NARUC Calls on FCC to Suspend High-Cost Support Methodology, Echoing Industry Advocate Concerns

State regulators asked the FCC Friday to suspend an updated method of determining high-cost support from the USF (http://xrl.us/bnsr4j). The motion comes after months of debate and allegations from national and state entities that the year-old reform will hurt companies due to its unpredictability. “Clearly [the FCC model] is going to have the most impact on high-cost, rural-type carriers,” NARUC Telecom Committee Chair John Burke told us. It will impact states differently depending on how many such companies they have, he said. The FCC’s methodology of quantile regression analysis was introduced in its November USF/intercarrier compensation order, adjusted in April and determines more than 700 companies’ high-cost support as of this July. Other NARUC telecom committee members are “concerned,” Burke said.

NARUC’s request for suspension, directed at FCC Chairman Julius Genachowski, echoes a NARUC resolution approved in July. The resolution urged suspension “until questions about [the methodology’s] impact and appropriateness are resolved in collaboration with State commissions” (http://xrl.us/bnsnf6). It also asked the FCC to refer USF and intercarrier compensation reform decisions to the Federal-State Joint Board on Universal Service, a request NARUC reiterated in its Friday motion. The FCC should have consulted the joint board on quantile regression analysis, Burke said now.

This methodology has chilled Wisconsin telcos’ broadband investment, the state’s largest telecom industry association said late Wednesday (http://xrl.us/bnsnfm). The Wisconsin State Telecommunications Association conducted a survey of its roughly 40 members within the past two weeks and found half have delayed or canceled broadband investment projects due to fears over FCC uncertainty. Members’ confusion fixed on the agency’s quantile regression analysis. “Multimillion-dollar investments are being put on the backburners,” Executive Director Bill Esbeck told us. “It’s become clear [to telcos] that the opportunity for penalty exists.” The penalty is possible in spite of companies “doing the right thing” in making broadband investments, he added. A company canceled a project this summer due to concerns, he said.

The FCC disputed the notion that its actions have slowed broadband deployment. “The Connect America Fund is already connecting tens of thousands of residents across rural Wisconsin to broadband, providing $38 million this summer to cut the number of unserved in the state in half,” an FCC spokesman said. “And that is just the beginning.” The fund doesn’t increase “overall spending thanks to savings earned from greater fiscal responsibility and accountability,” he added: The FCC reforms include “reasonable limits on expenditures” and demand telcos “that spend dramatically more than their peers to come into line.”

The “penalty,” as Esbeck phrased it, refers to unrecoverable costs that would fall above the 90th percentile in model estimates, a number based on what hundreds of other companies are doing in a given year and not immediately apparent, he said. The FCC said in April that although some unpredictability exists due to reliance on national averages, the new model is “more predictable for most carriers” than what came before (http://xrl.us/bnsq2z). It created a multiyear plan to phase in the changes to support, and dismissed fears that support would “fluctuate radically.” About 500 study areas would experience more support and “roughly 100” would see $65 million in support reductions, the order estimated. The model goes after outliers and will affect only 120 to 130 companies and not the other 500 or so, Wireline Bureau Deputy Chief Carol Mattey said at the summer NARUC meeting (CD July 25 p8). But Wisconsin telcos are experiencing “a significant level of anxiety” over the FCC’s methodology, Esbeck said. It’s fraught with uncertainty because companies can’t predict what percentile they'll fall into, which determines their support, he said. “It’s a moving target based on what other companies do and don’t do.” Companies learned of the methodology’s alleged problems in recent months as “the dust has settled” from the USF order and they began formulating five-year business plans, he said. Telcos are now reluctant to invest, “playing it safe” in the face of a “very unclear picture,” he said.

USTelecom asked for reconsideration of the FCC methodology in June and “those concerns remain to this day,” Senior Vice President of Law and Policy Jonathan Banks said. The FCC needs to deliver a “fact-based demonstration” illustrating why the methodology is predictable, he said. Companies need a “substantial time horizon” in investments, and these concerns “are not going away,” said Banks. The FCC will likely take the NARUC motion “seriously” and USTelecom will “continue to advocate” on the model, he added. “We're at the point where simply saying it’s more predictable is not really adequate to the gravity of the issue.” The FCC methodology is “a national concern” that “persists,” said Michael Romano, NTCA senior vice president of policy. The models don’t work in their current form, he said. Companies “don’t know how it'll change year from year” in what’s “an issue nationwide,” he said. The FCC determines the high-cost support through benchmarks looking at what 700 companies have invested in two years prior, but “it’s a benchmark in name only,” Romano said. NTCA CEO Shirley Bloomfield described on her blog Thursday (http://xrl.us/bnsnit) “angst that is being created.,” citing the Wisconsin survey and a similar one from Iowa.

The need to correctly outline boundaries is also crucial -- if they're not outlined, companies may be “dramatically underfunded as a result of that,” Burke said. He questioned whether the federal government is more qualified than the states to weigh in on boundaries. There’s a rush for a “one-size fits all” way of operating, he said. If the model isn’t done right, it'll have “serious effects” on companies and states, said Burke. Wisconsin officials had described such FCC methodology fears to him months earlier, he added. More than 650 telecom providers signed a letter to the FCC protesting the model this summer (CD July 16 p6) and a U.S. congressman recently introduced a bill to nullify the FCC’s ability to enforce the methodology (CD Sept 24 p24).

The FCC has presented “an open door” for discussion, but the problem will continue to grow the longer it persists, Romano said. The model’s unpredictability will be “increasingly unattractive” for investors and lenders and be a problem for rural consumers that want broadband, he said. The model will “protect the consumers and businesses who pay into the fund, while freeing up more funds for broadband,” the FCC spokesman said.