unserved areas because the proposed funding is one-time only. In other words, not for rural high cost areas that require ongoing investment. RICA shares my concerns that reverse auctions will result in the lowest quality, lowest level of performance, and lowest level of reliability in networks funded through this mechanism. Ultimately, reverse auctions may significantly increase the rural-rural divide, as rural CLECs will have little incentive to participate. Furthermore, rural CLECs "cannot expect to outbid large carriers with thousands of times their financial resources" (RICA, 2011, pg. 14). Next, RICA argues that an alternative to reverse auctions should recognize other meaningful factors besides the cost to deploy a network, such as "a [carrier's] demonstrated commitment to the area, demonstrated competence in providing quality service, and a credible business plan" (RICA, 2011, pg. 16). I cannot stress how important it is for the FCC to make sure that these factors are somehow embedded in a funding distribution mechanism. Local businesses are favored in small communities, and a company's reputation is important in this case. Next, RICA argues that funding for both fixed and mobile broadband is critical, because both fixed and mobile broadband are critical services for rural consumers. Ensuring funding for both fixed and mobile networks will also go far to ensure reasonably comparable service for rural areas. Finally, RICA adds that the FCC should not impose artificial boundaries such as Census blocks on participants in CAF funding; rather, recipients should decide their own geographic service territories, within reasonable limits. I highly recommend that rural CLECs take a look at these comments to get more clarification than I can provide regarding the identical support arguments, but overall I was very impressed with the arguments set forth in RICA's comments against reverse auctions.

Comments of the Rural Broadband Alliance ("RBA"): "Speed Matters"
Now that I have covered several of the sub-categories of rural telecom stakeholder comments on an "overall arguments" basis, I want to focus on some specific arguments from other participants. First up, the proposed 4/1 Mbps "speed limit" the FCC plans to impose on rural broadband providers and customers. I have been speaking out against the 4/1 Mbps proposal for awhile now, and it was the focus of a large project I did for a class last semester where I deemed this proposal the "fundamental flaw" of the National Broadband Plan and compared the U.S. to several countries that ensure reasonably comparable broadband for all residents--rural and urban alike. The RBA argues that the widespread criticism of rural rate-of-return companies "gold plating" their networks (read: investing in high-speed networks like FTTH) is unfounded, rather these investments were forward-looking and customer focused. According to the RBA, "to call such customer-focused delivery 'gold-plating' is at best, merely insulting, and at worst, misguided and insensitive to the needs of rural customers" (RBA, 2011, pg. 4). Rural telecom providers recognized the growing demand for fast broadband over 10 years ago, and have done nothing but strive to deliver this critical service to rural customers. Although RBA supports the 4/1 Mbps baseline on an initial, interim basis, the association insists that this definition of broadband must evolve and increase quickly. RBA points to the example of Comcast's recent announcement to provide 105 Mbps to more than 40 million homes. With 105 Mbps, a customer can download a 6 GB movie in 8 minutes. The same movie would take 2 hours with a 6 Mbps connection, and over 4 hours with a 1.5-3 Mbps connection. The RBA emphasizes that broadband speed "can mean the difference between life and death" in rural health care centers, and can mean the difference between economic success and failure for rural businesses (RBA, 2011, pg. 5). The 4/1 Mbps broadband definition for rural areas is contrary to the Communications Act of 1934, which is the central argument I made in my paper "Unreasonably Comparable Broadband Service: An Analysis of Leading International Broadband Plans and Accomplishments." The RBA notes that the FCC has a monumental task of not only ensuring that unserved rural areas gain access to broadband, but ensuring that well-served rural areas gain access to reasonably comparable broadband.

 Comments of the Rural Telecommunications Group (Bennet & Bennet): Long Term CAF
I have been interested in reading the responses regarding the long term CAF proposals, because in my opinion this is the most challenging aspect of revamping USF--we have no idea what the future holds in terms of telecommunications. In the 96 Act, the Internet was barely on the radar, and now we suffer the consequences of regulatory shortsightedness. I fear history will be repeated yet again if the Long Term CAF policies are not crafted carefully and with "room to move" when the telecommunications industry produces the next game changer a la the Internet--the Long Term CAF proposals revolve around disseminating all USF funding through CAF and capping CAF at 2010 high-cost levels. Today I received a Twitter comment criticizing ongoing funding for USF recipients, saying "why subsidize dinosaurs?" Not to veer too far off track, but does the age of a company really matter when it comes to distributing funding to a provider who can efficiently and reliably provide high performance broadband in uneconomic rural areas? Anyway, the Rural Telecommunications Group emphasizes the importance of ongoing support for rural wireless, which I also believe should be a fundamental component of Long Term CAF. My concern is that many rural wireless and wireline carriers simply won't make it to the long term visions of CAF if short term funding is capped or limited to one-time investments. RTG points out that business plans are based on the current USF system, and a 5 year phase-out of CETC support would be devastating to small rural wireless carriers: "simply put, in virtually every case, a loss of high-cost support will make running a high-cost, rural mobile network unprofitable, and therefore unsustainable" (RTG, 2011, pg. 11).  RTG argues that the Long Term CAF should be specific, predictable, and sufficient; again ensuring that rural wireless carriers will be able to develop and accomplish goals in their business plans. Furthermore, Long Term CAF must be consistent with Section 254(b), and it should ideally provide support for one wireless and one wireline carrier. I applaud RTG for recognizing the importance of an appropriate long term vision for CAF, for without assurance of ongoing, predictable and sufficient support rural wireless carriers will not be able to continue investing in rural wireless broadband infrastructure.

Edit 4/19/10: Other noteworthy points:
Comments of the Blooston Rural Carriers:
  • "For most price cap carriers their rural service areas are backwaters that are so small relative to their total operations that [the rural areas] have no material significance to their business plans or their financial statements" (Blooston Rural Carriers, 2011, pg. 6)

Comments of John Staurlakis, Inc:
  • "Universal Service is not a box of Kellogg's Corn Flakes--a commodity purchased, placed on a shelf and then consumed at breakfast time. Ongoing operational and maintenance expenses constitute a significant portion of annual costs associated with these rural networks" (JSI Inc., 2011, pg. 2-3).
  • "The financial impact of the Commission's proposed near-term reforms portents severe financial impacts that are certain to have a negative impact on the preservation and advancement of universal service in areas served by rural ILECs" (JSI Inc., 2011, pg. 7).
  • "If the Commission wants to evaluate the best way to deliver universal service to rural areas of the nation, it should not start with the premise that rate-of-return should be abandoned" (emphasis my own, JSI Inc, 2011, pg. 15).

Comments of Moss Adams LLP:
  • "Each company [rural providers analyzed on the impacts of the NPRM] is one of the, if not the, largest employers in its rural service territory, providing jobs and financial stability in some of the most rural and economic depressed areas of the country" (Moss Adams LLP, 2011, pg. iv). See Comments of Kalona Cooperative Telephone Company at pg. iv which confirms this argument.
  • "The combined result of all the proposed USF rule changes [on the study sample of 57 study areas] is a reduction in net income of $58,766,146 from $61,262,980 to $2,496,835" (Moss Adams, 2011, pg. 5-7). Furthermore, the combined impact of all the FCC's proposals is a loss of $29,353,172, and "no lender will provide capital in this regulatory environment." 

I will leave you with this final point by Kalona Cooperative Telephone Company as I feel it really brings together all of the issues I have summarized so far, and it drives in the point that these USF reform proposals are a nightmare for the rural telecom industry. It is very important to hear from these small companies to get the full effect of how these proposals will damage rural communities:
"The effects of this proposed plan would leave KCTC no better than bankrupt. In this day and age with the changing technology, KCTC has strived to meet and beat our customers needs for broadband and telephone usage. If the proposed plan is implemented, it would not only be detrimental to KCTC, but the whole Kalona, IA community. No business would be able to thrive in this area without the efforts we put forth each day to keep broadband and communications thriving. KCTC would no doubt have to close its doors leaving a small community without a large employer in town, losing many active leaders in the area, and literally decimating the community" (KCTC, 2011, pg. 13-14).

Later this week (hopefully, depending on how much of my Energy Communications Networks paper I get done in the next few days) I will be taking a look at the "Dark Side" perspective as well-the large price-cap carriers. My work on this proceeding will be an ongoing effort, as I hope USF support for rural carriers will be as well.

My Final Thoughts (For Now):
  • This is the single most important, game-changing telecommunications policy initiative in my lifetime. Coming from a small rural family-owned telecom service provider, the ultimate results of this rulemaking will have a significant impact on my future, one way or the other.
  • Everyone wants the money, and not everyone will get it. 
  • Many of the initiatives in the NPRM are insensitive to, and ignorant of, the contributions that rural carriers have made towards making broadband what it is today--this is very unfortunate, and I'm not sure if there is enough time left to educate the FCC about our contributions. 
  • I love that so many rural telecom providers are vocalizing their objections to the NPRM, I feel strongly that our companies will have an impact--I may be overly optimistic given the political climate of the FCC and the dire warnings indicated in many comments, but we need a dose of optimism right now! These dire warnings may be just the thing we need to get the FCC's attention.
  • Overall, the RLECs are unprecedentedly united on most issues in the NPRM. Small rural wireless carriers diverge on some key issues, but that is to be expected. I know there are often differences in rural telecom regulatory perspectives from state to state and even within states, but this is the one time that differences must be set aside for a untied front against the detrimental proposals in the NPRM.

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