USF Reform Comments Showdown: The Rural Associations Propose Separate, “Evolved Rate-of-Return” RLEC Plan for CAF

Comments on USF Reform and the Connect America Fund were due April 18, 2011 and May 2, 2011 for the Federal State Joint Board, commencing the second round of comments in this proceeding (following April 1st's ICC comments). For your reference, the following comment summaries are in response to:

          In the Matter of:

          Connect America Fund (WC DN 10-90)

          A National Broadband Plan For Our Future (GN DN 09-51)

          Establishing Just and Reasonable Rates for Local Exchange Carriers 
          (WC DN 07-135)

          High-Cost Universal Service Support (WC DN 05-337)

          Developing a Unified Intercarrier Compensation Regime (CC DN 01-92)

          Federal-State Joint Board on Universal Service (CC DN 96-45)

          Lifeline and Link-up (WC DN 03-109)

Comments of the National Exchange Carrier Association (NECA), National Telecommunications Cooperative Association (NTCA), Organization for the Promotion and Advancement of Small Telecommunications Companies (OPASTCO), Western Telecommunications Alliance (WTA) and Concurring State and Regional Associations ("Rural Associations"):

Just in time for the OPASTCO Legislative & Regulatory Conference and the May 23 due date for reply comments, I have finally finished reading the Rural Associations' RLEC Plan for USF Reform. I have also been reading about the history of China lately (I just finished reading Dragon Rising: An Inside Look at China Today by Jasper Becker, which was really interesting), and as I was reading these comments I continued to draw connections between the FCC's USF NPRM proposals and the Great Leap Forward and the many sensationally ineffective Five Year Plans. Perhaps my morbid fascination with failed Communist regimes is insensitive and blurring my judgment, but there were several points made in the Rural Association comments that made me think about how dangerous it is for any government to impose significant policies without including a reasonable transition period or mechanism for those affected by the policies to adjust without enduring irreparable financial harm. In other words, the FCC cannot just say that all companies need to move abruptly from one USF regime to another and expect that broadband will be deployed in high-cost rural areas effectively, inexpensively and with high quality technology. RLECs are more delicate than large companies and will feel the aftershocks of abrupt reforms much more severely, and in some cases with devastating outcomes. The Rural Associations warn, "if a clearly designed balance is not maintained in any implemented reform, customers will almost certainly see 'rate shock' as support disappears, and some operators who offer services where little, if any, business case exists for doing so will fail" (Rural Associations, 2011, pg. 35). The FCC absolutely must consider the impacts of implementing a new USF regime on the entire industry and consumers, and the Rural Associations offer a very insightful and reasonable alternative plan to ensure that RLECs and rural consumers are not inadvertently harmed by the transition to a broadband-supporting Connect America Fund.

In addition to recognizing the importance of a careful, calculated and methodological transition that allows for RLECs to reasonably recover cost such as middle mile access, corporate expenses and especially high-cost loop investments; the RLEC Plan recognizes the risk that the FCC takes in developing a large-scale USF Reform mechanism without having solid evidence of what the future has in store—which is obviously impossible. Clearly, this is a fundamental problem with regulation in general—regulators (or the industry for that matter, but the industry is usually more insightful) are not psychic and they often do not place bets on the correct future outcomes. Regulators are usually years behind the industry, and the effects are often very severe. Look at the 96 Act- the Internet was barely considered, and as late as the early 2000s the FCC and the Joint Board were still not recognizing Internet as an essential service. Anyway, the Rural Associations argue that the FCC needs to continually monitor and modify whatever USF Reform plan is implemented to reflect real changes in costs and broadband deployment, "It is clear that even the best predictive judgments as to where a market will be in 10 years, or what reforms might be necessary to reach that 'end game' are almost certain to miss the mark. Indeed, the only guarantee may be that technology and market development will, over 10 years, outpace and/or render moot any reforms that the Commission and the industry put into place today" (pg. 37). This reminds me of the 4/1 Mbps speed target recommended in the National Broadband Plan—this target is already insufficient and the majority of the population already has access to higher speeds. Why settle for mediocrity? The Rural Association Plan, like the Joint Board Plan, lays out specific steps to achieving the end goal of USF for broadband, but successfully addresses some of these larger, more philosophical issues at hand like maintaining balance in cost recovery and ensuring that the Fund does not become a victim of regulatory lag.

Overall, the RLEC Plan is an extremely thorough alternative to the FCC's proposal, which includes methods and safety nets for RLECs to ensure that rural telecom providers and their consumers can continue to reap the benefits of broadband, as they have been doing under the current USF regime. The RLEC plan meets the FCC's critical reform objectives: modernized for broadband, fiscal responsibility through reasonable cost recovery limitations, accountability through strict COLR requirements for recipients, and market-driven by recognizing and adapting to technological and market changes. Furthermore, the RLEC Plan ensures Section 254 obligations for sufficient, specific and predictable funding and for reasonably comparable rates and service for rural consumers; and, "The RLEC Plan carriers forward and adopts to a broadband-oriented universal service program many of the COLR policies and requirements that have worked effectively to ensure that quality and affordable voice-grade services are ubiquitously available throughout high-cost rural areas" (pg. 69). The Rural Associations remind the FCC that RLECs have been very successful at efficiently using USF support to provide broadband in rural areas, whereas larger carriers have struggled with this task. I believe that the RLEC Plan is very reasonable, conservative, and successfully addresses the key concerns with the current USF system while simultaneously addressing the financially fragile rural telecom industry such that significant and devastating harms will not be imposed on RLECs, if the RLEC Plan were to be adopted by the FCC.

So, what is the RLEC Plan? First,

"The RLEC Plan has been carefully designed to ensure that the benchmarks, cost allocations, and ultimate recovery mechanisms will (i) sustain broadband-capable networks in high-cost areas where they exist today, (ii) provide a reasonable opportunity to recover the costs associated with existing investments, (iii) promote the responsible 'edging out' of broadband into unserved areas at a reasonable pace; and (iv) control growth in the fund. If however, the Commission 'tinkers' with the benchmarks or other mechanics of the reform proposals, if it fails to provide adequate support for recovery of existing investment made under current rules, or if it fails to provide sufficient support for the task of both delivering and keeping broadband in rural America, the Commission runs the substantial risk of frustrating efforts to push broadband into unserved areas and would also place at risk the ability to sustain existing network investments" (v-vi). 

The RLEC Plan includes 4 steps (combined with ongoing monitoring and modification) that address both USF and ICC reform, without compromising the affordability, availability or quality of existing rural voice and broadband networks:

1. Near-term reform for ICC to immediately address access charge arbitrage issues (see my ICC Reform comment summaries for more details on this topic).
   
2. Near-term reform for USF, whereby RLEC investment recovery is reasonably constrained, which "should minimize any actual or perceived incentive for carriers to invest in any manner that might be influenced in whole or part by a desire to obtain or retain HCLS" (pg. 9). Clearly, the perception that RLECs gold-plate and inefficiently invest in network facilities simply to squander USF is a very powerful perception indeed—regardless of how accurate the perception actually is, the Rural Associations are proposing methods to prevent wasteful and abusive USF utilization. The Rural Associations propose reasonable and limited cost recovery, and oppose completely eliminating corporate expense recovery. An example about corporate expenses illustrates that if this recovery is eliminated, customers could see local rate increases of at least $27 per line per month (pg. 40).
   
3. Longer-term reform for ICC, where interstate and intrastate switched access rates are unified by company with a restructure mechanism (RM) for the transition. Without a restructure mechanism, RLECs could "have trouble repaying loans, meeting current payrolls, fulfilling service responsibilities, and simply maintaining existing network plant" (pg. 14). Additionally, the Rural Associations oppose bill-and-keep because it would create more opportunities for access charge arbitrage, and it would prevent RLECs from incentives and options to upgrade networks without significantly increasing customer rates. Additionally, we have not yet achieved a 100% all-IP industry infrastructure, and once again, this is not the time or place to experiment with a USF/ICC Great Leap Forward.
   
4. Longer-term reform for USF, which transitions to a cost-based, "evolved rate-of-return," where RLEC support is a separate but complementary component of Long Term CAF. This step starts with today's regulated interstate costs including recovery constraints, adds additional support for middle mile access (limited based on a defined Mbps capacity per line), recognizes the impact of continued broadband adoption and then determines the amount of RLEC support for broadband by Broadband Network Transmission Cost – Urban Wholesale Benchmark.
   
5. Continued monitoring and modification of the reformed USF to ensure accountability, account for market changes in costs, deployment and technology, and course-correct any assumptions that may prove to be incorrect from the initial rulemaking.
   

The Rural Associations make many insightful and interesting comments about the "donut and hole" concept applied to competitively attractive low-cost areas surrounded by unattractive high-cost areas, and they discuss the importance of COLR requirements in great detail, claiming that coverage and service COLR obligations will help ensure accountability of USF support. The Rural Associations argue that, "RLECs invest and operate in places that have been historically left behind, and are community-based providers that are committed to delivering the highest-quality services to their customers/neighbors. They are committed COLRs eager to deliver on reasonably designed service obligations" (pg. 74). Like the Joint Board, the Rural Associations focused specifically on the dangers that will befall rural carriers if reverse auctions are approved for CAF support distribution. The Rural Associations argue that reverse auctions will create a "race to the bottom," where low-quality networks are constructed with the funds, it will be extremely difficult and costly for the FCC to enforce service quality standards, and many rural areas could be left without a suitable COLR. My favorite comments against reverse auctions by the Rural Associations are: "proponents of reverse auctions have been unable to offer any relevant real world examples of successful application in circumstances similar to the way they would be utilized to provide service in the United States;" (pg. 76) and reverse auctions would unfairly favor large carriers, "put simply, the proposed 'ranking bids per price unit covered' mechanism appears to ensure that AT&T, Verizon and other large national and regional carriers will receive virtually all the initial Phase I CAF support they want" (pg. 87).

 Finally, the Rural Associations addressed the controversial issue about capping the size of the Universal Service Fund at current levels, and provided the most poignant argument that I have read thus far: "There is…a fundamental inconsistency between the directives in the Act [section 254] and the insistence that the size of USF cannot increase," and there is no law stating that the fund is not allowed to grow (pg. 89). The Rural Associations are rightly concerned that the FCC could easily fail to meet broadband deployment goals by becoming overly focused on keeping the size of the fund in check. In order to get passed this issue, the contributions base should be broadened to include broadband service providers, which would very simply eliminate the need to cap the fund at current levels. Throughout this proceeding, I have never been able to understand why the FCC is so hell-bent on capping the fund at current levels—it really defies any fiscal policy logic and reason. What is even more confusing is why they are insisting on capping the fund when there is a vast, deep, and growing ocean of providers who do not contribute to the fund, but who may become recipients once the reforms are implemented. I understand that the FCC does not want to burden consumers, but the FCC needs to be reasonable and understand the network effects of broadband—if more consumers have broadband, more consumers will benefit from broadband, and therefore consumers should pay a tiny bit more to enable the continued adoption and deployment of broadband. I personally have no problem with paying a few extra cents or dollars to help ensure that more Americans (especially rural Americans) have access to broadband. Why limit the fund, which could cause significant long-term harm to broadband availability and the industry as a whole, when there is a much more effective option of broadening contributions, which would only have very small short-term negative impacts on consumers? I just don't think the FCC is looking at the problem from the right angle, but they seem determined to promote all of the wrong solutions to a pretty straightforward problem.


I think the Rural Associations' RLEC Plan is very reasonable, all-inclusive, and potentially life-saving for RLECs, which may become an endangered species if the FCC's proposals are adopted. I'm not sure if I prefer the RLEC Plan more or less than the Joint Board's Plan—they are both really attractive options that address similar shortcomings in the NPRM, such a reverse auctions and the size of the fund. Either one would be considerably more effective and would not force the telecommunications industry into a potentially disastrous and devastating Great Leap Forward to universal service for broadband.

This is my last comment summary for this round of comments on USF Reform! Don't get too comfortable though, because replies are due on May 23—I'm expecting a lot of explosive and hard-hitting reply comments. I'm both excited and scared to read them! Additionally, next week I will be covering the OPASTCO Legislative and Regulatory Conference in DC and the much-anticipated 3^rd FCC USF Workshop which is taking place in Omaha, NE, which includes people I actually know on the panels. The battle over USF Reform is definitely moving forward, and I will be here watching every move!


Cassandra Heyne
ruraltelecommentary@gmail.com

Read the rest of my comment summaries and USF Reform articles:
Comments of RLECs and rural telecom advocates (USF)
Comments of price-cap carriers (USF)
Comments of the Joint Board on Universal Service (USF)
Comments on ICC reform (ICC)
FCC's Workshop on ICC Reform (ICC)
FCC's Workshop on USF Reform (USF)



 

Will AT&T-Mobile Lay Claim to CAF and Mobility Funds? Now it’s Getting Personal.

I was planning to write a nice, calm review of the Rural Associations' RLEC Plan for USF Reform today, but an article that I caught first thing this morning really got me riled up about the AT&T-T-Mobile merger—not that I haven't been riled up about it all along. I just could not pass up analyzing the latest steaming dish of controversy, plus it has been awhile since I've written about the merger and a lot has happened since Commissioner Copps talked with CSPAN about his merger concerns. Can you stand to read yet another article criticizing this merger after all the reports this past week about consumers rallying against the AT&T Monopoly 2.0? Well in case you were on a remote island all week with no Internet—in which case I am eternally jealous—over 4,000 consumers submitted comments to the FCC (search docket 11-65) voicing their concerns about the merger. In response, AT&T allegedly claimed rather arrogantly that consumers' comments were not legally or rationally argued, therefore they don't really matter. I normally get a kick out of some of the crackpot consumer comments submitted in FCC proceedings, but it this case I actually found a number of very well stated and extremely concise arguments. How many pages of legalese and industry jargon does it take to say something like "The merger will harm competition and increase prices, taking away a viable and low-cost competitor from the marketplace." I flipped through about 100 or so consumer comments at random the other day and most of them carried this message in some form or another—easily and clearly stated in a few paragraphs at the most. As a former T-Mobile employee and customer, I can vouch for many of the reasons why consumers are worried about the merger. But: it wasn't really until this morning that my anti-merger sentiment really hit the boiling point.

The May 10, 2011 Hillicon Valley article, "AT&T's Subsidies an Issue in Merger," revealed a merger concern that I have been pretending to ignore thus far: "some lawmakers are worried that AT&T could use government funds to fulfill its broadband pledge"--that is to bring wireless broadband to 97% of the U.S. in 6 years (Jerome, Hillicon Valley, 2011). It is extremely profound that this merger is taking place in parallel with the potentially RLEC industry-shattering USF Reforms—both are excepted to be decided within the year, and both will potentially change the telecommunications industry as we know it. The question is: how will these two legally separate but inextricably linked decisions mold the future of USF and rural access to broadband? When you consider the lobbying prowess of AT&T, things start to look pretty scary. If the merger is approved and the FCC's USF Reform NPRM proposals are adopted without change or consideration of alternative plans (such as the Joint Board or Rural Association Plans), there is a real threat that AT&T-Mobile will make a clean sweep of the limited (and possibly capped) CAF and Mobility Funds by dominating the reverse auctions and literally annihilating competitors market by market, like ants with a magnifying glass. According to the Hillicon Valley article, "As timing would have it, AT&T stands to gain a lot of government-collected money in the next several years, as the Federal Communications Commission moves forward with a plan to subsidize broadband service through the $8 billion Universal Service Fund" (Jerome, Hillicon Valley, 2011).

Am I getting worried over nothing? I don't think so. This issue poses a real and significant threat to both RLECs and small wireless carriers. Although AT&T claims that they are not looking for government subsidies to build out wireless broadband to 97% of Americans, AT&T is still the largest recipient of USF to date. With the FCC's proposed mechanisms for USF Reform, I don't see how AT&T will not continue to be a major recipient of USF. The FCC specifically wants to get more USF support into the hands of large price cap carriers, who have historically done the worst job at deploying broadband to rural areas. Additionally, the fundamental principles of reverse auctions literally guarantee that AT&T-Mobile will scoop up even more subsidies unless conditions are applied to prevent this from happening. Such a condition would not be unreasonable or unusual—both Sprint and Verizon have faced similar conditions in the past.

The first condition should be that AT&T-Mobile is not allowed to participate in reverse auctions. It was AT&T's choice to consume a viable competitor for $39 Billion in order to increase its spectrum assets rather than try to acquire more spectrum the hard way—by patiently waiting for the FCC to release little bits and pieces and then fighting for them with everyone else like hungry dogs fighting for table scraps. Buying an entire competitor just to increase spectrum holdings is a luxury that literally no other carrier—except maybe Verizon—can afford. AT&T's market power and economies of scale would undoubtedly allow the behemoth to undercut the bids of any small competitor in a reverse auction. Furthermore, if reverse auctions are technology neutral and if USF is only granted to one provider per area under CAF, AT&T could easily dominate any RLEC attempting to participate in a reverse auction to provide broadband to rural areas. If auction blocks can be aggregated, we have even more reason to worry, as AT&T could gobble up entire hunks of geography in one bite. After that, will AT&T even bother to extend wireless broadband to far reaching, unprofitable rural areas? The Federal State Joint Board on Universal Service is concernedunserved or poorly served—especially if there are no conditions placed on the winner. I think these USF reform concerns effectively overlap with my concerns about the merger and its impact on the future of USF. AT&T made a choice to devour a competitor with cold, hard cash; and that choice should be reiterated through restrictions to USF support in the future. I do not think it would be unreasonable to impose a condition that AT&T could not participate in reverse auctions (if reverse auctions are approved, which I hope they are not). If the FCC and DOJ want to go really far, they can impose a second condition that restricts AT&T from receiving any USF under either CAF or the Mobility Fund, but realistically I don't think this would happen. Too many rulemakers and lobbyists will argue that you cannot prevent a carrier from receiving USF just because the carrier is big and rich, especially if the carrier is critically positioned to be able to provide broadband to rural areas at the lowest cost (even if quality and small companies are sacrificed in the process). Additionally, the endpoint goal of deploying broadband to 97% of the US will cloud the short term judgments about how that goal is to be achieved.

I keep thinking about the story in The Master Switch about how AT&T used to go into farm communities and rip out the telephone infrastructure that the first rural telephone company proprietors poured blood, sweat and tears into building. AT&T would publicly destroy the equipment as a macabre symbol of their monopoly power. This will absolutely happen once again, in essence, if AT&T-T-Mobile merger is approved and the company is allowed to participate in reverse auctions. There is a domino effect that is being set into place right now: if USF reforms are passed in ways that are harmful to small rural carriers, and AT&T is allowed to merge with T-Mobile, and AT&T is not restricted from receiving USF funds under the new USF regime; RLECs will start to fall one by one to the monopoly. Am I being overly depressing and grim? Possibly. But when AT&T rips out and destroys the telecom infrastructure that a small family-owned company has built over the last 100 years—literally or figuratively—I take it personally. 

Cassandra Heyne
ruraltelecommentary@gmail.com


P.S. This article in The American Prospect about the merger, "The Return of Big Bell,"  by Nancy Scola, is the without a doubt the best article I've read about the merger so far, hands down. Also, if you are strongly opposed to the merger, then check out the No Takeover Project.

Update 5/11/11: At the conclusion of an explosive and dramatic Senate Judiciary subcommittee hearing on the AT&T T-Mobile merger today, AT&T did agree to hypothetical condition to not use USF to deploy broadband. Although this promise calms my fears somewhat, it is an empty promise until the condition is actually imposed. I guess the first step is acceptance, but for now its like they are accepting nothing since the conditions have not yet been developed. Your move, FCC and DOJ.   

Edit 5/19/11: Tied for first place in the best article on the merger is  "The End of the Telecom Revolution," by Chip Pickering, which emphasizes the importance of knowing the history of the telecommunications industry, including pre-telecom history going back to the eternal wisdom of Adam Smith. This article warns of the dangers of monopolies and that approving the AT&T-T-Mobile merger will wipe out years of progress in telecom competition, reverting the industry back to the dark ages, literally. Best quote ever:  "The American people need market competition, not collegiality between Washington bureaucrats and the companies they supervise on behalf of taxpayers.  The public interest cannot be exchanged for cupcakes and market concentration. As Marie Antoinette infamously said as the French people starved, “Let them eat cake" or in AT&T’s case, cupcakes." Referring, of course, to AT&T's habit of gifting the FCC with pricy baked goods.

USF Reform Comments Showdown: In This Corner, the Joint Board Proposes a Very Reasonable Plan and Opposes Reverse Auctions

Comments on USF Reform and the Connect America Fund were due April 18, 2011 and May 2, 2011 for the Federal State Joint Board, commencing the second round of comments in this proceeding (following April 1st's ICC comments). For your reference, the following comment summaries are in response to:

In the Matter of:

Connect America Fund (WC DN 10-90)

A National Broadband Plan For Our Future (GN DN 09-51)

Establishing Just and Reasonable Rates for Local Exchange Carriers (WC DN 07-135)

High-Cost Universal Service Support (WC DN 05-337)

Developing a Unified Intercarrier Compensation Regime (CC DN 01-92)

Federal-State Joint Board on Universal Service (CC DN 96-45)

Lifeline and Link-up (WC DN 03-109)

Now that I have spent some time reading and summarizing comments from individual companies and associations, it is time to take a hard look at two of the alternative plans proposed in response to the FCC's USF Reform NPRM. Although I originally simply saved the longest comments for last due to my pressing academic obligations, it appears as though I indeed saved the best for last as well. Today I give you a brief summary of the Joint Board's 177 page comments, and next I will provide analysis of the Rural Association Plan.

 
Comments by State Members of the Federal-State Joint Board on Universal Service 
I am fairly new to understanding the complex and important role of the Joint Board—it was not something that I learned about in my telecom graduate program nor is it one of the more commonly known aspects of telecom regulation. Anyway, I spent some time in my previous job researching past Joint Board decisions and their relevance to the proposed Mobility Fund. I learned that the FCC typically accepts and considers Joint Board decisions, albeit several significant decisions which were not adopted by the FCC. I feel that the Joint Board's alternative plan for USF Reform is extremely reasonable and adequately addresses many of the shortcomings in the current system as well as criticisms about excessive and unnecessary ILEC/RLEC support. Basically, the Joint Board recommends including both broadband and mobility in the list of services supported by USF, and then implementing three separate funds to distribute service: a Provider of Last Resort (POLR) Fund, a Mobility Fund, and a Wireline Broadband Fund. Furthermore the Joint Board is not supportive of reverse auctions or a bill-and-keep mechanism for ICC reform, which shows that states are clearly more in-tune with RLEC issues and their concerns with the NPRM. States have more knowledge of consumer problems, competition, local business conditions, and other unique insight, and they typically act as a buffer between local business, local consumers and the FCC. The Joint Board's vision for the new Universal Service Fund includes broadband and mobility as supported services, but recognizes that the fund should not continue to grow exponentially. However, the Joint Board also acknowledges that it may not be possible to contain the fund at 2010 levels, especially if new services are expected to be supported: "It is difficult to understand how the current USF financial structure will be adequate to support these expanded objectives when the chief funding source applied to the task will be the repurposing of the current $4.2 billion of high cost funding" (Federal State Joint Board on Universal Service, 2011, pg. 15). The Joint Board warns that if the FCC restructures USF with insufficient funding, the entire system could be harmed significantly, carriers may not be able to repay debts, capital investment may be reduced, and some customers could even lose service altogether if networks cannot be maintained.

The Joint Board recommends creating 3 separate and distinct funds. The first is the POLR Fund for continuing cost based support to high-cost ETCs for both voice and broadband. I found the proposal for the POLR Fund to be especially well developed and reasonable, especially considering the alternative (the FCC's plan). This fund includes 9 steps:

1. Targeted support for non-competitive areas: This mechanism recognizes the existence of "donuts" where low cost areas are surrounded by high cost areas. Support will be distributed on a simple calculation of cost – revenue where revenue is "total company" (minus video service) based and costs are all capital and operating costs, including a reasonable return and depreciation. The Joint Board recommends resetting the rate of return to 8.5%, which is still well above the rate that many small companies actually receive but below the current rate of 11.25%. Finally, investment and expense costs would be capped, to "prevent carriers from making excessive investments solely or primarily to obtain new or secure existing universal service funding" (pg. 38). I believe this final point is very important given the widespread criticism that RLECs gold plate their networks and invest in pointless, wasteful services like FTTH (yes, I'm being sarcastic)—the Joint Board recognizes that the cap should probably increase over time to accommodate FTTH construction.
   
2. Intercarrier compensation reform support to replace lost access revenue: This step would calculate the difference between pre- and post- ICC regulatory revenue change and then multiply the difference by a transition factor to determine a reasonable amount of per line support, which would decline to 0 over a period of years. This step would effectively reduce the shock factor that some companies may experience as a result of ICC reform and its resulting impact on revenues.
   
3. A rate-of-return mechanism to ensure no excessive profits: This step imposes an earnings ceiling which will limit the risk of excessive returns—another common and usually unfounded criticism of RLECs. This step will prevent double recovery and ensure that statutory requirements for affordable and reasonably comparable rates are met. For example, support would be limited for cases where a provider's large low-cost area drives down the costs to serve a smaller high-cost area.
   
4. An upper limit on "very" high cost support: Again, this step will help prevent wasteful and abusive use of universal service funds (one of the FCC's main objectives for USF reform). According to the Joint Board, "the nation cannot afford to provide broadband service in all areas and must limit public expenditures for extremely remote and extremely low density areas" (pg. 59). Accordingly, the Joint Board proposes a $100 per-line, per-month high cost cap, and a corresponding waiver process for extremely special cases. With prevailing criticism that some RLECs receive like $2,000 per month for high cost lines, this step will effectively ensure that companies do not receive extremely excessive and unsustainable subsidies.
   
5. Combine steps 1 through 4 to determine initial Federal support: Rather than adding steps 1 and 2, the larger of the two should be applied to prevent double recovery. Then, the appropriate limits from steps 3 and 4 would be applied.
   
6. An incentive for state support: Although only about half the states have universal service funds, this step attempts to create incentives for more states to participate and it rewards states who do participate. The Joint Board proposes reducing the amount of support (calculated thus far in the preceding steps) by $2 per month per line, where the states would substitute the $2 or any other amount. The Joint Board acknowledges there is a risk of insufficient funding in states that do not participate, but at only $2 per line the harm would be minimal.
   
7. An incentive to encourage build-out, service quality and performance standards: In order to ensure that support is effective and network build-outs are fast, support would be eliminated if providers do not meet requirements. For example, a minimum requirement may be to provide 4 Mbps service to 60% of customers by 2016. If this minimum requirement is not met, funding would be eliminated.
   
8. A transition period to reduce the impact of fiscal shocks: Carriers may have financial difficulty transitioning from the old to the new USF system; the Joint Board recommends a 5 year transition but some of the recommended steps, like step 8, should be implemented immediately.
   
9. Final federal support level: Taking all these steps, limitations and transition times together, the final amount of federal support and corresponding timeframe would be established for POLRs.
   

The second and third funds proposed by the Joint Board, the Mobility Fund and Wireline Broadband Fund, are basically identical in methodology but targeted to different services. The Mobility Fund would provide grants to help finance building wireless towers in unserved and underserved areas, and the Wireline Broadband Fund would provide grants to construct wireline broadband in unserved and underserved areas (yeah, that is pretty obvious). Anyway, each fund would be capped at $500 million, but include a gradual increase to this level, starting at $50 million and reaching $500 million by the sixth year. Each fund would be financed from reallocated CETC support, and each would go towards financing up to 50% of the debt to cover network construction. The remaining 50% would have to come from private financing, which would "ensure that carriers invest prudently and would avoid making wasteful capital expenditures" (pg. 72). Again, the Joint Board is specifically addressing the FCC's requirement that the reformed USF must eliminate waste and abuse. It also may stimulate investment from new entrants. I definitely think this 50% capital expenditure requirement is important not only to reduce over-subsidizing, but to maintain a predictable and sufficient means of support. Private lenders are so scared of investing in rural telecom providers right now with the fear that all USF support may go away, and 50% is a lot better than 0%.

The Joint-Board comments contain a lot of interesting information from studies and data analysis, as well as remarks about ICC reform (bill and keep may result in some carriers having to increase rates by ridiculously high amounts), contributions (broadband providers should be contributing), and public interest obligations for broadband POLRs (states should have a significant role in the POLR system)—I highly recommend reading these sections if you are particularly interested in these topics. The last topic I will cover in detail here is reverse auctions: the Joint Board is not in favor of them! I've been really pleased with all the arguments against reverse auctions lately, and the fact that no sane broadcaster or wireless carrier is willing to release their death grip on their spectrum holdings. I'm really hoping that the FCC sees how bad of an idea reverse auctions are, especially with no spectrum to auction in the first place. Later this week I am going to write about some of the failures that other countries have had when they tried to implement reverse auctions—I think you will see why I feel so strongly that they are a horrible idea once you learn how disastrous they have been elsewhere. Reverse auctions have never been used in the US for universal service, and this is not the time to give them a try just to see how it goes and whether or not they actually work. The Joint Board provided the following (very persuasive) arguments against reverse auctions:

• Reverse auctions may destabilize ILECs.
  
• Reverse auctions could be easily manipulated if service areas can be aggregated.
  
• The FCC cannot operate under the assumption that multiple bidders will participate everywhere, nor that the winning bid will actually reflect the bidder's true costs.
  
• "Bidders can collude without being detected," which is pretty scary (pg. 81).
  
• Reverse auctions would provide incentives to significantly overbid above true costs if the FCC's baseline support level is well above true costs.
  
• "Reverse auctions work best when all bidders are approximately the same size, there exists a semblance of a level playing field across a range of bidder sizes and bidder technologies, and the opportunity for gaming is limited" (pg. 82). Well… we know this is not the case in the industry today! Verizon Wireless vs. Small RLEC of 2000 customers. Who will win that auction?
  
• Bidders may apply a "risk premium" to their bids or simply not participate if the risk is perceived to be too high.
  
• Federal support could be seen as a replacement for capital investment.
  
• Reverse auctions would create islands of high density areas being served and leave the low density areas no better off than they are today, defeating the sole purpose of USF reform.
  
• The FCC's plan to use census blocks is insufficient because census block boundaries do not perfectly match providers' boundaries. Furthermore, the current data actually overestimates the availability of broadband in the National Broadband Map—even if a census block is partially served the map recognizes the entire block as being served. Maybe that is how Verizon is listed as having 3-6Mbps service everywhere, even in rural areas where I have personally stood and received no signal whatsoever.
  
• Self-defined service areas violate Section 214(e), which grants responsibility to the states to determine ETC status and whether subsidies should be provided in specific areas.
  
• Finally, reverse auctions hold the risk that service quality would decline because the FCC's proposed 5 year commitment does not address long term universal service goals.
  

Overall, I felt the Joint Board proposed a very reasonable alternative to the NPRM. I believe the Joint Board's 3 Fund plan is forward-looking and will meet the most fundamental objectives of USF Reform: to reduce inefficient and wasteful subsidies, to ensure support for new broadband networks in unserved areas, to ensure continued support for existing voice and broadband networks, and to provide more market-based incentives to invest in broadband for rural areas. Most importantly, this proposal goes far to ensure the statutory requirement of predictable and sufficient universal service support, which the FCC seems to forget about in the NPRM. I think this plan would effectively reduce some of the financial uncertainty that is preventing private lenders from investing in RLECs.

Stay tuned for my review of the Rural Association Plan in the next few days—I am going to attend the OPASTCO Legislative and Regulatory Conference next week so I am definitely motivated to analyze this plan so I can speak about it to my Congressional staff with sufficient knowledge and insight.

Cassandra Heyne
ruraltelecommentary@gmail.com


Further reading: 
Rural carriers and association comment summaries
Price cap carriers comment summaries
FCC workshop on USF Reform
FCC workshop on ICC Reform
Comment summaries on ICC Reform

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Smart Grid Synergies for Rural Electric Co-ops and Telecom Providers

Two months ago, I first wrote about my growing interest in opportunities for rural telecom providers to serve electric utilities with communications networks for the Smart Grid. I was particularly interested in analyzing the overlays between rural electric cooperatives and rural telecom providers; because it seems to make perfect sense that these two entities collaborate in some way to achieve two of the most critical infrastructure goals for the 21^st century: broadband deployment in rural areas and modernizing the electric grid. I had a perfect opportunity to explore this opportunity in a project for my Energy Communications Networks class, and I am happy to report my research to my readers.

In my project, Smart Grid Synergies for Rural Electric Cooperatives and Rural Telecommunications Providers, I first looked at reasons why rural telecom providers and rural electric cooperatives would even consider merging or collaborating on smart grid projects—after all, this idea would have been extremely radical and unacceptable just a few years ago. I found that there is quite a bit of support for rural telco/utility collaboration by rural cooperative associations such as NTCA, NRECA and NRTC. NTCA reported that "For the smart grid to blossom, rural electric and broadband providers need a fresh start and a new, creative approach to mutually constructing and maintaining this foundational partnership…rural electric providers and rural telcos are ideal partners in smart grid ventures" (Ward, NTCA, 2010). For some background information, there are 260 rural telephone cooperatives and 930 rural electric cooperatives, but when you consider all of the small and family owned rural telecom companies, the numbers are pretty even. Both entities provide service to approximately 70% of the US geography, but only about 10% of the population—rural utility and telecom providers serve on average 10,000 or fewer customers and 10 or fewer customers per square mile. The both provide service to some of the most economically challenged rural areas in the country and to some of the most rural and hard-to-reach customers in the country. Broadband and electricity are the lifeblood for rural Americans, and rural telecom and utility providers have gone to tremendous efforts to ensure that their rural customers have state-of-the-art networks. In fact, rural telecom companies have been some of the most successful telecommunications providers in deploying broadband to rural areas, and rural utility cooperatives have also been tremendously successful in deploying smart grid technologies in rural areas. Finally, rural utility/telecom collaboration is consistent with several major U.S. government initiatives to bring broadband and the smart grid to all Americans. A collaborative effort by a rural utility and a rural telecom provider would help achieve goals of the American Recovery and Reinvestment Act of 2009 and the National Broadband Plan of 2010. Congress, the FCC and the Department of Energy are all pushing the convergence of telecom and electricity networks, and there is really no better place to make these breakthroughs than in rural areas.

For the next section in my project, I looked at a company that is a real trailblazer in rural utility + telecom collaboration: NineStar Connect in Indiana. At the beginning of 2011, Hancock Telecom and Central Indiana Power merged to become one of the first combined rural electric and telecom providers in the country. In this arrangement, the utility division uses the telecom division's FTTH network for smart grid applications like Advanced Meter Infrastructure (AMI) and Demand Response (DR), which will help consumers monitor and control their own energy consumption based on peak demand times and pricing. The companies will be able to leverage each other's business operations, such as billing, customer service, and call centers, to reduce operational expenses. As an added bonus, the telecom division gains access to the utility's right-of-ways and pole attachments. The benefits and synergies do not stop here—the telecom division will now be able to become a CLEC in communities that were previously only served by the utility provider, creating a significant sustainable competitive advantage. Furthermore, the threat of the utility provider becoming a direct competitor to the telecom provider is completely eliminated. NineStar Connect is using a Tantalus fiber-based technology platform, and the CEO of Tantalus (Eric Murry) seems to be really excited about the benefits and synergies from this merger: "It's natural for telecoms and utilities to work together…It's a logical next step that will accelerate smart grid roll out, avoids the costs and complexity of building and maintaining two separate communications networks, and consolidates billing, customer service, and many other business functions under one roof" (Tantalus, 2010). All eyes are on NineStar Connect right now as the company has truly formed a new breed of cooperative—I am hopeful that they realize great synergies and success from the merger and become a model for other rural telecom and utility providers to follow in their footsteps.

Next, I looked at ideal business and technology arrangements for rural utility and telecom collaboration. Unfortunately, this is such a new idea, so there aren't any prominent models at this time. From my own observation, I concluded that FTTH is the best type of technology to facilitate an effective collaboration because the capacity is virtually unlimited so it can easily support the data load from smart meters (which is very small) as well as the data load from broadband customers—with room for the loads to grow. However, FTTH has not been deployed completely in many areas, and there may be no broadband connections at all to some extremely remote areas. In these situations, wireless technology can effectively be used to fill in the gaps until fiber is deployed. Prior to making any agreements, the utility provider must conduct a Strategic Communications Plan, whereby they analyze their communications needs one-by-one for each component of their grid. It may be the case that a utility will want to maintain a private network for SCADA or substation automation, but would be completely willing to work with a commercial telecom provider for AMI and other smart grid applications closer to the customer. Finally, many business operations can be consolidated to achieve maximum synergies—call centers, service crews, even warehouses and office supplies.

Finally, and probably most importantly, I analyzed the challenges that utilities and telecom providers must overcome to collaborate on rural broadband and smart grid projects. The challenges are significant and will likely not be overcome easily or soon. The main challenges include:

• Regulatory uncertainty for rural telecom providers: I don't feel a need to go into detail here; we know how significant these challenges are! For more information, feel free to read my USF Reform NPRM comment summaries from the rural telecom industry.
  
• State laws: the laws in Indiana prevented utilities and telecom providers from merging; luckily the state recognized the benefits and opportunities of the NineStar Connect merger and changed the laws to allow the merger.
  
• Mismatched geography: Not all rural electric and telecom service territories align perfectly. In many cases, the utility may need to provide electricity to an extremely remote area where no telecom customer even exists—such as an irrigation control center in the middle of a 20,000 acre ranch. These are the situations where wireless becomes a great fill-in-the-gaps communications technology.
  
• Ensuring network reliability, security and priority for the utility: commercial telecom networks are not built for utility communication, and utilities will not tolerate many of the network weaknesses found in commercial networks. The FCC released a NOI last month inquiring about these issues, so hopefully we will see some telecom providers responding that their networks are suitable for smart grid communications.
  
• Utilities' age-old mistrust of telecom providers: utilities have simply mistrusted telecom providers for so long, that it will be hard to overcome this barrier to effective collaboration. However, I believe that rural communities are the ideal testbed to break this barrier because of the unique qualities of rural businesses, communities and relationships between these two entities. They both have and strive to achieve the goal of providing excellent, state-of-the-art services to rural communities that are often not considered profitable by larger companies.
  
• Utility regulation: utilities have an incentive to invest in their own networks and infrastructure as a result of their regulatory rate structure. They are not able to recover investments if they utilize commercial networks. In the National Broadband Plan, the FCC recommended that states take steps to reduce regulatory impediments for using commercial networks.

In conclusion, there are significant challenges for both utilities and telecom providers to overcome in order to effectively collaborate. However, if these challenges are reduced—or if companies follow the lead of NineStar Connect and just "go for it," there are great opportunities for business and technology synergies. Not only will the companies achieve many benefits, but customers will as well. I think there are some amazing opportunities here if rural utilities and telecom providers are willing to make the effort, initiate dialogue with each other, and strive to overcome the challenges to collaboration. I am really hoping that more rural utility and telecom providers start looking at these opportunities. There are several interesting direct analogies between rural electric cooperatives and rural telecom providers, and the two entities can successfully leverage their similarities to overcome their differences and reach an effective, profitable solution.


I would like to credit Jesse Ward from the National Telecommunications Cooperative Association and Joan Engebretson from Connected Planet for their articles and research on this topic—articles that largely inspired me to do this project. Just last week, the day after I finished my paper, Connected Planet released this article providing an update on how NineStar Connect is progressing since the merger.

If you are interested in reading my full report, I would be happy to e-mail it to you if requested.

Cassandra Heyne

ruraltelecommentary@gmail.com

FCC's Second USF Workshop Tackles Broadband Technologies, Phase 1 CAF and the Dreaded Reverse Auctions

On April 27, 2011, the FCC conducted the second workshop on Universal Service Fund reform, focusing on broadband technologies and capabilities; the implications of different broadband technologies for achieving USF objectives; and finally--the controversial and all-around bad idea of reverse auctions for Phase 1 Connect America Fund (billed as "technology-neutral competitive bidding"). Like the first workshop on ICC reform, this gathering of experts from across the industry was high-tension and low- consensus; but also like the previous workshop, it was very interesting to hear from a wide range of stakeholders about these critical issues. FCC Chairman Genachowski opened the workshop with a familiar message about USF reform--the same message he has been repeating since the NPRM was released: USF is broken, it was designed for a 20th century voice telephony network, it is insufficient for the 21st century broadband era, and reforming the broken USF system is vital for the economy and industry. Genachowski added that of the many promising broadband technologies that exist today, all will play an important role in the goal of achieving universal broadband in America. Sharon Gillett, Chief of the Wireline Competition Bureau commented that if the different broadband technologies were children, she would "love them all equally...But they are not all the same...Each has a unique developmental path." I was actually pretty excited to hear from the diverse broadband technology stakeholders about the capabilities, costs and limitations of different broadband technologies--I enjoy (and understand) engineering topics a lot more when they are put into policy perspectives and debates. However, I was most excited/anxious to hear the panel on Phase 1 CAF and reverse auctions. Without further delay, here is my commentary on the topics discussed in the three panels.

Panel #1: Broadband Technology Capabilities Today and in the Future
Panelists: Steve Rosenberg (Moderator), Ralph Brown (CableLabs), Ken Ko (ADTRAN), Paul Mankiewich (Juniper Networks- Mobility), Mark Dankberg (Viasat, Inc.), Matt Larsen (Vistabeam), Jim Stegeman (CostQuest)
This panel kicked off with each participant describing the broadband technologies and capabilities of their respective companies--including fixed wireless, fiber, DSL, cable, mobile wireless and satellite. The panelists discussed their companys' various speed and capacity accomplishments as well as the challenges to deploy these technologies in accordance with the USF Reform NPRM and the National Broadband Plan. I believe there is plenty of room in the market for each technology, and each has specific advantages and merits--except perhaps for satellite broadband. I was not convinced by the Viasat participant's argument that satellite broadband is a competitive player in the overall broadband market. I see satellite broadband as a last resort solution, for people who really have no other viable choice. I would imagine that some of the other panelists are trying to find ways to make sure that rural customers do not have to be forced to deal with the slow speeds and high costs of satellite. I have it on good authority that some former satellite customers in rural Iowa were beyond thrilled when a certain Iowa RLEC began offering FTTH in their areas. These customers had been paying upwards of $700 per month for extremely slow and unreliable satellite service, so even an "expensive" FTTH connection was a dream come true, particularly for the high bandwidth users. Anyway, the panelists were asked to discuss issues related to capacity, such as meeting demand for essential applications and whether downlink/uplink symmetry will be an important characteristic in the near future. There was a near consensus that video is definitely the essential application of the moment, and Matt Larsen from Vistabeam (a rural fixed wireless service provider in western Nebraska and eastern Wyoming) commented that his network capacity was maxed out on Christmas day last year when everyone was playing with their new gadgets and downloading video. Clearly, ensuring ample capacity at all times is not only a necessity, it is at times becoming a luxury as well. I know many RLECs are extremely concerned about the substantial and growing chunk of capacity that Netflix downloads take from the network on a daily basis. The other point that I found particularly interesting was about the growing demand for cloud computing services, and how this demand will impact the demand for greater (and more symmetrical) uplink speeds from both business and residential consumers. The panelist from CableLabs added that although it is very difficult to make accurate predictions about how traffic and capacity demands will evolve in the future, it is important to build networks that are very flexible and engineered for future growth. My concern is that if USF support is only going to initially be targeted to networks with 4/1 Mbps, the networks will not be engineered for growth nor will they be forward-looking, which will result in swift obsolescence and high costs down the road. Keeping with the 4/1 Mbps topic, the panel was asked about customers who choose to adopt low speeds, and how that might change in the future. I thought the Viasat panelist had an interesting answer. He said that consumers use different algorithms to determine which service to pick--some want the fastest broadband regardless of cost, some want the cheapest broadband regardless of speed, some care about the overall value, and some care about bundled service offerings. I think a very important point, one that was actually made in AT&T's comments, is that the FCC should take a "holistic" approach, rather than focusing on the "definition of broadband in a vacuum." In other words, the 4/1 Mbps broadband definition is completely meaningless to some consumers but very meaningful to others--the true definition of broadband is actually in the eye of the beholder. The panelists mostly agreed that 4/1 Mbps is a good, but modest, starting point. The panelist from Juniper Networks argued that if the target is too big, it will simply take too long to achieve; and 4/1 is very conservative, but there are vast areas to cover with an impending need to be fast with deployment. The panelist from Vistabeam argued that the FCC should not over-subsidize providers to deploy higher speeds than 4/1, because broadband is a necessity and not a luxury--in this particular situation it is more important to be fiscally prudent than try to achieve the end-game goal of FTTH for everyone.  Personally, my favorite argument was from the economist on the panel (Jim Stegeman from CostQuest)--he said that FTTH is surprisingly cheap to deploy and it has basically unlimited bandwidth, which makes FTTH the most economically attractive option. I completely agree with this panelist and wished more people would understand that FTTH is not actually that expensive--it is just stigmatized as expensive, and the ultimate payoffs in capacity are well worth the investment. Interestingly, the panelist from the satellite provider actually commented that 4/1 Mbps should not be a "sentence" for rural people, rather the broadband speed definition should present an exciting "opportunity" in rural areas--I completely agree that 4/1 Mbps essentially sentences people in rural unserved areas to be second class citizens in the broadband world.  The final point that I felt was especially interesting, by Ken Ko of ADTRAN, was about the duality of the broadband ecosystem: on one hand, customers need mobility but mobility always has limitations; so customers also need a fixed broadband connection. Fixed and mobile broadband will continue to be compliments, not substitutes, therefore the FCC should encourage deployment and adoption of both fixed and mobile broadband. I definitely think that each of the technologies--except satellite for the most part--have unique merits and fit different market niches, and there is a role for each technology in achieving the goals of the National Broadband Plan. However, the FCC should pay attention to the point that customers need access to both fixed and mobile broadband networks. And, rural people are not second class citizens--I just had to throw that in once again.

Panel #2: Implications of Technology Capabilities for Achieving Universal Service Policy Objectives
Panelists: Carol Mattey (Moderator), Mark Cooper (Consumer Federation of America), Andrew Newell (Viaero Wireless), Dave Bickett (Park Region Mutual Telephone/Otter Tail Telecom/Valley Telephone), Phil Jones (Washington Utilities and Transportation Commission), David Russell (Calix), Christopher McLean (Rural Utilities Service)
This panel revolved around the perpetual debate of wireless vs. wireline, and which one is better to meet the goal of deploying broadband to the country's unserved areas. The moderator insisted the panelist operate under the premise that the new USF ecosystem will have finite (capped at 2010 levels) resources and should be distributed in a technology neutral manner. A lot of people, myself included, have difficulty with the proposal that USF be capped at 2010 levels--from an economic standpoint it is an outlandish request. Would you tell your employees that they could not receive a raise for 10 years and expect them to stay at your company? Is there any other industry that operates under the assumption that costs will not increase in 10 years, and if they do--thats just too bad? Anyway, the panelists were not allowed to digress about the size of the fund, which totally killed some of the potential controversy that would have ensued in this discussion. The panel was asked to weigh in on how higher broadband speeds will be achieved without actually increasing the size of the fund, and Dave Bickett (the panelist from an RLEC and rural CLEC in rural Minnesota) responded that consumers are constantly expecting and requiring higher speeds, so it is important that the restricted USF does not hinder the ability of networks to grow in order to meet these demands. Two panelists (Andrew Newell of Viaero Wireless and Mark Cooper, who I may not always agree with but have seen at conferences before and I really enjoy hearing his arguments--he is a very engaging and passionate speaker) were insistent that wireless is the best solution, as it makes the most economic sense and it is "infinitely more valuable" to consumers. Next, the panel was asked to discuss the opportunity for synergies between wireless and wireline--afterall, you cannot even have wireless service without a wireline backbone! It is so unfortunate how few people realize this.... Anyway, Dave Bickett explained that his rural customers have a specific need for both mobile and fixed broadband, but fixed broadband is really the necessary and valuable service. David Russell of Calix added that Verizon does not even allow wireline carriers to serve LTE towers unless they have a fiber connection, which I found to be really interesting. He also added that many people will not buy homes unless there is an adequate broadband connection--and wireless does not count. Later in the discussion, Dave Bickett argued that fiber is actually cheaper to deploy in extremely rural, long loop areas than copper. He added that his company deploys fixed wireless in order to help push fiber further out and offer customers a quality interim broadband technology until fiber is fully deployed--I happen to think this is a really smart strategy, where a small rural carrier can leverage fixed wireless on a temporary basis in order to serve more/new customers until FTTH is fully deployed. Bickett also discussed the broadband adoption challenges that his provider faces--he admitted there is only about a 45% adoption in his service areas. He is striving to overcome the adoption challenge by educating his communities about the value of broadband, and he has developed a creative solution with the city to market the town as a broadband-ready area perfect for telework. He has even invited representatives from Microsoft and Blue Cross to talk to members of this community, which has been hit particularly hard by the recession. As a result, the community is seeing new jobs and the provider is gaining customers and helping to increase broadband adoption. It is definitely important for rural providers to address the adoption issue--it is an unfortunate fact that broadband adoption is typically 10% lower in rural areas for a variety of reasons. By increasing adoption, the provider increases revenue, and then has a greater chance of securing loans from RUS and lenders like CoBank, and can therefore continue deploying and upgrading high bandwidth networks. Many USF issues are very circular when you look at the big picture. In the final comments of the discussion, the RUS panelist added that RUS tries to make the best possible long term investments, which facilitate "graceful upgrades" when consumer demands change in the future and funding recipients must upgrade or face competitive annihilation. Finally, Mark Cooper compared the challenge at hand to the rural electrification challenge from the 1930s. He pointed to the success of the cooperative business model in rural areas in delivering electricity to nearly 70% of the country's landmass, and how this monumental challenge was addressed with a really pragmatic solution. Overall, I enjoyed this panel and leaned some interesting facts and anecdotes about both fiber and wireless. I agree with some of the panelists that both fiber and wireless are the critical technologies to meet the goal of deploying broadband to unserved rural areas, and I agree that these two services are highly complimentary both from a consumer perspective and from a provider perspective. I really wished there was more cooperation between service providers with different technologies, especially in rural areas. The challenges will not be overcome with constant infighting and bickering about which technology is better.

Panel #3: Phase 1 of the Connect America Fund--Targeting Support for Unserved Areas Through Technology-Neutral Competitive Bidding
Panelists: Joseph Cavender (Moderator), Grant Spellmeyer (US Cellular), Jason Hendricks (RT Communications), Maggie McCready (Verizon), Ross Lieberman (American Cable Association), Jose Jimenez (Cox Communications), Greg Rosston (Stanford Institute for Economic Policy Research)
The final panel of the day was all about making competitive bidding--AKA reverse auctions--work under the goals of CAF. This was arguably the most controversial panel of the day, with some of the most heated and exciting debates as the panelists were either fiercely anti-reverse auctions or fiercely pro-reverse auctions. As someone who is fiercely anti-reverse auction, I was interested in hearing how "my side" responded to the reverse auction proposal. I hoped they had plenty of ammunition in the form of well thought-out arguments and legalese, and I was ultimately very happy with the panelist from US Cellular and the panelist from RT Communications, an RLEC in Wyoming and Montana. Grant Spellmeyer from US Cellular argued that a single winner reverse auction is contradictory to the 1996 Act, and since USF sits in Title II, the FCC needs to limit eligibility to only Title II carriers. If an auction determines a single winner only, significant government oversight will be required. Taking the pro-reverse auction perspective, the panelist from Verizon argued that reverse auctions are very effective and produce very efficient outcomes. My question is this: how do you know? Reverse auctions have not been used in the US to deliver broadband to unserved areas, and reverse auctions have failed spectacularly in other countries where they have been applied in a similar manner as the FCC proposes. I honestly believe that Verizon supports reverse auctions because Verizon knows they will win most of the auctions. When your perspective is from the apex of the auction kingdom, you will agree with anything that will further your reign over the industry. Jason Hendricks from RT Communications added that reverse auctions will threaten existing investments, reduce the ability for rural carriers to pay back loans, and rely on the broadband map which is unreasonably inaccurate and will at best always be out of date. He argued that reverse auctions should start off as a pilot program in price cap areas. The panel addressed the scale of the bidding area, which has also been a contentions component of reverse auctions. Not surprisingly, there was very little consensus about the ideal size of a bidding block. It was even suggested that auction participants can bid on blocks or tracks that are not even located in the same state--such as a few census blocks in Texas and a few census blocks in Washington and a few in North Carolina--all in the same bid. Clearly, this idea proposes some significant challenges for RLECs and could effectively push an RLEC out of the game unless the blocks are contiguous and relevant to their current market. RLECs are also concerned about "cherry picking," where the larger carriers can single out specific census blocks that might be the easiest or cheapest to serve--which would artificially drive down the bidding price without actually addressing the real problem of serving high cost unserved areas. The panelist from US Cellular was especially concerned that a single winner would essentially become a government selected monopoly provider, and this would significantly harm future competition. Additionally, how would the FCC ensure that the winner actually follows through with providing service to the most costly and difficult unserved areas? This brings up an interesting debate about unserved areas and how the USF reforms will play out in the near future--how do you address currently unserved areas that will be served in the next year (areas where a service provider is already planning deployment, which is NOT included on the broadband map as it should be)? Will a single auction mechanism satisfy funding needs for soon-to-be-served areas and areas that probably won't get service for many years? The panelist from Verizon argued that focusing heavily on the provider who gets the money is not meeting the actual objective of USF--to provide service in unserved areas. She asked: Who cares which provider wins the auction so long as broadband is deployed quickly and efficiently? Well, small companies care if Verizon suddenly takes all of the USF money available for broadband but continues to ignore the deeply rural areas. I imagine their customers care as well. Clearly, it will be challenging for the FCC to determine the appropriate conditions for the auction winners--I did not pay particularly close attention to this topic when I was reading comments, but auction conditions will obviously play a significant role in who ultimately participates in the auctions. The FCC must take caution to not impose conditions that actually end up shaping the outcome to favor one class of carriers or one type of technology--this would be extremely contradictory to the goals of USF. The conditions, the bidding area size, and the definition of unserved areas for the purpose of bidding must all be crafted carefully and based on input from all potential participants. Overall, I am not even slightly more convinced that reverse auctions are a good idea and I am even more concerned about how they will effect RLECs if they become the standard for distributing USF funds for broadband.

"Who says talking about universal service isn't fun?" I didn't catch who said that--I think it was the moderator--but at least I was laughing by the end of the workshop.

I learned a lot from this workshop and I am really grateful to the FCC for putting these summits together and making sure the public is able to watch them--I hope that the public is actually taking advantage of these resources to learn about the issues in the telecommunications industry. I'm really looking forward to the next workshop which takes place in my (near) home city of Omaha, Nebraska. I'm actually in Omaha now, I guess I was a couple weeks early with my visit.

After my final exams are finished next week, I will be taking a closer look at the Rural Association Plan, and I will start my International Telecom Policy Spotlight by focusing on--you guessed it--the failure of reverse auctions in other countries.

Cassandra Heyne
ruraltelecommentary@gmail.com

To read my review of the previous FCC Workshop on intercarrier compensation, click here.
To read my summaries of the USF Reform comments, click here for the RLEC perspective and here for the price cap perspective. 

USF Reform Comments Showdown: In This Corner, Price Cap Carriers Want to Have it All

Comments on USF Reform and the Connect America Fund were due April 18, 2011, commencing the second round of comments in this proceeding (following April 1st's ICC comments). For your reference, the following comment summaries are in response to:

In the Matter of:

Connect America Fund (WC DN 10-90)

A National Broadband Plan For Our Future (GN DN 09-51)

Establishing Just and Reasonable Rates for Local Exchange Carriers (WC DN 07-135)

High-Cost Universal Service Support (WC DN 05-337)

Developing a Unified Intercarrier Compensation Regime (CC DN 01-92)

Federal-State Joint Board on Universal Service (CC DN 96-45)

Lifeline and Link-up (WC DN 03-109)

I realize that I said I wasn't going to resume my USF comment summaries until after May 2, but I miraculously finished my rural smart grid synergies paper way ahead of schedule--so I figured I should squeeze in some price cap comments while I have some unexpected free time. Since most of the large carriers submitted rather long comments (as usual), I'm focusing on specific arguments that are either attacks on rural telecom providers or particularly worrisome. Onward with comments from Windstream, AT&T and Verizon..


Comments of Windstream Communications, Inc: 
"Price Cap Areas First" and 4 Mbps/768Kbps
Windstream starts out by boasting that "over the next two years, Windstream will mount one of the industry's most aggressive campaigns to improve rural broadband access" (Windstream, 2011, pg. 2). However, the company is very concerned about making sure that price cap carriers are able to access funding for the most uneconomic areas--"the balance of Windstream's unserved areas, however, are expected to remain unserved until the Universal Service Fund is reformed" (pg. 2). Windstream argues that areas served by small rural telecom providers have access to state-of-the-art broadband, while areas served by price cap carriers go without--because USF is directed, presumably unfairly, at the small carriers. Is it bad that rural customers served by small rural providers have great broadband? Apparently so, at least if you are a Windstream customer. Windstream believes that the current USF system has created a rural-rural divide, and "CAF needs to fully replace this broken funding regime with a program that responds directly to the cost of deploying and sustaining networks in all high-cost areas, rather than the size or business model of the companies serving those areas" (pg. 8). Windstream discusses the challenge of providing broadband to households that are not quite high-cost but not quite low-cost either--they support one-time targeted funding for these semi-uneconomic areas coupled with a minimum private investment requirement. Windstream proposes a "Price Cap Carriers First" plan, which includes combining High Cost Loop funding with the High Cost Model method, then redistributing funds based on wire-center costs. They argue for a capped fund and distribution through competitive bidding. Although the semi-uneconomic areas should only receive one-time support, price cap carriers should receive ongoing support to one provider per area--Windstream is clearly hoping to become that one provider in many rural areas. The other point I found alarming was that Windstream supports the 4 Mbps downstream speed target, but believes the upstream target should be reduced to 768 Kbps. Windstream argues that 4Mbps/768Kbps is more than sufficient for basic Internet applications (since all most people do is check their e-mail anyway), and it will help increase fiber deployment in second- and middle-mile transport--which they believe is more important than deploying high-speed fiber in the last mile. Windstream adds that 768 Kbps upstream is much cheaper than 1 Mbps, and the additional 232 Kbps "is arguably not worth the incremental additional deployment costs and added strain on the universal service fund" (pg. 18). Furthermore, Windstream references a paper by former FCC chief technologist (and my former professor) Dale Hatfield, to support its argument that 4Mbps/768Kbps is sufficient: "fiber optic cable is often regarded as being 'future proof,' and policy makers should focus on the immediate need to bring fiber significantly closer to the customer" (pg. 17). I do not take that statement as meaning that high-speed fiber should stop at the second-mile, but Windstream apparently does not want to commit to bringing fiber to the home at this time, at least until the price cap carriers are securely the sole recipients of USF. The most alarming comment by Windstream was: "The Universal Service Fund cannot continue to bear the strain of expansion of Fiber to the Home that is being deployed in some high-cost areas served by small rate-of-return carriers" (pg. 34). Ouch! Lastly, Windstream is in favor of eliminating all legacy high-cost support for CETCs in order to free up funds and limit the overall size of the fund, because funding competitive providers "has imposed irrational burdens on the consumers who contribute to the Universal Service Fund" (pg. 27).

Comments of AT&T: 
Sweeping Reforms for a "Relic of a Bygone Era"
AT&T opens with some real fighting words directed at the FCC, indirectly at RLECs. With a harsh tone and a hint of irony, AT&T insists: "The existing universal service and intercarrier compensation regime is teetering on the brink of collapse. Adopted in an era of local exchange monopolies, that regime is no longer adequate to the task of rationally promoting universal service even on the legacy [PSTN]. And it is utterly incapable of advancing universal service on the all-IP communications network of the future...The Commission's existing policies are actively hindering broadband investment and adoption in high-cost areas, denying millions of Americans the benefits of next generation technology" (AT&T, 2011, pg. 1). I actually laughed out loud while I was reading the introduction, because AT&T talks about how outdated and inefficient the current USF system is because it was designed for a monopoly-dominated industry, which is not what the industry is today. Really? Because last I checked, AT&T seems to be trying really hard to return the industry to its former AT&T-dominated glory. Regardless, AT&T wants sweeping reforms to abolish "monopoly-era perspective regulations" (pg. 3). New reforms should include market-based approaches and a procurement model, whereby providers are only subject to explicitly agreed upon service obligations, are not compelled to provide broadband but can on their own accord in exchange for universal service support, and this model would create certainty and encourage participation. The new-era USF should eliminate legacy COLR obligations because they are legal obstacles to the transition to an IP-based industry, and they inefficiently maintain both circuit and packet switched networks. New-era USF funding should be targeted specifically to uneconomic areas, and the FCC should adopt a hard deadline of January 1, 2017 for "all legacy high-cost funding and all state and federal legacy service obligations should be terminated, and only the broadband support mechanism should remain" (pg. 6). AT&T wants the FCC to adopt final rules for CAF now, in order to reduce regulatory uncertainty. Ironically, AT&T refers to a comment by CoBank (a primary lender for RLECs), possibly taken out of context: "Lenders don't lend against hypothetical costs and they don't get repaid in hypothetical dollars" (pg. 85, footnote 177). I do agree with AT&T's definition of broadband--they argue that the definition should be based on what consumers actually use now and in the near future, "rather than focusing on the definition of 'broadband' in a vacuum" (pg. 88). I think this is a really good idea, because imposing a static speed limit on the definition of broadband is going to cause the FCC more problems down the road than they are capable of dealing with, and it will pose significant harms to consumers. Unfortunately, AT&T adds that if the FCC does not take a "holistic" approach to the definition of broadband, 3Mbps/768Kbps is probably the best speed-based definition because it is cheaper than 4/1 Mbps and will "ensure faster and more efficient deployment to households in high-cost areas" (pg 94). The bulk of AT&T's comments were in response to the ICC component of the NPRM--which should have been submitted separately on April 1. However, nobody tells AT&T what to do, right? It is really scary to think about how AT&T basically wants the FCC to "eradicate" the entire current USF system, good parts and all (although AT&T doesn't think there are any good parts, clearly), and start over based on their recommendations--will AT&T's lobbying prowess and be enough to overshadow the united RLECs proposals, like the Rural Association Plan? I'm well aware that there will have to be some compromises in this rulemaking and the RLECs will need to make some sacrifices, but I'm really hoping that for once AT&T is not the sole winner of the USF battle.

Comments of Verizon and Verizon Wireless:  
Cap & Reduce USF, Eliminate Rate-of-Return
Verizon's comments are not quite as garish as AT&T's, but they are not without a plethora of dramatic accusations and insults to rate of return RLECs. Verizon argues that the current USF system "discourages carriers from updating their business models for the broadband era in order to hold on to legacy universal service and access subsidies" (Verizon and Verizon Wireless, 2011, pg. 2). This is a direct attack on rate-of-return carriers, which Verizon argues should be forcibly transitioned to price cap regulation. Verizon argues that no carrier deserves the privilege of a guaranteed 11.25% rate of return, and rate of return "rewards inefficiency, insulates carriers from competition, and gives these providers a disincentive to innovate," and "no carrier should be forever insulated from the effects of competition or relieved of the need to pursue innovation" (pg. 53-54). First, we saw in the Iowa Telecom Association comments that 85% of Iowa's nearly 150 rate of return carriers recovered below the 11.25% threshold, and 41% actually earned a negative rate of return. Second, I would like to see proof of one rate of return RLEC who is not concerned about, and is insulated from, competition--this is a ridiculous argument. Competition in the broadband era comes from many sources--including wireless, satellite and VoIP, and I don't think there is a single small rural carrier who isn't sufficiently freaked out about competition for their small number of customers. When you only have 2,000 customers, the impact of losing just one to a competitor is catastrophic. Finally, I would also like to see proof of the rate of return RLEC who does not feel pressure to innovate. In the broadband era, it is innovate or die. Time and again I have heard these accusations against rate of return carriers, yet I rarely see any solid evidence of the claims that rate of return carriers are inefficient and avoid modernizing their networks. As a result of competition, resisting innovation is business suicide. I'm sure there may be a few rate of return carriers who are guilty of inefficiently using universal service support, but it is certainly not the majority, nor should the majority suffer from the bad actions of the few. Anyway, back to Verizon: they argue that the high cost fund should be capped at the 2010 level of $4.3 billion, AND the FCC should "establish an expectation that funding decreases over time as broadband is deployed into unserved areas and technology drives greater efficiencies" (pg. 55). Verizon believes the fund will be reduced over time if the FCC adopts competitive bidding (which will reward carriers who can build broadband for the lowest cost--resulting in an unfair advantage to the largest companies with the greatest economies of scale, and resulting in very low quality broadband networks), targeted support to unserved areas, and only supporting one provider per area. Together, these actions will help the FCC "impose the kind of market discipline on the system that will shrink the fund over time" (pg. 58).

Well, there you have it--the perspective from the large carriers. It is about as diametrically opposite from the RLECs and rural carriers as it can be, further evidence that the USF reform NPRM has initiated an extremely bitter fight where it is almost guaranteed that nobody is going to rise from the rubble completely unharmed. Exactly who will be harmed remains to be seen, and I sincerely hope that the lobbying power and deep pockets of AT&T and Verizon is not a persuasive factor in decisions that will impact the entire country and telecommunications industry for years to come.

For my next installments, I will take a close look at the Rural Association Plan and the FCC's April 27 USF Reform Workshop (which I will unfortunately miss as I will be on a plane while it is happening). If you are just tuning in, you can read my summaries of the rural carriers here, and my summaries if the ICC reform comments here.

Hope everyone had a nice weekend, and don't forget to FOLLOW RURAL TELECOMMENTARY ON TWITTER!

Cassandra Heyne
ruraltelecommentary@gmail.com

Rural TeleCommentary is Looking Forward to Summer, New Features Coming Soon!

As much as I want to continue reading and writing about the USF comments, I have to take a short break from blogging for the next 2 weeks in order to focus on my studies and travel to Omaha for the Berkshire Hathaway 2011 Annual Meeting. However, I will be back with a vengeance come May 2 or so, and I will definitely resume summarizing the USF comments from the price cap carriers as well as take a closer look at the Rural Association Plan proposed by NTCA, OPASTCO, WTA, etc. I believe the FCC is also holding a USF workshop soon like the one they had for ICC, which I will certainly watch and report on once I have some time.

I have some exciting ideas planned for new features on Rural TeleCommentary, including an International Telecom Policy Spotlight. I have been so amazed at all the readers I have been getting from all around the world, I never expected to have such an international audience--it has inspired me to keep learning about international telecom policies. For this feature, I am planning to highlight telecommunications policies in specific countries that are either focused on rural issues or just plain interesting. I think it will be valuable and interesting for my American audience to learn about international telecom policies, and it will be very educational for me to dig deeper into some of the topics I see on the news or have studied in the past. I took an international telecom policy and business class last year and I really loved it--each week we had to pick a country and write about a recent telecom development in that country. I'm already planning to write about the plight of reverse auctions in India and Chile, the European decision on Net Neutrality, and rural broadband initiatives in Sweden, Japan, South Korea and many other countries. If you have any suggestions, please leave a comment or e-mail me! 

I will also continue writing about rural telecom/electric cooperative Smart Grid Business Opportunities, including an overview of the paper that I should be working on right now! Naturally, I will be keeping a close eye on the AT&T-T-Mobile Merger, Net Neutrality, Intercarrier Compensation, and Universal Service Reform so I can bring you the rural telecom industry perspective on these hot issues.

I'm looking forward to an exciting summer for Rural TeleCommentary! I don't think I am taking any classes (I anticipate that this spring is my last semester of classes--ever--unless I decide to take more "for fun"), so aside from working on my thesis project I should have plenty of time to dedicate to this website.

Cassandra Heyne
ruraltelecommentary@gmail.com