July 13-19, 2011. Washington, DC: 7 days, 3 great events, and one exhausted blogger!
There is no denying that basically every stakeholder in the telecom industry has strong feelings on USF, but as we move closer to a rulemaking there are still very few indications that the industry agrees on anything except the overall goal of USF reform: bringing broadband to all Americans and transitioning away from a PSTN-focused subsidy mechanism. One of the things that I love most about living in DC is the easy access to wonderful telecom industry conferences, seminars and events—most of which are usually free or very low cost considering the quality of participants. Apparently USF is the hot topic during this wretchedly hot month, and I have had the privilege of attending two panel discussions and one press conference at the Senate in the past week. As much as I have enjoyed listening to the differing perspectives on USF from across the industry, I am still deeply concerned about how these rules will impact RLECs. Anyway, most of you know how I feel about USF reform, so here’s a recap on the events of this past week.
Wednesday, July 13: The Free State Foundation, “Universal Service and Intercarrier Compensation: Will the FCC Finally Bite the Reform Bullet?”
Panelists: James Assey (EVP, National Cable & Telecommunications Association), Jerry Ellig (Sr. Research Fellow, Mercatus Center), Randolph May (President, Free State Foundation), Mike Romano (SVP, NTCA), Deborah Taylor Tate (Sr. Fellow, Free State Foundation and Former FCC Commissioner), Tom Tauke (EVP, Verizon).
Confession time: I’m a libertarian/fiscal conservative by most standard definitions. I try really hard not to let my personal politics interfere with my telecom industry perspectives, but sometimes it is very hard to separate the two as the FCC becomes less and less “independent” with each passing administration. Since I started this blog, I have tried to instill a principle of political neutrality in my writing, because as a libertarian, my political orientation is none of anyone’s damn business. Anyway, my political orientation finally became relevant to my writing as this event was sponsored by a highly libertarian organization. I had a lot of anxiety going into this event because I didn’t want to be faced with the ugly truth that my political party is not in favor of my USF reform desires. When this type of situation occurs—where I am caught in the middle of politics and telecom policy—I tend to go into what I like to call “existential crisis mode.” Anyway, I ended up being very impressed with the Free State Foundation event. I honestly thought it was better than all of the FCC’s USF Reform Workshops because the panelists really dug deep on almost all of the USF topics without just complaining about the NPRM being unfair or insisting that whatever company they represent is the best positioned to provide broadband in unserved areas (ahem, WildBlue in the 3rd Workshop). The result was a very compelling discussion on fund caps, reverse auctions, funding prioritization and contributions reform. The Free State Foundation supports a free-market oriented USF that is economically sound and market-defined, and they believe that Lifeline/Linkup is a good model for “a post high-cost fund 21st Century.” Yes, the Free State Foundation wishes to see the High Cost Fund eliminated completely, which is the precise point where my political orientation and my telecom policy perspective sever painfully.
Here are some highlights from this discussion:
- James Assey described the current USF and specifically ICC thusly: “even the weeds have weeds.” He argued that there should be 4 elements to USF reform: controlling the size of the fund, building on the success of USF for voice and the success of broadband deployment, making sure the money goes to areas that currently have no broadband, and addressing the fact that ICC is not rational or fair at all right now. He argues that USF is about consumers, not about companies; and a cap on the fund may result in more efficient companies.
- Mike Romano provided some great commentary about the perpetual accusation that the High Cost Fund is rife with waste, fraud and abuse, and has experienced “rampant” growth. He pointed out that the HCF has only grown at about 3% per year, which is by no definition “rampant growth.” He insists that we need to answer the question: “Why is the 2010 level appropriate,” before we can move forward with a workable solution. Romano warns that we should not make assumptions about caps, because we do not know what the future holds or where the money will be needed over time—it is possible that the need for USF subsidies will decrease in the future just as it is possible that the need will increase. Either way, we shouldn’t impose an arbitrary limitation that challenges the statutory requirement of “sufficiency.”
- Jerry Ellig provided the colorful comment, “GREED IS BAD” when subsidies are on the table. He is concerned that some companies are trying to go beyond what is basic and necessary—and what should be covered by subsidies—and getting greedy with USF. He pointed to voice service as an example, stating that we went from a sensible system that supported one line per household to a system that pushes for landline and wireless lines for everyone. He sees the same thing happening with broadband, and he clearly supports a very basic definition—he even thinks that 4/1 Mbps is too high because it is beyond the capabilities of satellite and 3G. Ellig asked, “Why pay a per-line subsidy over $30?” where technologies (like wireless) are available for that cost.
- Deborah Taylor Tate talked at length about the alleged “consensus” on USF reform during her time at the FCC—she actually read notes that she had taken in 2008 detailing an FCC consensus on reverse auction pilot programs, traffic pumping, eliminating identical support, and so on. “As a fiscal conservative and republican,” Tate argued that Lifeline and Linkup are great examples of government programs that do what they are supposed to do, as they have strict eligibility criteria and are consumer-focused. Tate also supports regular audits, strong oversight of eligibility, and the use of experimental pilot programs to test new ideas.
- Tom Tauke argued that we need a last-mile wireline infrastructure because wireline is inherently more robust, reliable and secure. He shared that the current 5 funds should be transitioned into 2 funds: CAF and a recovery mechanism (RM) for ICC replacement. Together, these two funds should not exceed the total of the 5 funds today—we should redistribute USF but not increase the fund, with a focus on the consumer. Tauke is hopeful that there will be an industry consensus by the end of the month, which should have considerable support from a broad cross section of the industry.
Thursday, July 14: Rural Associations Launch “Save Rural Broadband” Campaign on Capitol Hill
Participants: Representatives from NTCA, OPASTCO and WTA; Senator Mark Begich (D-AK), Representative Lee Terry (R-NE), RLEC Executives Mark Gaily (Totah Telephone Company), Nancy White (North Central Telephone Cooperative), and Catherine Moyer (Pioneer Communications).
I won’t go into much detail on this event because I covered it on JSI Capital Advisor’s Blog—please read my article there if you are interested. I am so thankful to the Rural Associations for inviting me to attend this event; it was very exciting for me to participate in a press conference on Capitol Hill. Save Rural Broadband is a terrific advocacy campaign focused on educating rural consumers about the threats of the FCC’s USF reforms, and I really hope that this campaign is successful. It has been getting a lot of buzz this past week, so it looks like they are gaining momentum. At the press conference, I was very inspired by Rep. Terry, who actually seemed really optimistic about USF reform—I know, shocking. Both Terry and Begich pointed to the growing bipartisan support in both the House and Senate for reasonable USF reform, and we all know that bipartisan support is a rare bird these days. It is comforting and empowering to know that RLECs have allies on the Hill—30 Senators and 39 Representatives have signed a letter to the FCC warning that USF proposals could have unintended negative consequences. I definitely encourage my readers to check out Save Rural Broadband and do whatever you can to spread the message! Here is a picture I took at the press conference: “Begich Serious about Rural Broadband in Alaska.”
Tuesday, July 19: Broadband Breakfast Club, “Making the Universal Service Fund into a Universal Broadband Fund.”
Panelists: Russell Hanser (Wilkinson Barker Knauer, LLP), Hank Hultquist (VP Federal Regulatory, AT&T), Joshua Seidemann (Director of Policy, NTCA), Michael Spead (Sr. Technical Specialist, ICF International), Darrell West (VP, Brookings), moderated by Jonathan Charnitski (Editor, BroadbandBreakfast.com).
I’ve wanted to attend a Broadband Breakfast Club event for a while, but I’ve always had a scheduling conflict with previous events of interest hosted by this group. Like the Free State Foundation event, I thought Broadband Breakfast did an excellent job selecting participants who were willing to dig really deep on the big issues, and the panelists all provided interesting perspectives ranging from technology to policy and everything in between. The discussion started out with a bang—Charnitski asked how we will transition the current POTS-based “loophole-ridden wasteful spending program” known as USF to a Universal Broadband Fund. Here’s my recap of the debate:
- Russell Hanser, arguing from the mid-sized and wireless carrier perspective, agreed that some current USF spending is wasteful. He supports reducing ICC rates and making USF less complicated. Hanser thinks that “we got into this mess” because the fund grew but contributions declined. When the discussion turned to reverse auctions, as USF panels inevitably do, I actually thought Hanser expressed a rather logical analysis in support of reverse auctions. He made some rational arguments about various pitfalls of rate-of-return and cost models, and deducted that reverse auctions could be attractive because they will allegedly reveal the true cost of build-out (I tend to disagree here, but it was still refreshing to hear a rational argument supporting reverse auctions rather than blind acceptance of an untested and defective methodology that hasn’t really worked anywhere). If bids would actually reflect true costs—with no “risk premiums” tacked on or below-cost bidding to exclude smaller competitors—then I can see where Hanser is coming from. However, at this point there have not been any reverse auction proposals that ensure bad actors will be disqualified.
- Michael Spead represented the viewpoints of states and carriers. He argued that we need to look at the impacts of USF reform on a state level. Spead argued that the fund growth is unsustainable, and the original USF regulations have been outpaced by technology. He made a great point that states and carriers need to be prepared for USF change, and they need to get in front of the changes rather than waiting around and then reacting, at which point it may be too late to secure an advantageous position in the market. Regarding broadband speeds, Spead suggested that broadband definitions could be revisited prior to each new round of reverse auctions. I have some problems with this idea—I think it could result in gaming, but I am still mulling over my response to this recommendation.
- Josh Seidemann, voicing the RLEC perspective, argued that USF has worked great so far but some adjustments are definitely needed for broadband. He argued that “waste, fraud and abuse” is not an RLEC problem—RLECs are subject to strict auditing and costs are rarely recovered for at least two years; furthermore, the HCF has only grown at about 3% per year, so accusations that the HCF is out of control are unfounded. Seidemann echoed the Rural Association’s argument from the Save Rural Broadband press conference that there must be a “surgical” approach to USF reform. I was very happy that Seidemann addressed the House recommendation to take $1b from USF for the deficit—he emphasized that USF does not come from general tax revenue, and taking it for deficit reduction would be like “reaching into an envelope never intended for that purpose.” This was a good visualization for me, because I actually used to keep cash in envelopes that were marked for specific purposes. I tried really hard not to open the “groceries” envelope if I wanted to buy shoes, but I also wasn’t bound by Congressional mandates to use specific envelopes for specific purposes. USF is a Congressionally-mandated “envelope” specifically for telecom service; it is not an envelope of “mad money” that can be tapped whenever the country is behind on its bills. I don’t know how much clearer I can be about this, but unfortunately some people still think that USF is a treasury tax. Guess what? The IRS won’t come after you if you don’t pay your phone bill. You can opt out of paying USF by opting out of phone service. Not. A. Tax. Anyway, sorry for the rant, but this is an especially menacing issue right now—thankfully most telecom stakeholders are voicing opposition and some of the House Republicans, like Lee Terry, are also opposed to this nonsense proposal.
- Hank Hultquist from AT&T commented that “whole forests have been felled spelling out AT&T’s position on USF”—he is not kidding, trust me. AT&T has been extremely vocal in the USF proceedings, and if you have read some of my comment summaries then you will know that I am pretty intimidated by their proposals and their lobbying prowess. I thought Hultquist made a good point about how there are “wild variations in technology” even within one segment of the broadband market, like wireline; furthermore, there is “great diversity of business models.” This variation and diversity must be considered in USF reform, where one size clearly does not fit all. Unfortunately, Hultquist and AT&T believe that reverse auctions are the best solution. He added that there will always be “the person who lives on the mountain top” who is too difficult and too expensive to serve. As a result, there will be many broadband choices for most Americans; but for the rest, we should just do the best we can do. I disagreed with Hultquist’s comments about what broadband speed should be supported by CAF—he argued that policymakers should first figure out what applications people are using, then figure out what is affordable, and then the industry needs to respond within these bounds. I find this to be a troublesome perspective because we do not know what broadband applications people are going to be using 6 months from now, let alone 6 years from now—binding broadband speeds within today’s budget and today’s demands means that tomorrow’s broadband users might be disadvantaged and innovation might be stifled. However, he later added that the FCC should not make a permanent decision on broadband speeds—the definition of broadband should be modified and expanded as needed. My concern here is regulatory lag—by the time the FCC figures out that they need to modify the definition of broadband, it could be too late, and the industry will be in a perpetual state of suspended animation as the FCC continually plays catch-up to technology.
- Darrell West argued that we have to increase broadband access, and address access disparities by income, race and location. I thought West’s best point was that we are headed for a “new digital divide,” where consumers are divided into low-speed and high-speed—I completely agree with this argument and I strongly feel that the National Broadband Plan recommendation of 100 Mbps for 100 million people and 4 Mbps for everyone else is the foundation for this new digital divide.
This panel concluded with the moderator asking each participant to name the most important consideration of USF Reform. Here’s what they said:
- Spead: state governments and carriers need to assess the impact of CAF, and the winners “will get in front of” the changes
- Hanser: get consumers what they want and need without paying too much
- Seidemann: “get it done right” and preserve private capital incentives
- Hultquist: have a sense of humility about not knowing the “perfect business model;” put USF in the context of a transition to broadband communications
- West: public policy needs to catch up with technology innovation
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So there you go—a diverse array of perspectives on USF but still no consensus on any of the finer points. I can’t wait to see the highly anticipated “industry consensus plan” that should be forthcoming in the next few weeks. While I try to make sense of all the different perspectives on USF, it is really hard to imagine that an industry consensus is actually close to being completed. Clearly, some stakeholders are going to be bulldozed and some stakeholders will be doing the bulldozing—who exactly will fall in these fortunate or unfortunate positions still remains to be seen.
Meanwhile, I’m exhausted but I am really happy to have had the opportunity to attend these events. I am also very happy about the response that my Open Letter to the FCC has received—it was featured on Daily Yonder last week and it has been read at least 250 times on Rural TeleCommentary! Thank you to everyone who tweeted, emailed and shared my letter! I’m also inspired by all the local news stories about Save Rural Broadband and USF reform threats to rural companies and consumers—be sure and check my USF Reform Headquarters for links to articles. Stories have been rolling in constantly the last few days so I’ve been trying to update the links on a daily basis.
Stay cool everyone!
Cassandra Heyne
ruraltelecommentary@gmail.com
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