Monday, May 30, 2011

USF Reform Reply Comments Face-Off: Rural Telecom Advocates Tackle Financial Risks, Reverse Auctions, Broadband Speeds and More!

Reply Comments on USF Reform were due Monday, May 23, concluding the comment-and-reply cycle for this proceeding. Today I am summarizing reply comments submitted by a variety of rural telecom advocates with different roles in the industry: John Staurulakis, Inc., the Fiber-to-the-Home Council (whose comments I usually find meaningful), Rural Telecommunications Group, Inc., and GVNW Consulting, Inc. I picked these comments specifically to represent viewpoints from several different sectors of the rural telecom industry: finance, business, technology, wireless and FTTH. As with my previous round of USF comment reviews, I will analyze the NTCA/NECA/OPASTCO/WTC reply comments in a separate, stand-alone article. I will also analyze reply comments from price cap carriers sometime this week.

These reply comment summaries are in regards to the following FCC proceedings (the USF Reform and Connect America Fund NPRM): WC DN 10-90, GN DN 09-51, WC DN 07-135, WC DN 05-337, CC DN 01-92, CC DN 96-45, WC DN 03-109.


John Staurulakis, Inc.

John Staurulakis, Inc. (JSI) is a regulatory, finance and business consulting firm which represents over 200 independent and rural ILECs. JSI conducts cost studies and submits data for NECA and tariff filings, among other services. In these reply comments, JSI argues against several proposals by the FCC, the Joint Board and AT&T.

On USF Reform Principles: JSI recommends three fundamental principles to guide USF Reform:

  1. The FCC should be wary of imposing caps on the level of support as this action may have negative consequences in the future, and "it is evident that there is a great need for federal support in encouraging private investment in rural areas of the nation" (pg. 4).
  2. Only ETC-designated providers should receive USF support, as mandatory ETC designation "provides necessary and reasonable oversight for the use of federal universal service support" (pg. 4).
  3. COLRs require universal service support, even in competitive areas.
On the Joint Board's Recommendations: JSI disagrees with several of the Joint Board's USF proposals, including the Joint Board's stand-alone cost approach, the $100 per-line support limit, the 12% return on equity recommendation, and the $2 state participation incentive. JSI argues that the $100 per line per month limit, which the Joint Board based on the cost of providing satellite service in rural areas, is arbitrary and even below the FCC's recommended $250 per month. $100 per line per month "will also relegate rural areas of the nation to second-class broadband speeds as satellite service will be unable to increase speeds at the same frequency as wireline networks can using scalable technology" (pg. 6). The Joint Board's 12% return on equity proposal is insufficient for non-competitive rural areas, and "will not be enough to persuade investors to invest in rural areas of the nation" (pg. 7). JSI adds that changing the rate of return should be considered in a separate proceeding. Finally, JSI argues that the $2 state participation incentive could be construed as a penalty for states that do not have a USF mechanism.

On AT&T's Comments: JSI believes that AT&T does not provide enough evidence that bill-and-keep is an appropriate solution for ICC reform, and that "users of networks should pay for their use" (pg. 8). JSI also addresses AT&T's support for reverse auctions, and JSI argues that the FCC should perhaps consider testing reverse auctions in a non-rural area first; in order to make proper assessments about how reverse auctions will work in rural areas.

My Thoughts: I was surprised to see disagreement with the Joint Board's proposals, but after some thought, JSI's arguments against the Joint Board make sense. I personally like the Joint Board's proposal simply because it is so much better than the FCC's NPRM, but I suppose it is not perfect either. The $100 per month per line limitation does seem pretty arbitrary in retrospect. Regarding reverse auctions, I don't want to see them implemented anywhere, but if they are, I agree with JSI that they should be tested in a non-rural area first. Reverse auctions are such dangerous and uncharted waters, and pilot programs are necessary to ensure that things do not go awry with really ugly consequences for rural Americans.

Fiber-to-the-Home Council

The Fiber-to-the-Home Council (FTTH Council) promotes FTTH deployment to the public and government, and represents over 200 members from across the telecom industry, including rural telecom providers. The FTTH Council provided incredibly insightful and interesting reply comments, primarily focused on broadband speeds, FTTH investment and deployment in rural areas, and maintaining the High Cost Fund.

On Broadband Speeds and "Next-Generation Access" Demands: The FTTH Council has strong, forward-looking opinions about the growing demand for broadband speeds, and they argue that 25Mbps symmetrical broadband is an appropriate target for 2015. The FTTH Council provides a lot of interesting data to support this argument, primarily from a 2009 study for the National Broadband Plan proceeding by CMSG Adventis. Examples include speed requirements for "Next-Generation Access" (NGA) broadband, including 64-256 Mbps for Advanced HD Video, 32 Mbps for 3D/HD Video, at least 256 Mbps for Advanced 3D/HD Video, and 10 Mbps-1Gbps for "massive downloads and uploads" (pg. 8). The FTTH Council adds that high-usage consumers already need 30Mbps, and will easily need 100Mbps within 7 years in order to meet demands for "'over the top' video content, multi-player online gaming, multi-device households, social networking and video conferencing, [which] will put pressure on both downstream and upstream bandwidths" (pg. 9-10, referencing a Motorola study). They also add that broadband-enabled distance learning and telemedicine will require significant bandwidth, as will small businesses. The FTTH Council provided some especially interesting comments about future broadband-enabled applications, arguing that we do not even know what types of life-changing "killer apps" may come as a result of setting a high bar for broadband speeds nationwide. The FTTH Council points to wildly successful applications like Napster, Apple iTunes, YouTube, Skype, Google Maps and Netflix streaming video, arguing that YouTube's success was "clearly due in part to consumer broadband connections having sufficient bandwidth to upload and download videos in a reasonably short time" (pg. 10). Finally, The FTTH Council referenced the infamous 1977 quote from Digital Equipment Corporation CEO Ken Olsen, "No one will ever want a computer in their home," to illustrate the danger of projecting limitations on the power of innovation and consumer demands (pg. 11)

On FTTH Costs and Benefits for Rural America: The FTTH Council discussed the cost of providing FTTH to all Americans: it would cost $70 billion to pass 80% of US households with FTTH, and an additional $94 billion to reach the last 20%. However, these astronomical amounts do not tell the whole story—the cost to deploy FTTH has declined by 50% in the past decade, "owning to equipment and cabling innovation, experience in constructing and operating networks, and overall economies of deployment" (pg. 14). It is safe to assume that FTTH deployment costs will continue to decline; additionally, the total-life cost of FTTH actually provides a savings of $100-250 per subscriber over other common technologies due to the significantly greater performance capabilities of FTTH—basically, rural companies that deploy FTTH will not need to make nearly as many ongoing infrastructure investments to keep pace with demand. The FTTH Council breaks down the cost of providing FTTH to the last 20%, where it would be relatively inexpensive ($13 billion and $16 billion respectively) to pass the 80-85th and 85-90th percentiles. However, the bulk of the cost would be the final 5%, at $44 billion (pg. 19-20).

On the High Cost Fund and Rural Broadband Investment: The FTTH Council argues that the High Cost Fund has been very successful for encouraging investment in rural broadband due to the low risk for lenders. If the FCC reduces or eliminates the High Cost Fund, there will be "considerable risk by removing the recurring, stable and substantial subsidy stream that has assuaged investors historically. To accommodate this risk, investors will demand a higher premium or higher interest rate on debt or loans. Other investors will back away from lending to the riskier venture" (pg. 24). The FTTH Council discusses the concept of the "hurdle rate," which is basically the minimum return on investment required to make a project worthwhile (with low risk). The FTTH Council is concerned that eliminating the High Cost Fund could cause hurdle rates to double due to increased costs of borrowing money. The FTTH Council describes high cost support as akin to payments with "credible backing," such as lottery payouts and structured settlements, whereas a fixed support model is akin to riskier startup ventures (pg. 25-26). The FTTH Council provides the following solution/suggestion to the FCC: "instead of seeking to shift the USF to a completely new paradigm, the Commission can best achieve its universal broadband objective by seeking to preserve and build upon the success of the High Cost Fund and meld the aim of this fund with the CAF's new objectives to reach unserved areas" (pg. 31).

My Thoughts: The FTTH Council's comments were excellent and possibly the most aligned with my personal philosophies about broadband speeds and network investment out of any of the comments I have read so far. All along, I have been arguing that the FCC needs to stop trying to impose backwards-looking limitations on broadband speeds. I completely realize that it is too expensive to provide 100Mbps broadband to 100% of Americans using USF, but the NBP and the NPRM do not go far enough to ensure reasonably comparable broadband service for rural Americans, which the FTTH Council definitely understands. The 1977 quote about how nobody will ever want computers really made me think about what could be the financial loss of imposing speed limits on rural broadband. I've heard many times about how the slow development of the wireless industry shut out billions of dollars in revenue and caused untold damage to innovation, but has anyone thought about the damage that could be done to the economy and the future of innovation if high-performance broadband speeds are not supported in accordance with consumer demands—and if rural Americans are subjected to second class broadband? Anyway, this topic gets me really riled up… I really liked the FTTH Council's discussion of the hurdle rate, and they provided some great examples of the investment challenge ahead if the High Cost fund is reduced or eliminated. I highly recommend reading these comments and the studies referenced in the FTTH Council's examples. To me, the thought of combining a 4/1 Mbps speed limit with a reduced or eliminated High Cost fund equals the death of broadband in rural areas, primarily because no investor will want to fund projects that are outdated before they are deployed, not likely to satisfy customers, and will not produce sufficient revenue returns.

Rural Telecommunications Group, Inc.

The Rural Telecommunications Group (RTG) is a trade association and rural wireless advocate, representing members who serve less than 100,000 customers with wireless technology. I thought the following statement powerfully describes RTG's position on USF Reform: "RTG members are extremely concerned that the radical changes proposed in the USF NPRM will have detrimental effects on the continued availability of wireless service in rural areas, which will harm employment in rural areas and slow the economic recovery process. RTG's members collectively employ thousands of people in rural areas and support the ongoing business operations of numerous industries that employ thousands of people across rural America. These rural Americans will be impacted negatively if wireless services are taken away or allowed to atrophy as the rest of the country continues to receive even more advanced services" (pg. 3).

On CETC Support and §214(e) and §254: RTG argues that sections 214 and 254 of the Communications Act will be violated if CETC support is eliminated. §254(e) "limits the class of entities that may receive universal service support to eligible telecommunications carriers," and §214(e) "requires eligible telecommunications carriers to be 'telecommunications' carriers and 'common carriers'" (pg. 6). Furthermore, the FCC cannot forebear from these principles, and phasing down CETC support faster than phasing down ETC support also violates competitive neutrality principles.

On the Importance of Supporting Rural Wireless: RTG provided some excellent examples and discussion about the importance of mobile broadband for rural economies, the national economy, and public safety. According to RTG, by eliminating CETC support, the FCC "will be abandoning rural consumers and businesses that increasingly rely on mobile broadband," and "the harm that will befall public safety in rural America if CETCs are denied ongoing support will be immeasurable" (pg. 8-9). RTG recommends a long transition period of greater than 10 years, and adds that ongoing support is necessary for rural mobile broadband networks.

On Waivers and Exceptions to CETC Phase-out: RTG argues that waivers and exceptions should be allowed in any CAF distribution mechanism. RTG discusses the dynamics of rural wireless, where Tier I carriers typically only provide service along highways and in population clusters, and "they have not committed to covering the entire surrounding rural areas which are typically high cost areas"—which rural wireless carriers have historically served with strong ties and commitments to their rural communities (pg. 11). RTG also argues that CETC phase-out waivers and exceptions should be available for companies that serve Tribal lands, and the FCC should not impose an expiration date on waivers.

On Reverse Auctions and Bidding Credits: RTG's comments echo the majority of rural carrier and association comments regarding reverse auctions: they are dangerous and may result in low quality service for rural Americans. RTG also describes the anticompetitive dangers of reverse auctions, and emphasizes that Tier I carriers do not need USF support—Verizon and Sprint have even surrendered high cost funds, so it would be contrary to the public interest to reward subsidies to these carriers in reverse auctions. RTG goes as far as arguing that Tier I carriers should not be allowed to participate in reverse auctions, especially since they will have an incentive to use below-cost bidding (see my recent article on the failure of reverse auctions in other countries for more examples of this danger). If reverse auctions are adopted, RTG supports including a public benefit component. Additionally, for a provider to receive support, the provider must meet certain criteria, including: the carrier must be an ETC, the carrier must have sufficient access to spectrum, the carrier must have sufficient financial resources and technical capability, and the carrier ideally should be Tier II, III or IV (pg. 17). RTG supports the use of bidding credits "for carriers that meet certain public interest objectives associated with delivering mobile broadband to unserved markets" (pg. 18). Bidding credits could help give especially small rural carriers an advantage if the carrier will provide public benefits like new jobs, and "these bidding credits will spur rural economic development among those eager to serve the rural area and who have a history or nexus to the rural area and are naturally invested in serving their rural communities" (pg. 18).

My Thoughts: I was particularly impressed with RTG's realistic and rational comments about reverse auctions. I really, really support RTG's proposal to keep Tier I carriers out of the auctions (if reverse auctions are adopted, which I still hope they will not be). Honestly, nothing good will come from allowing Tier I carriers to participate in reverse auctions. If they wanted to serve extremely rural areas, they could do it with their own money—it's that simple. RTG also made some good points about contributions, arguing that the current contributions base "is not only unsustainable, but also outdated" (pg. 22). I couldn't agree more, and I find it more and more ridiculous every day that the FCC is trying to make voice telephone consumers pay for broadband network subsides, but not broadband consumers, when the number of voice telephone consumers is rapidly shrinking. This FCC simply defies logic sometimes.

GVNW Consulting, Inc.

GVNW is a management consulting firm providing regulatory consulting, advocacy and strategic planning for rural telecom providers. GVNW basically supports the Rural Associations' RLEC Plan, and they provided many insightful responses—both positive and negative—to a wide range of comments. GVNW agrees with Senator Daniel K. Inouye (D-Hawaii), who submitted a letter to the FCC emphasizing that USF reform is not a "one size fits all" solution; and GVNW also supports comments from the Telecommunications Association of Maine, which insist that USF Reform should "first, do no harm." Unfortunately, many of the FCC's proposals ensure considerable harms for rural telecom providers and consumers.

On Public Policy Criteria for USF: GVNW presents four public policy fundamentals for USF Reform: (1) compliance with federal law; (2) incentives to transition to broadband without harming some rural consumers for the benefit of other rural consumers; (3) recognition of the importance of voice service; and, (4) reasonably comparable rates for rural consumers. GVNW believes that the RLEC Plan generally complies with these principles. GVNW provided some entertaining, slightly sarcastic, and hard-hitting comments to the FCC regarding the first principle (compliance with federal law): "We respectfully remind the Commission that federal law with respect to universal service has not changed since the Telecommunications Act of 1996;" and "Absent Congressional action changing the law, the Commission must adopt rules that meet all legal requirements as opposed to the desire of former staffers that drafted the National Broadband Plan" (pg. 13, 14). I appreciated the lighthearted humor, despite the fact that it is very troubling that the NPRM is contrary to the very rules that govern the agency who drafted it…

On Special Tribal Broadband Issues: GVNW addressed the special challenges that Tribal areas face, citing comments by the Native Telecom Coalition for Broadband: "A 'hundred years' of geographic isolation on Tribal lands and related income disparity are real barriers prohibiting Native Americans from experiencing quality of life enhancements and economic opportunities…through advanced communications technology" (pg. 19-20). GVNW noted that the Native Telecom Coalition for Broadband believes the FCC should create a separate Native Broadband Fund, and the National Tribal Telecommunications Association argues that Tribal areas should not be included in reverse auction for fear of "catastrophic results for small businesses" (pg. 20).

On Acknowledging Past Performance and Track Records: GVNW made some interesting observations about the level of commitment to serve rural areas by both price cap and rural carriers. While large price cap carriers "have virtually ignored an obligation to invest in their most rural service areas," RLECs have a much better track record of deploying rural broadband despite having considerably fewer resources at their disposal. GVNW suggests that the FCC should enforce rural build-out commitments as well as verify rural broadband deployment by USF recipients. GVNW warns, "it would be prudent for the Commission to very carefully approach the rural-rural divide issue and not issue blank checks" to price cap carriers (pg. 28).

My Thoughts: I liked how GVNW responded to a wide range of comments with both positive and negative critique—of the reply comments I have read so far, I have actually been disappointed with the lack of replies to other comments in the proceeding. I was also interested in GVNW's brief discussion of Tribal lands, and I am inspired to read more comments specifically addressing the challenges that Tribal areas face in broadband deployment and USF Reform. GVNW also made some great remarks about ICC Reform, and referred to a very applicable and appropriate Yogi Berra comment from the NARUC comments: "This is déjà vu of déjà vu of déjà vu all over again" (pg. 21).


I would have liked to include some additional comments, but I think these four give a pretty good representation of rural provider concerns (beyond just RLECs anyway). I considered adding the Joint Comments by the satellite providers (WildBlue, etc.), but I really just don't believe that satellite broadband is a viable alternative so I am not going to pay them much attention. The FTTH Council reply comments truly impressed me and provided me with a lot of food for thought.

Next up: price cap carriers/associations! Sure to be an exciting reading and writing experience.

Cassandra Heyne



Wednesday, May 25, 2011

USF Reform Reply Comments Face-Off: Rural Carriers Defend Rate-of-Return and High Cost Support

Reply Comments on USF Reform were due Monday, May 23, concluding the comment-and-reply cycle for this proceeding. Today I am summarizing reply comments submitted by rural carriers, which will be followed by summaries of price cap carrier comments and rural association/advocacy firm comments—probably all within the next week. I'm using a slightly different format for comment summaries in this round, which you will hopefully find easier to read and more organized that my previous summaries. Anyway, I'm open to suggestions on my writing format as I am hoping these summaries are beneficial to my readers.

The following reply comment summaries are in regards to the following FCC proceedings (the USF Reform and Connect America Fund NPRM): WC DN 10-90, GN DN 09-51, WC DN 07-135, WC DN 05-337, CC DN 01-92, CC DN 96-45, WC DN 03, 109.

Nebraska Rural Independent Companies

These reply comments, written by Woods & Aitken LLP, represent the views of 19 rural carriers in the state of Nebraska. Overall, the Nebraska Companies support the entire Federal State Joint Board proposal as an alternative to the FCC's NPRM, as the Joint Board recommendations will achieve the FCC's four principles for USF and reduce the risks for small companies. The Nebraska Companies supported the Rural Associations and the Joint Board, and disputed comments by CTIA, Verizon and Time Warner Cable.

On Rate-of-Return: The Nebraska RLECs believe that if the Joint Board proposal is adopted in entirety, the financial risks for RoR companies should be reduced sufficiently such that the Joint Board's 8.5% rate of return will not impose further financial risks. However, if the FCC does not adopt the Joint Board's recommendations, the rate of return should remain the same as it is now. The Nebraska Companies point to overwhelming support for RoR in the initial comments: "The record for supporting RoR is so strong, and opposition thereto is so predictable and baseless" (pg. 11). The Nebraska Companies also point to the many reasonable proposals for cost recovery limitation (like upper limits on CapEx and corporate expenses, and a limited rate of investment in new plant), such that eliminating RoR is not necessary

On Reverse Auctions: The Nebraska Companies believe that reverse auctions will not achieve the goals of USF reform, and they will overwhelmingly favor large companies: "Put simply, the proposed 'ranking bids by price per unit covered' mechanism will ensure that AT&T, Verizon and other large national carriers will receive virtually all the initial CAF support" (pg. 24). Furthermore, the FCC should not allow bidders to define their own areas, which will prohibit smaller companies from participating.

On ICC: The Nebraska Companies argue that reducing ICC rates and eliminating ICC recovery will devastate rural broadband deployment, and the proposed $0.0007 per-minute rate will literally stop RLECs from investing. The $0.0007 rate does not acknowledge the real costs of building and operating networks in rural areas, and lenders like CoBank will be much less likely to provide private funding if there is no cost recovery, which will significantly damage RLEC cash flows. The Nebraska Companies attack CTIA and Verizon's comments, adding that "large carriers and wireless providers simply attempt to induce the Commission to adopt proposals that ultimately lead to their sole financial gain" (pg. 27-28).

On Wireless and Satellite Technologies: The Nebraska Companies do not think that wireless and satellite should form the basis for CAF support with regards to RLECs. They specifically attack CTIA's comments which claim that wireless is a substitute for wireline, wireless is the most efficient technology, and wireless is the lowest cost technology. The Nebraska Companies claim that CTIA's "proposal to dumb down the definition of broadband service would simply eliminate support for broadband as defined by the Commission," and CTIA's definition of broadband of 768/200 kbps is "a definition of broadband that has not been accepted by the industry or the Commission" (pg. 46-47). The Nebraska Companies illustrate that "the inherent capacity of one fiber optical cable link exceeds the entire available radio frequency spectrum," and investment per Mbps for FTTH is $68 vs. $25,773 for LTE! Regarding satellite broadband, the Nebraska Companies refer to an excellent paper that was released recently by RuMBA, Satellite Internet Connection for Rural Broadband, by Stephen Cobb. I highly recommend reading this paper if you have not done so already. Anyway, satellite has significant inherent limitations such as latency, delay, capacity, speed, performance, reliability, and cost, which make it an unattractive option for broadband—however, the Nebraska Companies add that satellite may have a very limited application. Finally, the Nebraska Companies point out that even if satellite technology improves, there is no way to overcome the 22,000 mile one-way trip up and back, and "the dramatic increases in capacity that would be needed to be an effective substitute for wireline broadband networks have not been proven nor demonstrated to be achievable" (pg. 64).

My Thoughts: I thought the Nebraska Companies' comments were very good, and they covered each of the major areas of concern for RLECs effectively and thoroughly. I am pleased with the support for the Joint Board's recommendations. I thought the Nebraska Companies were a little tough on wireless broadband, but they made some interesting arguments nonetheless. They also included a paper by Vantage Point entitled Wireless Technology Cannot Deliver Broadband Services as Envisioned in the National Broadband Plan, which is quite interesting. I don't think wireless should be disregarded completely, but I do agree that wireless and wireline broadband are strongly complimentary and that all consumers should have access to both technologies wherever possible.

South Dakota Telecommunications Association

The South Dakota Telecommunications Association (SDTA) represents the interests of 25 SD telecom providers, all RLECs, including 12 cooperatives, 5 cooperative affiliates, 3 municipal companies, 1 tribal provider and 4 locally private-held telecom providers. These companies together serve 80% of South Dakota's geography, with an average of 2.3 customers per square mile, for a total of 134,356 access lines. To illustrate the SD market, "the smallest incorporated town, the town of Hillsview, and the largest city, the city of Brookings, served by RLECs, have populations of 3 and 18,504 respectively" (pg. 2). SD RLECs have provided broadband service to nearly 100% of their customers, and invested over $133 million in 2008-2009. SDTA supports the Rural Associations' RLEC Plan.

On the NPRM and Corporate Expense Recovery: SDTA believes that the FCC's proposals in the NPRM are largely arbitrary and will backpedal the success of the state's RLECs in broadband deployment. The result of the FCC's proposal would include a 20% reduction in high-cost support to SD RLECs, where end-user rates would have to be increased substantially and RLECs would not be able to operate or deploy broadband effectively. SDTA believes that the total elimination of corporate expenses "unfairly penalizes small rural carriers for being small," and small carriers already have a disadvantage as they are subject to the same regulatory and administrative burdens as large companies. Small companies still have to pay for accountants, engineers, attorneys, interconnection agreements, regulatory fees, etc., which corporate expense recovery partially covers. Eliminating corporate expense recovery "impacts smaller companies to a greater extent because they have fewer customers and access lines over which to spread these costs" (pg. 6).

On ICC: SDTA argues that the FCC has no legal authority to unify ICC rates, citing AT&T v. Iowa Utilities Board and an 8th Circuit Court decision as evidence that the FCC can only "design a pricing methodology" and guide states on access rates, not forcibly direct states to the FCC's desired end result. SDTA argues that the FCC's ICC proposals—bill and keep and $0.0007—will reduce SD RLEC's revenue by over $37 million, which will have "severe negative consequences," where end-user rates could not possibly increase enough to replace this lost revenue (pg. 7). SDTA supports the Rural Associations' RLEC Plan, where states would be allowed to decrease access rates in conjunction with a restructure mechanism (RM).

On ETC and COLR: SDTA argues that the FCC should impose COLR obligations on all USF recipients, and non-common carriers are not eligible to receive USF under §254 and 214, of which the FCC cannot forbear from as these sections are still very much relevant and necessary. According to SDTA, "only properly designated ETCs are eligible to receive Federal universal service support, and…an entity designated as an ETC must be a common carrier. The Commission cannot ignore the mandates of Congress, plainly stated, in these sections of the Act" (pg. 12).

My Thoughts: I was happy to learn some more information about the South Dakota telecommunications industry, and I find it to be very impressive that the SD RLECs have managed to deploy broadband to nearly 100% of their customers, despite being in one of the least populated, highest-cost states in the country. Good job South Dakota RLECs! Hopefully the FCC acknowledges your hard work, because I cannot imagine there are a whole lot of large companies who are clamoring to provide high quality broadband to a town of 3 people. These companies have defied the odds and used the current USF system to their advantage—and to the benefit of the residents and businesses of rural South Dakota.

Blooston Rural Carriers

The Blooston Rural Carrier's comments represent the views of 32 RLECs from across the country. The Blooston Rural Carriers support the Rural Associations' RLEC Plan, and offer preliminary support of the Joint Board's proposals.

On Diversity in the Rural Telecom Industry: The Blooston Rural Carriers provided some very insightful information about diversity in the rural telecom industry, supporting the argument that the rural industry absolutely cannot fit within the bounds of a one-size-fits-all approach to USF Reform. The rural industry companies: range from companies with 100 customers to Fortune 500 corporations; have vastly diverse ownership structures from cooperative to family owned and everything in between; range in scope from single townships to international business; utilize vastly different financial resources and investment strategies; provide service to practically every different size, population, climate and terrain possible in the U.S.; employ basically every different kind of technology for broadband; and have different levels of broadband deployment and capacity (pg. 3-4). As a result of these differences, the Blooston Rural Carriers support the Joint Board's proposal for 3 separate funds, as the Joint Board proposal better addresses the specific and localized needs and variations of the rural industry.

On Sufficient High-Cost Support and Contributions: The Blooston Rural Carriers agree with the Joint Board that the current size of the high-cost fund, $4.2 billion, should be the minimum size of a potential COLR fund. Regarding the Joint Board proposal versus the FCC's intended cap on the high cost fund, "there is likely to be a choice between (a) sufficient (and perhaps increased) high-cost support for RLECs and other ILECs; and (b) accepting a network increasingly characterized by deferred maintenance, poor customer support, and declining service quality for both voice and broadband services" (pg. 7). The Blooston Rural Carriers argue that the contributions base should be expanded to include all broadband service providers except content-only providers. Expanding the contributions base would effectively quell the need to cap the high-cost fund, and it would have the added benefit of reducing the contributions burden on the dwindling number of landline consumers.

My Thoughts: I really appreciated that the Blooston Rural Carriers pointed out how diverse the rural telecom industry is. I tried explaining this to an FCC staffer once and was met with blank stares and insulting comments about how all the RLECs should just merge. RLECs represent the diversity of the communities they serve, which is critically important to the American economy, culture, identity and vision.

Missouri Small Telephone Company Group (MoSTCG)

MoSTCG represents 30 small telecom companies that serve rural Missouri. MoSTCG members serve between 200 and 15,000 lines for a total of 91,000 access lines in the state. Additionally, MoSTCG companies "play an essential role in rural Missouri economies by employing approximately 630 people" (pg. 1). One of the most interesting facts I learned today in the rural carrier reply comments is that MoSTCG companies have only had 5 customer complaints about service quality to the state utility board in 3 years! That is so amazing! How many customers do you think complain to utility boards about AT&T in a day? It honestly wouldn't surprise me if it was equivalent to the number of dollars they spend per hour on lobbying (over 3,000).

On Rate of Return and the role of USF in Missouri: The MoSTCG companies argue that RoR works, and these companies have delivered 1.5 Mbps broadband to 99% of their customers; as well as 3 Mbps broadband to 89%, 6 Mbps broadband to 78%, and over 6 Mbps to 53%--all thanks to RoR. MoSTCG attacks Verizon and the other large carriers, who argue that RoR should be eliminated. Meanwhile, AT&T and Verizon have "failed to upgrade (or simply sold off) their rural service areas," even though "these carriers promised innovation and investment where they when they were granted price cap status…yet their rural service areas are the ones lacking broadband, not those of rural companies" (pg. 4). MoSTCG also makes some interesting points on the philosophical and economic importance of Universal Service, noting that MoSTCG companies provide distance learning and telemedicine opportunities to help overcome the economic challenges that rural schools and health care providers in the state are currently facing. According to MoSTCG, USF is "an excellent example of an audited and effective government program. USF support currently provides moneys for jobs and the building and maintenance of a viable broadband network. The money is well spent" (pg. 5, emphasis my own).

On ICC and Revenue Recovery: MoSTCG argues that per-minute compensation is important and appropriate, but intrastate rates should be reduced to interstate levels over a reasonable transition period coupled with effective recovery mechanisms. MoSTCG calls AT&T and Verizon's claims that access charges should be eliminated or set at $0.0007 "unreasonable and confiscatory," where $0.0007 would not even be enough to cover the cost of billing (pg. 7). Furthermore, bill and keep is unlawful because traffic between carriers is not balanced. MoSTCG argues that any decreases in revenue resulting from USF and ICC reform must include some form of revenue replacement, and "MoSTCG companies have a constitutional right to a fair and reasonable return upon their investment in rural telecommunications networks" (pg. 10).

My Thoughts: I'm still in a state of total shock that there have only been 5 consumer complaints to the MO utility board in the last 3 years about Missouri RLECs! Considering how much consumers hate the telephone company these days, this is a truly impressive accomplishment and the MoSTCG companies should be very proud. I also liked MoSTCG's discussion of the socioeconomic importance of USF and broadband in rural Missouri.


Overall, I was pleased with the reply comments by the rural companies, but I was expecting more direct attacks on AT&T, Verizon, etc.—that is what makes reply comments so exciting after all. I'm looking forward to reading the rural association and advocate comments tomorrow.

Cassandra Heyne

Tuesday, May 24, 2011

Refuting the FCC’s Self-Serving Optimistic Conclusions about Reverse Auctions with International Examples of Challenges and Failures

Since I started Rural TeleCommentary in January of this year, I have continually expressed my frustration with the FCC's proposal to use reverse auctions (also known as "incentive auctions") to distribute Universal Service Funds. I first discussed my opposition to reverse auctions in a post about the Mobility Fund, and I have consistently covered them throughout my series on USF Reform. Today, I am going to discuss one of the main reasons why the FCC should be wary of implementing reverse auctions on a large scale: reverse auctions have never been used in the U.S. telecommunications industry, and have failed spectacularly in other countries. I mentioned last month that I wanted to analyze some international telecommunications policies, and I believe this is one case where the FCC really needs to pay serious attention to how reverse auctions have been used—and how they have failed—in other countries, like Chile and India. Since there is no local data or models for telecom reverse auctions in the U.S., there is actually no choice but to look beyond our borders for information. Based on the following studies, I feel strongly that the international telecommunications industry is sending very clear signals that reverse auctions will fail to achieve the goal of distributing universal service funds efficiently and to the most capable provider, but this is just my interpretation of the limited information available (which is predominately supportive of reverse auctions).

Irene Wu from the FCC's International Bureau seems to interpret things differently, but one has to wonder how self-serving her October 2010 report, "Maximum Impact for Minimum Subsidy: Reverse Auctions for Universal Access in Chile and India," is. She concludes that reverse auctions were successful in these countries and will be a fast and efficient way to distribute USF here in the U.S. When I first read this paper last year, I did not see very many indications of "success" with reverse auctions in India and Chile, and it is not unusual for the FCC to release self-serving data prior to making a major decision that the data supports. Case in point, the Seventh Broadband Progress Report and Order on Reconsideration (706 Report), was released at the end of the day last Friday, and has already received considerable criticism for being self-serving and an excuse to impose heavy-handed regulations to ensure broadband is deployed at a more rapid pace going forward. The Report concluded that 100 million Americans do not have broadband, with 26 million Americans having no access to broadband. Here is the shady part—they use data from the NTIA's National Broadband Map which has been widely disputed and deemed inaccurate. This is not to say that there aren't millions of Americans without broadband and we need a USF mechanism to build out networks quickly, efficiently and relatively inexpensively, but the data used in this study may not tell the whole story. The report concludes that broadband is not being deployed fast enough, but I personally don't think "fast enough" is a reliable term of measurement. Fast enough compared to what? Anyway, according to Hillicon Valley, "The report is controversial because industry sees it as a pretext for regulation. The FCC used last year's negative findings to help justify net neutrality regulations passed in December. Rep. Greg Walden (R-Ore), chairman of the House telecom subpanel, made it clear Monday that he thinks the findings are without merit. 'It is one thing to recognize that some areas of the country—typically rural—are difficult to serve; it is quite another to say that broadband is not being reasonably and timely deployed to all Americans,' he said" (Jerome, Hillicon Valley, May 23, 2011). Not to stray off topic too much, but this report, and Wu's report on reverse auctions, are both examples of the FCC releasing self-serving data to justify controversial regulatory decisions.

Wu's report identifies requirements for successful reverse auctions, such as clear policy targets, methods for calculating how much money is available for each project, minimum technical and financial requirements, procedures for distributing funds, increasing participation, and evaluating bids (Wu, FCC, 2010, pg. ii). However, the FCC and participating members of the FCC's Workshops on USF Reform have not been able to come up with any specific or attractive proposals to meet any of these requirements, literally. They cannot even decide on how large or small the auction blocks should be, or if providers of different technologies can participate in the same auction. I personally think it could take years for all these details to be worked out, which could make broadband deployment even slower, and further frustrating the FCC, who already thinks broadband is being deployed too slowly.

Chile has the longest history with reverse auctions, which started in 1995 as a method to deploy public pay telephones in rural areas, and they are still being used to deploy fiber and mobile infrastructure to unserved areas. Chile's telecom regulator, Subtel, identifies project areas by soliciting requests from communities, telecom providers and the public (Wu, pg. 4). In the early years of reverse auctions for payphones, Chile had a difficult time developing a specific, targeted definition for projects that should receive subsidies. This is something that the FCC is already struggling with, as they have not been able to define the size of areas that will be auctioned. Furthermore, Chile struggled with a version of the "donut and hole" issue that the FCC is facing—in Chile, low income "holes" within higher income "donuts" were ineligible to receive subsidies, leaving areas with the greatest need for telecommunications services behind in development. Wu cautions that, "to avoid these kinds of problems, substantial local data on population, geography, and other socioeconomic indicators should be collected in advance of making policy decisions" (Wu, pg. 5). This worries me because the FCC and NTIA cannot even get accurate data for the National Broadband Map, and they are planning to rely on this data to determine subsidies for unserved areas. In a major 2008 reverse auction to provide Internet to over 1,000 rural communities, another significant problem emerged: the winner's funding fell through and it could not build the networks. The winner, Inverca (a Chilean-Malaysian joint venture, until the Malaysian partner bailed), had to surrender its license to the runner-up, Entel. Although Entel ended up building out mobile broadband to the rural communities, it certainly delayed the desired outcome and serves as a major cautionary tale for the U.S. In this report, Wu sees the Chilean reverse auction process as being very successful, but I see it as being a long and bumpy road with questionable success.

India is no stranger to controversy in its telecom industry, and their reverse auctions were no exception. According to Wu, "years of stalled progress toward achieving universal service objectives spurred the Indian government toward implementing minimum subsidy auctions…By 2002, it was apparent that politically important goals, such as connecting a phone in every village, would not be achieved with the original plan to rely on competition in the market with universal service obligations attached to licenses" (Wu, pg. 11). Basically, India was warehousing USF and not using the funds to improve telecommunications service in rural and remote areas. The success of reverse auctions in India is highly dubious, and India's problems can definitely serve as a cautionary tale for the U.S. as well. India's incumbent wireline provider, BSNL, has made a clean sweep of most of the subsidies, just as many critics are anticipating will happen in the U.S. with companies like Verizon pushing small competitors and new entrants out of the running. In most of the auctions, BSNL bid the exact minimum benchmark subsidy, which eliminated viable competitors who may have been able to build the networks more effectively but at a slightly higher cost. In some cases, participants even submitted zero or negative bids, which is clearly not a representation of true costs but more likely a callous strategy to exclude competitors from gaining market share. After winning the most subsidies in a 2007 mobile infrastructure reverse auction, BSNL actually had the slowest rate tower installation using the subsidies. This is also a valid concern for the U.S., if a company like Verizon (or worse, AT&T) wins auctions that include rural geography surrounding a more densely populated community. How will the FCC enforce timely build-out in the rural areas, or ensure the winner is not just focusing on improving infrastructure in the most profitable areas of an auction block? This point has been raised repeatedly in the USF Reform proceeding comments and workshops, so it would be wise for the FCC to analyze BSNL's failures to use USF subsidies effectively and efficiently in the Indian reverse auctions.

Wu's paper is not the only source on international use of reverse auctions for telecommunications, thankfully. I also recommend "Reverse Auctions and Universal Telecommunications Service: Lessons from Global Experience," by Scott Wallsten of the Technology Policy Institute (2008, Federal Communications Law Journal), which is definitely less self-serving and includes analysis of a wider range of countries (such as Australia, Colombia, Nepal and Peru). Wallsten's paper is supportive of reverse auctions for universal service "if the regulator's goal is to reduce the level of subsidies or to provide information about the 'right' level of subsidies," but it also highlights the challenges that other countries have faced (Wallsten, pg. 4). Wallsten concludes that "global experiences reveal that auctions are feasible and that subsidies required are generally less than incumbents had previously led policymakers to believe," but I still do not find the examples in this report to be convincing reasons why the U.S. should implement reverse auctions (Wallsten, pg. 9). In a 2000 Australia reverse auction pilot program, none of the incumbent's (Telstra) competitors bid for the $85 million subsidies because they felt the subsidy was too low and they would not be able to compete with Telstra. This is basically my biggest fear for the U.S.—that small and regional providers will not even bother participating in reverse auctions, avoiding them completely as they often do in regular wireless license auctions. The dominant carrier simply intimidates them and the administrative expenses of participating may even be too high. Australia's goal in this auction was to increase competition, which it completely failed to achieve, possibly because subsides were insufficient to incentivize competitors to participate. Wallsten also addresses some of the challenges in Chile that were not discussed in Wu's paper, particularly the gaming done by the dominant provider: "The dominant local firm bid 100% of the maximum subsidy in areas with no competitors which were close to its existing network, 90% of the maximum subsidy in areas with an emerging competitor which were close to its network, and zero in areas with strong competition" (Wallsten, pg. 12). This is a really scary likely outcome of reverse auctions, and the FCC will need to consider mechanisms to prevent gaming or we may see a repeat of this ugly situation in the U.S. I personally do not think a provider should be allowed to place zero or negative bids; this action clearly signals that the provider can afford to build out the network without the subsidies, and the provider is mainly looking for the FCC to cement its status as a dominant provider. Zero and negative bids will completely undermine the goals of using reverse auctions to distribute USF subsidies in high-cost areas, as the subsidies would go to providers who clearly do not need the money in the first place. If a provider has the financial strength to bid zero or a negative amount, they need to just start building the network and not even bother participating in the auctions. Finally, Wallsten talks about reverse auctions in Peru, which occurred from 1999 to 2001 for providing telephone service in unprofitable rural areas. I thought this example was interesting because the number of telephones in Peru increased, but it is highly unlikely that this success can be attributed to reverse auctions but rather from greater global market forces resulting from liberalization and increased investments in telecom worldwide. Wallsten simplifies (possibly over-simplifies) the definition of reverse auctions by equating them to Request-for-Proposals (RFPs), which are commonly used by the government for both basic and complex products and services. Although Wallsten believes that reverse auctions can be successful, he offers some important words of wisdom: "One lesson is clear: details of the auction matter. A poorly designed auction may not generate any improvement over the status quo," (Wallsten, pg. 21).

I am worried that the FCC will hastily throw together the guidelines and requirements for reverse auctions because they are in such a rush to reform the USF system and make sure broadband is deployed more rapidly—the 706 Report illustrates the panic that the FCC is trying to induce regarding how the U.S. measures the success and failure of broadband deployment and adoption. There is simply not enough information available for the FCC to make informed and rational decisions when forming the rules for reverse auctions without first taking very small steps through extremely narrow pilot programs. The FCC should not approve reverse auctions in the USF Reform rulemaking because the risks are far too great.

I chose to revisit the Wu and Wallsten studies today because I am strongly considering an extensive focus on reverse auctions in my Master's thesis, so I wanted to write down some of my thoughts on how reverse auctions have failed in other countries. Readers, if you have any other interesting studies on reverse auctions in other countries, I would love to read them!

Tomorrow I will start reviewing the USF Reform reply comments, and I will hopefully have something published by Thursday. Also, I am finally making an effort to use LinkedIn, so please add me as a connection! I've had a LinkedIn account for years and have never really figured out how to use it effectively. I've had a lot of success so far with Twitter, so I figured I should give LinkedIn another shot.

Cassandra Heyne

Thursday, May 19, 2011

Rural Wireless Mobilizes Against the AT&T-Mobile Merger

Today, a group out outspoken opponents to the AT&T-T-Mobile merger hosted a webcast about consolidation in the wireless industry, which included a very insightful discussion about harms that the merger will impose on consumers and the industry as well as baseline antitrust arguments against the merger. The webcast was hosted by Carri Bennet of the Rural Telecommunications Group (RTG) and featured Ernesto Falcon from Public Knowledge, Ben Moncrief from Cellular South, and Trey Hanbury from Sprint. RTG and Public Knowledge are founding members of the newly formed No Takeover Project, a coalition of companies and consumer advocacy associations who are all vehemently against the merger. If you haven't yet checked out the No Takeover Project, I highly recommend you do so soon! The No Takeover Project is extremely dedicated to debunking the myths that the AT&T-Mobile merger will increase competition, provide consumer benefits, and not move the wireless industry back nearly 3 decades to a time when we knew of nothing besides wireless duopolies and telecom monopolies. Anyone who thinks we are not headed backwards in this direction would be wise to brush up on their telecom history and antitrust law before speaking out in favor of the merger. Hopefully I can help the No Takeover Project by providing my readers with commentary about the merger and its potentially devastating impact on small rural wireless carriers (although I suspect that most of my regular readers are anti-merger already). This is my 4th article on the merger, and I am definitely planning to summarize some of the petition to deny comments (due May 31 at the FCC-still time if you haven't done them yet!) as soon as I get through the USF Reform reply comments.

The webcast opened with some wireless and AT&T history lessons from Ms. Bennet- as a longtime lover of history, I always enjoy learning anything about telecom history, like how in 1999 AT&T introduced one-rate nationwide digital roaming which was soon copied throughout the industry, and ultimately became the lynchpin for consolidation as carriers frantically needed to expand their footprints to meet demand. I remember 1999; I had a Nokia phone with changeable face plates which (as a 17 year old) I though was about the coolest thing ever. Unfortunately, I wasn't allowed to use my phone because my service provider, AirTouch (which had just purchased my family's early wireless company), didn't have affordable roaming at my boarding school in Minnesota. So I happily changed my phone's faceplates every day to match my outfits and carried my phone everywhere, never daring to make a call unless it was an "emergency." Thankfully, by the time I moved to DC in 2000, I had service on the new Verizon nationwide network, allowing me to keep my Iowa number and make as many phone calls as I wanted (sort of) to my friends back home. Anyway, enough nostalgia about the early days of wireless, because we all need to focus on the challenge at hand. Ms. Bennet firmly stated that the merger will devastate small rural wireless carriers, and "if we don't win this one, we're gone."

Ernesto Falcon from Public Knowledge described the impact of the merger on consumers, and claimed that consumers will see higher prices. The 34 million T-Mobile consumers will be the real losers, as they typically have plans that are up to $50 cheaper than AT&T plans. In the Senate hearing last week, AT&T claimed that T-Mobile consumers will be able to keep their plans, but we all know that this will not be indefinite. As soon as a T-Mobile customer wants to renew his or her contract or buy a new handset, they will undoubtedly be forced to a more expensive AT&T plan, and AT&T consumers will certainly not be able to move to a lower-priced T-Mobile-style plan. One interesting point that Falcon mentioned, which I had not really considered yet, was the fact that there will be a duopoly for wireless service, but a monopoly for GSM service if the merger is complete. This means there will only be one choice for a nationwide GSM network, which could have devastating effects on GSM handset innovation in the U.S. Falcon argued that AT&T's claim that the market is currently competitive is "borderline ridiculous," and that smaller regional wireless carriers have virtually zero competitive impact on the AT&T machine. Furthermore, he added that "if the 5th largest wireless carrier merged with every single remaining regional and local wireless carrier, they would be smaller than T-Mobile." If this doesn't prove that competition in the wireless industry is an endangered species, I don't know what will!

Ben Moncrief from Cellular South, the nation's largest privately held wireless company with 875,000 customers, emphasized that the merger is purely horizontal and a case of "one competitor gobbling up another." He followed by discussing something I pointed out in my first article after the merger was announced: what will stop Verizon from going after Sprint next? Furthermore, what could be done to stop them? If the AT&T-T-Mobile merger is approved, Verizon could base its arguments on this approval, and the government would be in a really tough position to say "sorry, you can't merge even though we just allowed an equally monumental merger to happen." Now, this is definitely speculation, but it is still troublesome. Moncrief described how the two biggest consumer demands of a wireless carrier are nationwide coverage and "iconic" handsets, and the smaller carriers will not be able to offer affordable nationwide roaming or iconic handsets in a duopoly-controlled industry. He also addressed AT&T's assertion that the merged company will focus extensively on rural build-out, and he pointed out that AT&T will gain no additional rural spectrum from T-Mobile and AT&T already hoards spectrum without expanding into rural areas. Basically, AT&T will not expand its rural footprint by acquiring T-Mobile, and once again rural consumers will be the real losers in the end—especially if smaller wireless carriers are bled dry on roaming agreements or bullied out of exciting handsets through AT&T and Verizon exclusive contracts with manufacturers. Trey Hanbury from Sprint continued the discussion about AT&T's spectrum surplus, and provided some interesting maps to illustrate how much spectrum AT&T currently warehouses (as much as 50 MHz in some major markets, not including Qualcomm's spectrum, which brings that number up to 70 MHz in some markets). On the other hand, T-Mobile has virtually no unused spectrum. Why? Because AT&T underinvests; and despite claiming billions in network investment, AT&T's investment per subscriber is less than the industry average.

I thought the most interesting points in this webcast addressed antitrust law and the Herfindahl-Hirschman Index (HHI) for the wireless industry. Regarding antitrust law, the panelists argued that mergers have been blocked in the past; it is just particularly rare in the telecommunications industry. However, it is widely accepted that moving from 4 competitors to 3 is extremely harmful; and moving from 3 competitors to 2 is absolutely not desired. The bottom line is that the merger violates antitrust law, and the panelists provided a nice lesson on why this is true. Three thresholds that a company being acquired needs to meet in order for a merger to be acceptable are not valid with T-Mobile:

  1. The company being acquired cannot restructure to be successful on its own (FALSE, albeit T-Mobile has been hemorrhaging customers since the merger was announced),
  2. The company is facing imminent failure and has no other options (FALSE, T-Mobile is still relatively profitable),
  3. The company has conducted an exhaustive search to merge whereby antitrust laws are not violated (FALSE, there were rumors of T-Mobile merging with Sprint, but that is far from an "exhaustive search").
Finally—and here is the really kicker—the HHI argument. AT&T has been really dodgy on this topic, at least from what I have heard and read. HHI is a widely recognized method of determining how concentrated an industry is, and is calculated by adding the squares of the competitors' market share. 2,500 is considered highly concentrated, and the wireless market is currently at an HHI of around 2600. Furthermore, an increase in HHI of 200 points is considered dangerous, and the AT&T-T-Mobile merger will skyrocket the HHI up another 800 or so points to around 3400. If you don't believe me, here is a quick and dirty calculation if AT&T and Verizon each control roughly 40% of the market and the remaining 10% dispersed through smaller competitors: (0.4)^2 + (0.4)^2 + (0.1)^2 *10,000 = 3300. Math never lies, and this is a low-ball estimate.

The purpose of this webcast was clearly to mobilize consumers, the rural wireless industry, and anyone else who is likely to be harmed by the merger (including ancillary wireless communications inputs and industries) to jump into action and put a stop to this merger. This means submitting petitions to deny to the FCC, contacting members of Congress, and taking advantage of the many channels of communication (such as Twitter, Facebook, etc.) to inform others about the dangers of this merger. AT&T spends over $3,000 per hour on lobbying, but that is no reason to give up hope because the opponents of the merger are clearly attracting vast and powerful numbers.

I strongly urge my readers to check out the No Takeover Project. I will continue to write about the merger from the rural telecom perspective and I just donated $25 to the Public Knowledge "AT&T Lobbying Match Challenge," where they pledged to raise as much money in a week as AT&T spends on lobbying in an hour. Pretty creative! I think they met their goal, because they had $76 left to go before I gave them $25. Hopefully it was money well spent.

Have a great weekend everyone!

Cassandra Heyne

Wednesday, May 18, 2011

FCC’s Third USF Workshop in Omaha, NE: Many Questions, Few Solutions for Ideal Rural Broadband Policy

The FCC concluded its trio of highly interesting and collaborative USF events today in Omaha, NE, with the Workshop on Defining the Federal/State Partnership in a Broadband World. I just want to say that I really value the learning experiences that these workshops have provided, because they have given me such an insightful look deep into the core of every major issue related to USF reform. As a result of these workshops, I have been able to learn so much about many facets of USF reform (such as ICC, COLR obligations, state USF funds, broadband technologies, etc.), including areas that I did not previously know much about or understand completely just by reading comments. I l truly enjoyed watching members of all different telecom industry sectors debate on USF topics in each of the three workshops. I hope the FCC utilizes this type of collaborative, open discussion platform in the future for other major proceedings as well. This workshop in particular covered some of the topics of the previous workshops, such as Intercarrier Compensation reform (ICC) and reverse auctions; but it also addressed new issues, such as the states' role in USF, business cases or the lack thereof to invest in rural broadband infrastructure, and unique consumer perspectives straight from the mouths of actual consumers. Overall, I thought there were a lot more questions than answers provided in this workshop, and once again there was very little consensus on any issue in any of the panels (but that's what makes it fun, right?). It was really nice to see people I know (like Tom Conry from Harlan, Iowa) participate in such an important event, and it was also an amazing opportunity for people all over the Midwest—Iowa, Nebraska, Kansas, Wyoming, South Dakota—to come together and represent the heart of the rural telecommunications industry so close to home. I took 14 pages of notes on this workshop, so I'll try my best to condense that down to the key points and arguments—readers, I appreciate your patience, time, and attention on these USF Reform topics which I have been writing about in great detail and hopefully not in vain.

Commissioners Clyburn and Copps opened the workshop by reiterating how important it is to modernize the Universal Service Fund for broadband. Clyburn provided a localized example, citing that Nebraska has 300,000 people (18% of the population) without broadband, and it is a significant barrier for these people to find jobs, receive a quality education, and conduct basic transactions. Copps added that the current USF system is plagued by market power, "at best outdated and at worst Byzantine and broken." He argues that now is not the time to listen to "Dear Santa wish lists," and everyone in the industry is going to have to make some kind of sacrifice for the greater good. Copps is hoping that the USF reforms will move forward sometimes this summer, which leaves very little time for ensuring everyone gets exactly what they want. Nebraska Public Service Commissioner Ann Boyle described what she considers a significant and unique problem in highly rural states like Nebraska: the larger cities, like Omaha, only account for about a county or so of the state's geography, whereas the extremely rural areas, like Western Nebraska, compromise vast territory and include significant challenges to serve with quality and affordable broadband. She even presented a map of Nebraska to illustrate how one Nebraska Public Service Commissioner is literally responsible for nearly the entire state in terms of geography, but only about 1/3 of the population. This example reminded me of when I used to go camping in Western Nebraska when I was really young. If you think Iowa is rural, you haven't seen what rural really looks like! Even Western Nebraska looks like a metropolis compared to other regions in that part of the country, where you can literally drive for hours without seeing another person. Yet, people do live in these areas, and they deserve quality and affordable broadband. I have long argued that these are the people who need broadband the most, because broadband has the potential to transform their lives in ways that it cannot in urban areas simply by opening up the entire world of education, health care, finance, business and culture to individuals who would normally have to drive 300 miles to reach the nearest "city" to conduct business or even purchase everyday goods and services. Ms. Boyle mentioned how beautiful Western Nebraska is—and I agree—but unfortunately most people will never understand the attraction to areas like this. Without broadband service, even fewer people will ever consider living or starting a business in these areas, and the children in extremely rural communities will not see any opportunities to remain in these areas once they become adults. I can personally serve as a prime example to illustrate this phenomenon, and I theoretically have a pretty decent job opportunity in rural Iowa if I really want it.

Panel 1: The Evolution of the State/Federal Partnership in a Broadband World

Panelists: Alex Minard (FCC, Moderator), Peter Bluhm (Rolka, Loube, Salzer Associates), Doug Garrett (Cox Communications), Tom Conry (Farmers Mutual Cooperative Telephone Company), Teri Ohta (T-Mobile), Edward Krachmer (Windstream)

This panel largely discussed the complex dual roles of the FCC and states in USF reform, and how these two roles can be balanced and appropriately coordinated to ensure the goal of modernizing USF for broadband is successfully achieved. While this panel lacked the fireworks that some of the other panels have had, it was still very interesting. The main debates centered around the extent that COLR and ETC requirements should be applied to broadband providers receiving USF support, and how involved states should be in enforcing these requirements and managing their own USF mechanisms. Peter Bluhm described the relationship between the FCC and states as a "marble cake," rather than a "layer cake" as it is often described, as the roles are mixed together with different and complimentary sets of requirements and responsibilities at both levels. Doug Garrett from Cox commented that states have a valuable role in overseeing agreements, developing fair terms for interconnection, and ensuring a smooth transition to redirect USF for broadband in the Connect America Fund (CAF), but the FCC has the ultimate responsibility to solve the greater USF challenges as well as provide incentives for states to achieve broadband goals—basically, close coordination between state and federal agencies is necessary. Tom Conry argued that states serve an important role in Carrier of Last Resort (COLR) obligations and in ensuring that USF recipients use funds effectively to bring broadband to rural areas, and there must be a close partnership between states and the FCC. Edward Krachmer of Windstream prefers broadband oversight at the federal level, and argued that there should be uniform standards for all states developed by the FCC, where states can provide input on these uniform standards. Commissioner Copps asked the panel to discuss how competition—or lack thereof—impacts COLR obligations, and if COLR obligations should be applied everywhere or only where there is very low or no competition. Bluhm responded that there should be some exemptions, but COLR obligations should be especially rigorous in areas with no competition, but Gerratt claimed that COLR has outlived its usefulness and has now become a burden. On the other side, Conry argued that COLR will be very important going forward to ensure that providers cannot pull out of providing service in high cost areas, a la the "Hotel California" concept (You can check out any time you want but you can never leave.. Digression: I believe this is a common term in the finance industry for an FTC or SEC regulation, because I just read an article a few weeks ago about how complicated and obscure finance industry acronyms and jargon has become, where my response was "obviously you don't know anything about the telecom industry," which has 500+ page dictionaries just for acronyms. Anyway I love the Eagles so I have no problem borrowing this term from the finance industry). The panel debated about the ease of COLR and ETC requirements and pitfalls of COLR, after a Commissioner from Indiana commented that in some states receiving ETC status is as easy as tossing an application out of a car at a drive-through window, which I thought was a pretty funny visualization. Bluhm argued that states do not have uniform approaches to COLR obligations, but a uniform baseline requirement would be a good idea albeit difficult to develop. Ann Boyle chipped in and added that many carriers will not want to be a COLR except for ones who are already providing service (specifically rural carriers in rural areas), and she added that many rural carriers have far surpassed baseline COLR service requirements. She commented that multi-state carriers should not be using one state's money for provide service in a different state, and some states may need to go above and beyond any standardized COLR benchmarks. Commissioner Copps asked about the role of states in addressing the broadband adoption challenge, to which Conry replied that in his service area (Harlan, Iowa and surrounding communities, 15 minutes from my hometown of Walnut and a neighboring exchange to Walnut Communications), the primary adoption problems lie in age and income demographics, not in availability, which is nearly universal in that area. Naturally, reverse auctions worked their way into the panel, and Gerratt argued that they are the best way to ensure public money is used for public goals. He erroneously claimed that reverse auctions have been very successful in other countries, and I promise to debunk this myth in an upcoming post, hopefully in the next week or so. Conry responded that reverse auctions will undoubtedly create networks that are of lower quality simply because the true costs will not be supported. Finally, there was a debate about whether or not states should provide their own USF support. An audience member from South Dakota voiced concern that the state of South Dakota simply does not have a large enough population to afford a stand-alone fund, but Ann Boyle responded that the population should not matter—if everyone in South Dakota who has a phone pays a small amount, the South Dakota can have its own fund for broadband too, and states should do whatever they can to limit the burden on the federal fund, which I agree. Bluhm referenced the Joint Board's proposal that states could impose a per line USF fee of up to $2, which would be subtracted from the federal subsidies. Overall, I thought this was a good panel but I would have liked if there was a broader group of panelists which may have incited a more heated debate—most of these panelists seemed rather like-minded with the exception of Conry representing the RLEC perspective. I was particularly impressed with the comments and questions by Ann Boyle, and I can see that she is a dedicated advocate of rural broadband and rural telecommunications companies.

Panel 2: State and Federal Roles in ICC Reform

Panelists: Sharon Gillett (FCC), Hank Hultquist (AT&T), Ken Pfister (Great Plains Communications), Kathleen Abernathy (Frontier Communications), Rich Morris (Sprint)

The interesting thing about ICC reform, which is arguably my least favorite category—or "leg of the 3-legged USF stool," if you will—is that nobody really disagrees that we are moving towards an all-IP world, where per-minute and interstate/intrastate rates will be obsolete, and we therefore need reforms to this system. However, naturally nobody can agree on how to reach that endgame, and the FCC needs to realize that they cannot force a Great Leap Forward in technology to an all-IP network just by snapping their fingers or wishing it so. In this panel, I thought the most interesting debate focused on the $0.0007 intercarrier compensation rate proposed by the FCC. Ken Pfister from Great Plains Communications (a fairly small RLEC) basically argued that whether its 0.0007, 0.002 or 0.01 doesn't matter because none of those arbitrary values have any relation to costs and imposing these rates would devastate the industry. Kathleen Abernathy of Frontier argued that today's high-cost/low-density areas will most likely continue to be tomorrow's high-cost/low-density areas, which must be recognized in a comprehensive ICC reform and jurisdictional differences must be addressed effectively before we can expect to reach the envisioned "broadband nirvana" of the future. Commissioner Copps asked the panel a really good question: what is the actual consumer benefit of ICC reform? How would you even begin describing ICC to a consumer? ICC is one of the most complicated, archaic components of telecom policy and I have actually tried describing it to non-insiders before and found it was actually easier to use industry jargon than try to talk about it in basic English. Anyway, good question, Copps. The answers from the panelists weren't very helpful; in fact Abernathy's response that it is basically impossible to describe the benefits of ICC reform to consumers was pretty dead on point. The AT&T panelist said that since consumers are the ultimate beneficiaries of USF, any long term repurposing of USF support from POTS to broadband will create consumer benefits, however it may be awhile before every consumer sees lower rates (if that ever happens). Keeping with the day's theme on federal-state cooperation, Clyburn asked the panelists to describe which states are effectively addressing ICC and what tools these states are utilizing. Pfister responded that Nebraska has a very progressive system but there is still work to be done to reduce intrastate rates, and Abernathy responded that Georgia has a access recovery fund which allows for protection of current investments while still focusing on longer term goals. Moving right along, there were a lot of questions about technology neutrality and the appropriate model for ICC reform. One comment I found especially entertaining was from the Sprint panelist—he stated with confidence that satellite is completely appropriate to provide broadband to the 3-8% of households that aren't covered by wireless (yes, he is apparently buying in to the National Broadband Map's defective data that shows wireless coverage in places where no wireless coverage actually exists). However, he admitted that he has never actually used satellite broadband. The Commissioner from Indiana discussed the "business case/no business case" debate, and described a scenario where three providers who could have brought broadband service to Indiana took drastically different approaches—one finding a considerable business case based on projected returns, one investing elsewhere and now lacking a solid footprint in Indiana, and one finding that 40% of unserved areas are not necessarily uneconomic and building service to these areas, squeezing blood from a turnip in other words. Basically, an unserved area is not necessarily uneconomic, but there still might not be a business case. I thought this discussion was interesting because in most rural areas there simply is no business case, especially for larger price cap carriers, and there is nothing anyone can do to change that short of forcing people to move to these areas. If the FCC thinks repurposing RLEC USF support to carriers who admittedly have no business case or desire to serve extremely rural areas is a good idea, they are sorely mistaken. Ken Pfister confirmed this by stating that there is no business case to provide broadband to most of Nebraska, but rural carriers are doing it anyway. Furthermore, moving to a $0.0007 or near 0 access rate will perpetuate the existing business case problems in rural areas because then carriers really won't see any incentives to invest heavily in IP infrastructure. Once again, it seems like the FCC is just creating a bigger problem in its attempts to incorrectly solve a lesser but fundamental USF problem (the "problem" being the perception that RLECs avoid upgrading to IP networks just so they can collect high access rates). No words from this panel on the ICC Big Three- VoIP, traffic pumping and phantom traffic, but these topics were addressed at great length in the first USF workshop.

Panel 3: Targeting Support and Transitioning to the Long Term CAF

Panelists: Carol Mattey (FCC), Jeff Lanning (CenturyLink), Kevin Hess (TDS Telecommunications Corp.), Cheryl Perira (replacing Wendy Fast, Consolidated Telephone Company), Jim Kohler (State of Alaska), Lisa Scalpone (ViaSat/WildBlue), Johnie Johnson (Nex-Tech Wireless)

This panel was very interesting and included some excellent perspectives from both the rural Midwest and the really rural state of Alaska, where issues in the Lower 48 pale in comparison to the challenges faced in Alaska to deploy broadband to rural areas. The most heated debate in the panel centered around reverse auctions, where panelists were split in favor and against, yet there were still no valid arguments in favor of reverse auctions in my opinion. The panelist from rural Consolidated Telephone Company argued that the FCC is simply not hearing the arguments against reverse auctions, the panelist from WildBlue argued that reverse auctions will be very effective at bringing high quality, low cost broadband to rural areas, and the panelist from Nex-Tech Wireless argued that small rural carriers will not be able to compete economically in reverse auctions which will ultimately cement the auction winners' monopolies. Were there any answers on why reverse auctions are appropriate or how they will actually work successfully? No, of course not; such answers simply do not exist for an auction mechanism that has never been used in the U.S. for broadband infrastructure. The panelists were asked how support should be targeted to high cost areas, and the panelist from Consolidated Telephone Company responded that a density-based approach makes the most sense. Jeff Lanning from CenturyLink agreed, adding that competitive areas should be excluded. He argued that it is important to think like an investor, and identify areas where you would not want to invest—these are the areas where funding should be targeted. The panelists were asked if mobility should be a supported service, which brought up the debate over wireline vs. wireless. Ultimately, I believe it is really important to understand that customers want both wireline and wireless for different reasons, and they are not substitutes for each other—the market should provide clear evidence of this. I thought about my own telecommunications service use during this discussion—I have a 3G mobile smartphone, fixed DSL and cable TV (long story somewhat short, Comcast sucks and refused to fix my cable Internet a few years ago without putting me through significant headaches and costs, so I dropped them as my ISP. But, Verizon doesn't offer FiOS in poor neglected Northwest DC, so I'm stuck with unbundled and more expensive services from separate providers. I use my Verizon mobile Internet for very specific applications and I use my DSL for very specific applications, and it is unlikely I will substitute one for the other anytime soon. I haven't used a landline since 2005). Commissioner Copps, who was really on-point with the hard-hitting questions today, asked about the fate of underserved areas, noting that Congress will be concerned with both unserved and underserved areas, such as inner-city low income communities. Jim Kohler from Alaska responded with yet another question: where do we draw the line between unserved and underserved? This is especially challenging when we include speed targets and consumer demands for unlimited bandwidth, because an area that was served perfectly well recently may swiftly become underserved especially if USF is redirected without considering operational expenses, as noted by the panelist from CenturyLink, who also added that it is going to take longer to serve these areas if the fund is capped and the budget is reduced. This increases the risk of stranded infrastructure and reduced incentives to invest in unserved and underserved areas. Finally, the panelists were asked how soon the long term permanent system should be implemented, but once again there weren't any real answers here. There was some consensus that there needs to be pilot programs for some of the riskier proposals like reverse auctions before anything permanent can be implemented, and the panelist from Alaska emphasized that a rapid transition could result in some communities "going dark" if they cannot adjust to the changes fast enough. Very scary possibility…

Panel 4: Consumer and Public Forum

FCC Chairman Genachowski, Sharon Gillett (moderator, FCC) and panelists Linda Rice (Nebraska resident), Lazaro Spindola (Mexican-American Commission), and Mike Arnold (Communications Workers of America Local 7470).

Ah, the consumers. The ones who will actually benefit or hurt from the FCC's rural broadband policy decisions, but whose voices are not always heard because they lack the capacity for high level industry jargon and legalese—which according to AT&T makes them irrelevant (reference to the AT&T-Mobile merger drama). Chairman Genachowski, fresh from his visit to extremely rural Diller and Liberty Nebraska, opened this panel by describing his experience visiting these two rural Nebraska communities—one with broadband and one without. He described how broadband has provided amazing opportunities for the Blue Valley Meats company, which started as a small grocery store and become a bustling e-commerce business with triple the number of employees as when it started. On the other hand, small businesses in the unserved community cannot reach new customers, farmers cannot participate in online auctions, and children cannot receive a quality education without broadband. Supposedly, Genachowski visited an RLEC in Diller, Nebraska, but not so much as a peep was made about this visit so I'm wondering if it even happened. Not to rant too much, but I was really upset about this oversight. I was expecting Genachowski to at least pretend to give some reassurance to the RLECs after visiting one such company in person, but no luck with that today. What happened? Anyway, the most riveting consumer testimony was given by Linda Rice from the Omaha area—yes, the Omaha area, not a ghost town in the western sand hills of Nebraska. She does not have broadband and has gone through horrendous ordeals trying to get broadband, even though a local broadband provider has infrastructure just 4200 feet from her house *cough—sounds like Qwest—cough.* This broadband provider refuses to extend service even though it could gain a dozen or so new customers in her neighborhood, and residents have continually petitioned the company for years to provide service. This is why price cap carriers cannot be trusted with redirected USF support!! Nothing is going to change the fact that these unserved areas have low business case for investing, even if the investment would be very small (4,200 feet small), so why should we expect that a price cap carrier would utilize USF to extend service, or that they would do it relatively quickly? The FCC and State commissioners took questions and comments from the audience, which included a wide range commentary on fixed wireless opportunities in rural areas, broadband for education, remote medical monitoring and health care, access for persons with disabilities, technology neutrality, and broadband adoption initiatives. I have a feeling that consumer questions and comments could have gone on a lot longer than 30 minutes, and the FCC could have successfully dedicated an entire day just to taking questions from consumers, who we must not forget they are doing all these reforms for in the first place, allegedly.

Well, there you have it—I've covered everything that has happened with the USF Reform rulemaking up to the reply comments, which are due on Monday, giving me literally no time to rest or write about anything other than USF this month. 

Cassandra Heyne

Have a lot of free time? Read my entire USF Reform Series up to the reply comments:
First Workshop on ICC Reform
Second Workshop on USF Reform
RLEC, rural association and rural wireless carrier comments
Price cap comments
Joint Board comments
Rural Association comments
ICC reform comments

OPASTCO Legislative and Regulatory meeting
NTCA Legislative and Policy meeting



Tuesday, May 17, 2011

OPASTCO Legislative & Regulatory Conference: Do Not Leave Rural America Behind in Broadband

Today (Tuesday, May 17), I attended the opening session for the Organization for the Promotion and Advancement of Small Telecommunications Companies (OPASTCO) 2011 Legislative & Regulatory Conference in Washington, DC. As with the NTCA Legislative and Policy Conference back in March, the central theme of this conference was spreading the word about how the FCC's proposals for USF Reform threaten the very existence of small independent rural telecommunications companies and cooperatives. The main difference between these two conferences, besides the attendees, was that this time the rural carriers had significant ammunition to take to their Congressional staff with the RLEC Plan for USF Reform, which was released last month. OPASTCO put forth a strong message of unity with the other Rural Associations (NTCA, WTA and NECA), and urged members to focus on USF and ICC issues above any other current points of contention, such as the AT&T-T-Mobile merger, Net Neutrality and video retransmission consent. This illustrates just how important it is that Congress hears the message of rural telecommunications loud and clear, because rural telecom delegations normally come to DC to describe a variety of issues as many of these individuals only get one or two chances every year to communicate face-to-face with the rulemakers in DC. One of the speakers today really emphasized the importance of focusing on USF Reform by saying that most of the other current big issues won't really matter in the end if rural Americans are left behind in broadband deployment and adoption--which is almost certain to be the case if the FCC's USF Reform NPRM is adopted without change. The FCC is hoping to adopt final rules for USF Reform in the upcoming months, most likely by the end of the year.

I heard something very frustrating at the conference, which is the FCC has not been very warm to the Rural Associations' arguments so far. The FCC Commissioners and staff have somehow managed to develop some really inaccurate perceptions of small rural telephone companies. The FCC apparently thinks rural carriers purposely lose money and that all rural carriers get a rate of return of 11.25%--something we learned is not true from the studies conducted for rural carrier comments in the USF Reform proceeding. The unfortunate truth is that a significant percentage of rural carriers earn a negative rate of return, and yet they continue to make significant and even miraculous efforts to deploy broadband in high-cost, low-density regions of the country. The FCC thinks rural carriers are wasteful and inefficient, and yet they want to give the money to larger companies who are even more wasteful and inefficient, and who have no interest in serving populations more sparse than 20 people per square mile. I can't help but be overwhelmed with questions that I imagine will never be answered to my satisfaction... How did these perceptions come to be in the first place? How can they be overcome...and fast? Why does the FCC want to trivialize the significant broadband accomplishments that hundreds of small companies have made in the last 15 years, in places where there is literally no business case to provide service? I know that I am lucky to have a very unique perspective and insight on the rural telecom industry, and I want to do everything I can to help both lawmakers and the general public to see past faulty premises and misconceptions about rural telecommunications providers. I just hope its not "too little, too late," for me and for all the wonderful rural telecom owners, managers and advocates who are tirelessly communicating these issues in both the state and federal arenas. I definitely felt some sense of satisfaction when I read the Federal State Joint Board comments on USF, they also largely disagreed with the FCC's proposals and they seemed very in-tune with the issues that rural carriers are most concerned about such as reverse auctions and the unfounded cap on the fund, of which there is no legal basis or logical reason for imposing other than pure ignorance, in my opinion. The FCC wants to impose all these significant changes of USF--and I am not disagreeing with the fact that USF needs to be "modernized" to include broadband--but the FCC's proposals will ultimately end up causing significant harm to rural telecom carriers and therefore to rural consumers, either through higher rates, lower quality, or by eliminating broadband service entirely in some rural areas.

NTIA Chief of Staff Tom Powers addressed the conference this morning and touched on several key issues, such as spectrum policy, broadband adoption, and Internet policy. He described the most critical broadband adoption challenges, where 46% of broadband non-adopters (in a recent broadband adoption survey) cited "lack of interest" as the main reason why they do not use broadband. He made some interesting points about the difference in adoption rates between rural and urban users--there is about a 10% difference in adoption and that 10% can primarily be accounted for by lack of availability in some rural areas, especially when factors like income and education are constant between urban and rural groups. The NTIA is encouraging programs to increase broadband adoption by targeting the "lack of interest" non-adopters, especially minorities, senior citizens and persons with disabilities. It is discouraging that some of the people in America who could probably benefit the most from broadband either can't get it or don't understand the benefits. It is even more discouraging that rural telecom providers may not have the chance to convert the remaining non-adopters if USF is restructured in a detrimental way, and as a result the remaining rural non-adopters could be waiting years until another carrier comes along. I think it is important to consider that broadband non-adopters are not going to be clamoring for service, lobbying Congress, and reaching out to competitors if their current broadband provider vanishes from the market. They will not take matters into their own hands and build community wireless networks. They will simply be left behind, and be economically, educationally and culturally disadvantaged without broadband.

I enjoyed this conference and as usual I met many great rural telecom advocates from all over the country. I really applaud everyone who traveled to DC to meet with Congressional and FCC staff this week, because we are running out of time to communicate our concerns about USF Reform on the Hill. I know our efforts at the NTCA Legislative & Policy meeting in March were successful, because the letters that NTCA members presented to the House and Senate were circulated and signed by many senators and representatives. I hope the OPASTCO members will be even more successful with their lobbying efforts this week! I was finally inspired by this conference to start moving forward on my Master's thesis, which will be about USF Reform. My broad topic, "Will RLECs Survive 21st Century USF Reform," is starting to become a little more constrained, and now I am thinking about focusing more specifically on whether (and how) RLECs will survive reverse auctions and a cap on the fund, which I believe will be the most likely and most negative outcomes of the final rules.

Think I'm done talking about USF yet? Think again! Tomorrow is the much-anticipated 3rd FCC Workshop on USF Reform, taking place in Omaha Nebraska, complete with a special FCC Commissioner trip to a rural telecom provider in Diller, Nebraska! I can't even imagine how excited the employees at that rural telco must be right now--I'm really excited for them! I hope to have a review of this meeting posted by late tomorrow evening. I also signed up for a webcast on Thursday about consolidation in the wireless industry, which I am really looking forward to watching.

Cassandra Heyne