USF Agreement Under Attack from Small, Mid-Sized Wireless Carriers

Rural Cellular Association President Steve Berry sharply criticized the Universal Service Fund/intercarrier compensation proposal formally filed by a U.S. Telecom-organized group of carriers at the FCC Friday (CD Aug 1 p1). He argued it’s a wireline-centric plan that largely leaves wireless in the cold. Berry called the proposal “a joke.” RCA represents small to mid-sized carriers. Satellite broadband companies, who also were not part of negotiations on the proposal, also criticized it Monday. Consumer groups and states’ rights advocates expressed concerns, while executives representing small and mid-sized cable operators expressed support for elements of the plan.

Six large wireline carriers filed the proposal, joined by a “complementary” filing from the three largest rural telecom associations. The commission was working on a public notice seeking comment on the two filings. An FCC official told us Monday that commission staff was confident they could find a way to accommodate the rest of industry by the time an order is ready for the October meeting. A second FCC official said more will be known about where Chairman Julius Genachowski is headed on the proposal when the FCC releases the notice. “I don’t think this is the end-point by any means,” the official said.

"The groups that haven’t signed on represent a pretty important segment of the FCC’s universe,” said MF Global analyst Paul Gallant Monday. “But there’s also some momentum behind the [USTelecom] proposal, so those groups may feel compelled to just push hard over the next two months and take the best deal they can get.”

"It’s a wireline-centric position that really bears no vision whatsoever for the future,” Berry said in an interview Monday. Genachowski has put significant emphasis on the importance of wireless broadband, Berry said. “You would never believe that, based on anything that the Wireline Bureau has proposed so far to the FCC,” he said. “They only are concerned about wireline companies."

The plan proposed Friday only provides about $100 million of $4.5 billion divided up to wireless, with a limited $300 million mobility fund, Berry said. “Wireless pays in three times more than it takes out of the USF.” The main goal of the plan, he said, appears to be keeping rural wireline carriers from going under financially before they can pay off Rural Utility Service loans. “That’s what this is really all about,” he said.

The Wireline Bureau doesn’t appear to take seriously that wireless offers a clear substitute for wireline, Berry said. “Wireline telecom companies are the only companies losing subscribers faster than the Postal Service,” he said. “What they're doing is taking DSL or copper and replacing it as fast as they can with fiber. They're not adding consumers. ... They're just improving their network. In the end, they realize they're going to be backhaul providers for wireless companies.” RCA and its members will be contacting FCC commissioners and their staff lobbying against the phone company proposal, Berry said. Berry noted that a year ago, he wrote Genachowski a letter asking that the chiefs of the Wireless and Wireline bureaus be designated as co-equals in heading up a USF reform order, but never got a response.

Cellular South was also sharply critical of the plan. The proposal “claims to reflect an industry consensus on universal service reform,” the carrier said. “However, that is only true to the extent it represents the interests of [USTelecom’s] members, the legacy landline telephone companies. Cellular South has not been involved in the development of this proposal, nor has the Rural Cellular Association, the only industry association representing the interests of nearly 100 competitive wireless providers and their customers."

"While we look forward to reviewing the final details of the plan, it appears to advance several key goals, particularly in the areas of intercarrier compensation, and moves the ball forward on a number of important issues,” CTIA said in response to the plan. “We will work with the parties and Commission on these issues and on the creation of a robust, ongoing mobility fund that will facilitate the wireless broadband goals of the President and the Commission.”

"The main goal of the ... plan is to deliver robust broadband service to Americans living in areas so costly to serve that there is no business case to provide service,” said David Fish, spokesman for the group that submitted the USF plan, in response to Berry. “In these areas, a universal service subsidy is necessary, but the plan recognizes these subsidies are ultimately funded by consumers, and that service must be delivered efficiently and within a budget that does not allow for funding multiple competing providers. The ... plan would create a technologically neutral fund that contemplates roles for wired, wireless and satellite broadband providers."

Satellite broadband provider WildBlue is also very much opposed to the phone company proposal, General Counsel Lisa Scalpone said. Under the proposal, satellite broadband funding would also come from the $300 million mobility fund. The “proposal isn’t USF reform at all,” said Scalpone. WildBlue would rather see satellite broadband given a chance to compete for the funds to provide service in high-cost areas, even if that leaves the possibility of satellite winning nothing if it isn’t the best service for the lowest cost, she said. The Friday proposal effectively “insulates” the carriers from competition and with the speed that satellite and wireless services are evolving, the proposal may reflect a reluctance to compete with wireless and satellite bids for providing service to rural areas, she said. WildBlue would formally respond with its concerns about the proposal if the agency puts it out for public notice, she said.

"It’s the same wasteful and inefficient USF program we have today, except that [USTelecom] coalition members have now guaranteed themselves $4.2 billion every year in taxpayer dollars,” said Scalpone. “The calls for quotas against satellite, preferences for incumbents, and prohibitions against competitive bidding in most areas are hallmarks of bad policy. One hopes that the FCC and Congress will recognize this brazen proposal for what it is, and instead call for competition and consumer choice in the new USF program. USF should be about the best broadband for consumers, not preserving service areas for inefficient incumbents."

The proposal is “fundamentally flawed” and doesn’t serve legitimate public interest goals Maine’s Public Advocate Office Senior Counsel Wayne Jortner told us. He urged the FCC to “listen primarily to those who really represent consumers when evaluating the extent of the “consumer benefits” in this or any other proposal.

Most troubling to Jortner, the telecom plan proposes to slash intercarrier compensation rates and make up for lost revenue by increasing flat charges on the bills of consumers and new subsidies for carriers that may be already highly profitable. Customers’ dollars should not be used to subsidize profits, he said. “Just as low-income customers must pass a means test in order to get support, carriers should live by that same principle,” Jortner said. The carriers claimed that the lower intercarrier compensation rates will result in lower long-distance prices, but “we believe that, under current market circumstances, most of those savings will be kept by the carriers and not passed on to consumers in the form of lower rates.” Low-volume customers -- most who are poor -- will see higher rates just to have a basic service, Jortner said. And they won’t have an opportunity to enjoy savings on long-distance even if lower rates were to result, he said.

Cable operators generally support the USF deal worked out by major phone companies and backed by some rural ones, said executives from large and small cable entities. The American Cable Association and NCTA each said they'll file comments on last week’s USF plan with the FCC, once the agency seeks notice on it.

It may take a while, perhaps longer than the October time frame Genachowski is targeting, before the FCC has a draft order on comprehensive USF and intercarrier comp reform to vote on, said a cable lawyer representing the ACA. Work by industry is “going forward,” and the commission seems poised to move on the issue as well, but “there are number of issues” including those of a “practical” nature to be considered in the next few months, said Tom Cohen of Kelley Drye. “We've all got to move forward and sharpen our focus."

The USF priorities for big and small operators overalp on some issues, industry executives said. “There’s a lot of common concerns amongst the entire cable industry -- large and small,” said Vice President Ross Lieberman of the ACA. A major priority for operators of all sizes is on preventing USF from funding broadband and other overbuilding of existing telecom companies, industry executives continued to say (CD July 27 p7) this week. An NCTA spokesman declined to comment beyond that group’s filing, posted Monday in docket 10-90 (http://xrl.us/bk3t67).

The plan now before the FCC is “an incumbent LEC plan” to deal with USF and intercarrier compensation, Lieberman said. The task ahead for large and small cable operators is to participate along with other USF stakeholders on the issue at the FCC, he said. “There are good policy rationales to make sure it encompasses the interests of cable as well. And I think that’s where this is moving.” A positive of the plan submitted to the commission is that by subjecting VoIP to USF, it could end entirely or reduce the number of disputes between telcos on so-called Internet Protocol “self help” on billing matters between companies, Cohen said. “If the rules are clear, and supposedly it will be for VoIP, then it won’t be an issue,” he said of self-help. “That’s a real value if we can get this done."

Meanwhile, Jortner said the plan also diverts substantial dollars to broadband carriers -- without any real obligations to provide new service in currently unserved areas that was not already planned based on private business decisions. This proposal would increase what the already profitable big carriers get from USF, he said. The Connect America Fund should be used primarily to fund new broadband connections for currently unserved customers and to support access for low-income consumers, he said. Jortner said he had trouble with a proposal “buried” in the document that he said is a proposal to end carrier-of-last-resort obligations, putting potentially millions of customers at risk of losing their basic phone connection. The plan proposes federal preemption, “a heavy-handed way to take away from states the right to protect their own citizens and assume universal connectivity at affordable prices, even in rural areas,” he said: It would also prematurely free carriers from service-quality obligation.