For those of us who believe the FCC would more effectively regulate the industry if it could ever get beyond its current partisan bitterness, this has been a mixed week.  At the same time Republican commissioners are before Congress, testifying to the extent to which the Commission has become ultra-partisan, it appears the agency has actually compromised on a plan that would end the standalone rural broadband problem.  Under the current rules, rate-of-return (ROR) ILECs are prevented from receiving Universal Service Fund (USF) support for broadband-only services unless they provide an accompanying voice service even when their customers do not need or want that service.  The rule simply makes no sense in an age when customers have so many choices to purchase voice service.

The extent of the Commission’s disarray became apparent this week when Republican Commission Ajit Pai appeared before the House Subcommittee on Communications and Technology of the United States House of Representatives Committee on Energy and Commerce on March 22, 2016.  In his Testimony, Pai stated:

[T]he FCC continues to be run in a partisan fashion.  Since December 2013, there have been 20 separate party-line votes at our monthly meetings. That’s twice as many as under Chairmen Martin, Copps, Genachowski, and Clyburn combined.  Proposals from Republican Commissioners have been roundly rejected as crossing a “red line,” even when an identical proposal from a Democratic Commissioner is accepted later on.  And requests by Republican Commissioners to increase transparency or amend a proposal are routinely ignored, which means the Commission regularly adopts orders without any official response to our requests. 

Yet, despite their stark differences, the commissioners can work together, as evidenced by the proposal to fix the universal service quagmire faced by rural ILECs.  Their plan, which has been circulated in a draft order to all five commissioners, is expected to be approved quickly.  Significantly for ROR carriers, in addition to fixing the broadband issue, the plan would also lower their authorized rate of return on net investment from the current 11.25 percent to approximately 8 percent.  While they will not like this, rural ILECs have been on notice for years that their authorized rate-of-return would likely drop as the cost-of-capital dropped. Hopefully, they have planned accordingly.

Here are more details of the upcoming order:

Stand-alone broadband has become an important issue to rural ILECs who argue that requiring them to offer voice service along with broadband to receive funding is becoming increasingly impractical at a time when many people are discontinuing traditional voice service.  Congress has become increasingly vocal in urging the FCC to seek a solution.  In his February 17, 2016 blog, Chairman Tom Wheeler acted like a proud papa in describing the details of the new plan for ROR carriers:

The proposed Order sets forth a package of reforms to address rate-of-return issues that are fundamentally intertwined—the need to modernize the program to provide support for stand-alone broadband service; the need to improve incentives for broadband investment to connect unserved rural Americans; and the need to strengthen the rate-of-return system to provide certainty and stability for years to come.

The proposed Order would create an entirely voluntary path for rate-of-return carriers that prefer the predictability of defined support amounts over a ten-year term. Similar to the approach that has successfully spurred deployment by larger “price-cap” carriers, this model-based support comes with defined milestones for efficient, accountable deployment. This model-based option has been actively sought by some rate-of-return carriers, and reflects significant updates and carrier-submitted data from the rate-of-return community.

For carriers who choose to continue receiving support based on traditional rate-of-return principles, the proposed Order would provide more certainty for carriers, increase fiscally responsible management of the fund, and ensure that a reasonable portion of support is spent on new buildout to connect those that remain unserved. To better meet the needs of consumers, for the first time, we would provide support for stand-alone broadband without a voice service subscription, building on the framework of our longstanding rules.

To limit the universal service fund’s burden on ratepayers, the proposed Order would adopt budget control mechanisms to ensure that rate-of-return carriers collectively stay within the established rate-of-return budget. Notably, the proposed Order reflects the shared principle embodied in the “Walden Rule,” that we should limit the use of ratepayer funds to support service in an area that is served by an unsubsidized Internet provider. And the proposed Order would lower the authorized rate of return for incumbent carriers to better reflect current financial market conditions. Finally, a Further Notice included with the Order would seek comment on additional reforms that would further guard against waste.

The change in the authorized rate-of-return for rural ILECs comes from a May 16, 2013, FCC report which set forth the data and procedures the Wireline Competition Bureau recommended the full Commission use to re-prescribe the authorized rate-of- return:

Based upon the staff analysis of 16 publicly-traded incumbent LECs, using various analytical methods and sources of publicly-available data, the staff report identifies a zone of reasonable estimates of the weighted average cost of capital (WACC) ranging from 7.39 percent to 8.72 percent.  This zone of reasonable estimates reflects, among other things, different estimates of the cost of equity produced using the Capital Asset Pricing Model and the Discounted Cash Flow Model (WC Docket No. 10-90, Public Notice filed June 7, 2013).

Perhaps the Commission was able to get beyond politics on this issue because helping rural companies does not receive the publicity of a net neutrality or Internet privacy issue.  Perhaps the only way for the Commission to effectively function in the future is to eliminate public and Congressional lobbying and make the agency more like the Supreme Court.  Conversely, maybe the Commission should be forced to make all its decisions transparent so all work product is open to public scrutiny and if a decision is political, it would be open for all to see.  Regardless of how the Commission moves forward, it would be awful if compromise can occur only when the general public and the big-city media cares little about the solution.

By Andy Regitsky, CCMI