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

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