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Mercatus Institute

FCC Set to Press Forward on 'White Spaces,' But Pulls Comprehensive Overhaul of Telecom Payments

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News: Special Election Day Report

By Drew Clark, Editor, BroadbandCensus.com; and Drew Bennett, Special Correspondent, BroadbandCensus.com

WASHINGTON, November 4 – The Federal Communications Commission on Monday deleted one of the four big-ticket items that it planned to tackle at its Tuesday open meeting, but resisted pressure to spike a rule that would force broadcasters to share the vacant spaces between television channels.

In pulling FCC Chairman Kevin Martin’s plan to overhaul both the universal service fund and inter-carrier compensation system – or the rates that telephone companies pay each other to connect calls – Martin ran up against a four-commissioner revolt against his plan.

In dueling press releases on Monday, Martin blamed his fellow commissioners for seeking a one-month delay of the plan. He said that they will not “be prepared to address the most challenging issues” come December.

The other four commissioners – two Republicans and two Democrats – cited the need to circulate the comments more widely. “Any reform proposal [must] receive the full benefit of public notice and comment – especially in light of the difficult economic circumstances currently facing our nation,” said the four commissioners.

But Martin hasn’t backed down yet from his goal to force broadcasters to share the “white spaces” on the television dial. Broadcasters’ fears of interference have kept stations far, far, apart on the television dial. For example, in Washington, no more than four of the 21 channels between 30 and 50 are occupied: 32, 45, 47 and 50. That leaves 17 available as white spaces.

The channel numbers vary from city to city, and will likely change with the transition to digital television (DTV) on February 17, 2009. Still, a lot of vacant frequencies remain vacant in the airwaves.

Martin has resisted pressure from broadcasters and their allies – including the major football leagues, Broadway producers and mega-churches, including House Energy and Commerce Committee Chairman John Dingell, D-Mich. – and is apparently siding with the high-tech companies, including Google, Microsoft, Phillips and others, that seek to use the frequencies for transmitting broadband signals over low-power devices.

The commission is apparently set to accept a report of the agency’s Office of Engineering and Technology that would set technical parameters for the operation of such devices.

Additionally, the FCC is apparently also pressing forward to authorize the merger of mobile provider Sprint with Clearwire, a providers of wireless broadband, and the merger of Bell company Verizon and regional telecommunications company Alltel.

Pushing for Telecommunications Changes on Election Day

The universal service fund and intercarrier compensation (USF and ICC) regimes combine to dictate, to a large extent, the revenue and subsidy flows between large, integrated telecommunications providers that serve comparatively wealthy and urban populations on the one hand (Verizon, for example) and smaller rural carriers who serve comparatively lower-income customers in areas where deployment and service costs are high on the other (like Century Tel).

Among the key policy components of the inter-carrier compensation and universal service regimes the prices that rural carriers charge to terminate wireline voice services, the methodology by which subsidies are extracted from urban carriers to contribute to the USF, and the expansion of services that are eligible to receive universal service funding.

While most telecommunications stakeholder groups agree that inter-carrier compensation rates and universal service funding methods need to be changed, there was a great deal of discontent over the impact that Martin’s proposed rule changes would have on carriers that serve low-income and rural consumers, often at the highest costs.

Additionally, critics charged that Martin was rushing to overhaul a portion of telecommunications regulation that could severely impact the landscape of the industry for years to come – on the heels of his departure from the commission with a new presidential administration.

The National Telecommunications Cooperative Association reacted positively to news that the USF/ICC item had been pulled. The group, which represents rural telephone co-ops, praised the four commissioners “for recognizing the importance of due process and in providing all interested parties the opportunity to fully review and comment on the proposal.”

OPASTCO and the Western Telecommunications Association, which also represent rural carriers, were dismayed by the news. “OPASTCO and WTA believe that a delay in the vote for the comprehensive plan, as negotiated by the two associations,… will have extremely negative consequences for rural carriers and the rural customers they serve,” the organization said in a statement.

“We worked in good faith with the FCC, communicating with all of the FCC commissioners’ offices to ensure that each office understood the negative affects a plan without these modifications would create,” OPASTCO President John Rose stated.  “Delaying the vote from Nov. 4th will make it virtually impossible for the FCC to achieve such a beneficial comprehensive plan for rural areas.”

Randolph May, President of the market-focused Free State Foundation, said: “It is disappointing that the FCC won’t be voting on Chairman Martin’s plan to fundamentally reform the intercarrier compensation and universal service regimes. In this instance the public has had adequate notice and opportunity to comment on the substance of the proposals put forward by Chairman Martin.”

Wireline Regime Reform: Averting a Byzantine Failure

In 2006, FCC Commissioner Michael Copps commented that inter-carrier compensation “is Byzantine…it’s broken and has been dissolving quickly.” A recent discussion on Capitol Hill sponsored by the Free State Foundation also labeled both regimes “archaic” and featured Commissioner Deborah Taylor Tate who started the session by agreeing that “archaic is certainly an apt description” and submitted that changes to inter-carrier compensation and universal service are long past due.

Following Commissioner Tate at the Free State Foundation’s event, Gerald Brock, Professor of Telecommunication and of Public Policy and Public Administration at The George Washington University, described the long and tortured history of three of the open dockets involved that date back anywhere from seven to twenty years.

Intercarrier compensation rates, for example, were first structured in 1984, when the break-up of “Ma Bell” (AT&T) separated incumbent local carriers from long-distance and regional providers and dictated high access rates that these carriers would charge each other to complete a telephone call that passed over multiple providers’ wires. While these regulated rates are significantly lower today, they still disproportionately favor rural incumbents and are not sensitive to more sophisticated forms of service (like Internet service) that have evolved since the break-up.

The inter-related universal service regime, designed to fund the build-out of rural telephone lines, is also criticized as being cumbersome and punitive by nationally integrated providers who must pay the bulk of the fees. Meanwhile, the services that the fees fund have not evolved either and many telecommunications experts have cited a need for high-speed Internet services to be integrated into the regime.

In a September 22, letter to the FCC, the Mercatus Institute presented results from a variety of studies that show the antiquated access rates to be burdening consumer welfare with at least a $1 billion deadweight loss, as recently as 2002. The Mercatus researchers and other groups concerned with the economic burden placed on regional carriers and their comparatively urban and wealthy customer-base by the current regime recommend the Commission minimize the access charges on price-sensitive services like long-distance wireline telephone calls and wireless calls in general.

In a separate letter, Verizon Communications recommended the Commission set a reduced flat rate access rate for all carriers, all jurisdictions and all service types. In an effort to recover lost revenue for high-cost rural carriers, the regional carrier also recommends the Commission increase the monthly charge for an access line, a reform also referred to as a “numbers based approach” to Universal Service Fund reform.

Given this platform for potential reforms to be examined by the Commission, many interest groups also wanted to see the Universal Service Fund expanded to include broadband services.

Many Industry Groups Want Change to Wait

While an array of industry stakeholders agree with the likes of Tate and Brock that change is overdue, many perceive Martin’s recent efforts to be rushed and overly-ambitious.

“I am concerned that expedited consideration of this draft proposal won’t allow sufficient time for interested parties to review and comment on its impact,” Sen. Lamar Alexander, R-Tenn. said in a recent letter addressed to the Commission and signed by 60 other lawmakers.

The National Association of Regulatory Utility Commissions (NARUC) echoed the sentiments of this letter and urged the FCC in a press release last week to “allow more time for due process and public comments before it acts on a sweeping proposal that will revamp intercarrier compensation and the Universal Service Fund.”

NARUC, whose members include the state regulatory commissions that play a distinct role in setting compensation and universal service rates along with the FCC, is particularly concerned with the possibility that the federal commission will make the most drastic changes to rules that determine interstate rates that carriers charge and that currently fall under the jurisdiction of state regulatory bodies.

Without an official public statement regarding the exact rule changes that will be considered on November 4, NARUC and others are left to speculate and the association has recommended a stay of 90 days on any decisions and the issuance of a public notice “summarizing the…discrete issues…and proposed legal theories.”

Some groups have even levied cynical charges against the commission that imply a rush towards massive reforms on November 4th that might slip under the national radar in the midst election day.

“A ‘phony crisis’ is being manufactured by FCC Chairman Kevin Martin and some on Capitol Hill who want to change the USF fee on long-distance to a flat per-line charge that would increase phone taxes  by up to $700 million for 43 million U.S. households, most of them low-income seniors, rural residents and minorities,” said the report by the Keep Universal Service Fund Fair Coalition.

On the other hand, the agency faces a November 5 deadline to resolve issues concerning the termination of service bound for a dial-up internet providers.

Leveling the Playing Field or Tilting it Further?

Whenever the agency follows-through on the intercarrier compensation and universal service funding mechanisms, then the revenue flows between providers in the telecommunications industry could be dramatically shifted.

NARUC asked the Commission to consider whether reforms to the regimes will “increase wireless/cellular or broadband deployment in unserved or underserved high cost areas, or actually undermine deployment” and whether they will “put upward pressure on local rates.”

Some say that a “numbers based approach” to universal service reform may lower some consumers long-distance rates and it would also, according to Verizon’s letter, raise the monthly flat rate for owning a residential phone line from $6.50 to $10.50.

Consumer groups claim that the reaction to such a rate-hike by consumers in low-income areas would be to forgo telephone adoption altogether, cutting off a segment of the population from vital communication services, even in the case of an emergency.

Groups like the Mercatus Institute, however, counter with studies that reveal consumers to be more price-sensitive to long-distance charges then to flat rates for line ownership and are pushing for a numbers-based approach to reduce deadweight losses to overall consumer welfare that would be complimented by programs that ensure emergency connectivity for consumers who lack access otherwise.

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