April 16, 2009 5:32 PM

Broadband Grant Derby: And the Winner Is . . . The Rural LEC! (Unless . . .)

After diligently not poring over the many ( no doubt, well thought out) Comments submitted Monday to the NTIA in response to its request for comments on its implementation of the Broadband Technology Opportunities Program, and casually perusing the FCC's Notice of Inquiry ("NOI") regarding a "National Broadband Plan", I can now tell you the answer to who gets the $7.2 billion in broadband funds.  The winner is  . . . the same firms who now take the majority of the USF high cost/low income fund:  the rural LECs and their progeny. 

How do I know?  Because the politics haven't changed, and when big, entrenched interests are at stake, the status quo is the safest course of action. When I say the "winners" are the "rural LECs", I mean no disrespect at all toward the firms that I generically paint with that label; it's just a shorthand way of referring to the firms that are currently subsidized via the USF high cost fund.  My only point is that firms respond to incentives, and firms that currently benefit under the status quo will continue to prosper, because it seems unlikely that the regulation-related incentives will even be clarified any time soon, much less changed in a way designed to promote financially-risky broadband deployment.  Said differently, for all the questions the FCC asks in its NOI, the key to the success of the broadband stimulus grants (or any other broadband plan) hinges on the one key question that the Commission declined to ask, much less address: the jurisdictional classification of VoIP.

What does the "jurisdictional classification of VoIP" even mean?  For those of you that aren't super-telecom-geeks, then congratulations on your lack of obviously-disordered priorities, and let me explain further.  "Jurisdiction" determines which regulator gets to regulate (or refrain from regulation).  If a service is "intra-state", then the state regulators have exclusive jurisdiction.  Likewise, if a service is "inter-state", then the FCC has exclusive jurisdiction.  These terms are important for this discussion, because the prices that firms charge each other to deliver phone calls to the recipient of the call are regulated either by the states, or by the FCC.  This delivery service is called "terminating access" and it is a "telecommunications" service.  Generally speaking, the prices for inter-state terminating access (regulated by the FCC) are much lower (maybe a half cent per minute), than the prices for intra-state terminating access (rates of 7 cents, or more, per minute are not unusual). 

Also, only "telecommunications" traffic is subject to this telecommunications service charge.  Some services, like pure data (e.g. surfing the web) are "information services", and do not fall under this regime at all.  So, if you send an email to your friend, who is served by another company, then neither company pays the other for "delivering" the "information service."  Some services--like email over Internet Protocol--are clearly information services.  Other Internet Protocol ("IP") services have yet to be fully classified.  Voice over Internet Protocol is the most important of these, because it is the voice service of the future.  If it is an "information service", then it doesn't pay (and can't charge for) terminating access.  If it is an "interstate" service, then the FCC is the sole regulator, regardless of whether the FCC declares VoIP to be a telecommunications or information service.  On the other hand, if VoIP is a "telecommunications service", then it would be subject to paying (and collecting) access charges, including intrastate access rates.

So the question of the jurisdictional nature of VoIP is really important, because right now, in its unanswered form, it separates the grant-seekers into two groups: one group, which can estimate its revenues, and costs (both fixed and variable), with a fair degree of confidence.  These are the incumbents.  The other group--the prospective new entrants, public-private partnerships, etc.--does not have this same advantage.  The "new" group can estimate revenues, and fixed costs, but variable costs (i.e., whether or not access charges apply, and, if they do, are they inter-state or intra-state?) become much more difficult to estimate--both now, and in the future.  When the name of the game is bidding on risky projects (a group that would logically include building broadband to "unserved" or "underserved" areas), the advantage has to go to the party with a better handle on its potential exposure, and, right now, that party is the incumbent. 

It goes without saying that the FCC could better promote new broadband deployment by drawing in more grant-seekers, but we can't take the Commission seriously until it takes exclusive jurisdiction over IP services.  Why?  Because, only by taking exclusive jurisdiction can the FCC control, or limit, the variable cost exposure a new entrant might face.  Otherwise, it is always possible that state compensation rules and/or rates could change, with the effect of imposing unanticipated cost increases on the new broadband providers.

Recall that in one of my first posts, I congratulated Chairman-to-be Genachowski, and then offered up a very simple two-part agenda that, I believed, would make him great.  Specifically, I implored the Chairman-select to pursue this agenda with the exhortation that, "[i]f you're going to be a bear, be a Kodiak."  The first piece of the simple, two-part agenda was to classify VoIP.  Is it jurisdictionally interstate, mixed, or intrastate?  Is it a telecom service, or an information service?  These are questions the Commission has been sitting on for well over 5 years, and VoIP is a service that broadband begets.  Simply put, more broadband equals more VoIP.  If the regulators can't solve for VoIP, they can't expect firms (non-profits or for-profits) to fund marginal broadband-related business plans (i.e., business plans to serve "unserved" or "underserved" areas).

So, at the risk of being too repetitive, let's reconsider the question. "Why, again, is the regulatory classification of VoIP so important to the success of the current broadband grants, or a national broadband plan?"  Imagine a fixed wireless company, or rural cable provider, even an existing rural ILEC or CLEC extending its network with grant money to promote broadband penetration.  Further assume that this new broadband provider displaces some revenues from customers located in areas already served by the biggest recipients of USF money.  Now, we know that all of the "new", stimulus-created traffic will be IP traffic, because, as noted, broadband begets IP traffic. 

If the question of VoIP jurisdictional classification remains unresolved, it is easy to imagine a well-intentioned state regulator reacting to the panic in the eyes of a community stalwart LEC with a plan to "share" some of the federal stimulus money by classifying intra-state VoIP to PSTN ("public switched telephone network") traffic as a telecommunications service subject to an asymmetric (only paid to the PSTN owner) intra-state terminating access rate of 10 cents a minute.  In other words, an otherwise-profitable (but maybe only marginally-profitable) business built on broadband stimulus funds, can easily become unprofitable if the FCC does not take action eliminate variable cost risk by acting preemptively to classify all IP services as exclusively interstate services.  Otherwise, the best laid plans of the President, Congress, and the agencies, will go awry--and in a perfectly avoidable, yet perfectly predictable, way.

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