FCC ICC/USF ORDER: APPEALS AND OPTIONS

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The Legal and Financial Implications and Opportunities of the FCC USF/ICC Order on

Rural CLECS

Sponsored by

www.ricalliance.org 866-472-1209

FCC ICC/USF ORDER: APPEALS AND OPTIONS

THE FUTURE OF RURAL CLECS

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IN RE FCC 11-161US COURT OF APPEALS FOR 10TH CIRCUITWHY SHOULD RURAL CLECS CARE?

• FCC Order 11-161 transitions CLECs to sole reliance on end user revenues– Inter- and intrastate access transition to Bill & Keep (i.e.

“$0.00”) over 9 years ; ILECs get temporary support, CLECs do not.

– CLEC USF Revenue frozen and phased out; price cap ILECs get USF support for broadband, CLECs excluded for at least five years

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Overview of OrderINTERCARRIER COMPENSATION

1. Inter- and intrastate terminating access frozen and converted to reciprocal compensation

2. Default rate of zero (“Bill & Keep”) prescribed after transition

3. “Recovery Mechanism” created for ILECsa. Access Recovery Charge (“ARC”) to end-usersb. USF (CAF) support for excess over ARC on declining

separate schedules for Price Cap and Rate of Return ILECs

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Overview of OrderUNIVERSAL SERVICE SUPPORT

1. Connect America Fund (“CAF”) replaces current USF after transition.

2. Voice remains only supported service, but receipt of support conditioned on provision of Broadband per technical specs.a. Phase I in Price Cap territories

i. Frozen 2011 USF level + $300Mii. Distributed based on current model at holding

company level.iii. If accept support, provide BB at 4/1 to one

subscriber for each $775 received

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Overview of OrderUNIVERSAL SERVICE SUPPORT (Cont’d)

3. Phase II in Price Cap territoriesa. Model predicts support required by unserved areasb. If elect support, must commit to provide BB to all

high cost (except very high cost) areas in state within 5 years.

c. After 5 years, support awarded by competitive bidding.

4. CAF support for Rate of Return

a. Required to provide BB on “reasonable request”b. Existing support substantially reduced by “reforms”c. Further notice explores BB focused CAF for RoR

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Overview of OrderUNIVERSAL SERVICE SUPPORT (Cont’d)

5. Very High Cost Areas6. Mobility Fund

• Phase I Auction Sept. 27, 2012• Phase II

7. Reconsideration Petitions • RICA reply re para. 150 “unsubsidized competitor”• Third Order released May 15, 2012

8. Decision on FNPRM Issues pending9. Bureau Implementation Orders

• Regression Model Revised• Waivers pending

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Overview of Order CLEC Specific Provisions

1. ICC

a. Terminating access rates phased out over 9 years beginning July 1, 2012

b. CLECs excluded from all aspects of Recovery Mechanism 2. USF

a. Identical support based USF frozen and phased out over five years.

b. Price cap carriers have de facto Right of First Refusal during Phases I & II of CAF

c. CLECs can bid for support in Price Cap territory if ILEC refused Phase II support and after 5 years

d. No mechanism for CLEC support in RoR areas.

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Parties and Schedule of Appeal

1. Court and Parties a. All appeals consolidated by lottery at10th Circuit in Denver, b. 26 Petitioners, 21 Interveners: State Commissions, Consumer

Advocates, ILECs (Price Cap, RoR including Tribal Owned), CLECs, Wireless

2. Probable Schedulea. Briefing schedule to be adopted by court on motion of parties

i. Parties required to cooperate on consolidated briefsii. Expect main and supplemental briefs

b. Argument after completion of briefing schedulec. Decision 3 -12 months after argument

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Scope of Review1. Court must defer to agency per “Chevron”

a. Follow terms of unambiguous statuteb. Reasonable interpretation of ambiguous statute

2. Basis for reviewa. Administrative Procedure Actb. Supreme Court Precedent

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Administrative Procedure ActThe reviewing court shall hold unlawful and set aside agency action, findings, and conclusions found to be:

A. arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law;

B. contrary to constitutional right, power, privilege, or immunity;

C. in excess of statutory jurisdiction, authority, or limitations, or short of statutory right;

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Supreme Court Precedent• Reviewing court may not substitute its judgment for that of the agency,

but may find decision arbitrary and capricious if the agency has committed a “clear error of judgment”

• Review limited to whether the agency articulated a rational connection between the facts found and the decision made.

• Action is arbitrary and capricious if agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.

• Agency’s explanation must be “sufficient to enable us to conclude that it was the product of reasoned decision making.”

• Reasoned decision making requires the agency to acknowledge and provide an adequate explanation for its departure from established precedent.

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Issues before the CourtGeneral ICC Issues

1. Neither the record nor the FCC’s explanation support abandonment of “calling party pays.”

2. Order contrary to Sections 251, 252 and 254a) No authority to treat inter and intrastate terminating access as reciprocal

compensation.b) If FCC does have authority to treat as reciprocal compensation, FCC prescription

of a specific rate unlawfully preempts state authority to arbitrate interconnection agreements.

c) If FCC does have authority to prescribe specific rate, it must comply with the “additional cost” standard of the act and it has no record establishing the cost of call termination.

3. FCC lacks authority to preempt state regulation of originating access.4. Order deprives RoR carriers of a reasonable opportunity to recover their lawful

and prudent investment and expenses.5. Order camouflages its effect of creating vast windfall for ATT/Verizon.

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Issues before the CourtGeneral USF Issues

1. The Act does not permit the FCC to condition receipt of support for a “supported” telecommunications service upon the provision of an unsupported information service. It cannot do by indirection what it is prohibited from doing by direction.

2. The decision to limit CAF support to a budget based on the amount provided by current contributions to “legacy” USF is without a rational basis.a. No determination of how much support is sufficient and predictable in order

to make rural service and rates reasonably comparable to urban.b. No rational relation between contribution amounts available from declining

base of interstate voice service users and that which could be raised by customers of broadband service.

c. It is irrational to presume that support can be provided for expanded investment necessary to provide BB to unserved areas and continue existing voice service while simultaneously increasing total amount of support

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Issues before the CourtGeneral USF Issues (Cont.)

1. The decision ultimately to use competitive bidding to award support fails to address the multiple, substantial objections in the record.

2. There is no basis in the Act or the record for exclusion of very high cost areas from support necessary to enable reasonably comparable service and rates. Record indicates satellite service is not reasonably comparable.

3. The exclusion of areas with “unsupported” competition is not rational or based on record support.

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Issues before the CourtRICA Specific ICC Issues

A. The recovery mechanism treats ILECs and CLECs differently without adequate justification by providing USF (CAF) support for lost access revenues to ILECs but not the CLECs competing with them.

B. The elimination of access revenues makes cost recovery impossible while greatly benefiting two largest ILECs.

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Issues before the CourtRICA Specific USF Issues

The exclusion of CLECs from eligibility for CAF support violates the Act, the FCC adopted principle of competitive neutrality and is without basis in the record.

a) Major Purpose of the ‘96 Act to promote local competition, CLECs were made eligible for USF (including mandatory ETC designation in non-rural areas) in order that they could compete with ILECs receiving support.

b) FCC action removes support from entities that have demonstrated intent and ability to serve rural areas.

c) No record support for FCC argument that Price Cap carriers voice networks provide base to extend BB to unserved areas.

d) FCC actions designed to eliminate small companies in interest of supposed efficiencies of large carriers.

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RICA Docketing Statement Issues

1. Did the FCC exceed its authority in requiring entities to provide Broadband Internet Access as a condition of receipt of universal service support for the Title II voice services they provide?

2. Is [the Right of First Refusal] contrary to the principle of competitive neutrality adopted by the Commission, and/or otherwise unlawful?

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3. Did the FCC exceed its authority or otherwise act arbitrarily by ending the historic "called party pays" paradigm and instead designating terminating access as reciprocal compensation?

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RICA Docketing Statement Issues (Cont’d)

4. Does … Bill and Keep … violate the requirement of Section 252(d)(2) of the Act that reciprocal compensation must allow for the recovery of the "additional costs" of terminating calls and/or arbitrarily disregard objections that it had not ascertained the underlying costs of call termination?

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5. Was order provid[ing] CAF support for ILECs’ lost interstate and intrastate access revenues, but not for CLEC lost revenues, either violative of the 1996 Act, an arbitrary departure from its findings in the same order that CLECs lack market power, … or otherwise in arbitrary disregard of the constraints on rural CLECs?

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6. Did the FCC exceed its authority by preemptions of state commission authority to designate ETCs or to set rates for intrastate access and reciprocal compensation?

7. Is the FCC Order’s conclusion that the revised rules will result in voice and broadband services that are reasonably comparable to urban service at reasonably comparable rates supported by substantial evidence …?

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8. [Was] the FCC’s decision establishing a budget for the CAF based solely on the maximum perceived contribution from declining voice service revenues, unsupported by substantial evidence, illogical or otherwise reflective of an arbitrary failure to give reasoned consideration to expanding the revenue contribution base?

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9. Did the FCC decision to utilize competitive bidding to determine which carrier will receive CAF support in a given area run contrary to law, and/or arbitrarily disregard evidence that competitive bidding would not work, and/or lack substantial evidence to support it?

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Questions?

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© CHR Solutions. All Rights Reserved.


Needles & Haystacks

“The NEW Competitive Normal”

Presented by CHR SolutionsKent Larsen – Senior Vice President, Financial Services


Yesterday – The ILEC World

• Monopoly– If not us, then who?

• Enabling Networks– Expensive– First and Only

• Rate of Return– Profits tied to Network Investments

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Yesterday & Today – The CLEC World

• Monopoly Competition– If not us, then who? Maybe not everywhere but it’s there

• Enabling Networks Competing Networks– Expensive Sometimes Cheaper, More Valued– First and Only Many

• Rate of Return Low Cost Provider Wins– Profits tied to Network Investments Profits tied to

Operating Efficiency

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Today

SARs lead to SARs

Silly A#% Rules lead to

Significant Adjustments Required

The NEW Normal

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Today…

• No Magic Bullets– Regulatory Issues / Fight not on the Agenda

• Pricing Pressure• Opportunities for Margin

– The “New” Normal: Blocking and Tackling• Grow Subscriber Revenues• Manage / Reduce Operating Expenses• Managing Capital

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LECs can improve their profitability by reducing switching and transport costs

• The interstate portion of switched access services are no longer RoR based or pooled

• The Order dictates these revenues will diminish by 5% per year

• Carriers will be incented to reduce their costs at a greater pace than 5% per year rate

• Any savings greater than the reduction to revenues can be realized as profit to the bottom line


Creativity in Switching and Transport

• Consolidated Switching – Part 64– Part 64 no longer matters - financially - even if still required for

“regulatory hygiene”• ILEC affiliate revenue requirement not reduced in sharing arrangement• ILEC / CLEC corporate structure may merit re-examination

• Complete outsourcing of switching?– Consider only future cash, QoS– ILEC and CLEC

• Terminating toll via VoIP– Customer expectations of QoS changing

• Nationwide calling scopes…? – The Wireless Model– What is “local” anyway?


Improving broadband capabilities provides the best opportunity for future financial performance

• Customers demand bandwidth– Price Cap Commitments, or NOT

• COLR obligations under pressure– Underserved consumers will still exist

• Is there a market – especially for new technology?– New Support at $775 cap-ex cap probably boring for all

players• Video still a challenge

– Capital– Thin Margins– Threat of OTT

• The Long Tail– Cloud, SMB


The Long Tail

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Controlling Operating Expenses

• Everything must be on the table• Operating expenses are a larger (approx. 60%) portion of

overall costs compared to capital costs (approx. 40%)– Immediate results compared to capital (long term and committed)

costs• Corporate expenses are the most controllable

– Non-core functions should be examined• Customer operations expense should be measured for

effectiveness– Is the retail presence cost effective? Locations, functions, activities

etc. – Are the customer-facing employees maximizing their customer

facing time?– Is money being left on the table?

• Service Intervals: Can you staff for peak periods? What do customers expect?


Leverage Existing Assets

• Loops are the ONLY asset (physical or human) that can not be outsourced

• Concentrate on customers that are profitable – quickly. SMB, not residential.

• New thinking in the provision of – OSS / BSS – Marketing– Maintenance– Management

• Maximize Revenues from EXISTING assets– Are you leaving money on the table?

• Use IP to provide additional services to additional customers - The Long Tail– New IP-based opportunities emerging

• Cloud?• OTT

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Financial Issues

• Cash is King– 5 year cash flow projections– Access to capital becoming more difficult– Manage leverage ratios– Payback periods for new investment

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Summary

• The regulatory landscape is set for the near term– Appeals will take years

• For most, competitive pressures will outrun regulation

• The “New Normal” will be a required strategy

• Capital deployment (and even access to capital) will require new disciplines

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Questions?

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FCC ICC/USF ORDER: APPEALS AND OPTIONS

Documents

usf support

clec support

receipt of support

temporary support

usersusf caf support

price cap ilecs

ilecs price cap

price cap territoriesmodel