Results tagged “high cost fund”

March 16, 2011 7:53 PM

The Best Role for States on Broadband and USF Reform

Today is the one year anniversary of the National Broadband Plan.  The Broadband Plan recommends, as a catalyst for broadband deployment, that the FCC undertake long-needed reform of its Universal Service Fund ("USF") and intercarrier compensation regimes.  Last month, the FCC released a Notice of Proposed Rulemaking ("NPRM"), proposing to reform both programs.  Noticeably absent in either the National Broadband Plan or the USF/ICC NPRM is any defined ongoing role for the states in either the national goal of spurring broadband deployment, or under a reformed USF/ICC regime.
 
There is an important role for the states in a new, broadband-centric, regulatory system.  But, to get there, the FCC has to put consumers at the forefront, considering that the purposes of its proposed reforms are to make high cost support more efficient, and further extend broadband into high cost areas.  It is possible to accomplish both objectives, while giving the states a meaningful role.
 
The communications visionary (and "patron saint" of Wired Magazine) Marshall McLuhan, observed, "[m]ost of our assumptions have outlived their uselessness."  The assumption that the FCC should distribute money to carriers, based on the carrier's optimal utility, in order to satisfy consumer demand is an assumption that has outlived its uselessness.

How would a better plan work?  First, get rid of the notion that state participation should be accomplished through state regulators.  They, too, are trapped by assumptions that have outlived their uselessness.  And, to be sure, the assumptions underlying the distribution of High Cost subsidies are useless--the FCC makes that case quite persuasively in its NPRM.

Consider this statement of Indiana Commissioner Larry Landis, on reforming the low income fund, "[t]oo little attention has been paid to the financial health of the RLECs (and mid-size companies) and the importance of existing High Cost support." Jt Bd Refferal Order, Sep. Stmt. of Commissioner Larry Landis.  This sentiment is antagonistic to nation's technological goals, and offers no solutions. 

While, concern for the welfare of the rural consumer is important, rural consumers' rights are a part of the law, and not up for debate.  On the other hand, no carrier has a right to be inefficient and still be in business.  So what's the answer?

I outline the long form here:Abstract_Managed Broadband Markets.doc.  The short answer, though, is to involve those parts of the state that are responsible to the NTIA for spending the states' broadband mapping/BTOP money.  Accountability and efficiency are built into their directives, plus they already have to report on their success.  But these state agencies can contribute more.

There are no real "markets" for rural consumers in high cost parts of a state, but the state BTOP point-of-contact is a natural market maker.  These agencies could function in the role of broadband development authorities.  They already know where open access local and backhaul networks exist, and they could work with rural broadband providers (including ILEC, cable, wireless, and satellite providers) to put together efficiently sized demand RFPs and match them with bidding (or reverse-bidding) supply consortia.

But, what about the "financial health" of the rural carrier?  Some, funded with the almost $40 billion or so in High Cost support since 1998 (Jt. Bd. 2010 Monitoring Rept., Chart 3-1) will, no doubt, be efficient parts of any bidding consortium.  If not, why must consumers care?

Much greater sums of competitive fiber investment--arguably more important to the health of a broadband economy--were not protected from market risk.  During the "telecom bust" of the early 2000's, an estimated $2 trillion in stock market wealth was destroyed as a result of over-investment.  Is it foolish to think that RLECs, too, may have "over-invested"?  It would be shocking if they didn't when, since the modern High Cost fund began dispersing subsidies, the "prime rate" for borrowing has been comfortably below the RLECs government-protected rate of return of 11.25%.  Why should the privately-owned, publicly-subsidized, rural LECs fare any differently from their privately-funded brethren?

States have an important role to play in the reform of the USF and stimulating broadband deployment.  However, the FCC should update its assumptions about what state agencies they find most helpful to accomplishing the Commission's goals.  The NTIA points of contact for broadband mapping/grant purposes are ideal.  By playing the intermediary between "suppliers" of high-cap backhaul, and the most efficient aggregations of local demand, the state agencies could--using "real" markets--determine the most efficient way to bring the best broadband/voice service to the most consumers.  

February 18, 2011 4:12 PM

USF/ICC Reform: The Customer Can't Carry the Carrier

Maybe our relationship isn't as crazy as it seems
Maybe that's what happens when a tornado meets a volcano
All i know is i love you too much to walk away though

"Love the Way You Lie" Eminem (ft. Rihanna), 2010

Last week, the FCC released a Notice of Proposed Rulemaking ("NPRM") in yet another attempt to address its crazy relationship with the tremendously (perhaps, needlessly?) complex, and intertwined, issues of Universal Service Fund ("USF") and intercarrier compensation ("ICC") reform.  The NPRM is long, but well-written.  It does a good job of explaining why these two subsidy systems are in need of drastic reform, and it proposes some thoughtful ideas for reform in both the near term and longer term. 

Sadly, though, that's the "tell"--the "near term"/"longer term" goals, with no immediate action--even on the so-called "immediate reforms."  Yep. I hate to say it, but within a few paragraphs--you know the Commission loves these old relics (both the regimes and the many small, inefficient carriers they make everyone else subsidize) way too much to walk away.  Before you even get to the Executive Summary--though the words are lovely--you can't help but think, "Love the Way You Lie."

Don't get me wrong, it's not just this Commission. These regulatory structures have been crumbling--quite publicly--for some time now, and no FCC has done anything about it (including this FCC--for its first year and a half and counting).  But, because of this tendency towards delay, there is no longer a "longer term", and the FCC cannot save, or reform, the USF without "sudden changes" or "flash cuts" that the FCC "intends to avoid." NPRM, ¶12.  Sudden changes are inevitable, and rate of return carriers can either act quickly to participate in a version of reform that guarantees them a chance, but no guarantee, of surviving, or the rate of return carriers can resist reality and the time it takes for the FCC to adopt reforms will be there only transition period.

Why do I say this?  Because "near" term was 4-5 years ago, and "long" term is just as fast as the Commission can act--probably 1 ½ -2 years at the soonest.  Let's consider the notions of "near term" and "long term" in the historical contexts of the need for USF/ICC reform.

The NPRM cites a few factors that make the reform of the USF/ICC regulations so urgent.  Prominent among these factors are observations about the market, and observations by politicians about the state of the USF.  First, the FCC points to the trend of the acceleration of the deterioration of the PSTN, once supported by its now-antiquated, and always-artificial, LEC (intrastate) and IXC (interstate) distinctions. NPRM ¶8.  The PSTN, so rapidly in decline, contains both the purpose of, and presumption for, the USF/ICC models we have today.  The NPRM also notes the observations of Congressman Lee Terry and former Congressman Rick Boucher that "the Universal Service Fund is broken." NPRM, ¶9.  But, here's the thing: neither of these precipitating factors is new. 

A Long Time Coming

As early as 2002, barely upon completion of the USF reforms of the 1996 Act, the FCC's Common Carrier Bureau ("CCB") Chief testified before the Senate that the USF structures just put in place a few years earlier would need to be evaluated and changed frequently.  Then CCB Chief Dorothy Attwood, explained that,

price competition, technological substitution, and development of new service bundles and new services--are precisely the kind of developments Congress sought to stimulate when it passed the 1996 Act. . . . Nonetheless, they strain traditional regulatory distinctions. They present challenges to our universal service framework.  They require us to consider difficult questions. Testimony at p. 4.
What about Representatives Terry and Boucher?  Well, Congressman Terry introduced his first USF reform bill, H.R. 1582 almost 8 years ago, in 2003.  Reps. Terry and Boucher were working together on universal service reform at least as early as 2005.  So the observation by Reps. Terry and Boucher that the USF is broken is hardly new information. 

The NPRM also notes the importance of clarifying the regulatory treatment of VoIP for intercarrier compensation purposes.  Is this a new problem?  Nope, been there, done that (as far as asking the questions go). The FCC just celebrated its 7th anniversary of adopting its first VoIP classification NPRM.

Transition? Maybe When We Had Time

Finally, let's go back to the fundamentals.  Paragraph 8 of the NPRM says it all with just a few statistics,

traditional wireline telephone (switched access) minutes plummeted from 567 billion in 2000 to 316 billion in 2008.  From 2008 to 2009, interconnected Voice over Internet Protocol (VoIP) subscriptions increased by 22 percent, while switched access lines decreased by 10 percent.
  
By 2008, the number of switched access minutes were almost half of what they were in 2000.  By 2010, the number is almost certainly half (or less) of the number of switched minutes in 2000.  The Commission's recent Local Competition Report ("LCR") provides additional evidence of the trend away from the PSTN.  Between 1999 and 2009, ILEC switched access lines (including CLECs using ILEC lines) had declined from around 189 million in 1999 (LCR, Table 1) to about 116 million in 2009 (LCR, Fig. 4 + Fig. 8).  Interestingly, the total Universal Service Fund size in 2000 ($4.4 billion) was about the same as the size of the high cost fund alone today ($4.3 billion).

Add to this the information in the figure 6, ¶165 of the NPRM, which notes that at the end of 2010, rate of return carriers collected $2.0 billion to serve 5.8 million access lines.   If current trends hold (10% line loss/year), these same carriers will be serving 2 million less lines by the end of 2014.  If the President's $5 billion plan to bring wireless broadband to unserved areas  is successful, then line losses will be much more drastic around the time the FCC adopts comprehensive reform.

Unless reforms are equally drastic, the "have nots"--and thanks to the National Broadband Map, you now know who you are--will (one hopes) grow weary of paying a higher and higher USF "tax" on their phone bill (currently 15.5%) to subsidize the increasingly irrelevant "haves."  Contribution reform (another long-ignored concern) is not yet in discussion.  So, by the time comprehensive USF reforms are adopted, it's a safe bet that unless something changes the inefficient rate of return LECs won't have enough customers/lines to make a transition plan even worth the candle.  If these carriers choose to cling to antiquated entitlements, they will be choosing to accept the fate of the entitlements they love.

However, there is a message of hope for rate of return LECs.  They have a (very) little time left which they can use to work with the Commission to modernize USF in a way that allows them an opportunity (but no guarantee) of remaining relevant.  They also have the outside chance of getting efficient on their own.  Either way, a transition will be unnecessary.