Results tagged “rate of return carriers”

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.