High-Cost Cap, Reverse Auctions Could Hurt Broadband Deployment Efforts, Say Rural LECs

The FCC should “immediately” adopt an interim cap for high-cost support and then impose a long-term cap, said Verizon. “Virtually all government programs operate on a budget, and so should the high cost fund.” But the National Exchange Carrier Association opposed capping high-cost support, saying that would “harm rural broadband deployment efforts.” Caps also require “fundamental changes to existing separations and access charge rules,” it said. “Rural [incumbent carriers] need to continually upgrade their networks because the broadband connections that are available to consumers today will soon be considered antiquated and insufficient,” agreed the Organization for the Promotion and Advancement of Small Telecommunications Companies.

Reverse auctions would “significantly impair” rural local exchange carriers’ ability to get loans needed to build and maintain networks, said the Rural Telephone Finance Cooperative. “From a lender’s perspective, unless a revenue stream can be projected for the entire life of the loan being considered, it leaves a ‘hole’ in the business plan’s financial projections,” it said. “The possibility of relatively sudden and possibly total loss of high-cost universal service support at some point in the life of the loan creates an insurmountable level of uncertainty that the borrower will be able to service its debt.”

Reverse auctions could be an effective tool for providing support to unserved areas, but not for existing service areas, said Qwest. Auctions in served areas could harm existing and future investment and service quality of the network, it said.

Only wireless carriers should have to play in reverse auctions, said Embarq. “Growth in the [USF] fund is predominantly a wireless phenomenon,” it said. Also, auctions “could be an effective means for eliminating redundant support for wireless carriers,” it said.

Verizon advocated a combination of competitive and reverse auctions, funded by money used today for wireless high-cost support. Under the Verizon plan, carriers would bid competitively for one-time construction grants, and then participate in reverse auctions for ongoing subsidies to maintain the network.

But competitive bidding is a bad idea for USF, said the Rural Independent Competitive Alliance. RICA listed mostly administrative concerns, but said: “Competitive bidding… will give the large ILECs the power to destroy any small company they happen to think is in their way.”

Meanwhile, wireline carriers seemed to have few reservations about killing the identical support rule, which bases subsidies to competitive carriers on the incumbent’s costs. The proposal got backing from OPASTCO, NECA, RICA, the National Telecommunications Cooperative Association and the Independent Telephone and Telecommunications Alliance. Don’t stop at killing the identical support rule, said Verizon. It urged the FCC to “promptly eliminate support to ETCs from the funds that were intended to replace access charges.”

Less consensus was apparent on Joint Board recommendations to divide high-cost support, creating separate subsidy programs for broadband, advanced mobility and providers of last resort. ITTA, whose members include Qwest and Embarq, supported the proposal. The Telecommunications Industry Alliance backed a technologically and competitively neutral broadband fund using funds currently going toward narrowband technologies.

AT&T backed broadband and advanced mobility funds to encourage carriers to build out fixed and wireless broadband in unserved areas. Under an AT&T proposal, the FCC would dole out infrastructure funding using an “auction-like application process” to pick the carrier, AT&T said. The carrier would get subsidies “for a specified period,” it said. Money for the funds would come from “an infusion of new dollars” and money saved from reforming the current high- cost fund, it said. The FCC would also “shift all legacy wireless funding to the advanced mobility fund,” AT&T said.

Verizon opposed including broadband and wireless in the high-cost program. “These proposals would only further strain the fund,” it said. Verizon also opposed a Provider of Last Resort fund, saying the FCC should instead follow the Joint Board’s recommendation to “cap high cost support to incumbent [local exchange carriers] at 2007 levels.”

RICA opposed a broadband fund, saying it “would be unlikely to advance the goal of universal broadband service… In particular, the Joint Board fails to demonstrate that broadband services are subscribed to by a ’substantial’ majority of residential subscribers.” RICA also had concerns with a wireless fund. It urged the FCC to continue USF support for wireline competitive eligible telecommunications carriers (CETCs). Killing wireline CETC support but adding wireless is “bad public policy that will serve to further degrade service in rural areas and prevent the deployment of broadband-capable facilities,” it said.

The FCC shouldn’t extend support to broadband unless it simultaneously phases out analog network support, said the Benton Foundation, a public interest group. “As has been done with digital television, the goal must include not only a transition to newer, better digital services, but must also include a plan for moving away from older and limited analog services,” it said.

Broadband should be included in the definition of universal service, the National Telecommunications Cooperative Association said. But the FCC should “dismiss consideration” of creating three separate funds until it kills the identical support rule, it said.

The FCC shouldn’t limit a last resort providers fund to incumbent local exchange carriers, said the National Cable & Telecommunications Association. That proposal “assumes, incorrectly, that markets that were uneconomic for competitive entry in the past will remain that way indefinitely,” it said. Instead, the FCC “should take a more market-oriented approach.”

States Weigh In

NASUCA was sharply critical of the general approach the FCC has followed on USF reform, calling it “disjointed.” NASUCA said the FCC must immediately impose a funding cap as recommended by the joint board “which would allow adequate time for the commission to weigh the issues before it, and to make appropriate decisions to protect the universal service funding that guarantees essential telecommunications service for all Americans.”

Reverse auctions would hurt rural Americans relying on the fund, NASUCA. A single-winner auction is the only way to guarantee the program’s sustainability, it said. Proposals by the FCC “do not seem to be focused on results,” the group said, adding that the agency seems unable resolve most fund issues and is “easily distracted by new or peripheral issues while older and more fundamental issues remain unresolved.”

Regulators from the District of Columbia, Delaware, New Jersey, Virginia and Pennsylvania, filing jointly as the Mid-Atlantic Conference of Regulatory Utility Commissioners (MACRUC), said ratepayers in their jurisdictions “have paid more than $2 billion in excess of what we have received from the federal Universal Service Fund in just four years (2003-2006) with an increase of over 80% from 2005 to 2006 alone… Not only must the size of the Fund not increase any more, it must be reduced. Otherwise, the consumers of net contributor states such as the MACRUC states, that already pay more than their fair share for the laudable public policy goal of universal service, will be further burdened with no tangible benefit in return.”

The Missouri Public Service Commission said the reform proposals avoid a central problem. “The Joint Board fails to propose any significant reform measures for high-cost support currently provided to incumbent LECs who presently receive approximately three-fourths of current high-cost support disbursements,” the agency said. It questioned reverse auctions’ utility. “The MoPSC has basic reservations about using reverse auctions to determine high-cost support because reverse auctions will probably only work well if multiple bidders are participating,” it said. “Ironically, if multiple bidders desire to serve a specific area it is questionable if providing high-cost support is truly necessary to promote the principles of universal service identified in the Telecommunications Act.”

The New Jersey Board of Public Utilities generally endorsed reverse auctions, but was less enthusiastic about creating broadband and wireless funds. “Adding broadband to the list of supported services at this time would exacerbate the current problems with the high cost portion of the fund, particularly the size of the fund,” it said. “Adding a separate wireless fund is similarly troubling since the FCC and the Joint Board have already concluded that the main reason for the explosive, out-of-control growth in the fund is due to funding increases to competitive ETCs who are virtually all wireless carriers.”

The Maine Public Utilities Commission said reform must include killing the identical support rule. “The identical support rule has resulted in the support of multiple voice networks in many areas due to increased support provided to competitive eligible telecommunications carriers,” the commission said. “This has greatly increased the size of the high-cost fund without resulting in significant expansion of service.”