Why the USTA-Industry Deal Is Bad for Rural America

Why the USTA-Industry Deal Is Bad for Rural America

At the direction of the FCC, AT&T, Verizon, mid-sized carriers and some rural groups have been engaged in a closed-door negotiation, which is intended to be the basis for FCC action on USF/ICC reform. This process is totally contrary to the tenets of open government. The now-proposed “Industry deal” will be a windfall to AT&T and Verizon, and will be a disaster for rural America. The risk to small telephone companies, our communities, and our customers is unacceptable.

Rural companies support fair reform, and would support a plan modifying USF/ICC that conforms to the following principles:

1.  Adequate, non-discriminatory access pricing for both originating and terminating traffic;

2.  No pre-emption of state authority over intrastate rates, including intrastate access;

3.  Shared sacrifice within the industry;

4.  Compliance with the law;

5.  Reasonable cost recovery of existing investment;

6.  No unfunded mandates, explicit or implicit; and

7.  Cost recovery fairly allocated between the jurisdictions.

While we understand that the deal mechanics are fluid, the current formulation of the plan does not conform to the above principles and, therefore, must be rejected. The following summary outlines our concerns:

·  Adequate, non-discriminatory access pricing for both originating and terminating traffic. (1) A near-zero rate (or $.0007 as called for in the proposed plan) does not reflect rural costs. Setting a rate below cost will cause an overuse of facilities and a migration of special access to nearly free switched access. While the plan proposes to leave transport rates at interstate levels, we are concerned that these rates will not remain once the FCC reviews the plan. One of the pricing methodologies under consideration for rate setting is short-run incremental cost, which means that the only costs included in rates, switching or transport, are the incremental costs of operations. Rates will not recover any of the investment cost or contribute to the recovery of common costs. No capital-intensive industry can operate if all customers pay incremental costs. Therefore, if customers who purchase intercarrier compensation services receive incremental pricing, other customers who purchase special access, tandem, and local services must pay rates substantially above incremental cost. (2) Originating access is not addressed by the plan. Large companies will abandon retail long distance in rural markets or charge non-competitively high rates as underlying carriers for rural companies’ long-distance service. Rural companies will thus lose originating access, without receiving replacement funding. (3) In states where companies already have low intrastate earnings, there will be inadequate opportunity to recover intrastate costs, even though these companies are supposedly rate-of-return regulated.

·  No pre-emption of state authority over intrastate rates, including intrastate access. The proposed SLC increases plainly pre-empt state authority over local rates. Moreover, by agreeing to a pegged rate for switching, the rural associations are tacitly condoning pre-emption of the states, whether the rural associations explicitly agree with a pre-emption legal argument or not.

·  Shared sacrifice within the industry. Any reform plan that is financially unbalanced among industry sectors is unfair and unreasonable. The plan provides billions of dollars of windfall cost reductions to large companies, like AT&T and Verizon. Rural carriers, in contrast, would experience sweeping revenue reductions, with only minimal and short-lived increases in Recovery Mechanism (“RM”) and universal service support in return. While rural carriers’ rates are drastically reduced, the plan does not reduce the principal intercarrier revenue sources for the large carriers, including tandem service, wholesale toll services, and wireless roaming fees. Moreover, even within the rural industry, the burdens will be substantially higher for high-cost companies than for low-cost companies, as the rural plan moves money from the high-cost companies to the low-cost companies. Exacerbating the problems with the rural plan is the most recent NECA tariff filing, which increased the highest rate band’s transport rates 69% and switching rates 22% in order to keep the low-cost companies in the pool. This tariff change means that many high-cost companies will not receive RM. Other high-cost companies will receive less in RM than was originally expected. Furthermore, our advisors tell us that there will not be more federal money available. Even assuming that the FCC makes money available initially, there is no guarantee of long-term funding.

·  Compliance with the law. The 1996 Telecommunications Act requires access to advanced telecommunications and information services in all regions of the Nation. Additionally, the Act requires that all consumers have access to telecommunications and information services that are reasonably comparable in rural and urban areas, both in terms of quality and price. By reducing intercarrier compensation without increasing the funding available to RoR carriers for infrastructure deployment, the plan fails to meet this requirement.

·  Reasonable cost recovery of existing investment. The plan co-mingles new broadband investment with existing voice investment for purposes of universal service recovery. Limited funding will result in insufficient cost recovery for existing investments. The FCC has already stated its intent to bridge the “rural/rural divide” by assisting price-cap companies that have failed to deploy broadband,[1] even if the policy takes funding away from RoR companies that have already deployed broadband infrastructure. This policy erroneously supposes that existing infrastructure will not require future upgrades and is already paid for.

·  No unfunded mandates, explicit or implicit. The FCC will likely impose new middle mile and broadband deployment requirements on RoR carriers. As the transition from voice to broadband service occurs, provider of last resort obligations may also increase carrier requirements, without a commensurate increase in funding.

·  Cost recovery must be fairly allocated between the jurisdictions. Under this plan, states that have not taken action will not be motivated to do so and states that have taken action (early adopters) will be motivated to raise intrastate intercarrier compensation rates and dissolve state funds in order to receive federal money. A company’s risk will be significantly increased if the federal government funds all cost recovery. Changes in the political environment in Washington could put nearly all of a company’s revenues in jeopardy. By supporting this plan, the rural industry will be abandoning the state regulators. Companies may face substantial fallout from such an action.

Aside from the secretive nature of the negotiation, we have several other concerns with the process. First, the FCC has not agreed to accept the entire plan without modifications. Once the rural trade associations sign onto the plan, it will be extremely difficult to renege, even if the FCC later makes substantial unfavorable changes. Second, AT&T and Verizon have controlled the plan write-up and have not shared details of financial models. Even though the group plans to file this week, our rural negotiators have not yet seen a copy of the plan. There will be insufficient time for review before we are asked to accept the terms. In the telephone industry, millions of dollars are lost or gained by interpretation of words. We understand that the write-up will be general in nature, which only increases our risk.

The AT&T plan is simply too one-sided to be viable, and is grossly unfair to our customers. We recognize that the FCC is eager to move forward on USF/ICC reform, but we should not be forced to participate in a process and agree to a deal that hurts rural America. Do the right thing—reject this proposal and recommit to the principles that have served us well for over 100 years.

Usficcindustrydealsummary072611-1.docx

7/26/2011 8:55 PM

[1] Of the exchanges that do not have access to broadband, 82% are served by price-cap carriers and 18% by rate-of-return carriers.