BloostonLaw Telecom Update
Published by the Law Offices of Blooston, Mordkofsky, Dickens, Duffy & Prendergast, LLP
[Reproduced here with the firm's permission.]
| Vol. 14, No. 33|| September 14, 2011 |
New Jobs Bill Includes Old Wireless Proposals
Spectrum User Fees Could Hurt Clients
President Obama’s “American Jobs Act” includes proposals for auctioning wireless spectrum and public safety broadband expansion. These proposals stem from the “National Wireless Initiative” (NWI) that the President unveiled in his State of the Union address last January.
The NWI essentially calls for expanding wireless broadband to 98% of all Americans within five years. And to achieve that, the administration proposes to have government agencies auction off their spectrum, use spectrum more efficiently, and convince TV broadcasters to engage in “voluntary incentive auctions” (BloostonLaw Telecom Update, Feb. 16). The President expects that this plan will raise $27.8 billion over the next 10 years, including about $10 billion to support expansion of the public safety network, and proceeds to draw down the deficit by $17.8 billion.
Unfortunately, the Jobs Bill authorizes the FCC to assess “spectrum use” fees from new and existing licensees to pay for the initiative. The Bill provides a minimum amount the Commission must collect, starting with $200m total in 2012 and $550m total in 2015 and each year thereafter, until 2021. The legislation provides a list of factors which the Commission may consider in assessing such fees, including the “highest value alternative spectrum use” and the level of demand for the particular license. Failure to pay these fees may result in revocation of license or permit. Only broadcasters and public safety entities would be exempt from this new fee assessment. We will be assisting clients with efforts to contact their Congressional delegation to oppose the imposition of yet another tax on their licenses. Interested clients should contact us ASAP.
While the FCC already charges a regulatory user fee to most licensees, it is generally a modest amount designed only to defray the cost of running the FCC. However, the annual fee contemplated by the Jobs Act is clearly a revenue-raising measure, designed to eventually generate at least $550 million per year. And it is disturbing that the FCC can establish the fee based on factors such as “the highest value alternative spectrum use forgone” and “level of demand” for the spectrum. This suggests that the FCC could price the annual user fee for spectrum used by our clients by basing it on some theoretical value rather than actual use. This approach could make the user fee so expensive that existing licensees would have to consider abandoning the spectrum (a result that Congress may want to see, so more spectrum is available for auction); or at a minimum the licensees would have to pass all or part of this cost on to its customers, a less-than-desirable outcome in the current economy. Therefore, it will be important for the existing licensees to oppose this aspect of the Jobs Act.
Part I of Section H of the proposed Jobs Bill enumerates the requirements for repurposing Federal spectrum. In general, the bill would authorize the FCC to:
- Permit a licensee to relinquish all or part of its spectrum rights to reassign those rights through competitive bidding (auctions).
- Pay a portion of the auction proceeds to a relinquishing licensee (if the Commission so determines it is in the public interest).
- Modify spectrum usage rights prior to auction, so that it may still pay a portion of the proceeds to the relinquishing licensee to cover relocation costs.
The purpose of Part I is to create voluntary “incentive” auctions so that the FCC can raise money through the sale of broadcast spectrum to finance a nationwide public safety broadband network and help defray the deficit. Part II of Section H would reallocate the D-Block spectrum for public safety rather than selling it at auction. The bill would provide for flexible use of the narrowband spectrum, authorize only a single public safety wireless licensee—the non-profit Public Safety Broadband Corporation (PSBC). Part II also provides for a grant program and fund to aid state, regional, tribal, and local jurisdictions to implement the most efficient use of such a public safety network.
BloostonLaw contacts: Hal Mordkofsky, John Prendergast, Richard Rubino, and Cary Mitchell.
GO GREEN: BloostonLaw is now offering its clients an e-mail option for billing and payment. We will be able to use your e-mail address for invoices and statements. You will still be able to choose to have a hard copy mailed to you. If you would prefer to receive e-mail billings or make e-payments, please contact Debra Mayo at email@example.com.
INSIDE THIS ISSUE
- Rural associations unveil modified RLEC Plan to reform USF, ICC rules.
- New Jobs Bill includes old wireless proposals, new spectrum fees.
- FCC proposes 15.3% USF contribution factor for fourth quarter.
- Auction 93 for FM broadcast spectrum permits set for March 27.
- House panel to focus on broadband, spectrum policy.
Rural Associations Unveil Modified RLEC Plan To Reform USF, ICC Rules
Blooston Rural Carriers Support Plan
The Rural Local Exchange Carrier or RLEC Plan to reform the Universal Service Fund (USF) program and the Intercarrier Compensation (ICC) rules was developed by the Rural Associations last April and recently modified. The modified RLEC Plan was unveiled in Ex Parte filings and in joint reply comments filed September 6 by the National Exchange Carrier Association (NECA), National Telecommunications Cooperative Association (NTCA), Organization for the Promotion and Advancement of Small Telephone Companies (OPAST-CO), and Western Telecommunications Alliance (WTA).
As noted by the Iowa Telecom Association, the RLEC Plan “incorporates a balance of mechanisms intended to enable cost recovery for RLECs while enabling the deployment and maintenance of broadband and broadband-capable networks. These cost recovery mechanisms are aligned with the Commission’s interest in constraining growth of high-cost support funds, and are designed to be implemented in complementary fashion with the America's Broadband Connectivity (ABC) Plan filed by large and mid-size carriers, including Verizon and AT&T, on July 29, 2011 (collectively, the Consensus Frame-work).”
BloostonLaw, on behalf its clients, the “Blooston Rural Carriers,” supported the RLEC Plan, as modified by the Consensus Framework.
The Blooston Rural Carriers said that the amended RLEC Plan constitutes the best available alternative at this time to enable RLECs to continue to make progress toward the completion of the conversion of their networks to broadband. The Blooston Rural Carriers said the proposed RLEC budget targets will allow RLECs to repay their existing construction loans, and to otherwise preserve their current progress in deploying broadband networks and services, and they may also permit the extension and upgrade of broadband facilities by some RLECs. By preserving a modified rate of return regulatory system for RLECs, as well as cost recovery based upon embedded costs, the Consensus Framework will help preserve the assurances of repayment necessary to induce lenders to continue to fund RLEC broadband investment projects, according to the Blooston Rural Carriers. Finally, they said the Consensus Framework provides a smooth transition path, based upon broadband adoption rates, from the existing RLEC high-cost support mechanisms to the future RLEC broadband support mechanism.
However, the Blooston Rural Carriers said they would never have agreed to many of the features thereof (e.g., a decreased 10.0% RLEC interstate rate of return, expanded caps on RLEC corporate operations expenses, constraints on future RLEC capital expenditures, and virtual elimination of RLEC terminating switched access rates) if these features were not part of a broad industry compromise and offset by other provisions (e.g., the Restructure Mechanism or RM).
RLEC Plan Details
If adopted by the FCC, the Rural Associations said, the amended RLEC Plan would: (1) refocus high-cost USF to support broadband services; (2) help to preserve the existing successes of rural rate-of-return (RoR) incumbent RLECs in deploying broadband facilities and services; (3) enable further “edging out” of RLEC broadband networks, subject to the availability of incremental support and reasonable constraints on capital expenditures and operational expenses; (4) significantly reduce RLEC per-minute access rates while providing a sufficient and sustainable replacement mechanism for lost revenues; and (5) address uneconomic ICC arbitrage and related billing disputes. According to the Rural Associations, the RLEC Plan aims to accomplish these goals within overall budget targets for the next six years that are intended to be capable of supporting continued provision of affordable, high-quality broadband and voice services to rural consumers in RLEC service areas.
As NECA noted in an August 29 Ex Parte letter to the FCC, the modified RLEC Plan is designed with the objective of staying within the annual funding target for each of the first six years following implementation. The Plan proposes that the Commission establish an annual funding target for areas served by RoR carriers that begins at $2 billion and, to the extent necessary to help ensure sufficient funding, increases by $50 million per year (i.e., starting with an additional $50 million in the first year and increasing to $300 million, or a total annual budget target of $2.3 billion, in the sixth year). Such incremental funding will be necessary to enable access restructuring, promote further broadband buildout (but only to the extent supported by increases in USF/Connect America Fund (CAF) funding above current levels for any individual company), and provide a reasonable opportunity to recover the costs associated with existing investments in broadband capable plant.
A key component of the RLEC Plan is the Restructure Mechanism (RM), which is designed to recover revenue losses as a result of capping interstate originating and terminating switched access rates at the start of access reform as well as revenue losses caused by reducing terminating access rates to targeted levels in three phases. As explained by NECA:
- In Phase I, intrastate terminating switched access rates would be reduced to capped interstate rate levels in two steps. The first step would begin on July 1, 2012, coincident with the effective date of the 2012 Annual Tariff Filing. On that date intrastate rates would be decreased by one half of the difference between the intrastate rates and the interstate rates. On July 1, 2013, the intrastate rates would be further decreased to the interstate rate levels.
- In Phase II, terminating end office rates are reduced to $.005 per minute in three steps. The first step of Phase II would be implemented on July 1, 2014, i.e., terminating end office rates would be reduced by one third of the difference between existing interstate terminating end office rates and $.005.
- In Phase III, subject to FCC review in year 5, terminating end office rates would be further reduced to $.0007 per minute in three steps. Transport and tandem switching rates would remain unchanged at capped interstate rate levels.
In explaining the calculation of the RM, NECA said that the total revenue shortfall is the sum of the intrastate and interstate revenue shortfalls. It is important to distinguish between the two revenue shortfalls because they have different effects on the RM calculation. The RM is calculated by offsetting the combined revenue shortfalls by increases in subscriber line charge (SLC) revenue. Intrastate regulated earnings test applies only to the intrastate revenue shortfall.
NECA said that any study area with a residential rate below the $25 local rate benchmark, must increase (or impute) its monthly residential SLC rate by $.75 per year to reach the benchmark, subject to a maximum of six increases of $.75, i.e., $4.50 over the space of six increases. Additional SLC revenues are used to offset the intrastate component of the RM first. If additional SLC revenues in a given step exceed the intrastate RM, the SLC revenue in excess of the intrastate RM is then used to offset the interstate component of the RM. An intrastate regulated earnings test is performed using a 10% rate of return (RoR) each year using FCC Part 32 and 36 rules. Earnings in excess of a 10% RoR for that year will be used to offset the intrastate component of the RM calculated for that year after the SLC revenue offset has been taken into account.
Blooston Rural Carriers
The Blooston Rural Carriers said that the FCC should reject the proposals of those opponents of the RLEC Plan, as modified by the Consensus Framework, that seek more drastic reductions in universal service and intercarrier compensation. For example, some commenters urge the Commission to eliminate corporate operations expense and other costs from universal service support calculations, apparently for no reason other than to drastically reduce the amount of support available to carriers.
Corporate operations expense results from costs inherent in providing telecommunications services, such as the numerous reports required by the Commission to be filed by ILECs and additional tasks ILECs must perform as a result of federal regulations (including the filing of federal tariffs, preparing cost studies to support the NECA tariffs or their own tariffs and reciprocal compensation rates, maintaining records, responding to requests for information by the Commission, filing network outage reports, preparing and maintaining the CPNI manual, responding to formal and informal complaints and negotiating interconnection agreements).
To comply with all of these requirements, ILECs must engage employees, managerial staff, accountants, engineers and attorneys, and the associated expense is included in corporate operating expense. Accordingly, there is no basis to support an elimination of corporate operations expense.
The Blooston Rural Carriers said that proposals to eliminate all intercarrier compensation, and instead impose bill and keep, also are without merit. These proposals are nothing more than a red herring advanced by entities that would like to improve their bottom lines by not paying to use the expensive last-mile networks of other carriers.
As the Blooston Rural Carriers have indicated, the universal service and intercarrier compensation proposals in the modified RLEC Plan will result in a reduction of revenues for many of these carriers, which will put pressure on the ability of carriers to continue to advance broadband service. Elimination of even more revenues, as proposed by some commenters, will damage the ability of carriers to ensure the continued availability and expansion of broadband networks. Further, additional cost shifts to end users would run afoul of the requirement in the Act that rural consumers have access to services at reasonably comparable rates.
The Blooston Rural Carriers also argued that (1) all eligible telecommunications carriers (ETCs) should meet carrier of last resort (COLR) obligations; and (2) that an RLEC’s support should not be reduced if a competitor is a satellite service provider, because it is well-known that satellite service is not comparable to service in urban areas.
The upshot here is that both the Blooston Rural Carriers and the Rural Associations agree that while the modified RLEC Plan is not perfect, it represents significant compromises by RoR and price cap carriers. And it appears to be the best deal for rural telcos in the current environment. As a result, both groups are urging the FCC to approve the plan without further changes or modifications.
BloostonLaw contacts: Ben Dickens, Gerry Duffy, and Mary Sisak.
FCC PROPOSES 15.3% USF CONTRIBUTION FACTOR FOR FOURTH QUARTER: The FCC’s Office of Managing Director (OMD) has proposed a universal service contribution factor of 0.153 or 15.3% for the fourth quarter of 2011. This is higher than the 14.4% for the third quarter; and the 14.9% factor in the second quarter, but is only slightly down from the record 15.5% contribution factor in the first quarter of this year. This 3Q 15.3% USF contribution factor is up from 12.9% in the fourth quarter; 13.6% for the third quarter; and 15.3% figure for the second quarter of 2010. And it compares with 14.1% for the first quarter of 2010; 12.3% for the fourth quarter of 2009; and 12.9% for the third quarter of 2009. If the Commission takes no action by September 27, the 15.3% contribution factor for the third quarter of 2011 will be deemed approved by the Commission. BloostonLaw contacts: Ben Dickens, Gerry Duffy, and Mary Sisak.
AUCTION 93 FOR FM BROADCAST CONSTRUCTION PERMITS SET FOR MARCH 27: The FCC has announced an auction of certain FM broadcast construction permits and seeks comment on the procedures to be used for this auction. This auction is scheduled to commence on March 27, 2012, and is designated as Auction 93. This auction will offer 123 construction permits in the FM broadcast service. The construction permits to be auctioned are for 123 new FM allotments, including 17 construction permits that were offered but not sold or were defaulted upon in prior auctions. Comments on auction procedures are due October 7, and reply comments are due October 17. All filings related to procedures for Auction 93 must refer to AU Docket No. 11-146. BloostonLaw contacts: Hal Mordkofsky, John Prendergast, Richard Rubino, and Cary Mitchell.
HOUSE PANEL TO FOCUS ON BROADBAND, SPECTRUM POLICY: U.S. House Energy and Commerce Committee Chairman Fred Upton (R-Mich.) has announced the panel’s fall agenda. This includes broadband and wireless spectrum policy. Upton said: “Broadband and wireless spectrum policy are vital jobs issues and spectrum legislation and FCC process reform will be at the forefront to advance wireless broadband, promote deployment of an interoperable broadband public safety network, create jobs, and reduce the deficit. The economic impact of streamlined regulations can be significant — in the last decade, the wireless industry has invested more than $240 billion on network structures and equipment. Combine the growing need for wireless broadband deployment with the private sector's resources and the industry is ripe for job seekers.” Additionally, on Thursday, September 15, the Subcommittee on Commerce, Manufacturing, and Trade will hold a hearing on “Internet Privacy: The Impact and Burden of EU Regulation.” The hearing will focus on the European Union’s privacy and data collection regulations and how they have impacted the internet economy. BloostonLaw contacts: Hal Mordkofsky, Ben Dickens, Gerry Duffy, and John Prendergast.
CALIFORNIA PUC SEEKS NRUF, LNP DATA IN CONNECTION WITH AT&T/T-MOBILE DEAL: The California Public Utilities Commission (PUC) has requested various Numbering Resource Utilization and Forecast (NRUF) reports filed by wireless telecommunications carriers and disaggregated, carrier-specific local number portability (LNP) data related to wireless telecommunications carriers in connection with its investigation of the proposed AT&T/T-Mobile merger. Throughout its review of the proposed acquisition in WT Docket No. 11-165, the FCC said that several parties have submitted filings to the FCC that contain NRUF or LNP data or information derived from NRUF or LNP data, and have filed redacted copies of those filings with the California PUC. On August 31, 2011, the California PUC ordered all parties that had filed redacted copies of their FCC filings with the California PUC to provide the PUC with confidential unredacted copies. The California PUC’s August 31st Order notes that to the extent information required to be furnished to the PUC is confidential, it may be filed under seal and that the PUC cannot release the confidential information except by order of the California PUC. The FCC said it has issued a Public Notice to inform carriers of the orders of the California Public Utility Commission to allow carriers the opportunity to contact the California PUC, file an objection, or take any other action they may deem appropriate if they have concerns or oppose disclosure of their NRUF or LNP Confidential Information. Comments or objections should not be filed with the FCC. On September 2, the California PUC issued an order providing that persons who object to the filing of NRUF or LNP Confidential Information with the California PUC have ten (10) days from the date of the FCC’s September 7 Public Notice to file their objections with the California PUC. BloostonLaw contacts: Hal Mordkofsky, John Prendergast, and Cary Mitchell.
RUS PLANS TO IMPLEMENT EXPANSION OF 911 FOR LOAN PROGRAM: The Rural Utilities Service (RUS) is amending its regulations to implement the expansion of 911 service as authorized by section 6107 of the Food, Conservation, and Energy Act of 2008 (2008 Farm Bill). This amendment will codify the Agriculture Secretary's authority to make loans in five areas of eligibility to expand or improve 911 access and integrated emergency communications systems in rural areas for the Telecommunications Loan Program. This interim rule became effective on September 12. Comments must be submitted on or before November 14 (RIN 0572-AC24). Section 6107 added section 315 of the RE Act to clearly authorize the RUS to make loans for the following purposes: (1) 911 access; (2) Integrated interoperable emergency communications, including multi-use networks that provide commercial or transportation information services in addition to emergency communications services; (3) Homeland security communications; (4) Transportation safety communications; or (5) Location technologies used outside an urbanized area. The provision also clarified that the Agency could consider State or local 911 fees to be security for a loan under this section and that loans may be made in certain circumstances to an emergency communication equipment provider to accomplish the purposes of this section where a State or municipality may be prohibited from incurring debt. The statutory language is very prescriptive, defining eligible entities, financing purposes, and loan terms and security requirements. According to RUS, the amendments to 7 CFR part 1735 simply incorporate those statutory requirements within the regulatory framework prescribing requirements for the telecommunications loan programs. Therefore, RUS determined that it is not necessary to issue a proposed rule since the codification represents a strict implementation of the statutory requirements. BloostonLaw contacts: Ben Dickens, Gerry Duffy, and Mary Sisak.
COMMENT SOUGHT ON TELECOM ARGENTINA USA TRANSFER OF CONTROL REQUEST: The FCC has asked for comments on Telecom Argentina USA, Inc.’s application requesting authority for a transfer of control that took place without Commission consent in April 2009. Telecom Argentina USA, a Delaware corporation providing interstate prepaid card services throughout the U.S., is a wholly owned subsidiary of Telecom Argentina S.A. Telecom Argentina S.A. in turn is controlled by Nortel Inversora S.A., which is controlled by Sofora Telecommunicaciones S.A.. All of these entities, except Telecom Argentina USA, have Argentina citizenship. Prior to the transaction control over Telecom Argentina USA was held by Telecom Italia S.p.A. (TI), an Italian company, and its controlled company, Telecom Italia International NV (TII), a Dutch holding company (TI and TII, the Telecom Italia Group), with the Telecom Italia Group indirectly holding 50 percent of the equity of Telecom Argentina USA, and W de Argentina – Inversiones, S.L. (W de Argentina), a Spanish limited liability company, holding 48 percent. On April 17, 2009, W de Argentina’s ownership interest in Telecom Argentina USA increased to 50 percent when it acquired a two percent interest held by France Telecom. Telecom Argentina USA states that it did not file a domestic section 214 transfer of control application at the Commission at that time. Applicants assert that the proposed transaction is entitled to presumptive streamlined treatment under the Commission’s rules and that a grant of the application will serve the public interest, convenience, and necessity. Comments in this WC Docket No. 11-125 proceeding are due September 21, and replies are due September 28. BloostonLaw contacts: Ben Dickens, Gerry Duffy, and Mary Sisak.
NTCA RELEASES ANNUAL WIRELESS REPORT SURVEY: The National Telecommunications Cooperative Association (NTCA) has released its 2011 Wireless Survey Report. This year, 127 NTCA members (25%) responded. NTCA said 63% of survey respondents indicated that they hold at least one wireless license below 2.3 GHz; 34% hold at least one license above 2.3 GHz. Sixty-one percent are providing wireless service to their customers. Sixty-eight percent of those providing wireless service offer fixed broadband, 58% mobile voice, and 49% text messaging. Forty-four percent of survey respondents not currently offering wireless service are considering doing so.
The average total (cumulative) investment in wireless facilities, excluding spectrum, is $5.6 million; average total (cumulative) investment in spectrum totaled $665 thousand. Seventy-six percent of survey respondents characterized the process of obtaining financing for wireless projects as ”somewhat difficult” or “very difficult;” 18% characterized the process as ”relatively easy” or “very easy.” Forty-one percent of respondents are utilizing unlicensed spectrum to provide some wireless services, despite problems such as interference. Seventy-five percent of all respondents indicated that competition from nationwide carriers was their greatest concern, 61% selected handset/equipment availability, 60% the ability to make necessary investments to be able to offer the latest services, 55% the ability to negotiate roaming agreements with national carriers, and 53% the ability to obtain spectrum at auction.
Sixty-eight percent of survey respondents categorized their experience in negotiating data roaming and in-market roaming agreements with other carriers as moderately to extremely difficult. Fifty-six percent of those respondents who have a reciprocal roaming agreement with another carrier indicated that they pay about as much on a per minute basis as they themselves are paid, while 28% pay more and 17% pay less. Thirty-seven percent of those survey respondents offering wireless resell another carrier’s service under their own brand, 11% do so under a national brand. Fifty-one percent sell service for which they are licensed for spectrum under their own brand, and 6% do so under a national brand. Eighty-nine percent find it difficult to compete with promotions offered by the national carriers. Eighty-seven percent of all respondents offer their wireless customers caller ID. Eighty-four percent offer voice mail, 77% offer unlimited local calling, family plans, and text messaging, and 74% offer free long distance, and Internet access. Seventy-five percent of survey respondents experience annual customer churn of less than 10%, while 21% reported annual churn of between 10% and 25%. These figures are well below the FCC’s reported industry annual average of between 18% and 40%, according to NTCA.
AUTOMOBILE ELECTRONICS VULNERABLE TO HACKING VIA WIRELESS DEVICES: An analysis by computer security giant McAfee titled “Caution: Malware Ahead” suggests that the large amount of electronics being used in cars today is making them increasingly vulnerable to hack attacks, even by something as simple as text message, according to Fox News. It said that embedded systems, including those for engine management, active cruise control and airbags, now live side by side with telematics that connect vehicles to wireless communication devices and the “cloud” through services like Ford’s Sync and General Motors’ OnStar, which has the ability to shut down cars and unlock doors remotely. Get in one virtual door and the others may be even easier to open, Fox News said. It added that many automakers also offer programs and apps that give owners the ability to start their car via their smartphones, remotely set charging times for plug-ins like the Chevy Volt and track the location of vehicles, creating further avenues into their computer systems. Conversely, Fox News said, once they have accessed the brains of a car, intruders could theoretically use them to retrieve personal information from connected devices. It’s the 21st century version of a car thief rifling through a purse found in a glove compartment, Fox News said. While the report notes that there have been no known malicious attacks on cars fitted with factory equipment, it does cite one incident where a disgruntled former employee of a car dealership disabled 100 cars by manipulating an aftermarket security system that had been installed on them. Additionally, McAfee cites an experiment done by researchers at the Center for Automotive Embedded Systems Security where they were able to access safety components in a vehicle via a wired connection and again using Bluetooth. For its part, the automotive industry is aware of the risks and constantly working on defenses against what is viewed as an evolving threat. Through the Society of Automotive Engineers, the industry has set up a Vehicle Electrical System Security Committee to develop broad strategies to prevent breaches and mitigate undesirable effects of successful ones.