Wednesday, August 31, 2011

Today, U.S. v. AT&T Gets a New Meaning

August 31, 2011 is indeed a fine day for competition in the wireless telecommunications industry, and it is very reaffirming to see that AT&T’s lobbying power in DC has for once not worked to their advantage—no amount of lobbying dollars can conceal the fact that this merger would be a disaster for competition and consumers. The AT&T-Mobile Saga is not over yet, not by a long shot… However, AT&T’s stronghold over the outcome has been softening gradually over the last month and with the DOJ’s decision today, AT&T’s claims to T-Mobile, and therefore to a duopoly in the wireless industry, are becoming more of a pathetic whimper than a battle cry.

I have been trying to consistently cover the merger from a rural telecom perspective since it was announced, but I’ve been fairly selective about what I have written about since there is no shortage of good information available. Well, if this announcement doesn’t warrant me taking a short break from USF comments, then I don’t know what does!

I have honestly not been paying very much attention to the DOJ’s review of the merger-the DOJ is “out of my element,” so to speak, so I typical focus my attention on the FCC’s review. I actually haven’t been paying all that much attention to the merger in general for the last few weeks, as I have obviously been focused on USF. However, I have been pleased with the FCC’s merger review so far, including its ongoing search for more information from AT&T. To me, this has indicated that the FCC is not about to blindly accept the merger (which Commissioner Copps assured the world several months ago). Public opinion about the merger has continued to decline, despite what AT&T may be saying. AT&T continues to spin news reports and “facts” about alleged merger benefits in a way that attempts to draw attention away from the real issues. They say the merger will create 5,000 jobs, but negative 15,000 jobs do not a public benefit make (this is just one of the recent examples of AT&T’s delusional attempts to justify the merger). 

Anyway, I couldn’t believe my eyes when I saw earlier today, on Twitter of course, that the DOJ filed a suit to block the mergerapparently, AT&T did not even expect this monumental action by the DOJ. I thought the Telecom Gods had gifted us aplenty this week with the FCC’s decision to extend the reply comments on USF by an additional week, but I guess I was wrong! Basically, the DOJ thinks the merger will have detrimental effects on competition, which means that the DOJ is actually doing its job. Here is a rundown of some of the comments in the United States of America v. AT&T Inc., T-Mobile USA, Inc., and Deutsche Telekom  that I found interesting, with an emphasis on comments regarding smaller carriers:

  •  “Vigorous competition is essential to ensuring continued innovation and maintaining low prices.” (pg.2). Nice shout-out to the Brick Phone of Yesteryear!
  •  “None of the smaller carriers’ voice networks cover even one-third of the U.S. population, and the largest of these smaller carriers has less than one-third the number of wireless connections as T-Mobile. Similarly, regional competitors often lack a nationwide data network, nationally recognized brands, significant nationwide spectrum holdings, and timely access to the most popular handsets” (pg. 2-3).
  • T-Mobile has, and continues to be a “challenger brand,” which is an important role in the market, and “places important competitive pressure on its three larger rivals, particularly in terms of pricing” (pg. 3)—a role which should not be eliminated from the marketplace.
  • “There are no cost-effective alternatives to mobile wireless telecommunications services” (pg. 6)—not for regular consumers or business/enterprise/government consumers.
  • “In the face of a small but significant price increase imposed by a hypothetical monopolist it is unlikely that a sufficient number of customers would switch some or all of their usage from mobile wireless telecommunications services to fixed wireline services such that the price increase or reduction in innovation would be unprofitable” (pg. 7).
  • “Nationally, the proposed merger would result in an HHI of more than 3,100 for mobile wireless telecommunications services, an increase of nearly 700 points. These numbers substantially exceed the thresholds at which mergers are presumed to be likely to enhance market power“(pg. 12).
  • T-Mobile is not only a value challenger, but a known innovator, “responsible for numerous ‘firsts’ in the U.S. mobile wireless industry:” first Android handset, BlackBerry, wireless e-mail, Sidekick, Wi-Fi hotspots, advanced HSPA+ technology, and unlimited plans (pg. 12). [But AT&T had the first iPhone, which is all that really matters now, right?]
  • “Competition taking place across a variety of dimensions, including price, plan structure, network coverage, quality, speeds, devices, and operating systems would be negatively impacted if this merger were to proceed” (pg. 14).
  • Smaller carriers would especially be impacted re: roaming agreements, ability to “constrain” the Big 4, obtaining good handsets and smartphones, and ability to increase their market shares.
  • “Enhanced risk of anticompetitive coordination” = significant harm, for consumers “all across the nation, including those in rural areas with limited T-Mobile presence” (pg. 16)
  • “By eliminating T-Mobile as an independent competitor, the proposed transaction will likely reduce the competitive incentive to invest in wireless networks to attract and retain customers” (pg. 17).
  • The merger would increase entry barriers, and entry “would not be likely, timely and sufficient to thwart the competitive harm” that the merger would cause (pg. 19)

Naturally, the response from the industry has been colossal. Most merger opponents wasted no time in releasing statements declaring the DOJ’s decision a victory and “a triumph of facts over politics,” but AT&T has spit back that they will oppose this decision—I don’t know about you, but I can’t wait to see what “evidence” they provide in an effort to persuade the DOJ to reverse its findings. cautions that “the fight isn’t over until a federal court hands down an order to block the merger, or AT&T decides it will just be too much trouble.” However, other analysts are saying that the merger is basically dead in the water, which could end up being a bad thing for companies like Sprint who may wish for a shot at eating AT&T’s leftovers once the deal falls through.

The Wall Street Journal’s article asks, “who could oppose a deal supported by interest groups as varied as the Louisiana Ballooning Festival and the Association of New Jersey Orchestras?” Since I’ve found the insanely strange responses by rice farmers, balloon hobbyists, cattle ranchers and whatnot one of the most entertaining aspects of this merger, I can’t help but say this: “It’s a dark day for AT&T’s minions.” Next time, perhaps try gaining favor from constituents who are actually involved in the telecommunications industry. Most rational analysts saw though all the fluff submitted by these parties as nothing more than an attempt by AT&T to buy support and make the awful deal seam palatable. Anyway, who can argue with the Association of Retired and Disabled Minority Rare Orchid Farmers with Lupus when it comes to telecommunications mergers?  You don’t want to look like an insensitive jerk by saying “these people know nothing about the wireless market,” so you just let them have their duopoly—right? I think that was AT&T’s intention all along, because there definitely haven’t been any cold, hard facts proving that the merger will be a benefit to competition and consumers. 

Looking at the reactions… A statement by the Rural Telecommunications Group (a vocal opponent of the merger) explains that the DOJ’s decision “shows that there is no question that this merger would have been bad for rural America, rural consumers, and rural carriers.” Another vocal opponent, Public Knowledge, stated: “Fighting this job-killing merger is the best Labor Day present anyone can give the American People. AT&T’s effort to recreate ‘Ma Cell’ by holding rural broadband hostage and threatening American jobs deserves nothing by scorn. The FCC should move as quickly as possible to follow the lead of the Department of Justice and reject the merger.” JSI Capital Advisors analyst Richelle Elberg expressed little surprise about this decision and provided a great chart describing her reaction’s to AT&T’s alleged benefits of the merger. GigaOM mused on what might happen to T-Mobile if the deal fails, and considered options ranging from Sprint moving to merge with T-Mobile (again, but I honestly don’t expect this outcome to happen) to T-Mobile getting snatched up by a cable company or private equity firm. Members of Congress have weighed in too—Senator Al Franken (D-MN), yet another vocal opponent, stated “I have long believed that this merger would be a terrible deal for consumers, and I’m pleased the Department of Justice has taken the wise step of officially opposing it.” 

You get the idea—basically everyone is ecstatic about this decision, at least everyone who isn’t AT&T or T-Mobile or perhaps the International Rice Festival. Well, I am ecstatic too but I heed the warnings that the war is not won yet. I think the FCC will be more likely to block the merger now that the DOJ has filed this suit, but I definitely do not see AT&T letting up on the pressure. 

I think the DOJ has effectively paved the road for merger opponents, especially small wireless carriers, to feel confident that the government is not always against “the little guy.” The DOJ filing clearly describes the challenges that small carriers will face if the merger is approved, and these companies should continue to provide evidence illustrating this fact. Small rural carriers who are opposed to the merger need to keep in mind, "the battle may be won but the war is not over."

So far this merger has enough twists, turns, shocks and stabs to befit, well, an AT&T-sized merger. I can’t wait to see what happens next!

Tomorrow… Back to USF comments.

Cassandra Heyne

Monday, August 29, 2011

The Final USF/ICC Reform Lightning Round: Comments by Gila River Telecommunications, Inc.

Comments were due August 24, 2011 for the Further Inquiry in the Universal Service-Intercarrier Compensation Transformation Proceeding (AKA USF Reform), where the industry was asked to respond to a variety of questions about several proposed alternative frameworks for USF and ICC, namely The Rural Associations’ RLEC Plan and the price cap carriers’ ABC Plan (which together forge the Consensus Framework), and the Federal-State Joint Board’s plan. In an effort to cover a broad range of stakeholders in a really short period of time, today I want to bring your attention to a rather depressing selection of comments by Gila River Telecommunications Inc. (GRTI). Tribal carriers face some absolutely daunting challenges in deploying broadband on tribal lands, and the proposed USF/ICC reforms have the potential to further devastate broadband progress in these economically, geographically and demographically challenged areas. 

GRTI does not support the Joint Board plan, ABC Plan or RLEC Plan (referred to as “The Three Reform Plans”), but they do not offer much by way of evidence or arguments against these plans aside from claiming that tribal carriers would likely lose millions of dollars if any of these plans are adopted. According to GRTI, “The loss of revenues would cripple GRTI financially and would likely have a detrimental effect on telecommunications services and on broadband service in the Gila River Indian Community” (pg. iii). Furthermore, “any decrease in revenue would likely halt any progress” in increasing Tribal community broadband adoption rates or decreasing end-user prices. 

On the Unique Tribal Challenges: GRTI explains that only about 70% of households on tribal lands have basic telephone service, and the broadband adoption rate is absolutely dismal (like 10% dismal). GRTI actually has a fairly high adoption rate of around 20%. In addition to the adoption challenge, GRTI faces very high costs to deploy infrastructure, and the GRTI community has a high rate of unemployment and poverty. According to GRTI, “Costs of deploying fiber-to-the-home have been as high as $12,000 for a single residence. These costs leave little, if any, margin for profit. As a result, GRTI has been forced to deploy fiber-to-the-home in small increments” (pg. 5) Furthermore, GRTI cannot charge less than $52.90 per month for 1.5 Mbps DSL, over $20 more than the national average, and “few residents are able to afford this service” (pg. 5).

On Recognizing and Promoting Tribal Sovereignty: GRTI encourages the FCC to adopt USF/ICC reforms that uphold tribal sovereignty. GRTI’s recommendations include rules that reflect the following: “(1) any carrier seeking to provide communications services on tribal lands must receive approval from the appropriate tribal entity; (2) tribal governments should have the option to establish, monitor and enforce public interest obligations and deployment requirements; and (3) actions by states to reform state universal service systems and Intercarrier compensation mechanisms should have no bearing on the disbursement of federal funds to provide service on tribal lands” (pg. 11). Upholding such principles of tribal sovereignty in USF reform will allow Tribes to choose which carrier best serves their communities and allow them to have more control over service quality, costs and deployment schedules. 

On Adopting a Tribal Carve-Out: GRTI encourages the FCC to adopt a “Tribal Carve-Out” similar to General Communications Inc.’s proposal. The Tribal Carve-Out “should include the following characteristics: (1) a floor on the minimum amount of USF support; (2) cost recovery for middle mile costs; and (3) an exclusion for tribal lands from any cap on high-cost support” (pg. 14). GRTI thinks that a carve-out will “ensure that ILECs serving tribal lands would have a reliable flow of revenue to further broadband deployment and sustain local service…prevent net losses in revenue due to decreased ICC revenues…[and] ensure that GRTI realizes fair and expected returns on its investments” (pg. 15-16). In addition to the carve-out, GRTI thinks tribal carriers should be excluded from any caps on CAF support, “for the same reason a cap would not be appropriate in the context of high-cost USF support to tribal lands” (pg. 18).

My Thoughts: While I am deeply sympathetic to the trials and tribulations of Tribal carriers, I feel a need to be harshly critical on some of their proposals. First, I think there needs to be a demonstrated increase in adoption rates before the FCC “carves out” special treatment for these carriers. I don’t think a 20% adoption rate necessitates investments of $12,000 per household. I would rather see special funding programs going towards increasing adoption rates and digital literacy than going towards infrastructure investments that will never be recovered. I calculated that it would cost $1.2m to deploy FTTH to 100 households, based on GRTI’s $12k figure. If only 20 of these household subscribe, GRTI is only recovering about $12,500 per year at the $53 monthly rate, barely enough to cover the cost of deployment to one household. When you include regular operating expenses, there is literally no business case for deploying FTTH to these households—and I do not say that very often, as I am an avid FTTH supporter. Last week I wrote about the fundamental rural broadband conundrum: do you provide the service first and then reap the rewards from increased economic activity in the community, or do you wait for new businesses and education opportunities and improved health care to come to the community and then increase broadband capability? In the case of these tribal communities, I’m not sure if deploying FTTH first is the right answer, when 50% of the population is unemployed and 50% are below the poverty line.

However… broadband has the opportunity to facilitate jobs, education and health care for tribal communities, so it probably isn’t a good idea to hold off on deployment either. So, I would propose that Tribal communities take a hard look at wireless broadband, either fixed or mobile, preferably utilizing unlicensed spectrum. It would cost considerably less, and the benefits would be just as powerful as if the community had FTTH. It probably would not take 20 customers an entire year to cover the costs of deploying wireless to one customer. Wireless broadband would be a much more affordable solution for the members of the community, especially compared to the astronomical $53/month for 1.5 Mbps DSL. If the cost of broadband decreased to $20-30, more people could subscribe, and more people might be willing to try it out for a couple of months and boost their digital literacy skills in the process. Once the tribal carrier increased adoption and helped the community realize the benefits of broadband, it might be able to make a better business case for investing in FTTH. 

I hate that there are areas in this country where broadband only reaches 10-20% of the homes, but in these areas, I’m not sure if it is specifically the responsibility of the Universal Service Fund to fix what appears to largely be a demographic problem. I do however think that tribal carriers could benefit from a short-term separate fund, but a significant portion of the funding should go towards programs that increase adoption and digital literacy. Aside from this, I don’t especially think that tribal carriers should follow different USF rules than regular RLECs—there are also RLECs who provide service in tribal communities but are not specifically “tribal carriers,” so their interests need to be recognized as well, and there should be incentives for more companies—RLECs, ILECs, wireless, etc. to invest in tribal areas, which could be prevented by restricting special treatment only to tribal carriers. 

What other funding opportunities are available to tribal carriers through small business loans, special tribal business financing programs, and schools, libraries and health care broadband funding opportunities? I hope that there are ample funding opportunities outside of USF for these carriers, because there is clearly a need for extra, extra support in these communities. I definitely don’t think the tribal carriers should receive less USF support than they do currently, but I’m not sure if USF is the solution to the vast challenges these carriers face. 


If anyone has any good information on Tribal broadband adoption, deployment and investment challenges, please feel free to share it with me, as I would like to learn more about this issue. 

Only 2 more days until reply comments are due! Where did the time go? 

Cassandra Heyne

Saturday, August 27, 2011

The Final USF/ICC Reform Lightning Round (Hurricane Edition): Comments by Cellular South

Comments were due August 24, 2011 for the Further Inquiry in the Universal Service-Intercarrier Compensation Transformation Proceeding (AKA USF Reform), where the industry was asked to respond to a variety of questions about several proposed alternative frameworks for USF and ICC, namely The Rural Associations’ RLEC Plan and the price cap carriers’ ABC Plan (which together forge the Consensus Framework), and the Federal-State Joint Board’s plan. Whilst stuck indoors for the next 2 days while Hurricane Irene does its thing, I’m going to try to get through as many comments as I can. I highly doubt I’ll get through all 130 by Wednesday, but Hurricane Irene definitely provided me with a nice excuse to do as much work as possible this weekend!

Since the ABC Plan was released, I have been very curious about the response by rural wireless carriers to the proposal that the Mobility Fund should be a mere $300m, in comparison to the $4.5b for wireline carriers. When wireless broadband appears to be “the wave of the future,” according to Cellular South and the broadband marketplace, it is hard to imagine that these companies would be satisfied with such a small piece of the pie. Well, they are not satisfied. You can read more about the rural wireless perspective from the Rural Telecommunications Group here, but I also thought Cellular South’s comments deserved some attention. I thought they had some great arguments, and then… They call for rate-of-return to be eliminated! With all due respect to Cellular South, I do not think one rural wireless provider is exactly in a position to decide the best course of policy for all the RLECs. 

Overall, Cellular South agrees with the Consensus Framework and Joint Board proposals to establish separate funds for fixed and mobile broadband, but the agreement stops there. Cellular South feels as though these alternative frameworks are the “wrong answer” because “allocating a substantial share of CAF support to wireline carriers would inevitably and significantly impair the extent and pace of mobile broadband deployment in rural America, and would also ignore the fact that carriers serving subscribers of wireless services are by far the largest category of contributors to the universal service fund” (pg. iii). Cellular South is understandably outraged by the fact that mobile broadband is placed at such low priority in the alternative proposals, when mobile broadband in such high demand—“in the face of these facts on the ground, it is stunning that the wireline broadband proponents have chosen to put forward plans for CAF funding mechanisms that are marked by a transparent imbalance in proposed funding levels” (pg. 4). 

On a Separate Fund for Wireless: Cellular South provides 3 sound arguments in favor of establishing separate funds for wireless broadband:

1.       Separate funds “would enable the Commission to give a focus and priority to mobile broadband commensurate with the role that mobile broadband has come to play in the communications marketplace” (pg. 8);
2.       Separate funds “would facilitate the use of a forward-looking economic cost model tailored to the costs associated with deploying and maintaining mobile broadband networks in rural and high-cost areas” (pg. 9); and
3.       Separate funds would help meet the aggressive mobile broadband goals set forth by the Obama Administration and the FCC.

On the $300m Mobility Fund Budget: Cellular South points out that $300m is only 6.7% of the overall ABC Plan budget and only 12% of the Joint Board plan’s budget (and just for build-out costs, not operational costs, which can make up a substantial portion of a wireless network’s expenses). With this in mind, “Cellular South encourages the Commission to compare these proposals to the widespread and accelerating demand for mobile broadband devices and services, to the fading demand for wireline services, to the costs associated with brining mobile broadband networks and services to rural areas, and to the level of contributions into the existing USF program received from carriers providing wireless services” (pg. 13). Rather than such an incredibly one-sided budget, Cellular South supports a balanced distribution of funding with support portability reflective of the actual broadband marketplace. Of many of the comments I’ve read, I found this to be reasonably consumer-oriented. I think some of the commenters have forgotten that consumers are the actual beneficiaries of USF support. Cellular South seems to keep this in mind, at least until their next recommendation…

On Kicking RoR to the Curb: I don’t know why, but Cellular South is very bitter about RoR. They find it anti-competitive and they do not think it is even worth the FCC’s time and effort to improve it, because “the embedded cost mechanism used to disburse support to rural incumbents is bankrupt and should have been discarded long ago” (pg. 16). They caution that if RoR is maintained (which it should not be), the rate should be reduced significantly: “If the Commission decides to retain a rate-of-return mechanism—based on what Cellular South considers to be the misguided view that this mechanism can somehow be overhauled to improve the incentives of rural incumbents to make rational investments and to avoid the temptation of pumping up costs as a means of inflating the amount of support they receive—then a prerequisite for the continued use of the rate-of-return mechanism should be a represcription of the stratospheric 11.25 percent rate of return that has remained in place since 1990” (pg. 17-18).

On NOT Capping CAF: Taking the polar opposite position as Comcast, Cellular South is opposed to capping CAF. Interestingly, Comcast argued that caps are the definition of fiscal responsibility; but Cellular South argued that there is nothing about the definition of fiscal responsibility that necessitates a cap on high-cost funding (I agree with Cellular South). They insist, “The Commission has at its disposal many tools for improving the efficient use of funds (e.g. through reliance on forward-looking cost mechanisms and portability of support) and for curbing waste, fraud and abuse perpetuated by CAF funding recipients (e.g. through meaningful penalties and audit requirements)” (pg. 18). I think they hit on a good point—that curbing waste, fraud and abuse should be through enforcement. Cellular South further argues that a cap on USF is “a repudiation of the Commission’s statutory duty to base its universal service policies on a principle that its support mechanisms should be sufficient to preserve and advance universal service” (pg. 18). 

My Thoughts: I don’t know where Cellular South’s hostility towards RoR came from, but I would like to know. One of my biggest sources of aggravation throughout the multiple comment cycles in this proceeding, starting with last summer’s CAF inquiry (when it still seemed like a threat that RoR would actually be eliminated), are the complaints that RoR companies are wasteful and inefficient without providing examples. Verizon and AT&T were the worst perpetrators, and it surprised me that another rural telecom provider like Cellular South would also blindly follow this train. I want someone to cite specific examples of RoR companies who meet a numerical definition of wasteful and inefficient utilization of USF because of RoR regulation specifically. Tell me the name of the company, and show me exactly how a forward-looking cost model would correct the so-called abuses and inefficiencies allegedly caused by RoR. RLECs have been more than willing to show quantitative examples of 1) how most of them never see 11.25% in the first place; and 2) how eliminating RoR would be financially catastrophic. So, RoR critics, step up your game and stop saying that RoR is the source of waste, abuse and inefficiency without backing up your claims. This just leads to the FCC and others in the government (like state regulators and Congress) perpetuating the “systemic prejudice” against RoR and RLECs that the Rural Broadband Alliance is so gallantly trying to fight.
Aside from this one issue, I basically agreed with everything else Cellular South said, and I thought their reasons for establishing separate wireless and fixed funds were well conceived. I’m not sure if I think CAF should be split evenly 3 ways between ILECs, RLECs and wireless, but I actually think an even distribution is more rational than wireless only getting 6.5% of the funding. I also thought they made an interesting recommendation that funding should be portable between the separate funds, but they didn’t go into much detail about this—hopefully they will in the reply comments.


I’m going to enjoy the hurricane now, but tomorrow I’m going to take a hard look at the comments submitted by a variety of state regulators. Like the wireless carriers, I suspect many of them feel burned by the ABC Plan’s proposal to drastically reduce their role in the future of USF.

Have a request? Let me know! I’m definitely not going anywhere all weekend (contact me via e-mail or on Twitter @RuralTelComment). 

If you are also stuck indoors all weekend, you can catch up on all the comment summaries I have done so far: the Rural Broadband Alliance, Alexicon Consulting, ITTA, Comcast, Western State Telecom Associations, and the Rural Telecommunications Group (the last two are for The ILEC Advisor). 

Cassandra Heyne

The Final USF/ICC Reform Lightning Round (Hurricane Edition): Comments by Comcast

Comments were due August 24, 2011 for the Further Inquiry in the Universal Service-Intercarrier Compensation Transformation Proceeding (AKA USF Reform), where the industry was asked to respond to a variety of questions about several proposed alternative frameworks for USF and ICC, namely The Rural Associations’ RLEC Plan and the price cap carriers’ ABC Plan (which together forge the Consensus Framework), and the Federal-State Joint Board’s plan. Whilst stuck indoors for the next 2 days while Hurricane Irene does its thing, I’m going to try to get through as many comments as I can. So far I’ve mostly looked at comments by parties that I generally support, so now it is time to look at the perspectives of stakeholders who are much less friendly to RLECs. Who better than Comcast, one of America’s most hated companies? As it turns out, I found most of their arguments rather hard to digest. 

Cable companies were excluded from the “industry” negotiations, so I’ve expected them to be negative about the Consensus Framework and the ABC Plan. Cable companies are not very active in the rural broadband industry, as cable is typically associated with urban and suburban broadband only—where it is very popular, making the cable industry a front-running voice on broadband and Internet policy. So, I’m not sure how influential the cable industry will be in terms of the final rules for USF reform, but their comments on ICC reform and VoIP classification are likely to hold weight at the FCC. I definitely did not take their USF comments very seriously—they have what, 3 rural customers, tops? The day that I see Comcast trying to build broadband in rural Montana is the day I will respect their opinions about the high-cost fund.

Comcast basically colors inside the FCC’s lines in terms of the “4 Principles” for USF/ICC reform, and they cite a number of National Broadband Plan recommendations throughout their comments. They also rely on the Broadband Availability Gap Model for a lot of their “evidence.” Comcast naturally feels as though the Consensus Framework is “fundamentally inconsistent with the Commission’s guiding principles,” it doesn’t promote effective change for ICC, it could result in higher interconnection rates for CLECs, its biased towards ILECS/RLECs, and “the incumbent LEC’s principle concern with respect to USF reform appears to be maintaining their current revenue streams, rather than brining long-needed fiscal responsibility and accountability to high-cost support.”

On A Low Uniform Rate for ICC: Comcast wants the same rates paid by all originating voice carriers regardless of the terminating network’s technology, and they want it now. Comcast wants everyone on the $0.0007 rate in three years, with a very rapid glide path “for all rate elements including tandem switching and transport” (pg. 13). They argue that the current ICC regime discourages upgrades to IP technology and causes all of the arbitrage problems that plague the industry. According to Comcast; “In view of the well-documented disruptions, anomalies, and economic inefficiencies caused by the current ‘patchwork’ system of Intercarrier Compensation, the most desirable policy is to supplant the existing arrangements decisively and expeditiously. Comcast thus supports a brief transition to a uniform rate for all providers—price cap and rate-of-return incumbents as well as CMRS carriers and competitive LECs—that nonetheless is designed to avoid significant disruptions” (pg. 12). They believe that a 3 year transition to uniform 0007 is not a flash cut, and it will “[hasten] the demise of regulatory arbitrage,” and reduce “perverse incentives to invest in TDM technology” (pg. 13). 

On an Access Replacement Mechanism and Total Company Earnings Review: Comcast urges the FCC to reject the ABC Plan’s proposed transitional access replacement mechanism because, “there is simply no need to allow carriers, particularly price cap carriers, to recover lost revenues previously obtained from Intercarrier Compensation on a dollar-for-dollar basis” (pg. 14). Although I found humor in the “particularly price cap carriers” jab, I don’t think anyone has proposed a dollar-for-dollar recovery mechanism. Comcast argues that the proposed recovery mechanism undermines the FCC’s market-driven and fiscal responsibility policy goals, and “any such bailout would fundamentally distort the marketplace” (pg. 14). If a recovery mechanism is adopted, Comcast thinks the FCC should include non-regulated revenues “as well as technological advances and the efficiencies that companies realize when they provide multiple services over a single network” to determine the level of recovery support (pg. 15). They think arguments against a total company earnings review are “inappropriate,” and they provided several examples of why, which I did not find particularly convincing. They also argue, “Although Congress has prohibited carriers from using revenues from regulated services to subsidize services that are competitive, there is no Congressional or FCC prohibition against the Commission’s consideration of unregulated revenues when determining the appropriate level of subsidies for regulated services. To the contrary, taking revenues from unregulated services into account when calculating the need for and amount of subsidies would advance the Commission’s stated goal of fiscal responsibility by ensuring that support is targeted to the carriers and areas that actually need a subsidy” (pg. 17). 

On Capping the High-Cost Fund: Comcast supports a hard cap on the high-cost fund at 2010 levels and provides absolutely no evidence to support this claim, other than it was recommended in the National Broadband Plan. Comcast thinks that 2010 HC support levels are somehow the definition of fiscal responsibility, and “funding decisions should focus on maximizing consumer benefits, not on ensuring incumbent LEC revenue streams.” Basically, they just don’t want LECs to receive any more USF support than they did last year. Like I said, when Comcast announces plans to deploy broadband in extremely rural areas, I will respect their opinions about the size of the high-cost fund. 

On Reverse Auctions, “The Essence of Fiscal Responsibility:” In addition to claiming that a 2010 level cap is the meaning of fiscal responsibility, Comcast also thinks that reverse auctions are the “essence of fiscal responsibility,” but they provide no evidence to support this claim. They offer a vague, and slightly hilarious, roadmap for implementing reverse auctions:

·         Step 1: Determine unserved areas where market incentives are insufficient to encourage broadband deployment;
·         Step 2: Determine the size of the area for bidding purposes, which should be census blocks, which bidders should be able to combine. Furthermore, “the bid prices for the combination of census blocks would likely be lower than the sum of the bids for the individual census blocks” (pg. 26). Yay! A sale on unserved census blocks! Buy one, get one 50% off!
·         Step 3: Design the “protocols and practices to be used in the auction” (pg. 26) Oh really, that’s it? So basically they have no solution for the actual reverse auction methodology. That’s ok, nobody else does either. 

My Thoughts: I tried to read Comcast’s ICC-related comments through the eyes of someone who supports the proposal to eliminate the PSTN by 2018 and not someone who wants to prolong the current ineffective ICC regime. I do not agree that access rates should be reduced to 0007 in three years for everyone; I think that would cause anarchy in the access revenue world. Transitioning to IP networks does not eliminate the underlying purposes of access revenue—carriers still need to compensate one another for use of each other’s networks, and those compensation rates should at least somewhat reflect actual costs, which are significantly higher for small rural companies. There is a good reason why the Consensus Framework proposes different glide paths for price cap and RoR companies.

I agree with Comcast that there must be swift action to eliminate arbitrage, but I personally do not blame the broken system entirely for arbitrage schemes—I blame the companies who engage in this behavior. If I break a law that I personally find unnecessary, I’m the one who gets in trouble if caught, not the lawmakers, and there is no legal justification for “I should get away with it because the laws aren’t proper for today’s society.” Access rate arbitrage signifies a market failure whereby regulatory intervention is now necessary. Closing the loopholes that companies exploit is one part of the equation, and adequate enforcement to discourage arbitrage in the first place is another part of the equation. I do not see how imposing a uniform low rate for ICC in 3 years will specifically address these market failures, instead it will seriously disrupt revenue streams for RLECs in particular, which will even further delay upgrades to IP networks. So, I find considerable fault in Comcast’s reasoning that a rapid transition to 0007 will both eliminate arbitrage and push all carriers to transition to IP networks—many of the small carriers will not be able to afford it. 

Regarding Comcast’s USF arguments—they just aren’t very good. Comcast clearly just wants to see their ILEC/RLEC competitors receive less support, and this agenda is not well concealed in their comments. 

Still up for review this weekend: wireless carriers and state PUCs. 

Have a request? Let me know! I’m definitely not going anywhere all weekend (contact me via e-mail or on Twitter @RuralTelComment). 

If you are also stuck indoors all weekend, you can catch up on all the comment summaries I have done so far: the Rural Broadband Alliance, Alexicon Consulting, ITTA, Western State Telecom Associations, and the Rural Telecommunications Group (the last two are for The ILEC Advisor). 

Cassandra Heyne

The Final USF/ICC Reform Lightning Round (Hurricane Edition): Comments by the Rural Broadband Alliance

Comments were due August 24, 2011 for the Further Inquiry in the Universal Service-Intercarrier Compensation Transformation Proceeding (AKA USF Reform), where the industry was asked to respond to a variety of questions about several proposed alternative frameworks for USF and ICC, namely The Rural Associations’ RLEC Plan and the price cap carriers’ ABC Plan (which together forge the Consensus Framework), and the Federal-State Joint Board’s plan. Whilst stuck indoors for the next 2 days while Hurricane Irene does its thing, I’m going to try to get through as many comments as I can. I wonder if the FCC will delay the reply comments if their office loses power for several days? Probably not—they wouldn’t yield to NASUCA’s continual requests for an extension, so I don’t know why they would yield to a hurricane. 

I don’t know much about the Rural Broadband Alliance, but I’ve been following them throughout this proceeding because they have a very specific viewpoint about rate-of-return companies. On the spectrum of perspectives ranging from most resistant to the proposed changes to most excited about the proposed changes, the RBA seems to sit pretty far on the most resistant side. They submitted a proposal (the Transitional Stability Plan) in the earlier round which focused primarily on maintaining adequate investment recovery for both existing investments and future investments, which I thought was pretty good. You can read about it here. I appreciate that this group is sticking to its convictions about USF Reform and doing their own thing and representing RLECs who might not be on board with the Rural Associations’ proposal, but I’m not sure how effective their efforts will be in the end. Their plan was not included in the Public Notice, which to me indicates that the FCC is not considering it for adoption.

RBA is skeptical about the ABC Plan/RLEC Plan/Consensus Framework because they do not think it ensures sufficient and predictable recovery for small companies. RBA argues, “Any sustainable order must include rural rate-of-return carrier recovery of costs of existing expenses incurred to provide universal service, and clear, quantifiable, predictable, specific support mechanisms to ensure rural carriers of support sufficient to enable them to advance and preserve the provision of universal service available to rural consumers at ‘reasonably comparable’ rates” (pg. ii). RBA thoroughly answered all the questions from the Public Notice, but I thought their best comments were their free-flowing criticisms of how the FCC perceives RoR companies.

On 4/1 Mbps 4 Mbps/768 kbps: RBA pointed out something that perhaps many of us (myself included) have been thinking: 4/768, which was proposed in the ABC Plan, is a step backwards from the National Broadband Plan, which was released 18 months ago. What’s that old saying—computing power doubles every 18 months-2 years? I realize that Moore’s Law doesn’t apply directly to broadband speeds, but it is definitely one of the most fundamental guiding principles in innovation for the broader technology industry, which includes broadband. Anyway, RBA states that “speed matters, and it matters every bit as much in rural America as in our urban centers” (pg. 4). They argue that there was no fact-finding to reach the 4/768 conclusion, and that most rural telecom providers assumed that the 4/1 Mbps speed would be revised fairly soon after the rulemaking—not pushed backwards before the rulemaking even happened. And, it’s not like the ABC Plan authors are also recommending that the speed target for urban America gets pushed back to like 75 Mbps—that would be the real travesty, and then rural America would only have broadband speeds 18 x’s slower—which is definitely reasonably comparable!! The RBA argues, “the level of universal service available in a rural community will not only drive potential economic development in the area, but will also determine the availability of educational and health care services enabled by high speed broadband” (pg. 4). Basically, they really want the FCC to wake up and realize that the ABC Plan proposal for supported broadband speeds in rural areas is an insult to rural Americans, which it most certainly is. 

On Sufficient and Predictable Recovery: The heart and soul of RBA’s arguments throughout this proceeding have been about ensuring sufficient and predictable recovery for RoR companies for both existing and future investments. While they are not specifically against the Consensus Framework entirely, they are worried that “the math may not work” (pg. 12). Regarding the Rural Association’s decision that $2b with moderate growth and a 10% RoR is sufficient, the RBA “[hopes] they are correct. Rural carriers, however, cannot operate companies and provide universal service on the basis of hope” (pg. 12). RBA is also skeptical about the overall $4.5b size of the fund, arguing that it should be based on fact and law, and it is not. They really don’t like that 730,000 rural consumers are going to be stuck with satellite service, because “this result is the very opposite of the intent of the Universal Service provisions of the Act which seeks to ensure reasonably comparable services and rates to consumers” (pg. 15-16).

On Systemic Prejudice against RoR and RoR Companies: The RBA is really sore about how the FCC has been treating small rural companies in this proceeding, and I fully support them speaking out about this and making it known in a public document. What they say is true from my experience as well: “Both the official record and meetings with the Commission evidence the creation of a superficial caricature of rural companies and rate-of-return regulation at the Commission. This caricature is forged on a baseless assumption that rural rate-of-return carriers make unwanted investments in networks and incur operational expenses without limitations because rate-of-return provides them with an automatic recovery without regard to the prudency of their investment and expenses” (pg. 20). They go on like this for several pages…”The Commission, as indicated in the NPRM, perpetuates a baseless and prejudicial caricature which, in turn, drives the Commission away from the consideration of utilizing actual cost-based methodologies to determine what constitutes ‘sufficient’ funding” (pg. 24). 

My Thoughts: RBA hits on two issues that I have been vocal about in this proceeding as well—ensuring reasonably comparable service in rural areas and changing the FCC’s negative perception of RoR companies. I think that there is more than enough evidence in the mountain of comments that RoR companies are not wasteful and inefficient, and there are a lot of RoR companies who do not even see the 11.25%--not even close! Yes, there are undoubtedly a few companies that have abused the system for financial gain rather than consumer benefits. Yes, the current system needs to be updated for a broadband world. But NO, not all RoR companies are woefully inefficient or make business decisions only with the intention of reaping USF support and an inflated rate of return. That is not a sustainable investment strategy, and companies that have been around for 100 years will surely agree. RoR companies are subject to regular audits and they aren’t just handed a check no-questions-asked whenever they decide to undertake a large infrastructure upgrade. I’ve heard from a number of RLEC representatives who have met with the FCC that they encountered criticism and even insults from FCC staff. It’s not cool, OK, FCC? After seeing all the financial impact statements presented by RLECs, I would hope that they “get it” by now—RLECs walk a fine line between profit and loss, and reasonable and sufficient investment recovery is that fine line. 

Anyway, I also agree with RBA’s arguments about reasonable comparable service and that 4/768 is an unfounded step backwards. 18 months after the NBP was released—when 4/1 was widely criticized as insufficient and absolutely NOT reasonably comparable (I wrote a term paper all about this a year ago, detailing how 4/1 is the fatal flaw of the NBP because it will push the US far behind OECD countries who are ensuring equal broadband speeds for all citizens), the FCC should not even entertain the idea of stepping backwards on speed definitions. Have consumers suddenly stopped wanting to download movies? Are less people working from home and enrolling in distance learning programs? Are gamers suddenly deciding that they no longer want HD 3D capabilities for World of Warcraft or whatever the cool game is right now? Obviously no, on all these questions—so why adopt a USF framework that even further constrains innovation and consumer utility? Answer: so satellite broadband can serve those poor, unfortunate 730,000 rural Americans and the large ILECs won’t have to lift a finger to deploy service in deeply rural areas. It is not a good deal for anyone, especially not consumers. 


Next up: cable. 

Have a request? Let me know! I’m definitely not going anywhere all weekend (contact me via e-mail or on Twitter @RuralTelComment). 

If you are also stuck indoors all weekend, you can catch up on all the comment summaries I have done so far: Alexicon Consulting, ITTA, Western State Telecom Associations, and the Rural Telecommunications Group (the last two are for The ILEC Advisor). 

Cassandra Heyne