Rural carrier associations, price cap carriers defend Universal Service reform proposal

Representatives of rural carrier associations and large price cap carriers defended their joint Universal Service reform proposal (CP: Rural carrier associations confirm agreement with large carriers on broadband USF funding) on a conference call with reporters today. The call seemed to be driven largely by concerns about that proposal raised by a range of non-traditional carriers including wireless and cable companies.

“Our proposal represents the only comprehensive detailed solution,” said Windstream Senior Vice President of Government Affairs Mike Rhoda on the call today. “The companies supporting [it] comprise the vast majority of people . . . that serve rural America today and we understand the challenges and tradeoffs better than those who have not.”

The rural carrier/price cap carrier proposal has appeared to be the frontrunner in the FCC’s plan to transition today’s voice-focused Universal Service program to one focused instead on broadband—and supporters appeared determined to keep the proposal on track for adoption by the FCC before the end of the year.

“It’s important to adopt [this proposal] soon,” said Mike Skrivan, Vice President Regulatory for Fairpoint Communications. “It’s good for consumers and the commission and makes good business sense for the industry.” The opportunity, he said, is “unlikely to come again,” calling the proposal “the last clear chance for the commission to implement this in time to avoid severe industry disruption and . . . bring broadband to millions of homes that would not otherwise see it.”

The joint proposal calls for inter-carrier compensation reforms to kick in beginning in January 2012, with USF reforms beginning in July 2012.

AT&T: Wireless opportunities could be substantial
In an effort to allay concerns that the joint proposal favors incumbent landline carriers, AT&T Vice President of Federal Regulatory Affairs Hank Hultquist noted that opportunities for wireless carriers are greater than they might initially appear. Although the joint proposal allots only $300 million specifically for mobility, Hultquist reminded listeners that wireless carriers also would have the opportunity to participate in reverse auctions to award broadband Universal Service funding for areas where the incumbent is a price cap carrier (CP: AT&T, Verizon and other price cap carriers send broadband USF proposal to FCC. “Wireless carriers have the opportunity to compete for over $700 million,” Hultquist said.

That’s a good point—and one that Connected Planet has noted, but perhaps not sufficiently emphasized in earlier commentary on this topic (CP: Cable and wireless associations protest proposed USF reforms).

According to the FCC, about two-thirds of households that cannot get broadband are in areas where the incumbent is a price cap carrier—and if price cap carriers decline to offer broadband at the calculated level of support or if they have not already deployed broadband to 35% of the people in the area, funding would be awarded based on a reverse auction—and wireless carriers could bid in that auction.

It’s important to note a couple of other points in connection with the joint proposal and wireless:

1. To meet the proposed 4 Mb/s downstream, 768 kb/s upstream minimum broadband speed will require 4G—a service that, with few exceptions, only the largest carriers have deployed to date.

2. In any unserved areas where a reverse auction awards broadband Universal Service funding to a wireless carrier, the proposed plan will not fund landline broadband. Some might argue that it would be preferable for people in these unserved areas to also have a landline option, but the FCC has made clear that it will not consider increasing the overall size of the Universal Service fund—and with that constraint, there isn’t enough money to fund both technologies.

Implications
So what are the implications of the joint proposal’s plan involving unserved areas in price cap territories?

Price cap carriers such as Windstream and Fairpoint that don’t have their own wireless networks are likely to propose landline solutions for unserved areas where they are the incumbent—and the ability to leverage existing infrastructure in adjacent areas should help minimize their costs, which means landline broadband could have a good shot at winning in those areas.

But I wouldn’t be at all surprised if AT&T and Verizon compete for broadband Universal Service funding through their wireless, rather than their landline units. In many cases, they would likely have a better shot at being the lowest bidder using wireless rather than landline.

The Big Two probably wouldn’t be the only wireless companies bidding for broadband Universal Service funding. At least one other national carrier, Sprint, is also likely to participate-- and depending what happens in upcoming months, you might also see T-Mobile and/or Light Squared taking part. Small rural wireless carriers also are likely to participate.

But I suspect economies of scale could give the two largest wireless carriers a cost advantage over other national competitors and over smaller rural wireless carriers. And that could mean that ultimately, broadband Universal Funding would continue to go largely to the companies that receive Universal Service today—with the Big Two perhaps getting a larger percentage of total funding than they do today. The reason for the Big Two’s share increase is that the proposal would shift a higher percentage of funding toward areas where the incumbent is a price cap carrier—and that’s where wireless has the best chance of being the winning technology.

The upshot is that under the joint USF reform proposal, although the technology may change, the pool of USF recipients probably wouldn’t change much at all. As Connected Planet has previously noted, the proposal essentially asks existing recipients to do more without additional funding, which leaves little room for new players.