Tuesday, September 6, 2011

The Final USF/ICC Reform Lightning Round: Reply Comments by the Kansas Corporation Commission

Reply comments were due September 6, 201 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. This is it, people—the final chance for the industry to throw some hard punches at whomever they are so inclined to oppose, be it the FCC, the RLECs, the price cap ILECs, the Joint Board, or any number of commenters who may have said something irksome in any of the previous comments going back to April 1. To be honest, I’m not sure how much impact these final reply comments will have on the FCC—part of me suspects that the rules are already nearly completed and the FCC is just going to sit back and laugh while the stakeholders rip each other apart in comments. The Kansas Corporation Commission (KCC) definitely ripped into the ABC Plan, and given the state’s unique USF circumstances, it is easy to see why they are so heated about certain ABC Plan proposals.


One of the main reasons why I decided to start summarizing USF/ICC reform comments earlier this year was so that I could personally learn more about USF from the perspectives of different stakeholders. USF was not covered heavily in any of my telecom policy classes, yet it is the area that I am trying to become an expert in, so much of my analysis is based on what I have taught myself, specifically from this proceeding. The intricacies of State USF programs are something that I am still learning about, and the KCC reply comments proved extremely helpful for me to gain an understanding of the challenges that certain states are facing. Kansas RLECs have also been very outspoken on USF issues, so in general I really appreciate the efforts that Kansas stakeholders have made throughout this proceeding because I have learned a lot from them. Seriously- Thank you, Kansas. 

On to the comments… Wow. The KCC is seriously not happy with the ABC Plan—“If the FCC proceeds with the ABC Plan without a longer transition period for early adopter states and/or further analysis of the impacts of the plan on existing state reform, it risks irreparable harm to these complementary state reform vehicles” (pg. ii). Kansas is an “early adopter” of state USF reform, and thus faces this presumed irreparable harm, which as you will see, is definitely a menacing possibility for this state, its consumers, its businesses, and its telecommunications providers.

On the Kansas Universal Service Fund (KUSF): Some of my readers may know these facts, but I thought the background information on the KUSF was helpful. KUSF was started in 1996 to provide support for Lifeline, dual part relay, telecom equipment for persons with special needs, and universal service/intercarrier compensation funding. When KUSF started, the assessment rate was 9%, one of the highest in the nation, but it has decreased over time to 6.18% currently. The total current funding obligation for the KUSF is $65.7m, and over its 14 years the KUSF has contributed $870m. The KUSF is now “at risk for becoming unsustainable under the ABC Plan,” because the size of the state fund may have to double as a result of specific Kansas state laws that require complete “make whole” access recovery for RLECs (and an opportunity for price cap carriers to seek full recovery as well). The KCC anticipates that the ABC Plan could result in total user contribution rates of 20-25% “not outside the realm of possibility” (pg. 10). Basically, with any significant loss in federal universal service funding and access revenue recovery, Kansas will burden an equal-sized increase in state contributions as per state laws. Kansas has 37 RLECs which are required to be made-whole through KUSF support (K.S.A. 66-2005(c)), and 2 price cap ILECs who legally could, and probably will, request to be made-whole especially if access revenues are significantly reduced (K.S.A. 66-2008(d)). KCC describes that the only recourse is to chance the state laws, and “such a dramatic change in state law requires legislation, and this is uncertain, will take time to accomplish, and cannot realistically be done until the contours of federal reform are known” (pg. 11).

On the “Train Wreck” ABC Plan: Yeah, they went there—KCC called the ABC Plan a “train wreck” for states like Kansas who have already adopted USF reforms. According to KCC, the ABC Plan would be a train wreck if hastily implemented, if VoIP is declared 100% interstate, if states are preempted, and if the highest-cost consumers are relegated to satellite service only. KCC argues that Kansas and other “early adopter” states should be treated differently than states who have not already implemented reforms (which are most states). KCC is very worried  that, “even if the FCC provides some FUSF support to recover some parts of the lost access charge revenue, the KUSF will likely be the easiest and most attractive ‘target’ for LECs seeking to make up losses in access revenue that result from reform”(pg. 8). Basically, the state fund will be overwhelmed, and KCC does not think the ABC Plan’s proposed ARM will be sufficient to cover the losses for price cap carriers, nor will the strict RLEC funding budget which “must cover not only access restricting losses, but also broadband build out and a reasonable opportunity to recover costs associated with existing investments in broadband capable plant” (pg. 8). To make matters worse, KCC acknowledges that all these negative consequences will have a direct economic impact on the state, for example, “a high-tech communications-centric company would find Kansas to be uncompetitive with other states that did not levy such a perceived ‘tax’ on their communications services,” if the total USF assessment rate does actually become 20-25%. Train wreck, indeed. 

On Not Declaring VoIP 100% Interstate: If you like reading comments that use the terms “interstate” and “intrastate” so much that you constantly keep typing the wrong term in your notes and articles, then you should read this section. Legalese aside, this section was really interesting and not a topic that has been covered considerably so far in what I have read. Basically, KCC is against the FCC declaring VoIP 100% interstate traffic, as it would reverse previous decisions and cause considerable havoc for states. KCC explains declaring VoIP 100% interstate “would be construed by providers as preempting State USF assessments of VoIP traffic, because State USFs very likely may only assess intrastate traffic under current law. As VoIP replaces circuit-switched technology, that reversal would reduce the State USF assessment base, thereby reducing the assistance that State USFs now provide to the FUSF in maintaining universal service. Thus, declaring VoIP traffic to be 100% interstate contravenes the Act’s admonition that ‘there should be specific, predictable and sufficient Federal and State mechanisms to preserve and advance universal service’” (pg. 15). 

Furthermore:  “For the FCC to ‘wave a magic wand’ and declare 100% of VoIP revenues to be from interstate calls, when consumers in fact clearly make considerable numbers of intrastate calls using VoIP telephones, and providers earn intrastate revenues from those calls, would be arbitrary and capricious. It would be inexplicable in light of the FCC’s treatment of wireless revenue, which the FCC for more than a decade has divided into an interstate portion assessable by the FUSF and an intrastate portion assessable by State USFs, using a ‘safe harbor’ approach very similar to that now used by the FCC for VoIP calls” (pg. 17). KCC anticipates that the KUSF could assess $500m in VoIP revenues in the next 5 years, which would clearly be an important contribution especially if the threats discussed above to the state fund come to fruition. KCC argues, “if that revenue is eliminated, the surcharge on remaining circuit-switched revenue will be increased, putting ever more pressure on the KUSF, and unfairly disadvantaging circuit-switched customers and providers as compared to VoIP customers and providers” (pg. 18). 

The final argument that I found really interesting regarding VoIP classification, (and I apologizing for taking such long blocks of text straight from the comments, but I really like KCC’s voice in some of their examples and arguments) described how the combination of changing technology standards and regulatory loopholes could spell disaster for the KUSF via new methods of arbitrage: “A trend in rural areas is to provide communications services via fixed wireless or WISP networks in lieu of landline networks. Placing an antenna on a grain silo or mountain top and providing wireless broadband service via technologies such as Motorola Canopy is done today in rural areas. In such a configuration, voice communications is provided via VoIP in lieu of a traditional landline. If VoIP providers are exempted from State USF contributions, then an enterprising ILEC with an aging landline network could deploy an inexpensive wireless network and avoid making USF payments because it was a VoIP provider. Yet, it could collect State USF support from make-whole state funds, such as KUSF, for its embedded costs of its unused landline network” (pg. 18). It should be noted that KCC is not against WISPs per se, just ILECs who pretend to still be landline providers but whose traffic is really traveling on a fixed wireless VoIP network while the landline infrastructure collects dust. KCC even suggests that fixed wireless service would be far superior to satellite in high-cost areas because fixed wireless service can facilitate a high quality of voice communication through VoIP, which satellite cannot. Just do not be a WISP by technical definition but a landline ILEC by regulatory definition—KCC is clearly anticipating such schemes already (perhaps something like this has already happened?). 

My Thoughts: KCC really hit on some tough issues, and unfortunately the ABC Plan authors will probably not have an opportunity to respond directly to some of these Kansas-specific arguments (maybe they did, I guess I will find out soon enough), which means it is now solely up to the FCC to figure out the appropriate balance between state and federal authority and responsibilities. Hopefully the FCC will take heed to some of KCC’s warnings about the dire consequences that will be inflicted upon the state if certain ABC Plan proposals are implemented. Clearly, Kansas is an exception and not the norm, so I wonder just how much attention the FCC will pay to the minority of states who have taken tremendous efforts in USF Reform (Nebraska is also in this category). KCC is really worried that the ABC Plan proposals could literally wash out all the progress the state has made in USF/ICC reform, and they are confused about how state-level responsibilities like audits, eligibility, etc. will be handled by the FCC if states are preempted. 

I really appreciated the depth of research that KCC invested in these comments, and the clear voice that they expressed. I hope all their work wasn’t in vain. I would have liked more direct commentary on the RLEC Plan, since; after all, Kansas has such a large number of RLECs and rural areas in comparison to other states. I didn’t really get much impression on their feelings about the RLEC Plan, other than they seem to think that the access revenue recovery is insufficient. 

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KCC was an early filer with their reply comments, but the others should be rolling in soon. I have yet to decide which comments I will feature here (although I think I did promise to cover the WISP perspective), but on the ILEC Advisor I am planning to look specifically at how the ABC Plan parties and the Rural Associations address some of the common critiques of their plans, so be sure and check there for new articles! 


Don’t hesitate to contact me with requests!
Cassandra Heyne

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