Friday, May 13, 2011

USF Reform Comments Showdown: The Rural Associations Propose Separate, “Evolved Rate-of-Return” RLEC Plan for CAF

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)

Comments of the National Exchange Carrier Association (NECA), National Telecommunications Cooperative Association (NTCA), Organization for the Promotion and Advancement of Small Telecommunications Companies (OPASTCO), Western Telecommunications Alliance (WTA) and Concurring State and Regional Associations ("Rural Associations"):

Just in time for the OPASTCO Legislative & Regulatory Conference and the May 23 due date for reply comments, I have finally finished reading the Rural Associations' RLEC Plan for USF Reform. I have also been reading about the history of China lately (I just finished reading Dragon Rising: An Inside Look at China Today by Jasper Becker, which was really interesting), and as I was reading these comments I continued to draw connections between the FCC's USF NPRM proposals and the Great Leap Forward and the many sensationally ineffective Five Year Plans. Perhaps my morbid fascination with failed Communist regimes is insensitive and blurring my judgment, but there were several points made in the Rural Association comments that made me think about how dangerous it is for any government to impose significant policies without including a reasonable transition period or mechanism for those affected by the policies to adjust without enduring irreparable financial harm. In other words, the FCC cannot just say that all companies need to move abruptly from one USF regime to another and expect that broadband will be deployed in high-cost rural areas effectively, inexpensively and with high quality technology. RLECs are more delicate than large companies and will feel the aftershocks of abrupt reforms much more severely, and in some cases with devastating outcomes. The Rural Associations warn, "if a clearly designed balance is not maintained in any implemented reform, customers will almost certainly see 'rate shock' as support disappears, and some operators who offer services where little, if any, business case exists for doing so will fail" (Rural Associations, 2011, pg. 35). The FCC absolutely must consider the impacts of implementing a new USF regime on the entire industry and consumers, and the Rural Associations offer a very insightful and reasonable alternative plan to ensure that RLECs and rural consumers are not inadvertently harmed by the transition to a broadband-supporting Connect America Fund.

In addition to recognizing the importance of a careful, calculated and methodological transition that allows for RLECs to reasonably recover cost such as middle mile access, corporate expenses and especially high-cost loop investments; the RLEC Plan recognizes the risk that the FCC takes in developing a large-scale USF Reform mechanism without having solid evidence of what the future has in store—which is obviously impossible. Clearly, this is a fundamental problem with regulation in general—regulators (or the industry for that matter, but the industry is usually more insightful) are not psychic and they often do not place bets on the correct future outcomes. Regulators are usually years behind the industry, and the effects are often very severe. Look at the 96 Act- the Internet was barely considered, and as late as the early 2000s the FCC and the Joint Board were still not recognizing Internet as an essential service. Anyway, the Rural Associations argue that the FCC needs to continually monitor and modify whatever USF Reform plan is implemented to reflect real changes in costs and broadband deployment, "It is clear that even the best predictive judgments as to where a market will be in 10 years, or what reforms might be necessary to reach that 'end game' are almost certain to miss the mark. Indeed, the only guarantee may be that technology and market development will, over 10 years, outpace and/or render moot any reforms that the Commission and the industry put into place today" (pg. 37). This reminds me of the 4/1 Mbps speed target recommended in the National Broadband Plan—this target is already insufficient and the majority of the population already has access to higher speeds. Why settle for mediocrity? The Rural Association Plan, like the Joint Board Plan, lays out specific steps to achieving the end goal of USF for broadband, but successfully addresses some of these larger, more philosophical issues at hand like maintaining balance in cost recovery and ensuring that the Fund does not become a victim of regulatory lag.

Overall, the RLEC Plan is an extremely thorough alternative to the FCC's proposal, which includes methods and safety nets for RLECs to ensure that rural telecom providers and their consumers can continue to reap the benefits of broadband, as they have been doing under the current USF regime. The RLEC plan meets the FCC's critical reform objectives: modernized for broadband, fiscal responsibility through reasonable cost recovery limitations, accountability through strict COLR requirements for recipients, and market-driven by recognizing and adapting to technological and market changes. Furthermore, the RLEC Plan ensures Section 254 obligations for sufficient, specific and predictable funding and for reasonably comparable rates and service for rural consumers; and, "The RLEC Plan carriers forward and adopts to a broadband-oriented universal service program many of the COLR policies and requirements that have worked effectively to ensure that quality and affordable voice-grade services are ubiquitously available throughout high-cost rural areas" (pg. 69). The Rural Associations remind the FCC that RLECs have been very successful at efficiently using USF support to provide broadband in rural areas, whereas larger carriers have struggled with this task. I believe that the RLEC Plan is very reasonable, conservative, and successfully addresses the key concerns with the current USF system while simultaneously addressing the financially fragile rural telecom industry such that significant and devastating harms will not be imposed on RLECs, if the RLEC Plan were to be adopted by the FCC.

So, what is the RLEC Plan? First,

"The RLEC Plan has been carefully designed to ensure that the benchmarks, cost allocations, and ultimate recovery mechanisms will (i) sustain broadband-capable networks in high-cost areas where they exist today, (ii) provide a reasonable opportunity to recover the costs associated with existing investments, (iii) promote the responsible 'edging out' of broadband into unserved areas at a reasonable pace; and (iv) control growth in the fund. If however, the Commission 'tinkers' with the benchmarks or other mechanics of the reform proposals, if it fails to provide adequate support for recovery of existing investment made under current rules, or if it fails to provide sufficient support for the task of both delivering and keeping broadband in rural America, the Commission runs the substantial risk of frustrating efforts to push broadband into unserved areas and would also place at risk the ability to sustain existing network investments" (v-vi). 

The RLEC Plan includes 4 steps (combined with ongoing monitoring and modification) that address both USF and ICC reform, without compromising the affordability, availability or quality of existing rural voice and broadband networks:

  1. Near-term reform for ICC to immediately address access charge arbitrage issues (see my ICC Reform comment summaries for more details on this topic).
  2. Near-term reform for USF, whereby RLEC investment recovery is reasonably constrained, which "should minimize any actual or perceived incentive for carriers to invest in any manner that might be influenced in whole or part by a desire to obtain or retain HCLS" (pg. 9). Clearly, the perception that RLECs gold-plate and inefficiently invest in network facilities simply to squander USF is a very powerful perception indeed—regardless of how accurate the perception actually is, the Rural Associations are proposing methods to prevent wasteful and abusive USF utilization. The Rural Associations propose reasonable and limited cost recovery, and oppose completely eliminating corporate expense recovery. An example about corporate expenses illustrates that if this recovery is eliminated, customers could see local rate increases of at least $27 per line per month (pg. 40).
  3. Longer-term reform for ICC, where interstate and intrastate switched access rates are unified by company with a restructure mechanism (RM) for the transition. Without a restructure mechanism, RLECs could "have trouble repaying loans, meeting current payrolls, fulfilling service responsibilities, and simply maintaining existing network plant" (pg. 14). Additionally, the Rural Associations oppose bill-and-keep because it would create more opportunities for access charge arbitrage, and it would prevent RLECs from incentives and options to upgrade networks without significantly increasing customer rates. Additionally, we have not yet achieved a 100% all-IP industry infrastructure, and once again, this is not the time or place to experiment with a USF/ICC Great Leap Forward.
  4. Longer-term reform for USF, which transitions to a cost-based, "evolved rate-of-return," where RLEC support is a separate but complementary component of Long Term CAF. This step starts with today's regulated interstate costs including recovery constraints, adds additional support for middle mile access (limited based on a defined Mbps capacity per line), recognizes the impact of continued broadband adoption and then determines the amount of RLEC support for broadband by Broadband Network Transmission Cost – Urban Wholesale Benchmark.
  5. Continued monitoring and modification of the reformed USF to ensure accountability, account for market changes in costs, deployment and technology, and course-correct any assumptions that may prove to be incorrect from the initial rulemaking.
The Rural Associations make many insightful and interesting comments about the "donut and hole" concept applied to competitively attractive low-cost areas surrounded by unattractive high-cost areas, and they discuss the importance of COLR requirements in great detail, claiming that coverage and service COLR obligations will help ensure accountability of USF support. The Rural Associations argue that, "RLECs invest and operate in places that have been historically left behind, and are community-based providers that are committed to delivering the highest-quality services to their customers/neighbors. They are committed COLRs eager to deliver on reasonably designed service obligations" (pg. 74). Like the Joint Board, the Rural Associations focused specifically on the dangers that will befall rural carriers if reverse auctions are approved for CAF support distribution. The Rural Associations argue that reverse auctions will create a "race to the bottom," where low-quality networks are constructed with the funds, it will be extremely difficult and costly for the FCC to enforce service quality standards, and many rural areas could be left without a suitable COLR. My favorite comments against reverse auctions by the Rural Associations are: "proponents of reverse auctions have been unable to offer any relevant real world examples of successful application in circumstances similar to the way they would be utilized to provide service in the United States;" (pg. 76) and reverse auctions would unfairly favor large carriers, "put simply, the proposed 'ranking bids per price unit covered' mechanism appears to ensure that AT&T, Verizon and other large national and regional carriers will receive virtually all the initial Phase I CAF support they want" (pg. 87).

 Finally, the Rural Associations addressed the controversial issue about capping the size of the Universal Service Fund at current levels, and provided the most poignant argument that I have read thus far: "There is…a fundamental inconsistency between the directives in the Act [section 254] and the insistence that the size of USF cannot increase," and there is no law stating that the fund is not allowed to grow (pg. 89). The Rural Associations are rightly concerned that the FCC could easily fail to meet broadband deployment goals by becoming overly focused on keeping the size of the fund in check. In order to get passed this issue, the contributions base should be broadened to include broadband service providers, which would very simply eliminate the need to cap the fund at current levels. Throughout this proceeding, I have never been able to understand why the FCC is so hell-bent on capping the fund at current levels—it really defies any fiscal policy logic and reason. What is even more confusing is why they are insisting on capping the fund when there is a vast, deep, and growing ocean of providers who do not contribute to the fund, but who may become recipients once the reforms are implemented. I understand that the FCC does not want to burden consumers, but the FCC needs to be reasonable and understand the network effects of broadband—if more consumers have broadband, more consumers will benefit from broadband, and therefore consumers should pay a tiny bit more to enable the continued adoption and deployment of broadband. I personally have no problem with paying a few extra cents or dollars to help ensure that more Americans (especially rural Americans) have access to broadband. Why limit the fund, which could cause significant long-term harm to broadband availability and the industry as a whole, when there is a much more effective option of broadening contributions, which would only have very small short-term negative impacts on consumers? I just don't think the FCC is looking at the problem from the right angle, but they seem determined to promote all of the wrong solutions to a pretty straightforward problem.

I think the Rural Associations' RLEC Plan is very reasonable, all-inclusive, and potentially life-saving for RLECs, which may become an endangered species if the FCC's proposals are adopted. I'm not sure if I prefer the RLEC Plan more or less than the Joint Board's Plan—they are both really attractive options that address similar shortcomings in the NPRM, such a reverse auctions and the size of the fund. Either one would be considerably more effective and would not force the telecommunications industry into a potentially disastrous and devastating Great Leap Forward to universal service for broadband.

This is my last comment summary for this round of comments on USF Reform! Don't get too comfortable though, because replies are due on May 23—I'm expecting a lot of explosive and hard-hitting reply comments. I'm both excited and scared to read them! Additionally, next week I will be covering the OPASTCO Legislative and Regulatory Conference in DC and the much-anticipated 3rd FCC USF Workshop which is taking place in Omaha, NE, which includes people I actually know on the panels. The battle over USF Reform is definitely moving forward, and I will be here watching every move!

Cassandra Heyne

Read the rest of my comment summaries and USF Reform articles:
Comments of RLECs and rural telecom advocates (USF)
Comments of price-cap carriers (USF)
Comments of the Joint Board on Universal Service (USF)
Comments on ICC reform (ICC)
FCC's Workshop on ICC Reform (ICC)
FCC's Workshop on USF Reform (USF)


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