Saturday, May 7, 2011

USF Reform Comments Showdown: In This Corner, the Joint Board Proposes a Very Reasonable Plan and Opposes Reverse Auctions

Comments on USF Reform and the Connect America Fund were due April 18, 2011 and May 2, 2011 for the Federal State Joint Board, commencing the second round of comments in this proceeding (following April 1st's ICC comments). For your reference, the following comment summaries are in response to:

In the Matter of:

Connect America Fund (WC DN 10-90)

A National Broadband Plan For Our Future (GN DN 09-51)

Establishing Just and Reasonable Rates for Local Exchange Carriers (WC DN 07-135)

High-Cost Universal Service Support (WC DN 05-337)

Developing a Unified Intercarrier Compensation Regime (CC DN 01-92)

Federal-State Joint Board on Universal Service (CC DN 96-45)

Lifeline and Link-up (WC DN 03-109)

Now that I have spent some time reading and summarizing comments from individual companies and associations, it is time to take a hard look at two of the alternative plans proposed in response to the FCC's USF Reform NPRM. Although I originally simply saved the longest comments for last due to my pressing academic obligations, it appears as though I indeed saved the best for last as well. Today I give you a brief summary of the Joint Board's 177 page comments, and next I will provide analysis of the Rural Association Plan.

Comments by State Members of the Federal-State Joint Board on Universal Service 
I am fairly new to understanding the complex and important role of the Joint Board—it was not something that I learned about in my telecom graduate program nor is it one of the more commonly known aspects of telecom regulation. Anyway, I spent some time in my previous job researching past Joint Board decisions and their relevance to the proposed Mobility Fund. I learned that the FCC typically accepts and considers Joint Board decisions, albeit several significant decisions which were not adopted by the FCC. I feel that the Joint Board's alternative plan for USF Reform is extremely reasonable and adequately addresses many of the shortcomings in the current system as well as criticisms about excessive and unnecessary ILEC/RLEC support. Basically, the Joint Board recommends including both broadband and mobility in the list of services supported by USF, and then implementing three separate funds to distribute service: a Provider of Last Resort (POLR) Fund, a Mobility Fund, and a Wireline Broadband Fund. Furthermore the Joint Board is not supportive of reverse auctions or a bill-and-keep mechanism for ICC reform, which shows that states are clearly more in-tune with RLEC issues and their concerns with the NPRM. States have more knowledge of consumer problems, competition, local business conditions, and other unique insight, and they typically act as a buffer between local business, local consumers and the FCC. The Joint Board's vision for the new Universal Service Fund includes broadband and mobility as supported services, but recognizes that the fund should not continue to grow exponentially. However, the Joint Board also acknowledges that it may not be possible to contain the fund at 2010 levels, especially if new services are expected to be supported: "It is difficult to understand how the current USF financial structure will be adequate to support these expanded objectives when the chief funding source applied to the task will be the repurposing of the current $4.2 billion of high cost funding" (Federal State Joint Board on Universal Service, 2011, pg. 15). The Joint Board warns that if the FCC restructures USF with insufficient funding, the entire system could be harmed significantly, carriers may not be able to repay debts, capital investment may be reduced, and some customers could even lose service altogether if networks cannot be maintained.

The Joint Board recommends creating 3 separate and distinct funds. The first is the POLR Fund for continuing cost based support to high-cost ETCs for both voice and broadband. I found the proposal for the POLR Fund to be especially well developed and reasonable, especially considering the alternative (the FCC's plan). This fund includes 9 steps:

  1. Targeted support for non-competitive areas: This mechanism recognizes the existence of "donuts" where low cost areas are surrounded by high cost areas. Support will be distributed on a simple calculation of cost – revenue where revenue is "total company" (minus video service) based and costs are all capital and operating costs, including a reasonable return and depreciation. The Joint Board recommends resetting the rate of return to 8.5%, which is still well above the rate that many small companies actually receive but below the current rate of 11.25%. Finally, investment and expense costs would be capped, to "prevent carriers from making excessive investments solely or primarily to obtain new or secure existing universal service funding" (pg. 38). I believe this final point is very important given the widespread criticism that RLECs gold plate their networks and invest in pointless, wasteful services like FTTH (yes, I'm being sarcastic)—the Joint Board recognizes that the cap should probably increase over time to accommodate FTTH construction.
  2. Intercarrier compensation reform support to replace lost access revenue: This step would calculate the difference between pre- and post- ICC regulatory revenue change and then multiply the difference by a transition factor to determine a reasonable amount of per line support, which would decline to 0 over a period of years. This step would effectively reduce the shock factor that some companies may experience as a result of ICC reform and its resulting impact on revenues.
  3. A rate-of-return mechanism to ensure no excessive profits: This step imposes an earnings ceiling which will limit the risk of excessive returns—another common and usually unfounded criticism of RLECs. This step will prevent double recovery and ensure that statutory requirements for affordable and reasonably comparable rates are met. For example, support would be limited for cases where a provider's large low-cost area drives down the costs to serve a smaller high-cost area.
  4. An upper limit on "very" high cost support: Again, this step will help prevent wasteful and abusive use of universal service funds (one of the FCC's main objectives for USF reform). According to the Joint Board, "the nation cannot afford to provide broadband service in all areas and must limit public expenditures for extremely remote and extremely low density areas" (pg. 59). Accordingly, the Joint Board proposes a $100 per-line, per-month high cost cap, and a corresponding waiver process for extremely special cases. With prevailing criticism that some RLECs receive like $2,000 per month for high cost lines, this step will effectively ensure that companies do not receive extremely excessive and unsustainable subsidies.
  5. Combine steps 1 through 4 to determine initial Federal support: Rather than adding steps 1 and 2, the larger of the two should be applied to prevent double recovery. Then, the appropriate limits from steps 3 and 4 would be applied.
  6. An incentive for state support: Although only about half the states have universal service funds, this step attempts to create incentives for more states to participate and it rewards states who do participate. The Joint Board proposes reducing the amount of support (calculated thus far in the preceding steps) by $2 per month per line, where the states would substitute the $2 or any other amount. The Joint Board acknowledges there is a risk of insufficient funding in states that do not participate, but at only $2 per line the harm would be minimal.
  7. An incentive to encourage build-out, service quality and performance standards: In order to ensure that support is effective and network build-outs are fast, support would be eliminated if providers do not meet requirements. For example, a minimum requirement may be to provide 4 Mbps service to 60% of customers by 2016. If this minimum requirement is not met, funding would be eliminated.
  8. A transition period to reduce the impact of fiscal shocks: Carriers may have financial difficulty transitioning from the old to the new USF system; the Joint Board recommends a 5 year transition but some of the recommended steps, like step 8, should be implemented immediately.
  9. Final federal support level: Taking all these steps, limitations and transition times together, the final amount of federal support and corresponding timeframe would be established for POLRs.
The second and third funds proposed by the Joint Board, the Mobility Fund and Wireline Broadband Fund, are basically identical in methodology but targeted to different services. The Mobility Fund would provide grants to help finance building wireless towers in unserved and underserved areas, and the Wireline Broadband Fund would provide grants to construct wireline broadband in unserved and underserved areas (yeah, that is pretty obvious). Anyway, each fund would be capped at $500 million, but include a gradual increase to this level, starting at $50 million and reaching $500 million by the sixth year. Each fund would be financed from reallocated CETC support, and each would go towards financing up to 50% of the debt to cover network construction. The remaining 50% would have to come from private financing, which would "ensure that carriers invest prudently and would avoid making wasteful capital expenditures" (pg. 72). Again, the Joint Board is specifically addressing the FCC's requirement that the reformed USF must eliminate waste and abuse. It also may stimulate investment from new entrants. I definitely think this 50% capital expenditure requirement is important not only to reduce over-subsidizing, but to maintain a predictable and sufficient means of support. Private lenders are so scared of investing in rural telecom providers right now with the fear that all USF support may go away, and 50% is a lot better than 0%.

The Joint-Board comments contain a lot of interesting information from studies and data analysis, as well as remarks about ICC reform (bill and keep may result in some carriers having to increase rates by ridiculously high amounts), contributions (broadband providers should be contributing), and public interest obligations for broadband POLRs (states should have a significant role in the POLR system)—I highly recommend reading these sections if you are particularly interested in these topics. The last topic I will cover in detail here is reverse auctions: the Joint Board is not in favor of them! I've been really pleased with all the arguments against reverse auctions lately, and the fact that no sane broadcaster or wireless carrier is willing to release their death grip on their spectrum holdings. I'm really hoping that the FCC sees how bad of an idea reverse auctions are, especially with no spectrum to auction in the first place. Later this week I am going to write about some of the failures that other countries have had when they tried to implement reverse auctions—I think you will see why I feel so strongly that they are a horrible idea once you learn how disastrous they have been elsewhere. Reverse auctions have never been used in the US for universal service, and this is not the time to give them a try just to see how it goes and whether or not they actually work. The Joint Board provided the following (very persuasive) arguments against reverse auctions:

  • Reverse auctions may destabilize ILECs.
  • Reverse auctions could be easily manipulated if service areas can be aggregated.
  • The FCC cannot operate under the assumption that multiple bidders will participate everywhere, nor that the winning bid will actually reflect the bidder's true costs.
  • "Bidders can collude without being detected," which is pretty scary (pg. 81).
  • Reverse auctions would provide incentives to significantly overbid above true costs if the FCC's baseline support level is well above true costs.
  • "Reverse auctions work best when all bidders are approximately the same size, there exists a semblance of a level playing field across a range of bidder sizes and bidder technologies, and the opportunity for gaming is limited" (pg. 82). Well… we know this is not the case in the industry today! Verizon Wireless vs. Small RLEC of 2000 customers. Who will win that auction?
  • Bidders may apply a "risk premium" to their bids or simply not participate if the risk is perceived to be too high.
  • Federal support could be seen as a replacement for capital investment.
  • Reverse auctions would create islands of high density areas being served and leave the low density areas no better off than they are today, defeating the sole purpose of USF reform.
  • The FCC's plan to use census blocks is insufficient because census block boundaries do not perfectly match providers' boundaries. Furthermore, the current data actually overestimates the availability of broadband in the National Broadband Map—even if a census block is partially served the map recognizes the entire block as being served. Maybe that is how Verizon is listed as having 3-6Mbps service everywhere, even in rural areas where I have personally stood and received no signal whatsoever.
  • Self-defined service areas violate Section 214(e), which grants responsibility to the states to determine ETC status and whether subsidies should be provided in specific areas.
  • Finally, reverse auctions hold the risk that service quality would decline because the FCC's proposed 5 year commitment does not address long term universal service goals.
Overall, I felt the Joint Board proposed a very reasonable alternative to the NPRM. I believe the Joint Board's 3 Fund plan is forward-looking and will meet the most fundamental objectives of USF Reform: to reduce inefficient and wasteful subsidies, to ensure support for new broadband networks in unserved areas, to ensure continued support for existing voice and broadband networks, and to provide more market-based incentives to invest in broadband for rural areas. Most importantly, this proposal goes far to ensure the statutory requirement of predictable and sufficient universal service support, which the FCC seems to forget about in the NPRM. I think this plan would effectively reduce some of the financial uncertainty that is preventing private lenders from investing in RLECs.

Stay tuned for my review of the Rural Association Plan in the next few days—I am going to attend the OPASTCO Legislative and Regulatory Conference next week so I am definitely motivated to analyze this plan so I can speak about it to my Congressional staff with sufficient knowledge and insight.

Cassandra Heyne

Further reading: 
Rural carriers and association comment summaries
Price cap carriers comment summaries
FCC workshop on USF Reform
FCC workshop on ICC Reform
Comment summaries on ICC Reform


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