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



1 comment:

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