Regulation - What is it Good For?

Carrier of Last Resort

Every once in a while I see a regulatory requirement that makes me scratch my head. One of the requirements of the current CAF II reverse auction is that every winner must become an Eligible Telecommunications Carrier (ETC) before receiving the funding – and I wonder why this is needed? This requirement is coupled with another puzzling requirement that anybody taking this funding must provide telephone service in addition to broadband. Since the purpose of the CAF II program is to expand rural broadband these requirements seem incongruous with the purpose of the program.

The ETC regulatory status was created by the Telecommunications Act of 1996. Congress created this new class of carriers to mean any carrier that is willing to provide basic services within a specified geographic area (and in 1996 this was specified as providing voice service) and for that willingness to serve would be eligible to receive any available subsidies.

While this is not in writing anywhere, I’m guessing that these requirements are part of the ongoing plan to erode the rural carrier of last resort obligation (COLR) for the big telcos. Carrier of last resort is a regulatory concept that is applied by regulators to utility infrastructure providers including telco incumbents, electric, gas and water providers. The textbook definition of carrier of last resort is a utility provider that is required by law to serve customers within a defined service area, even if serving that customer is not economically viable. Further a COLR is required to charge just and reasonable prices and generally has legal hurdles that make it difficult to withdraw from serving within the defined service area.

We are seeing rural carrier of last resort obligations eroding all over the place. For example, the FCC is proposing rules that will allow copper providers to tear down copper networks with no obligation to replace them with some alternate technology.

I think this requirement in the CAF II reverse auction is along the same vein. All of the areas covered by this auction are within the historic regulated footprint of one of the large telcos. Except for the Verizon service areas, where Verizon did not accept the original CAF II funding, these are the most remote customers in this auction are in very rural areas. These are the customers at the far end of long copper lines who have no broadband, and likely no quality telephone service.

Anybody accepting the CAF II reverse funding must file for ETC status for those census blocks where they are getting funding. This is a requirement even if the auction winner is only going to be serving one or two people within that census block. Census blocks are areas that generally include 600 – 800 homes. In cities a census block might be as small as a block or two, but in rural areas a census block can be large.

My bet is that the large telcos are going to claim that they no longer have carrier of last resort in any rural area where there is now a second ETC. They will ask regulators why they need to serve a new home built in one of these areas if there is another carrier with similar obligations. If that’s the case, then this reverse auction is going to remove huge chunks of rural America from having a carrier of last resort provider. It’s likely that incumbent telcos will use the existence of a second ETC to avoid having to bring service to new homes.

I have an even more nagging worry. ETC status is something that is granted by state regulatory commissions. In granting this status it’s possible that some states are going to interpret this to mean that a new ETC might have some carrier of last resort obligations. If the incumbent telco tears down the copper network, it’s not unreasonable to think that state regulators might turn to the new ETC in an area to serve newly constructed homes and businesses.

I would caution anybody seeking ETC status as part of getting this funding to make sure they are not unknowingly picking up carrier of last resort obligations along with that status. If I was making such a filing myself I would query the regulators directly to get their response on the record.

I will be the first to tell you that I could be off base on this – but this feels like one of those regulatory requirements that could have hidden consequences. I can’t think of any reason why this program would require a new provider to supply telephone service other than for letting the large telcos off the hook to do so. I know that many companies going after this funding would think twice about taking it if it means they become the carrier of last resort.

Regulation - What is it Good For?

Why Carriers Hate Title II Regulation

One of the many industry blogs I follow is the Eldo Telecom blog. Frederick L. Pilot, the author of that blog, contends that the FCC has the obligation to enforce universal service rules on broadband in the same way that they have for many years on telecom service. For telephone service this requirement has often been called the ‘carrier-of-last-resort’ obligation and it has been used by the FCC and state commissions to require telephone companies to serve everybody within a defined service area. If somebody builds a new house, for example, the telephone company has been obligated, within reason, to build to serve them.

Pilot says that the FCC created this same obligation for broadband with the newly approved Title II regulations. I’ve followed his chain of logic through the FCC rules and he is right. The carrier of last resort rules are covered under Section 254 and Section 214(e)(3) of the FCC’s rules. And those rules are in place as part of the rules that govern broadband.

The FCC created the Title II regulations by forbearance – they excluded some sections of the existing telephone rules that they did not want to apply to broadband services. The choice of which FCC rules to forbear was arbitrary and the FCC left themselves wiggle room to come back in the future and add to and/or subtract from the list of the rules that apply – and it is this flexibility that the big ISPs most hate about the Title II regulations.

The FCC didn’t really have any other options because they are not allowed, on their own, to write new FCC code – those basic laws come from Congress and the sections mentioned above, for example, come from the Telecommunications Act of 1997.

But I come to a different conclusion than Pilot. He thinks that since the carrier-of-last-resort language is part of the Title II rules for broadband that the FCC should enforce them. I read these particular rules to instead be something that the FCC can choose to enforce if they want to. A carrier-of-last-resort obligation gets triggered by a complicated process of requiring carriers to become am Eligible Telecommunications Carrier (ETC). In order for the FCC to create a universal service obligation for broadband, the FCC and the states would have to go through the ETC process for broadband, like they did in the past for telephone companies. And the rules make it clear that the triggering of ETC is completely at the FCC’s discretion.

The FCC has never mentioned a desire to force carrier-of-last-resort obligations on ISPs, and they may never do so. But they have very obviously reserved this right for use in the future should they so choose. And there are other parts of the Title II rules that now can apply to broadband if the FCC decides to enforce them. If the courts uphold the challenges to the net neutrality ruling there are a whole slew of regulations that apply to telephone service that the FCC could try to impose on ISPs.

I really don’t think the FCC is interested in forcing universal broadband requirements on ISPs for broadband. That would force carriers, for example, to build broadband facilities in rural areas. They know there would be huge and immediate political pushback and probably a reaction from Congress. The FCC instead seems to be trying to entice the large companies to do better.

But since these rules are on the books the FCC could decide at any time to try to enforce them. This creates what I consider to be permanent uncertainty for ISPs. Not only on this one issue, but on a number of potential obligations that are buried inside the FCC rules. I think that these potential, and unenforced rules hang over ISPs like the sword of Damocles.

Don’t get me wrong – I am a big fan of regulating broadband. It’s vital to our way of life now and I think that without net neutrality the big ISPs would run roughshod over all of us. So I love the concept, but like many I am not particularly fond of the specific way that this regulation came about. The long-term problem I foresee is that the political sentiment in the country swings from left to right fairly regularly and regulation by forbearance gives a future FCC the ability to drastically change the way the net neutrality rules are applied and implemented. And that means permanent uncertainty.

Regulation - What is it Good For?

Another Regulatory Gotcha

The FCC recently went through the process of eliciting stories about ideas for rural broadband. I had a bit of a problem with how they went about it because they made it sound like anybody who would tell them their story was eligible to be chosen to get funding for a rural broadband experiment. And this wasn’t true, and the FCC really was just gathering stories. The actual applications to get funded will come later this year.

There is another thing that the FCC didn’t make very obvious to possible applicants. Any entity that wants to get money out of the Connect America Fund must be an Eligible Telecommunications Carrier (ETC). To be fair, the FCC says that companies that request funding don’t have to be an ETC at the time of filing, but that they must achieve that status before they can actually receive funds. The FCC language makes it clear that it expects ETC status to be obtained rather quickly.

What the FCC doesn’t seem to understand is that it can be very time consuming to become an ETC and in some cases impossible for some of the entities who are interested in the broadband experiments.

In most states there is a two-step process to become an ETC. First you must be certified as a carrier in your home state. The type of certification required varies by state. In some states you would have to obtain a Certificate for Public Convenience and Necessity (CPCN) and in other state you would have to become a CLEC or some other form of carrier.

Getting that kind of certification is not a slam dunk for start-ups and municipalities. Generally somebody wanting to get these certifications needs to pass three tests – that they are financially capable, managerially capable and technically capable of being a carrier. A start-up trying to get the FCC funding might fail one of these tests. For instance, a City might not be able to demonstrate technical capability because that is something they were going to hire after they got the funding. And in some states start-ups have trouble meeting the financial capability test set by their state regulatory commission. The process of getting certified can take anywhere from 90 days to 180 days in most states assuming you can meet all of the requirements.

Then, after getting the certification as a carrier, an entity can file to become an ETC. There are some very specific requirements in becoming an ETC that are going to stop some filers. For instance, an ETC must be willing and able to serve everybody in an existing ‘exchange’. An exchange is the service areas of the incumbent telcos and most rural exchanges have a town in the center surrounded by a sizable rural area. So anybody who wants to be an ETC must agree to serve that whole area. In some states a municipality is prohibited from or has a very difficult time serving anybody outside their City borders. And let’s face it, serving broadband to farms is expensive, and so having to agree to serve those areas can break a start-up business plan. So even if a City or ISP gets certified, it’s no slam dunk that they will meet the requirements to become an ETC. And even if they can, I know that there are many states where the ETC process can take a year.

Additionally, in both of these steps, the process can be further delayed if somebody intervenes in the regulatory process. The local telco or cable company can (and often does) intervene in the certification and/or ETC process as a delaying tactic to slow down potential competition. It’s not hard for the whole process end-to-end of becoming a carrier and then an ETC to take two years. And that will not work for the funding process. So many of those who are thinking about asking for this money have no idea that the regulatory cards are stacked against them.

At the end of the day, all that is proven by getting an ETC status is that you are good at the paperwork process of regulation. The status really has no other practical benefit. And I say this as somebody who gets paid to obtain these kinds of certifications. Some regulation is good, but I hate regulation for regulation’s sake. And this requirement of having to be an ETC to bring broadband to rural places is a stupid dinosaur kind of regulatory requirement.

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