Federal Telecom Policy and Rural America

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Federal Telecom Policyand Rural America

• October 6, 2002
• Des Moines, Iowa
• Glenn H. Brown
• gbrown_at_mcleanbrown.com

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Agenda

• 1. The FCC and State PUCs
• 2. Major Trends in Telecommunications
• 3. The Telecommunications Act of 1996
• 4. Regulatory Issues Facing Rural America
• Universal Service
• Broadband Deployment

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Federal Communications Commission

• Established by the Communications Act of 1934
• Five Commissioners
• Appointed by the President and Confirmed by the
  Senate
• No More Than 3 From The Same Political Party
• Five Year Terms
• President Designates Chairman
• Six Bureaus
• Organized by Function
• Handle Day-to-Day Responsibilities
• Total Staff of 1755 (Per 1997 Annual Report)
• Highly Qualified
• Generally Lawyers, Accounts Economists

4
The FCC
5
How the FCC Works

• Telecom Rules in Code of Federal Regulations
  (CFR) Title 47
• FCC Processes to Make and/or Modify Rules
• Notice of Inquiry (NOI)
• FCC Considering Possible Action
• Requests Input From Interested Parties
• Written Comments, Reply Comments and Ex-Parte
  Presentations
• Notice of Proposed Rulemaking (NPRM)
• FCC Proposing Additions or Changes to Rules
• Written Comments, Reply Comments and Ex-Parte
  Presentations
• Requests for Public Comment
• Requests Comment on Proposals and/or Papers
  Presented to Commission
• FCC Processes to Enforce Rules

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When/How to Work With the FCC

• Before Visiting With Commissioners or Bureau
  Chief be Sure Issue is On the Radar Screen
• Work With the Lower Level Staff First
• Best Time to Present Views is Before Issue is Put
  Out For Comment
• Opportunity to Shape the Notice
• Ex-Parte Filings Not Required
• File Complete and Informative Comments and
  Replies
• Use Facts and Data
• Make Ex-Parte Contacts to Reinforce Your Advocacy
• Support Your Position
• Address the Issues Presented by Other Parties
• Form Coalitions When Possible
• Contacts Prohibited During Sunshine Period

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State Regulatory Commissions

• All 50 States and DC Have Commissions
• From 3 to 7 Commissioners
• Commissioner Selection
• 39 States Appointed
• 12 States Elected
• Staff Size From 11 (RI) to 800 (CA)
• Varied Responsibilities Including Telecom,
  Electricity, Gas, Water, Taxi Cabs, Insurance,
  etc.
• Varied Rules and Procedures

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State Commissions
9
Major Differences
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U. S. Telephone Penetration
11
U. S. Telephone Penetration
12
U. S. Telephone Penetration
13
Revenue Trends by Service
14
Total U.S. Telephone Lines
15
Technology Substitution
From To
Local Toll Pay Phone Wireless
800 Service FAX Internet
2nd Lines Wireless Broadband
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Percentage of CLEC Lines
17
Number of CLECs
18
Number of CLECs
19
High Speed Lines
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Number of High-Speed Providers
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Number of High-Speed Providers
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Major Industry Trends

• Explosive Growth in Wireless
• Declines in Other Areas
• Long Distance
• Pay Phones
• 2nd Lines
• Increasing Burdens From Universal Service
• Emergence of Local Competition
• The Importance of the Internet
• The Digitalization of Everything
• It is truly becoming a world of 0s and 1s

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Industry Dynamics

• Evolving Technology and Markets
• The Mania of the Late 1990s
• Huge Debt Loads
• Cut-Throat Competition
• Plunging Margins
• Bankruptcies
• The Comoditization of Telecommunications

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1996 Telecom Act

• Major Objectives
• Incumbent Local Exchange Carriers (LECs) Must
  Open Their Networks To Competitors
• Interconnection
• Wholesale provisioning of services
• Unbundled Network Elements
• RBOCs Long Distance Upon Meeting 14-point
  Checklist
• FCC Must Provide For The Provision Of Universal
  Service
• Rural Areas have comparable services and rates to
  urban areas
• Schools And Libraries have access to advanced
  services
• Broadband Development
• Forebear from regulation where necessary

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1996 Telecom Act

• Other Major Provisions
• Creates a Federal/State Joint Board to recommend
  universal service solutions to the FCC (254(a))
• Recommendation due November 8, 1996
• FCC to act on recommendations by May 8, 1997
• Defines Eligible Telecommunications Carriers
  (ETC) for receipt of universal service funds
  (214(e))
• Differentiates between Rural LECs and
  Non-Rural LECs
• Based on size (I.e. lt 100,000 lines) and area
  served (3(37))
• Different market opening requirements (251(f))
• NRLECS shall have multiple ETCs (214(e)(2))
• States that any Federal universal service support
  should be explicit (254(e))

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Section 214(e)

• 214(e)(1) Eligible Telecommunications Carriers
• Must offer defined universal services
• Must advertise in media of general distribution
• 214(e)(2) Designation of ETC
• The Commission may for rural companies, and shall
  for non-rural companies designate more than one
  ETC
• Before designating additional ETC for a rural
  company area the State Commission shall find that
  the designation is in the public interest
• 214(e)(6) ETCs not Subject to State PUC
  Jurisdiction
• Added 12/1/97
• The FCC shall, upon request, designate such
  common carrier that meets the requirements of
  214(e)(1)
• Before designating additional ETC for a rural
  company area the FCC shall find that the
  designation is in the public interest

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Obligations of Carriers

• 251(a) All Carriers
• Interconnection
• 251(b) All Local Exchange Carriers
• Resale
• Number Portability
• Dialing Parity
• Access to Rights-of-Way
• Reciprocal Compensation

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Obligation of Carriers

• 251(c) Incumbent Local Exchange Carriers
• Duty to negotiate (252 provides specifics)
• Interconnection at any technically feasible point
• Unbundled access to network elements
• Resale at wholesale rates
• Notice of changes for transmission and routing
• Physical collocation of equipment
• 251(f)(1) Rural Exemption
• Rural carriers exempt from 251(c) until
• Bona fide request
• State Commission finding of public interest

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Section 254(b) - Universal Service Principles

• The Six Pillars of Wisdom
• (1) Quality and Rates
• Quality services should be available at just,
  reasonable and affordable prices
• (2) Access to Advanced Services
• Access to advanced telecommunications and
  information services should be provided in all
  regions of the Nation
• (3) Access in Rural and High Cost Areas
• Consumers in all regions of the Nation should
  have access to services (including advanced
  services) at rates that are reasonably comparable
  to those in urban areas

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Section 254(b) - Universal Service Principles

• The Six Pillars of Wisdom
• (4) Equitable and Non-Discriminatory
  Contributions
• All telecommunications providers should
  contribute to the preservation and advancement of
  universal service
• (5) Specific and Predictable Support Mechanisms
• There should be specific, predictable and
  sufficient Federal and State mechanisms to
  preserve and advance universal service
• (6) Access to Advanced Services for Schools,
  Rural Health Care and Libraries
• Elementary and secondary schools and classrooms,
  health care providers, and libraries should have
  access to advanced services.

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Other Section 254 Provisions

• 254(a) Joint Board Created
• Recommendation in 9 months
• FCC to complete proceeding in 15 months
• 254(c) Universal Service is an Evolving Level of
  Service
• The Joint Board from time to time will
  recommend modifications
• 254(d) Telecommunication Carrier Contribution
• Every provider that provides interstate telecom
  services
• 254(e) Universal Service Support
• Only ETCs (per 214(e)) may receive support
• Support must be used only for the provision,
  maintenance and upgrading of facilities and
  services for which the support is intended
• Any such support should be explicit

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Other Section 254 Provisions

• 254(f) State Authority for Universal Service
• States can adopt different standards but must
  provide funding
• 254(g) Interexchange and Interstate Services
• Rural and high cost areas no higher than urban
  areas
• 254(h) Schools, Libraries and Rural Health Care
• 254(i) Rates Must be Just, Reasonable and
  affordable
• 254(j) Lifeline Assistance Not Affected
• 254(k) Subsidy of Competitive Services Prohibited
• Universal Service shall bear no more than a
  reasonable share of joint and common costs

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Major Universal Service Issues

• Growth of the Fund
• Contribution Methodology
• Portability
• The Non-Rural-Rural Problem
• The Parent Trap Rule

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Growth of the Fund

• The Universal Service Fund has grown
  significantly in recent years due to
• The Schools and Libraries Fund
• MAG lifting of funding cap
• Access Reform Proceedings
• CALLS/IAS
• MAG/ICLS
• Portabilitiy
• The Fund will experience additional growth in the
  future due to
• The Non-Rural-Rural Problem
• Rural Broadband Initiatives

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Contribution Methodology

• Section 254(d) provides that funding will be paid
  by all interstate telecommunications providers
  on a non-discriminatory basis.
• Interstate end-user services assessed 7.2 of
  revenues
• Many carriers are marking-up their assessment
• ATT surcharge is 11.5
• It is not politically possible to grow this much
  more
• Interstate toll revenues are declining
• Proposals before the FCC
• Bifurcate Rural High-Cost from Schools and
  Libraries fund
• Change assessment to a per-connection fee
• Expand funding base to include Internet services
• Assess both Interstate and Intrastate revenues

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USF Portability

• Portability in Rural Areas Requires Public
  Interest Finding
• FCC and Many States Take a Simplistic View
• Competition Public Interest
• In Reality, the Public Interest is More Complex
• Portability has Benefits and Costs
• Benefits
• Greater Choice, Higher Quality, Lower Price
• Incentives on all providers to serve customers
  and be more efficient
• Costs
• Increased Fund Size
• Decreased Network Efficiency
• The Public Interest is Only Served When Benefits
  Exceed Costs

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CETC Support is Growing
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The Top 20 CETCs
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The Customer List Issue

• Wireless Carriers Generally Have an Established
  Customer Base in Rural Areas
• These Customers Were Obtained Under Business
  Plans That did not Include High Cost Funding
• Should This Existing Base Receive Funding?
• Significant Additional Funding Requirement
• Questionable Consumer Benefits
• States Generally do not Regulate Wireless Prices
• How Will Wireless Carriers Meet 254(e)
  Obligations?
• Scarce Universal Service Funds Should Bring New
  Services to New Areas

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Network Efficiency Issues

• Commissioner Martins Question
• I also note that I have some concerns with the
  Commissions policy adopted long before this
  Order of using universal service support as a
  means of creating competition in high cost
  areas. I am hesitant to subsidize multiple
  competitors to serve areas in which costs are
  prohibitively expensive for even one carrier.
  This policy may make it difficult for any one
  carrier to achieve the economies of scale
  necessary to serve all of the customers in a
  rural area, leading to inefficient and/or
  stranded investment and a ballooning universal
  service fund. It is thus with real pause that I
  sign on to an Order that may further this
  policy. Separate Statement of Commissioner
  Martin to the MAG Order, May, 2001
• In Some Subset of Rural America is Telephone
  Service a Natural Monopoly?

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Other CETC Issues

• What Level of Funding is Appropriate for CETCs?
• Current Rules Use Wireline Incumbent Cost
• ILECs Incur Costs That Wireless Carriers Dont
• Presubscribed Interexchange Carrier
• Unlimited Local Usage
• State and Federal Regulation
• FCC Will Have Proceeding Later This Year
• How Will CETCs Meet 254(e) Certifications?
• Funds Only Used for Intended Purposes
• Should ILECs Propose Proactive 254(e) Agenda?
• FCC is Planning NPRM on Portability

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Parent Trap Rule

• The FCCs Proxy Model Provides Limited Support to
  Non-Rural LECs
• Rule 54.305 Provides That Party Acquiring an
  Exchange Receives the Same Support as the Seller
• Over Half of High-Cost Rural Lines Nationwide are
  Served by Non-Rural LECs
• Unless Something is Done With the Parent Trap
  Rule Consumers in Legacy-RBOC Communities Could
  Become Digital Have-Nots
• The Non-Rural-Rural Problem

43
Broadband

• Major Change in Focus
• Kennard Commission focused on Unbundled Network
  Elements (UNEs)
• Powell Commission has changed focus to
  facilities-based competition
• Regulation of Broadband
• Is it Telecommunications or Information
  Service
• Should different provider types be regulated
  differently?
• ILECs
• Cable
• Should Broadband services contribute to Universal
  Service?
• Rural Broadband
• What does 254(b)(3) mean?
• Customers in all areas of the nation shall have
  access to
• How will rural broadband be funded?
• Can it even be funded if it is an Information
  Service