Sunday, June 5, 2011

USF Reform Reply Comments Face-Off: A Tale of Two Menacing Price Cap Carrier Plans

Reply Comments on USF Reform were due Monday, May 23, concluding the comment-and-reply cycle for this proceeding. Today I am summarizing comments from Windstream and AT&T (a mid- and large-sized price cap carrier, respectively), which I chose to illustrate the opposition that the rural carriers are facing. I also picked these two price cap carriers to illustrate overlays and differences between this subset of commenters, and because Windstream and AT&T have made their own unique proposals for USF Reform. Which group will have the most sway with the FCC? That remains to be seen, but there have been rumors swirling for a while now that AT&T and other large/mid-sized carrier are working with rural carriers/associations to come to some form of consensus and submit an alternative plan to the FCC. Based on comments and reply comments, I don't see much proof of a consensus between these opposing groups, but there are indications that even the price cap carriers are not completely satisfied with the FCC's proposals. I've said it before, and I will say it again: everyone wants the money, and there is just not enough of it to go around barring some sort of expanded contributions base for USF.

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.


Windstream Communications, Inc.

Windstream, a mid-sized price cap carrier, submitted initial comments (which I summarized back in April), which called for a "Price Cap Areas First" (PCAF) proposal, which is exactly what it sounds like: price cap carriers would get first dibs at CAF support for broadband in unserved areas. Although I disagree with Windstream that the PCAF proposal is the best way to target support to high cost areas, I did surprisingly agree with some of Windstream's reply comments on other topics.

On Mid-Sized Carrier Economics: Windstream favors a federally directed ICC reform methodology, not state-directed, which would be too slow and lead to economic distortion. Windstream also favors some type of revenue recovery mechanism, but not a "make whole" mechanism where all lost ICC revenue is recovered. Windstream provided some interesting analysis on the economics of mid-sized carriers to argue in favor of a recovery mechanism. Windstream claims that mid-sized carriers need a recovery mechanism even if the companies are profitable and issue dividends, due to the basic business principles of publicly traded companies. According to Windstream, "mid-sized carriers like Windstream rely on private investment to service debt, finance broadband deployment, and otherwise remain financially sound" (pg. 16). Basically, investors look for companies that pay dividends and see profits, and Windstream needs private investment to avoid increasing its reliance on USF subsidies while also meeting the FCC's goals for broadband. Windstream has a "duty of care to their shareholders," and "fulfillment of this duty includes not undertaking projects for which there is no rational business case—such as broadband deployment in some high cost areas" (pg. 17). In this powerful statement, Windstream literally admits that large investor-owned carriers do not invest in high-cost/low-density rural areas because it is unprofitable and contrary to stockholder wishes. Think about that for a minute, and you will understand why it is so important that localized, small rural carriers are the most appropriate recipients of USF—they have a duty to serve their communities (which in the case of cooperatives, the community is the owner), rather than Wall Street. I am not disputing the economic principles behind investing, dividends and profitability; but I deeply question Windstream's commitment to serving unprofitable rural areas because of these principles.

On ILECs vs. CETCs and Unfunded Mandates: Windstream supports a quick phase-out of legacy CETC support, where this funding is redirected to targeted high-cost areas (and preferably a price cap carrier). Windstream opposes the identical support rule for CETCs, calling it wasteful and attacking the Rural Telecommunications Group's claim that the FCC will abandon rural consumers by phasing out CETC support. Windstream argues that ILECs and CETCs "are not similarly situated with regard to their need for legacy support," because ILECs have COLR obligations and strict rate regulations, whereas CETCs do not have COLR obligations and have much more freedom to choose service areas (pg. 20). Furthermore, Windstream warns the FCC to avoid "unfunded mandates" where telecommunications providers would be subject to broadband requirements before support is in place. Windstream opposes the Joint Board's "POLR Fund" which would impose broadband build-out and service standards before there is any funding for broadband.

On Special Access: Windstream is opposed to including special access revenues in revenue benchmark for determining high cost support, because including special access "would create a mismatch in the determinations of appropriate levels of support, and likely not align carrier's support levels with their obligations" (pg. 26). Windstream notes that special access is not a Section 254 "supported service," and it is generally a wholesale service provided to other carriers and large businesses, not end-user residential consumers. Furthermore, Windstream adds that there is considerable uncertainty about special access rates which would make it inappropriate for a benchmark: "special access revenues can vary significantly year to year, so including these revenues in a benchmark could result in significant, unpredictable fluctuations in high-cost support" (pg. 27).

On Anchor Institutions: Windstream does not support funding for anchor instructions with CAF support because there is no data that proves anchor institutions lack broadband. Windstream attacks claims by Google and Connected Nation, such as "funding should be dedicated toward building high-speed connections to community anchor institutions" (pg. 31). Windstream argues that providing support to anchor institutions is not meaningful progress for broadband deployment in rural areas, because "anchor institutions offering service for health care delivery, education or children typically are located within or close to urban areas and town centers, which in most cases are economic to serve absent support and already have access to broadband by virtue of their relatively concentrated populations" (pg. 32). There is already funding for anchor institutions through E-rate and the Rural Health Care Support Funds, therefore USF/CAF needs to focus on funding broadband to households in unserved rural areas.

My Thoughts: I thought it was pretty amazing that Windstream came out and essentially said that investor-owned large carriers have no business case or incentive to provide service to areas that have less than 30 lines per square mile or cost more than $41 per line per month (pg. 9). At the same time, I applaud them for saying this—the FCC needs to see how little motivation these companies have to provide service to areas with 2 customers per square mile and a cost per month per line of $250 or more. As I stated above, large carriers do not have the same type of ties to the community as RLECs, where members of the communities they serve are actually owners and employees. It makes a huge difference to the business case when your neighbor of 30 years begs you to provide broadband in the rural countryside, versus just a nameless, faceless consumer, like Linda Rice from the Omaha metro area, who has tried and failed to get broadband from large carriers for years, even though she only lives 4200 feet from broadband infrastructure. Regarding Windstream's comments about anchor institutions, I completely agree—they should not be funded with CAF. There is plenty of money for anchor institutions from other sources—USF and elsewhere—which does not necessitate a need to focus on these institutions to the detriment of actual consumers. How is it beneficial for a rural consumer who lives 30 miles from the closest "anchor institution" when he or she has an emergency that requires a broadband connection immediately? Honestly, I didn't even realize there were comments in favor of dumping CAF into anchor institutions, because it is really ridiculous and not likely to happen anyway.


We learned in AT&T's initial comments that AT&T has some very strong opinions about USF Reform—opinions which are strongly in opposition to most RLECs and rural associations. AT&T wants immediate action to eliminate legacy telephone support, and AT&T supports many of the proposals that give the rural telecom industry nightmares, like bill-and-keep and reverse auctions. AT&T makes nothing short of violent statements, and they urge the FCC to act swiftly and not waste time with a Phase I/Long Term CAF stair-step process but rather to implement final rules immediately. AT&T believes that "one of the most harmful actions the Commission could take at this point would be to take no action at all" (pg. 7). I had a hard time choosing which AT&T arguments to highlight, and interestingly there were some I actually agreed with despite being in vehement opposition to most of their proposals.

On Bill-and-Keep: AT&T hopes for an end-state all-IP ICC ecosystem that is wholly driven by the marketplace, not the FCC or states. AT&T supports a zero or near-zero $0.0007 access rate as well as a bill-and-keep structure. According to AT&T, "Bill-and-keep would not limit the amount of recovery, instead it would alter only the source of that recovery. Carriers would need to turn to their own customers…to recoup costs, rather than other carriers, and ultimately, those carrier's customers" (pg. 23). Translation: small carriers would have to raise prices in order to replace lost ICC revenue caused by a bill-and-keep regime. AT&T argues that bill-and-keep will encourage competition, innovation and efficiency. AT&T attacks arguments against bill-and-keep from NECA and ITTA, calling these arguments "misconceived," and insisting that rural carriers are fond of implicit subsidies because "they are subject to less public scrutiny" (pg. 27-28).

On an Alternative Recovery Mechanism (ARM): One of the few AT&T arguments that I reluctantly agreed with is the argument in favor of a temporary, transitional recovery mechanism for lost ICC revenue—a la the Rural Associations' "RM." AT&T attacks opposition to ARM by Sprint, CTIA and XO, who claim that the ARM would "constitute an unjustified windfall for local exchange carriers" (pg. 36). AT&T insists that ARM is transitional and temporary and will be a great benefit for rural carriers who "derive half their revenue from access charge, and rapidly eliminating those revenues without providing an alternative source of recovery could threaten Universal Service" (pg. 37).

On AT&T's "Plan" for CAF: AT&T is definitely pushing for a Great Leap Forward for broadband, as they are pressuring the FCC and states to eliminate COLR because "the POTS business model is collapsing, and thus legacy obligations are an unsustainable means of ensuring ubiquitous access even to basic telecommunications service," and POTS should not continue to be "propped up" by the FCC (pg. 43-44). The main principle in the AT&T Plan is reverse auctions, or a "procurement model" where carriers are only subject to static service obligations if they agree to serve a high cost area in exchange for support. AT&T does not think the FCC should favor dynamic service obligations, as they would cause too much uncertainty. Furthermore, AT&T admits that there would be an incentive for over-bidding in reverse auctions if service obligations evolve over time (remember, the Joint Board warned about bidders adding risk premiums to drive up the bids in reverse auctions). AT&T argues, "The service obligations themselves would result in higher bids, because an economically rational broadband provider would assume evolving service obligations only if given an appropriate risk premium to offset the potential burdens" (pg. 50). Finally, AT&T insists that "compelling providers to offer broadband service without sufficient universal service support would constitute a physical taking, regulatory taking and confiscatory taking in violation of the Fifth Amendment" (pg. 54).

On Dumping High-Cost Broadband Deployment Responsibilities on Satellite Providers: AT&T supports "partnering" with satellite providers to serve the ultra-high-cost areas, and by "partnering" I mean dumping the responsibility of providing broadband in areas where AT&T has no business case to invest. AT&T points to comments by the California PUC which claim that providing satellite to the 250,000 most high cost households will reduce the $24 B broadband investment gap by $14 B, and "it would be a tremendous waste of resources to incur these costs for deployment of either fixed or mobile terrestrial broadband service, when satellite offers a viable alternative at a fraction of the cost" (pg. 56). Why-you may ask-does AT&T hold such an interest in ensuring that satellite providers get a slice of the CAF pie? Because AT&T wants to get its hands on some of that money itself by "partnering" with the satellite providers, even though AT&T would not technically do anything to ensure these ultra-high-cost households get access to broadband.

My Thoughts: Some of AT&T's comments shook me to the core, but some were surprisingly reasonable, particularly the ARM revenue recovery mechanism. What scares me the most is AT&T's push to eradicate the PSTN before consumers have sent clear signals that legacy telephone networks are no longer useful. There are still millions of people who rely solely on landline telephones to communicate with the outside world, and the FCC cannot implement a Great Leap Forward to broadband without considering the harm that these consumers—even if they are a minority—will face as a result. Until Congress passes a law that all Americans are not entitled to telephone service, the legacy telephone system needs to be at the very least maintained with limited federal support. I was particularly horrified by AT&T's "partnership with satellite" scam. I don't have a problem per se with satellite providers receiving limited support for the extremely rural consumers who literally have no chance at being served with fixed or wireless broadband. I do have a problem with AT&T or Verizon receiving this money under the guise of a satellite broadband "partner." If a price cap carrier receives USF though whatever means the FCC implements for distributuion, it is solely up to that carrier to provide broadband to high-cost households; otherwise they have no business going after the money in the first place. Finally, I am opposed to AT&T's argument that the FCC should skip the phased transition to CAF and go straight to the final rules, because this could have devastating effects if the final rules are wrong for the industry. Although AT&T correctly acknowledges that rural carriers are particularly in distress due to the current regulatory uncertainty, rural carriers could be even more distressed from hasty regulatory decisions implemented without reasonable trial periods and ongoing rulemakings to correct misguided or ineffective rules.


My next installment will be an analysis of the Rural Associations' reply comments (NTCA, NECA OPASTCO, etc.), which will probably be my final comment summary post on USF. I may cover some other random comments just for fun, if I have time.

To read my entire USF Reform Proceeding analysis:

Cassandra Heyne

No comments:

Post a Comment