Thursday October 13th 2011 – As BroadbandBreakfast.com gears up for our panel on “Bringing Broadband Infrastructure to Rural Areas: Where is the Progress?” we have been taking some notes on the FCC’s efforts to reform the Universal Service Fund and listened in on Wednesday’s Senate Commerce Hearing on “Universal Service Reform – Bringing Broadband to All Americans.” Here is a summary of some of the talking points and some highlights from the hearing.

Senator Kerry (D-MA) made the first remarks at the hearing, and highlighted an issue that became a recurring topic of conversation in yesterday’s proceeding. Senator Kerry was concerned about the difference between what Massachusetts residents pay into USF and the amount of the subsidy that Massachusetts receives in return.

Kerry said, “Inequity might be ok if the fund is really efficient and targets only the communities that need it the most … it might be ok if Massachusetts still did not have large pockets of geography without access to broadband and spotty wireless service, but we still do.”

Senator Inouye (D-HI) followed, “the draft order is a concrete step toward sustaining investments already made and will encourage new investment in broadband infrastructure in unserved areas.” He added however that he was “concerned that the fund will not go far enough to serve native communities and remote insular areas.” Although the FCC proposal dedicates special fund for tribal communities, Inouye believed that the amount was inadequate. Hawaii and Alaska have indigenous populations that face similar hardships and should be eligible for similar universal service support. The Senator asked for specific recognition of the needs of remote insular areas.

Chairman Rockefeller (D-WV) began his comments by applauding the intentions of the FCC to move ahead on USF reform but then gave a word of caution to the audience and witnesses. “We have been talking about reform for over a decade…reform will pit sector versus sector and will affect how much different companies get paid…reform means vested stakeholders will be unhappy because they prefer the status quo…but that is the definition of reform.” Rockefeller also raised the issue that some states are underpaying and some are over paying and restated that the definition of insular is very important for Alaska and Hawaii.

In addressing the hurdles that lay ahead for the FCC Rockefeller stated “there are issues about wireless and areas where towers are very scarce…there are issues about consumer bills, consumers need more value for what they pay for… there are serious questions about how state commissions fit into the reform….accountability and deployment are critical…but we must remember that adoption is also an essential part of our mission. Waiting relegates too many communities to the wrong side of the digital divide.”

In her remarks, Senator Hutchinson (R-TX) expressed what she would like to see in the USF reform. 1) Ensure the fund is sustainable for consumers who cannot afford increasing fees, 2) The high cost fund should support carriers only where no one else is providing unsubsidized service 3) USF needs to become broadband centric 4) USF must be technology neutral and 5) the rates telephone companies charge each other need to be rational and providers need to have time to adapt to the new system.

In brief opening remarks Senator Mark Warner (D-VA) noted that the “minimum broadband standards of 4 Mbps may sound fast now, but won’t sound very fast in the near future. We need to lock in on standards that will change with technology.”

Senator Wicker (R-MS) ended the opening statements by making two points, First, USF reform needs to be adequately responsive to the needs of rural America and second the FCC needs to make sure that the best technology for each separate region gets the support. “Those that want to compete in rural areas should not be impeded by anticompetitive regulatory policy,” said the Senator.

Witnesses testifying in front of the Committee included Kathleen Abernathy, Chief Officer and VP of Frontier Communications, Mary Dillon, President and CEO of US Cellular, Michael Powell, President and CEO of National Cable and Telecommunications Association (NCTA), Shirley Bloomfield, CEO of National Telecommunication Cooperative Association (NTCA) and Philip Jones, Commissioner of Washington State Utilities and Transportation Commission.

Frontier Communications and other telecom companies were signatories and supporters of America’s Broadband Connectivity (ABC) Plan which was a proposal submitted to the FCC to reform the universal service and intercarrier compensation services.

NTCA’s proposal to the FCC, the RLEC plan for rural areas served by small carriers was combined with the ABC plan to make up what the organizations have referred to as the “Consensus Framework.” Bloomfeld noted that “no one in the industry is getting exactly what they wanted and everyone is sacrificing to promote reasonable reform.”

Abernathy gave her witness testimony on behalf of Frontier Communications touting Frontier’s commitment to deploying broadband to some of the hardest to serve areas in the nation and pointing out that Frontier had deployed high speed internet to 91% of the households in their rural footprint that covers 27 states. Abernathy presented the four principles encompassed in the ABC plan 1) transitioning the voice supported mechanism to one that supports broadband, 2) fiscal responsibility which does not increase the size of the current high cost fund 3) accountability where funded recipients are required to provide defined results and 4) market driven policies that will allow funds to be distributed quickly and efficiently. With respect to ICC Abernathy mentioned that the ABC plan will phase down access charges over a five year period and will do a better job of targeting the highest cost areas of the country.

Powell representing the cable companies focused on the issues of fiscal responsibility and competitive neutrality for providing services to the unserved. Powell also suggested that the “goal of reform for the ICC regime should be regulatory certainty that ensures fair treatment of competitors and encourages migration from circuit-switched to IP technology.” “A reform that treats VoIP calls the same as “circuit-switched”” he added. The former FCC chairman called for a cap on the high cost fund at its current level of $4.5 billion and stressed the importance of cable companies being able to compete with the companies that have traditionally been subsidized by the fund.

Dillon from US Cellular spoke on behalf of the mobile providers when she stated that the goal of the fund was to invest efficiently. She expressed her concern that the commission tends to favor wireline over wireless in a marketplace that is moving towards mobile. “Investing in wireless provides more job growth and can deliver speeds faster than required in the National Broadband Plan.” She added, “The decisions that the FCC makes will affect the development of broadband in the long run, and reform must put consumers first and recognize the growth trend of wireless and mobile technologies.”

Bloomfield stressed the point that all broadband networks whether wireless or wireline ultimately rely upon a wired network. “Wired networks provide the capacity to support the type of application that the Nation critically needs.” Bloomfield was adamant that small rural carriers have invested most efficiently in connecting consumers in places where the low customer density and vast distances would discourage almost any other provider. Without USF support to these small carriers, rural customers would pay substantially more for communications services and companies would cut investments in their networks.

Commissioner Jones from Washington State wrapped up the panelist testimony. Jones’ major concerns with the new proposal  the FCC may adopt are that the consumers will give up whatever protections they currently have under the state utilities regime and that the states may loose their role as the Carrier of Last Resort (COLR).

Jones applauded the FCC chairman’s statement reiterating the States’ “crucial role in protecting consumers as we move forward in the transition of this federal subsidy regime.” Additionally, Jones was concerned that “any approach that allows the FCC to assume exclusive jurisdiction over VoIP services is short-sighted and will likely only promote additional arbitrage opportunities…Any reform must benefit the consumer and not the bottom line of carriers, assure accountability, and maintain build out and service quality requirements – a role that States are best positioned to handle.”

During the questioning session, when Senator Hutchinson asked about ICC reform, Bloomfield made the case that “lowering ICC rates is one of the only ways to come to real reform,” but she warned, “that the reduction must come in the form of a 6 to 7 year glide cut. A flash cut would be detrimental to the reform efforts.”

In response to Senator Hutchinson’s claim that NCTA does not really cover the most rural areas, Powell countered that cable’s roots were founded in rural America and that they reach 93% of American households.

Senator Warner addressed Ms. Abernathy when he asked “why being an incumbent alone should give a company the right of first refusal under the ABC plan.”
Abernathy answered by pointing out that the issue at hand is how fast one can you build out in that market. The only infrastructure in place will be the wireline provider’s, and they will inevitably build out faster than the auction process will take. Powell did add later on in the hearing that the auction process needs to be in place, and that the Commission is already an expert when it comes to auctions. “At the end of the day being hasty and efficient are two different things” claimed Powell.

Senator Pryor (D-AR) continued the questioning about the right of first refusal by asking, what was the timeframe that was proposed?

“The right of first refusal model would identify high cost areas, calculate the service area and see if a provider wanted to provide support,” Abernathy explained. The provider would either have to take the money and build out or there would be an auction. Abernathy mentioned that the basic timeframe would include a requirement of accepting the money in the first year and a demonstration of the companies’ ability to build out.

Senator Pryor then added, “Does accountability include quality of service and commitments to improve technology?”

“Under Frontier accounting is done every month,” said Abernathy. She added that companies should always asses the quality of their services and assessments of progress should be made at least once a year.

Senator Ayotte (R-NH) raised a similar issue to the ones initially raised by Senators Kerry and Rockefeller when she asked about what is the equitable balance of the fund if New Hampshire is contributing much more to the fund than they are receiving.

Jones from Washington blamed this inequity on the way the system works, “some states are net donors and some are net recipients,” he said “the same thing happens with electricity and rural telephone.”