[Senate Hearing 113-211]
[From the U.S. Government Publishing Office]
S. Hrg. 113-211
THE STATE OF RURAL COMMUNICATIONS
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HEARING
before the
SUBCOMMITTEE ON COMMUNICATIONS, TECHNOLOGY, AND THE INTERNET
of the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
APRIL 9, 2013
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
JOHN D. ROCKEFELLER IV, West Virginia, Chairman
BARBARA BOXER, California JOHN THUNE, South Dakota, Ranking
BILL NELSON, Florida ROGER F. WICKER, Mississippi
MARIA CANTWELL, Washington ROY BLUNT, Missouri
FRANK R. LAUTENBERG, New Jersey MARCO RUBIO, Florida
MARK PRYOR, Arkansas KELLY AYOTTE, New Hampshire
CLAIRE McCASKILL, Missouri DEAN HELLER, Nevada
AMY KLOBUCHAR, Minnesota DAN COATS, Indiana
MARK WARNER, Virginia TIM SCOTT, South Carolina
MARK BEGICH, Alaska TED CRUZ, Texas
RICHARD BLUMENTHAL, Connecticut DEB FISCHER, Nebraska
BRIAN SCHATZ, Hawaii RON JOHNSON, Wisconsin
WILLIAM COWAN, Massachusetts
Ellen L. Doneski, Staff Director
James Reid, Deputy Staff Director
John Williams, General Counsel
David Schwietert, Republican Staff Director
Nick Rossi, Republican Deputy Staff Director
Rebecca Seidel, Republican General Counsel and Chief Investigator
------
SUBCOMMITTEE ON COMMUNICATIONS, TECHNOLOGY,
AND THE INTERNET
MARK PRYOR, Arkansas, Chairman ROGER F. WICKER, Mississippi,
BARBARA BOXER, California Ranking Member
BILL NELSON, Florida ROY BLUNT, Missouri
MARIA CANTWELL, Washington MARCO RUBIO, Florida
FRANK R. LAUTENBERG, New Jersey KELLY AYOTTE, New Hampshire,
CLAIRE McCASKILL, Missouri DEAN HELLER, Nevada
AMY KLOBUCHAR, Minnesota DAN COATS, Indiana
MARK WARNER, Virginia TIM SCOTT, South Carolina
MARK BEGICH, Alaska TED CRUZ, Texas
RICHARD BLUMENTHAL, Connecticut DEB FISCHER, Nebraska
BRIAN SCHATZ, Hawaii RON JOHNSON, Wisconsin
WILLIAM COWAN, Massachusetts
C O N T E N T S
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Page
Hearing held on April 9, 2013.................................... 1
Statement of Senator Pryor....................................... 1
Statement of Senator Wicker...................................... 2
Statement of Senator Thune....................................... 42
Prepared statement........................................... 42
Statement of Senator Begich...................................... 45
Statement of Senator Blunt....................................... 47
Statement of Senator Fischer..................................... 49
Statement of Senator Klobuchar................................... 50
Statement of Senator Ayotte...................................... 53
Witnesses
John Strode, Vice President--External Affairs, Ritter
Communications................................................. 3
Prepared statement........................................... 5
Steve Davis, Executive Vice President, Public Policy and
Government Relations, CenturyLink.............................. 13
Prepared statement........................................... 15
LeRoy T. Carlson, Jr., Chairman. United States Cellular
Corporation.................................................... 17
Prepared statement........................................... 18
Patricia Jo Boyers, President and Chief Executive Officer, BOYCOM
Cablevision, Inc. and Board Member, American Cable Association. 32
Prepared statement........................................... 34
Appendix
Hon. Frank R. Lautenberg, U.S. Senator from New Jersey, prepared
statement...................................................... 59
Albert S.N. Hee, President, Sandwich Isles Communications, Inc.,
prepared statement............................................. 59
Memorandum dated April 9, 2013 from Jon Saunders, General
Manager, SECOM, Inc.; Vince Kropp, CEO/GM, PC Telecom; and
Thomas J. Kern, President, Northwest Colorado Broadband, Inc.
to United States Senate Committee on Commerce, Science, and
Transportation--Subcommittee on Communications, Technology, and
the Internet................................................... 61
Response to written questions submitted to John Strode by:
Hon. Barbara Boxer........................................... 62
Hon. Amy Klobuchar........................................... 64
Hon. Richard Blumenthal...................................... 65
Response to written questions submitted to Steve Davis by:
Hon. Barbara Boxer........................................... 66
Hon. Amy Klobuchar........................................... 66
Hon. Richard Blumenthal...................................... 67
Response to written questions submitted to LeRoy T. Carlson, Jr.
by:
Hon. Barbara Boxer........................................... 67
Hon. Amy Klobuchar........................................... 68
Hon. Kelly Ayotte............................................ 68
Response to written questions submitted to Patricia Jo Boyers by:
Hon. Barbara Boxer........................................... 70
Hon. Amy Klobuchar........................................... 72
Hon. Richard Blumenthal...................................... 72
THE STATE OF RURAL COMMUNICATIONS
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TUESDAY, APRIL 9, 2013
U.S. Senate,
Subcommittee on Communications, Technology, and the
Internet,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:33 a.m., in
room SR-253, Russell Senate Office Building, Hon. Mark Pryor,
presiding.
OPENING STATEMENT OF HON. MARK PRYOR,
U.S. SENATOR FROM AKANSAS
Senator Pryor. Let's go ahead and have our witnesses take
their seats and have the audience sit down. Thank you all. Call
this meeting to order.
I want to say good morning and welcome to the
Communications Subcommittee's hearing on the state of rural
communications. I want to thank all the witnesses for being
here today.
This is actually the first in a series of hearings that we
intend to hold on the state of the communications in the United
States. So, this is state of rural, and we'll have others in
the coming weeks. These hearings will serve as an important
snapshot on the various communications sectors around the
country. They will help educate our subcommittee members on a
lot of these issues. And it's an important chance for us to
listen to the stakeholders to find out how they see the lay of
the land. And also, it's going to be important for the
Subcommittee itself to help hear from other members on the
Subcommittee about their views on the state of communications
around the country.
Beginning with the Communications Act of 1934, Congress has
stood by the principle that all Americans should have access to
communications, whether they live in the urban or rural parts
of the country. That principle has meant that 98 percent of all
Americans have access to wireline communications. And, of
course, the USF is a big part of that. There's other policies
involved. And it's an important principle that continues to
underpin our push to make sure that rural Americans have access
to wireless communications, video services, and, even more
importantly, high-speed broadband. And I think broadband is the
basic fundamental communications network of tomorrow. High-
speed broadband in rural America means jobs, it offers access
to worldwide markets and digital economy. It provides advances
in healthcare and education, and it makes possible the new
forms of civic and social engagement for the 21st century.
So, for example, in my state, I've seen, firsthand, the
benefits of broadband. We have companies, such as Goggles and
Glasses in Batesville, an online eyewear retailer, and BriteSun
Data Services in Maumelle, a data network installation company.
These businesses are increasingly utilizing broadband to expand
and take full advantage of their potential.
The companies before us today, and the folks that they
represent, and many others around the Nation, have invested
billions of dollars in their networks to make their services
available to rural customers. I look forward to hearing from
our witnesses today about their businesses and their
experiences serving our nation's rural customers.
I also would like to know about the challenges that your
companies face in serving rural America. How do we bridge the
digital divide and meet the core principles of universal
service enshrined in the Communications Act? And how do we
ensure that rural consumers have the same quality of service as
their urban counterparts?
So, I know the members of the Subcommittee will benefit
from listening to what you have to offer. And, like I said,
we'd love to hear your perspectives.
Now, what I thought I would do is recognize Senator Wicker,
the ranking member of the Committee, and then, if it's okay
with the other Committee members, I may dispense with further
opening statements, just to allow us to get to the witnesses.
But, Senator Wicker, you're up.
STATEMENT OF HON. ROGER F. WICKER,
U.S. SENATOR FROM MISSISSIPPI
Senator Wicker. Thank you very much, Mr. Chairman.
This is the first hearing of the Subcommittee on
Communications, Technology, and the Internet, and I would like
to express my enthusiasm about working alongside my good friend
and colleague, Senator Pryor. I also appreciate Senator Pryor's
stated desire for us, up here, to get our talking done quickly
and let the witnesses have a chance to give us their expertise.
Mr. Chairman, you have put forward an ambitious agenda,
covering a broad cross-section of topics. I hope this will
position our subcommittee, not only as a forum for education
and debate on the current state of communications policy in our
nation, but also as a vehicle for identifying the best path
forward to ensure rapid, quality broadband for all Americans,
including rural Americans.
I am particularly glad that the first subcommittee hearing
is focused on the state of rural communications, a topic near
and dear to me. We, in Congress, must ensure that any digital
divide that exists between urban and rural areas is effectively
bridged, and that all Americans have the tools necessary to
take full advantage of our broadband economy.
The impact that high-speed broadband can have on economic
development in rural areas, like Mississippi and Arkansas and
Missouri and Nebraska and Wisconsin, cannot be overstated, and
strides have, indeed, been made. In particular, I'd like to
recognize the work of CSpire Wireless, for example, a regional
wireless provider headquartered in my home state. CSpire
provides nearly one million customers with mobile voice and
broadband access, and generates roughly $1.5 billion in
incremental positive economic impact on local, state, and
regional economies.
I would also like to highlight the nearly $975 million
investment by AT&T in its Mississippi wireless and wireline
networks in--with a focus on expanding 4G LTE mobile Internet
coverage across the state of Mississippi. I am confident that
these success stories are not only indicative of Mississippi,
but can be found across America.
I would like to welcome our witnesses and thank them for
testifying this morning. While not all inclusive, the companies
represented cover a broad range of providers with extensive
footprints in rural America, from wireline to wireless to
cable. I'm looking forward to learning about the work our
witnesses are doing to maximize broadband access and adoption.
At the same time, it is equally important for this
committee to learn about the regulatory obstacles providers
face, and how Congress can help clear those obstacles.
Thank you again, Mr. Chairman, for holding this important
opening hearing, and I look forward to working with you and all
the members of this subcommittee as we begin to examine the
varied and complex communication policies and the issues facing
our emerging broadband economy.
Thank you, sir.
Senator Pryor. Thank you.
What I thought I would do is, unless any of our colleagues
here would like to make their opening statements, I thought I
would just jump right into hearing from our witnesses today.
And I could do these long introductions. All of them have great
credentials and offer--and bring a lot to the table today. But,
I thought I'd just very briefly introduce each one and then
allow them to make their 5-minute opening statement.
We would love for you to keep your opening statement to 5
minutes each, if possible.
First, Mr. John Strode, of--he's Vice President, External
Affairs of Ritter Communications; that's based in Jonesboro,
Arkansas. Mr. Steven Davis, he's Vice President of CenturyLink.
Ms. Patricia Jo Boyers, she's President and CEO Of BOYCOM
Cablevision, up in Missouri. And Mr. LeRoy T. Carlson, Jr.,
Chairman of U.S. Cingular.
So, Mr. Strode, if you wouldn't mind? Thank you.
STATEMENT OF JOHN STRODE, VICE PRESIDENT--EXTERNAL AFFAIRS,
RITTER COMMUNICATIONS
Mr. Strode. Thank you, Mr. Chairman.
Chairman Pryor, Ranking Member Wicker, Committee members,
thank you for the opportunity to testify on this very important
topic. I am John Strode, Vice President of External Affairs for
Ritter Communications Holdings. Ritter operates in Arkansas and
Tennessee, employs about 280 people, serves nearly 33,000
telephone access lines, 26,000 broadband customers, and 20,000
basic cable subscribers.
The challenges we face, in terms of customer density and
distance, are similar to those faced by nearly 1,100 other
rural carriers who, together, serve about 5 percent of the
Nation's population but 40 percent of its geography. The cost
recovery necessary to serve such vast regions has historically
come from a mix of universal service support, intercarrier
compensation, and customer rates. Considering our success in
building out broadband over the past decade, with minimal
growth in USF support and declining intercarrier compensation
revenues, this strategy has clearly worked.
Unfortunately, ongoing efforts to transform this delicately
balanced structure have generated uncertainty and stalled
investment, leaving customers and broadband advancement in the
lurch. In the face of these regulatory shifts, many companies
are cutting costs, letting employees go, scaling back services,
and/or increasing rates, and hope that they can continue to
repay loans taken out to build advanced networks.
Regulatory uncertainty arising out of the changes already
adopted and the threat of more changes to come has led many
small companies to pull back on investment, and left all of us
with limited visibility into what rural broadband will look
like for consumers in the long run.
This uncertainty can be traced to two primary sources.
First, the FCC's quantile regression analysis model caps
USF support, based on a pool of data that is difficult to
analyze, contains acknowledged data errors, and is
unpredictable. Rural providers are not looking for guarantees,
but, like any small business, we need a reasonable capability
to develop and execute a business plan. The law recognizes
this, requiring that USF support be sufficient, predictable,
and specific. But, the unsettled nature of the QRA model leaves
many--leaves even a company that is not yet capped fearing that
potential investments may result in the company being penalized
for trying to provide the services that the national broadband
plan calls for.
Second, the FCC continues to consider additional caps,
cuts, and constraints on cost recovery before the dust has even
settled with respect to the reforms adopted in 2011 that are
now being implemented. We remain hopeful that the agency will
hold true to its commitment for a data-driven transformation
process and first consider the effects on consumers of those
changes already adopted before racing forward with further
modifications.
A recent survey conducted by NTCA, the rural broadband
association, underscores the impacts of this regulatory
uncertainty. Out of 185 small-carrier respondents, 127
indicated that they have either postponed or canceled plans to
upgrade network infrastructure due to this uncertainty; 101 of
those respondents indicated that the combined value of the
projects put on hold equaled more than $492 million.
So, how can we get rural broadband investment back on
track? Three key steps should be taken:
First, the FCC should reevaluate the QRA models and caps to
ensure greater transparency, accuracy, and predictability. They
should also employ the caps as triggers for further review
rather than as automatic disqualifiers of support.
Second, the FCC should refrain from any further cuts, caps,
or constraints until the effects of these changes that are now
being implemented can be evaluated.
And, third, it's important that the FCC define a path
forward for a sustainable broadband future for all rural
consumers.
On another note, but just as critical to the concept of
universal service, rural telcos have, for years now, confronted
the problem of calls failing to reach rural customers. The
industry has been seeking to shed light on the routing
practices that are the source of this problem. The FCC has
taken several steps, including issuing a declaratory ruling, in
February 2012, and a consent decree with Level 3, in March
2013, that required a contribution to the U.S. Treasury and a
compliance plan, going forward. The industry is appreciative of
the spotlight placed on this issue by Congress and the FCC, yet
the problem persists. It is clear that the problem is not
limited to just one entity, and it is essential that the FCC
undertake further enforcement to ensure that its recent consent
decree is not a one-time event.
While I was unable to cover every issue facing rural
carriers, I respectfully request that you review my full
written statement, which describes other challenges the small
carriers continue to confront with regard to deployment for
wireless services and access to affordable video content. Small
rural carriers, like Ritter, have been at the forefront of
technological evolution driven by a commitment to the
communities they serve.
We look forward to working with this committee to continue
delivering on that commitment.
Thank you.
[The prepared statement of Mr. Strode follows:]
Prepared Statement of John Strode, Vice President--External
Communications, Ritter Communications, on behalf of NTCA-The Rural
Broadband Association
Chairman Pryor, Ranking Member Wicker, committee members, thank you
for the opportunity to testify on this very important topic. My name is
John Strode, and I am the Vice President-External Affairs of E. Ritter
Communications Holdings, Inc. (Ritter).
Ritter was formed under the laws of the State of Arkansas on April
11, 1990. Ritter's parent company has been in business since 1886 and
has operated rural telecommunications companies since 1906. Today,
Ritter owns and operates three rural incumbent local exchange carriers
(ILECs), two in Arkansas and one in Tennessee; a facilities-based
competitive local exchange carrier (CLEC) and fiber network in
Jonesboro, Arkansas serving primarily small and medium-sized
businesses; and three cable television systems, one in a six-county
area of Northeast Arkansas and one county in southeast Missouri, one
serving a three-county area in North Central Arkansas; and one in a two
county area of West Tennessee. Ritter has also developed a fiber
network consortium extending from West Tennessee across Northern
Arkansas to Fayetteville in Northwest Arkansas. Ritter currently
provides broadband service, local and long-distance voice service,
switched access service, special access and private line services, and
cable television service.
Ritter has about 280 employees, with about 180 in Arkansas and 100
in Tennessee. Between all of its communications operations, Ritter
serves nearly 33,000 telephone access lines, 26,000 broadband customers
and 20,000 basic cable subscribers.
I have been involved with the communications industry in one form
or fashion for more than three decades. Specifically, for the past 17
years I have been employed by Ritter and previously I worked for the
Arkansas Public Service Commission. I am here to represent the hundreds
of small ILECs across the country who strive everyday to provide
quality voice, broadband, and other advanced services for all residents
in their service territories. The areas these companies serve range
from the Arctic Slope of Alaska to the outskirts of the Florida
Everglades. Companies like Ritter across the rural telecommunications
industry serve approximately 5 percent of the Nation's population, but
approximately 40 percent of the Nation's land mass.
While the size of the companies, the geographic and topographical
challenges they face, and their customer densities might all be
different, one thing remains constant--the dedication they have to
their communities. Many of the companies have invested in their
communities through scholarships, community development programs,
training programs, and most importantly well paying jobs. Companies
such as Ritter live and work in the communities they serve, they are
sources of economic development opportunities at home and critical
links to economic development opportunities in distant markets, and
they ultimately are the last line of defense in ensuring that the
Nation's universal service policies represent more than just words on a
page.
Universal Service/Intercarrier Compensation Modernization
The Federal Universal Service Fund (USF) and Intercarrier
Compensation (ICC) mechanisms have served as critical components of
cost recovery for network investments and service delivery in high-
cost, rural areas for decades. The need for reform of these mechanisms
has been discussed for a number of years, and there was a general
recognition over the past several years that these systems needed
modernization to realize their potential in a ``broadband era.''
Unfortunately, the transformation order released by the Federal
Communications Commission (FCC) in November 2011 has instead injected
uncertainty into the business of deploying broadband networks and
offering advanced services in rural America. Given the long-term nature
of investing in advanced networks, it is essential that some degree of
reasonable predictability be restored--and a reasonable path forward
for the recovery of such investments better defined--if our Nation is
to see the objectives of universal service truly achieved in this
broadband era.
In previous appearances before the Senate Commerce Committee,
representatives of the FCC have repeatedly expressed their intent to
employ a data driven process in undertaking USF and ICC reforms. The
FCC has also identified four pillars of reform that guided its efforts:
(1) modernization; (2) fiscal responsibility; (3) accountability; and
(4) incentive-based policies. We concur generally with these broad
themes. There were indeed aspects of the USF program that needed
updating to perform well over the longer-term and to reposition the
system to support broadband-capable networks and shifting consumer
demands. But unfortunately the data in the wake of the reform--and
Ritter's own experiences as a network operator in hard-to-serve, high-
cost areas for over 100 years--indicate that the recent changes should
be revisited, or at the very least recalibrated, to achieve the
ultimate objective of universal service: ensuring that every American
has access to affordable, robust, sustainable broadband, voice, and
other critical communications services.
When one considers that rural carriers were doing a ``commendable
job'' advancing broadband deployment even as of several years ago
(according to a group of FCC commissioners and state regulators) \1\,
and when one considers that rural telcos have been doing this work even
in the face of declining ICC revenues and only minimal--approximately 3
percent annual--growth in USF, it becomes apparent that, even if the
USF program may have needed modernization, it was also performing
reasonably well in terms of advancing broadband in the most rural
reaches of the United States within a fiscally responsible system.
Moreover, accountability could be measured best and most easily through
results. Even as more remains to be done to get broadband from basic
speeds to the kinds of speeds demanded by consumers and businesses
today, rural telcos were already doing a ``commendable job'' of
reinvesting in network deployment to further this cause.
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\1\ High-Cost Universal Service Support, Federal-State Joint Board
on Universal Service: Recommended Decision, WC Docket No. 05-337, CC
Docket No. 96-45, FCC 07J-4, at para. 30 (2007).
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Modernization therefore could have taken a different track than
what transpired, building upon the best of what worked but
repositioning critical USF systems for the future. Instead, in the wake
of the FCC's changes, there are a number of rural telcos adversely
affected by new caps, cuts, and constraints on their cost recovery
mechanisms. The reasons those telcos are affected by the changes vary,
and each change needs to be evaluated carefully, consistent with a
data-driven analysis, to see whether the regulatory changes are in fact
helping to preserve and advance universal service objectives.
As a representative of Ritter, however, I bring a unique
perspective, in that our company is not as adversely affected as many
others--at least yet--by the FCC's changes in terms of lost USF
support. But, as we stand here today, these regulatory changes and the
threat of more to come undermine predictability in the cost recovery
mechanisms. This has in turn made it increasingly difficult for my
company and many others like ours to decide whether and to what degree
to invest further in advancing broadband. It is important that
policymakers take steps as soon as possible to examine and address
these concerns, to inject reasonable predictability into the cost
recovery mechanisms for long-term network investments, and to promote
continuing investment in rural broadband.
A good deal of the current regulatory uncertainty can be traced to
two sources.
First, there is the FCC's ongoing consideration of whether to adopt
additional changes, such as further reductions to ICC revenue streams
or other USF changes such as reductions in the prescribed rate of
return, on top of those already adopted. Given that the ``dust has not
even settled'' on the changes already made and still being implemented,
it is hard to see why one would race forward with additional changes
that might only raise consumer rates further, reduce broadband
investment, and/or threaten the payback of loans, including Federal
loans due to the Rural Utilities Service. It is hard to square such an
approach with a commitment to a ``data-driven'' process.
Second, the FCC has adopted a model based upon ``quantile
regression analysis'' (or QRA) that applies caps to USF support based
upon a pool of data that appears to contain a number of errors and is
difficult, if not impossible, for any single company manager to
analyze. Moreover, the QRA model and resulting caps, at least for now,
shift from year-to-year in ways that cannot be easily predicted. To be
clear, rural providers like Ritter are not looking for guarantees with
respect to revenue streams -we simply want some reasonable visibility
into USF support and the ability to plan our businesses accordingly.
The law requires that USF support be ``sufficient, predictable and
specific''--and the QRA in its current form does not permit company
managers to make reasonable predictions about cost recovery revenues to
be obtained even a few years out, never mind over the 20-year-plus life
of telecom networks.
In fact, Ritter's multiple operating companies provide an
interesting perspective on the flaws of the current QRA model. Based on
the data used in the QRA model, it would seem at first blush that two
of Ritter's subsidiaries, E. Ritter and Tri-County, are somewhat
similarly situated based upon their ``access lines per square mile''
and several other factors. On the other hand, E. Ritter is located in
the Mississippi River Delta where the soil is very rich and allows for
cable to be buried, which provides a lower cost in the long run; while
Tri-County is situated in the Ozark Mountains where the cable must be
strung up on poles and overcome a 2,000 feet elevation change. The cost
characteristics of Tri-County are many times greater than E. Ritter and
Tri-County is very close to the caps set by the regression. There are
many legitimate reasons that some companies have high costs and the
regression should be used as a tool to identify companies that need
further examination, not as a blunt instrument to excise funding based
on an arbitrarily determined percentile.
Such oddities in the caps are compounded by data errors in the
underlying QRA model that is used to develop the caps. For example,
Tri-County's service area is 120 square miles larger than the FCC's
accounting in the model. Similar calculation errors have been found in
companies across the country. While each data issue on its own might
not seem troubling, because of the way in which the model looks at all
telcos nationwide, a change in any given factor for a single company
can actually cause significant fluctuations in the USF support that
telcos across the country receive. The FCC is taking steps now to
address a number of these data errors--but this will result in the
entire model and the QRA caps effectively being reset at the end of
this year, adding to the unpredictability as we all hold our collective
breath waiting for the new caps to come out.
While much attention has been paid to the so-called Connect America
Fund Phase 1--which is aimed at giving larger carriers a near-term
incentive to invest in rural areas--smaller rural carriers have been
forced to put many significant investments on hold for the time being
pending the resolution of the regulatory uncertainties described above.
A recent survey conducted by NTCA-The Rural Broadband Association \2\
underscores just how real the impacts have been. Out of 185 small
carrier respondents, 127 indicated they have either postponed or
cancelled plans to upgrade their network infrastructure due to
lingering regulatory uncertainty. One-hundred and one of these
respondents indicated that the combined value of the projects put on
hold equaled more than $492 million.
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\2\ This survey can be found through the following link: http://
www.ntca.org/2013-press-releases/survey-shows-rural-telecommunications-
carriers-postponing-delaying-network-upgrades-because-of-regulatory-
uncertainty.html.
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More recently, a publicly filed outline of a meeting between U.S.
Department of Agriculture (USDA) Secretary Thomas Vilsack and FCC
Chairman Julius Genachowski further underscored these concerns.\3\ That
filing outlined the importance of the USDA's historic role of promoting
rural economic development and financing rural utilities
infrastructure. It also noted that the economic stability of rural
areas depends on the availability of resilient robust communications
infrastructure. But the filing then indicated that, in Fiscal Year
2012, only 37 percent of the telecom infrastructure financing made
available through the USDA was used. USDA specifically cited
communications from current and prospective borrowers of the program
regarding hesitation to increase outstanding debt and move forward with
planned construction due to the recent regulatory changes. In other
words, it is not as if demand by carriers and consumers is not there--
to the contrary, it is quite clear that consumers across the country
are seeking increased levels of broadband, and as always, rural telcos
are willing and eager to serve them. Rather, the concerns that have
reduced loan demand arise out of whether the regulatory changes now
being implemented and those perhaps still to come will preclude the
payback of loans taken out to advance deployment of broadband-capable
networks in rural areas.
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\3\ See Ex Parte letter filed on 2/15/13 by Acting Administrator
Padalino which can be accessed here: http://apps.fcc.gov/ecfs/document/
view?id=7022122079
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Such developments are disappointing when one considers what rural
broadband investment means to the country as a whole. For example, the
Hudson Institute released a paper in October 2011 highlighting the
significant investment that rural providers provide beyond their own
local economies--the study showed that they contributed $14.5 billion
to the economies of the states in which they operated in 2009.\4\ An
earlier study indicated that every one percentage point increase in
broadband penetration increases overall employment by 0.2 percent to
0.3 percent a year.\5\ In short, broadband investment translates into
jobs in the near-term, valuable infrastructure in the long-term, and
benefits that flow not only locally, but regionally and nationally as
well.
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\4\ The Hudson Institute study is available through the following
link: http://www.hudson.org/files/publications/RuralTelecomOct2011.pdf
\5\ (n.d.). Retrieved from website: http://www.brookings.edu/ /
media/Files/rc/papers/2007/06labor_crandall/06labor_crandall.pdf.
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So how can we address these concerns as a country and get rural
broadband investment back on track? Three key steps can and should be
taken in short order.
First, the FCC should re-evaluate the QRA model and the caps it
produces to ensure greater transparency, accuracy, predictability, and
methodological integrity in their application. The caps should be
phased-in over a longer period of time--especially given that the caps
still need further development and particularly to the extent that they
apply inappropriately to limit recovery of investments made years ago,
before the rules were changed. The caps should also be used ultimately
as a ``trigger'' that flags a carrier for additional review, rather
than serving as an automatic disqualifier of recovery of certain costs.
Second, consistent with its commitment to a ``data-driven''
approach, the FCC should not adopt additional cuts, caps, and
constraints on USF support and ICC cost recovery until it has fully
implemented the changes already adopted and evaluated their impact on
consumers. A number of the reforms already adopted and just now being
implemented will result in rate increases on rural consumers and are
slowing down broadband investment as noted above. Before undertaking
changes that may only exacerbate these concerns, the FCC should take
stock of the effects of its reforms on broadband deployment, broadband
adoption, and end-user rates through a data-driven analysis.
Third, the FCC needs to define a path forward for a sustainable
broadband future for consumers in areas served by smaller carriers like
Ritter. The FCC created a Connect America Fund for larger carriers, but
it left in place legacy USF programs for smaller carriers that reflect,
on the whole, reductions in USF and ICC revenues. And the irony is that
this legacy system still needs updating to serve the objective of
universal service in a broadband-enabled world. Today, if a Ritter
customer wants to stop buying plain old telephone service from our
company and just wants broadband alone, that customer's broadband rates
would increase because USF support on that line goes away under the
legacy rules that are still in place. It is essential that the FCC
update its USF mechanisms to avoid this result--it can and should
create a targeted Connect America Fund in areas served by smaller rural
carriers by providing sufficient support for the networks (both last-
mile and transport) that enable the availability of advanced services
of all kind in rural markets, regardless of whether each customer
chooses to buy just plain old telephone service on those networks. This
does not require massive changes or reworking of the existing
mechanisms along the lines of the Connect America Fund that is still in
its second year of development for larger carriers--all that is
required here is a technical fix to the existing rules to achieve the
FCC's modernization objectives.
In the end, small carriers like Ritter and their representatives in
Washington, D.C. remain committed to working with the FCC and other
policymakers to ensure that the statutory promise of universal service
is realized. The experience over the past decade proves that
sufficient, predictable, and specific USF and ICC mechanisms drive
investment, improve the quality of life, create jobs, and increase
economic opportunities in rural markets. We believe that the several
simple and straightforward steps noted above will make a significant
difference in providing clarity to network operators, lenders, and
investors, thereby allowing them to make informed judgments about where
and when to deploy capital to build broadband-capable networks. We
believe that these steps are consistent with the statutory objectives
of universal service and the pillars of reform previously identified by
the FCC. And, finally and most importantly, we believe that consumers
and businesses in rural areas will benefit from efforts to facilitate
greater certainty in communications markets and to define a path
forward for sustainable rural broadband.
Contribution Reform
While debate has raged regarding the distribution side of the USF,
many policymakers and industry parties alike continue to hope the FCC
will soon finally tackle the contribution side as well. There are many
in the industry and policymakers as well, who feel the FCC should have
at least tacked contributions and distributions at the same time, if
not tacking contributions first to better ensure a foundation for and
appropriate ``sizing'' of the fund for the jobs required of it.
Contributions to USF are currently based upon interstate and
international revenues from certain telecommunications providers. As
consumer preferences shift, it has been widely recognized that the
eligible pool of revenue that can be assessed to fulfill the statutory
mandates of all four USF programs is declining.
The contributions system must be updated, much like the
distribution side of USF, to account for these shifts and to ensure
that those that rely upon next-generation networks contribute to their
universal availability and access. Contrary to what many may wish to
believe, the cost of deploying and using communications infrastructure
is not costless--even in an ``IP world,'' data must be moved from one
location to another, and that takes transport facilities, routing, and
delivery in even the most efficient and advanced of networks. We must
therefore take steps to ensure that the USF is sustainable by capturing
the broadest possible swath of those who benefit from the universal
availability of the network; casting the contribution obligations more
broadly will also help to reduce the burdens now being borne by only a
subset of customers, most of whom are making only minimal use of
communications networks as compared to other bandwidth-intensive users.
Some have questioned the FCC's authority to expand the contribution
base, but the FCC has ample authority under Section 254(d) to expand
the list of assessable services to any services delivered by providers
of ``telecommunications.'' It has used this authority for years to
assess contributions upon providers of interconnected VoIP services,
and the FCC also long ago concluded (as upheld by the U.S. Supreme
Court), even in classifying broadband Internet access service as an
information service, that broadband Internet access service also
includes a ``telecommunications'' component. There is thus no
``classification'' barrier to be resolved in rationalizing
contributions, because the legal path to assess contributions on the
provision of broadband Internet access services is clearly laid out in
the Act and already well-supported under existing FCC policy and
precedent.
Furthermore, it makes sense in the current environment, when the
USF distribution mechanisms are being reformed to focus more on
promoting broadband deployment, that the contributions system should
also look to broadband to support such deployment. Indeed, if the FCC
can distribute USF support to enable the deployment of broadband-
capable networks, as it has done in the wake of its November 2011
reforms pursuant to Section 254(c) (which refers expressly to
``telecommunications services'') and Section 254(e) (which refers to
``facilities and services for which the support is intended''), Section
254(d) provides an even more straightforward route to require USF
contributions based upon the clear and unquestioned fact that broadband
Internet access service incorporates a ``telecommunications''
component. Taking this step to ``broaden the base'' and update the
contributions mechanisms in short order is essential to make sure the
USF is sustainable and to realize the Nation's shared broadband goals.
IP Technology Evolution
Communications networks are evolving, along with consumer
preferences and the demand for advanced services. As noted earlier in
my testimony, rural network operators and service providers have been
at the vanguard of anticipating and responding to these changes, doing
a ``commendable job'' according to a group of FCC commissioners and
state regulators charged several years ago with evaluating the progress
of investment in advanced infrastructure.
The numbers bear this out--they show that small rural carriers are
no longer interested in just being telephone companies. Instead, these
small businesses have been at the forefront of investing in their
networks and making all kinds of cutting-edge services available to
consumers. A recent survey released by NTCA found that its entire
membership of small rural telecom providers now include broadband
within their service offerings;\6\ a study a few years ago by the
National Exchange Carrier Association (NECA) further found that smaller
rural carriers could deliver at least basic levels of broadband to 92
percent of their customers as of 2010, and that more than half of
smaller carriers had deployed or had plans to deploy next-generation,
IP-enabled switching and routing technology in place of legacy
telephone switches by 2011.\7\
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\6\ This survey can be found through the following link: http://
www.ntca.org/images/stories/Documents/Advocacy/SurveyReports/
2012ntcabroadbandsurveyreport.pdf.
\7\ This survey can be found through the following link: https://
www.neca.org/cms400min/NECA_Templates/PublicInterior.aspx?id=100.
---------------------------------------------------------------------------
Consumer demand for services on these advanced networks is on the
increase as well--the above-referenced NTCA survey indicated that the
consumer ``take rate'' for broadband (i.e., the rate at which consumers
who can get access to broadband are choosing to purchase it) is nearing
70 percent. In other words, these rural networks are not being built
just for their own sake, but precisely because real customer demand is
driving them--including demands for higher-speeds that require
additional investment and upgrade beyond the basic levels of broadband
that many small rural carriers can make available today. Small carriers
have demonstrated their commitment to promoting broadband adoption in a
variety of ways beyond just trying to deploy the best possible ``future
proof'' networks. From providing home-network installation and
computer/online literacy training to participating in the FCC's
Broadband Lifeline pilot program, rural telcos are looking to make sure
that as many consumers as possible get onto the network and that they
recognize and realize the value of the services provided. Broadband
adoption is not just a one-time event--it requires a commitment to
ensure that each customer finds good reason to stay on the network once
they've chosen to subscribe, and as community-based providers, small
rural carriers are as well-positioned as any to make that case.
The question then becomes how do we promote and sustain this
evolution to next-generation network technologies, including IP-enabled
services that depend upon a robust broadband foundation. To be clear,
it is not as if the public switched telephone network is ``dying'' or
that it needs to be ``shut off'' by regulatory mandate at some point.
Nor is it the case that an IP-enabled service equals ``the Internet.''
IP is just a technology, and there is nothing special about a network
that uses IP that makes it the ``Internet.'' There are plenty of
networks maintained by firms ranging in size from the smallest rural
telco to AT&T and Comcast that are privately managed and provide
quality-of-service that is unavailable and unobtainable on the public
Internet. Moreover, the evolution to IP technology is already occurring
as the ``public switched telephone network'' becomes more of a ``public
routed communications network.''
So it is an utter red herring to contend that this migration to IP-
enabled services and underlying higher-speed networks necessarily means
that everything is moving ``to the Internet.'' IP may be a technology
that is used in the Internet, but to be unmistakably clear, IP does not
equal the Internet. Instead, what we are seeing is an evolution in
technology that, while representing a significant leap in capacity and
capability, is analogous to when we moved from analog to digital
technology in networks decades ago. This is not to say that we should
maintain the same old regulations as we migrate to newer network
technologies--this is just to stay that we should not assume that the
existing regulations are inapplicable or of no use as new technologies
come on line simply because IP happens to have ``Internet'' in its
name. In the end, core statutory principles relating to protection of
consumers, promotion of competition, and assurance of universal service
apply by law to all communications, regardless of the technology used
on underlying networks.
It is important that policymakers approach the debate over how to
promote and sustain the ongoing IP evolution with this backdrop in
mind. The FCC is considering such questions now in the context of a
pair of petitions filed by NTCA and AT&T in late 2012. Our belief is
that policymakers can best promote and sustain this ongoing evolution
through carefully designed regulatory policies that do not ``prejudge''
the value (or inapplicability) of specific rules upfront. Policymakers
should neither dismantle the current regulatory framework simply
because services are being provided via IP technologies, nor should
they leave existing rules in place and simply hope that they serve the
same purpose they once did.
The former option, which NTCA has characterized as taking a
sledgehammer to existing regulations, would create a regulatory vacuum
that undermines the interests of consumers and defeats the objective of
providing regulatory certainty. Customers have felt the negative
impacts from the absence of adequate regulatory oversight of services.
Those impacts are underscored by rural call completion issues. Those
impacts are felt by customers whether the services are IP-enabled or
otherwise. The latter option, meanwhile, would turn a blind eye to the
fact that consumer expectations are changing and services are evolving
and that regulations must be re-evaluated periodically to determine if
they have redeeming value and purpose.
The NTCA petition therefore charts a middle course that would look
at existing rules to see if each rule still has value in serving the
statutory goals of consumer protection, promotion of competition, and
universal service. This approach has the benefit of starting from a
well-known regulatory framework that gives certainty to consumers,
investors, lenders, and the industry, but recognizing that there may be
the need to modify or discard elements of that framework to the extent
needed to address technological change or other factors. We support
such a comprehensive and thoughtful review of the regulatory framework,
and we also encourage the FCC to take certain targeted steps in the
near-term to accelerate the IP evolution--such as tailoring universal
service support to support broadband more directly and ensuring
reasonable interconnection between IP-enabled carrier networks.
Call Completion
Rural consumers and the carriers that serve them are losing faith
in the ability of regulators to ensure seamless connections across
critical communications networks. Increasingly over the past few years,
calls do not get through to rural areas--or when they do, they often
have quality problems. This large scale problem is seriously and
negatively affecting not only consumers, but public safety and the
viability of businesses that are located in rural areas.
The problem stems from choices made by originating long distance
carriers to use the cheapest possible route to transmit calls to rural
areas--with the apparent sense that, if the calls should happen not to
get there because the least-cost router in the middle failed to deliver
the call, there is little regulatory or economic consequence (if any)
for such failures. The solution to this problem lies with the
originating long distance carriers that need to better police their
service quality, and meaningful oversight and enforcement action by the
FCC is needed to prompt such a solution.
The FCC recently released a Notice of Proposed Rulemaking (NPRM)
which would force carriers to retain information so that the scope of
the problem could be ascertained on a company-by-company basis and
enforcement action could be pursued. However, to date, that NPRM has
not been published in the Federal Register and no comments have been
filed--this is more than 2 years after rural carriers and their trade
associations first brought this issue to the attention of the FCC. The
FCC also recently announced a ``Consent Decree'' with Level 3
Communications, in which the carrier paid a ``voluntary contribution,''
to monitor its call completion performance, and to pay additional
amounts if its performance failed to satisfy certain metrics.
In the interim, unfortunately, there has been no measurable and
sustained improvement in overall call completion rates to rural areas,
and calls continue to fail at an alarming rate. The FCC has made it
clear that carriers may not block, choke, or restrict traffic. But
these words have done little to deter call failures on their own, and
only strong oversight paired with effective FCC enforcement action
against offending carriers will ultimately put an end to the problem.
Video Issues
Small carriers have been providing video service to their consumers
for many years. In some areas this is done in direct competition with
large cable companies, enhancing consumer choice. In more remote places
where over-the-air signals may be weak and unreliable, this is a
critical service to customers who need access to local news and weather
reports.
Video provision is also a broadband issue, as small carriers
frequently use the same infrastructure to deliver both video and
broadband services. In fact, the FCC has found that these services are
intrinsically linked.\8\ When small carriers are able to offer video
and broadband services together, data shows that broadband adoption
goes up 24 percent,\9\ which makes it more feasible to invest in
broadband networks. However, small carriers' ability to deliver video
and broadband services are impeded by outdated program access rules
that make the business case increasingly difficult even for the
Nation's largest cable companies.
---------------------------------------------------------------------------
\8\ MB Docket No. 05-311, 22 FCC Rcd 5101, 5132-33, 62 (2007).
\9\ See NECA comments, GN Docket Nos. 09-47, 09-51, 09-137 (filed
Dec. 7, 2009), p. 6.
---------------------------------------------------------------------------
Retransmission consent rules that are now over twenty years old--
and thus reflect a very different video marketplace--give programmers a
stranglehold over video content and prevent small providers from
negotiating market-based rates for programming. Increasingly, customers
are facing blackouts of channels due to programmers' ``take it or leave
it'' tactics, which are technically prohibited but occur frequently. In
addition, evidence suggests that small and medium video providers pay
up to twice the rates that large companies do for the same programming.
And some types of content that is necessary for a viable service
offering, notably sports programming, may be subject to even higher
rates if it is available at all.
In addition, recent years have seen a spike in instances where
separately owned stations within the same market coordinate their
retransmission consent negotiations. Such collusion has enabled these
separately-owned broadcasters to command retransmission consent prices
that are 21 percent to 161 percent higher than each station negotiating
on its own behalf could command on its own.\10\ These high rates are in
turn passed on to consumers and decrease competition in the local
television market.
---------------------------------------------------------------------------
\10\ See ACA comments, MB Docket Nos. 09-182 and 07-294 (fil. Mar.
5, 2012), p. 9.
---------------------------------------------------------------------------
Customers must also pay ever-higher prices for video programming
they do not even want because programmers force providers to buy
multiple unwanted channels, and place them in basic service tiers, in
order to have access to channels that customers demand. This ``forced
tying'' prevents small providers from offering more affordable packages
of channels, and is raising prices to unsustainable levels.
Technology and the video marketplace have changed drastically since
the current program access regime was enacted over 20 years ago. Just
as we are talking about the need to re-evaluate rules in the context of
an IP evolution in communications networks, it is far past time for
policy makers to reform these outdated rules and encourage, rather than
impede, video competition and broadband deployment.
Wireless Issues
Rural consumers require access to a strong and reliable wireless
network and rural carriers are attempting to meet that demand despite
monumental challenges. A lack of interoperability across the 700 MHz
spectrum may lead to spectrum lying fallow or islands of rural service
with devices that cannot be used outside of a customer's home service
area. A lack of fair and reasonable data roaming agreements with large
carriers compounds the problem, creating barriers even when spectrum is
interoperable. Furthermore, rural carriers often lack access to the
equipment and handsets that are available to larger carriers.
The anti-competitive actions and advocacy efforts of larger
carriers are pushing smaller players out of the wireless market, to the
detriment of rural consumers whose only option for wireless service is
often the local community-based telecommunications provider.
Conclusion
Small rural carriers like Ritter have been at the forefront of
technological evolution and deployment of advanced services, driven by
a commitment to the communities in which they live and operate and
supported by cost recovery mechanisms that, while in need of updating,
enabled them to invest in high-quality networks in some of the most
challenging corners of the United States. Small rural carriers also
represent the lifeblood of economic development in their communities,
providing well-paying jobs and critical connections to distant markets.
Universal service is a national policy codified in Federal law. But
it is much more than that--it is also a sensible reflection of the
notion that our networks are made more valuable by the number of
connections to them, and the data show real and meaningful payback to
regional economies and the national economy through rural broadband
investment. Universal service is therefore too important to be the
subject of experiment or theory. We also cannot look at universal
service merely as a question of ``how many customers are connected
right now?'' Universal service cannot be viewed as a snapshot
``scoreboard'' of the number of customer connections in place at any
given time. Instead, universal service will only succeed, and the
universal service dollars put into network investments will only be
effective and efficient and provide a return to the country as a whole,
if the connections are sustainable--that is, if the networks that are
built through universal service dollars are ``future-proof'' in terms
of capacity and if the services that are available on those networks
remain high-quality and affordable.
Small rural carriers remain committed to their communities and the
consumers they serve in the face of changing technologies and shifting
consumer preferences. But we can only carry out the mission of customer
service in today's and tomorrow's communications markets if network
operators have reasonable visibility into the ability to recover
investments over time and if we can provide consumers in the hardest-
to-serve parts of the country with the affordable, reliable cutting-
edge telephone, broadband, video, and wireless services that they
demand and deserve. The future of rural communications could be in
question if small rural carriers cannot reasonably plan for the next
round of network builds, or if calls do not complete to rural areas, or
if consumers cannot gain access to affordable video or wireless
services. We hope that Congress and the FCC will help make the promise
of rural communications a reality through effective and sensible
oversight that protects consumers, promotes competition, and ensures
universal service.
Senator Pryor. Thank you.
Mr. Davis.
STATEMENT OF STEVE DAVIS, EXECUTIVE VICE PRESIDENT, PUBLIC
POLICY AND GOVERNMENT RELATIONS, CenturyLink
Mr. Davis. Good morning, Mr. Chairman and members of the
Committee. We appreciate your leadership in calling today's
meeting on the state of rural communications.
In our view, the central issue in rural communications is
the availability of broadband access and the challenge of
bringing it to markets with low population densities in often
very challenging terrain.
CenturyLink serves thousands of rural communities, often
with household densities below 15 people per square mile, many
of which do not have access to any other provider of voice
service or terrestrial broadband. By comparison, the population
of the greater Washington, D.C., metropolitan area is about
13,000 people per square mile.
Over the past 5 years, CenturyLink has invested more than
$4 billion to bring broadband access to every corner of our
service territory where it is economically feasible to do so.
And, despite the rural nature of our markets, we are making
high-speed Internet service available to more than 91 percent
of the homes and businesses within our local service area.
America is a vast country, and there are many diverse
places in almost every state where the cost of investment is
too great and broadband availability simply won't be feasible
under today's system. According to the FCC, nearly 18 million
consumers in rural areas still lack access to broadband and, as
such, aren't yet at the table in today's digital economy. These
rural customers want high-speed fiber-fed broadband networks
that are capable of delivering access to new educational
opportunities, cloud computing services, healthcare
applications, IP television, and streaming video. CenturyLink
and other large rural providers have the opportunity to reach
nearly 80 percent of those who do not have broadband today.
Fiber-fed broadband brings the capacity that will be needed to
meet the service demands of both wireline and wireless
customers for the foreseeable future.
In the last several years, Federal policies have sought to
address these challenges in a number of ways. As a result of
market realities and the reform process, we now believe there
is broad consensus for the following four guiding principles:
First, we must target support on a granular level to places
where market forces would not otherwise make broadband
available.
Second, we must ensure that support goes only to those
uneconomic places and where there is not an unsubsidized
competitor providing adequate service.
Third, we must ensure that support and services are
reasonably equivalent to those available in urban markets, in
features, quality, price.
And, finally, we must match support and obligations to
serve. Obligations cannot exceed the available support, and
they should be limited to the supported areas.
In the near term, the challenge is to keep reaching
unserved households and bring more consumers and communities
into the broadband economy. A critical feature of the FCC's
broadband deployment plan is the interim support component of
the Connect America Fund, frequently referred to as CAF-1--C-A-
F-1. This fund is intended to jumpstart the unserved deployment
process by allocating approximately $300 million in 2012 and
2013 to the deployment of broadband services in high-cost,
unserved areas. These funds have already been collected from
customers, as directed by the FCC.
Unfortunately, only a small fraction of the dollars
targeted for unserved markets have been put to use. The states
and local markets that will benefit from this funding are eager
to see the release and use of these CAF-1 funds to build
broadband networks and take part in the services that will be
provided. With spring's arrival, the time for providers to
build new networks is now.
Unsurprisingly, support for moving forward with this
approach has been bipartisan and widespread across both urban
and rural affiliations. Nearly 100 Members of Congress,
including members of this committee, have contacted the FCC
within the last 90 days about completing its work on CAF-1
incremental support. The good news is that it appears the FCC
is listening and is ready to move forward on this important
initiative. CenturyLink will continue to work with the FCC and
the industry to achieve good broadband outcomes for unserved
areas.
Too often, conversations in rural America take place among
neighbors, family, and friends about helpful technologies and
advances that they have witnessed in other parts of the
country. Sadly, they are accustomed to waiting many years for
these advances to be available in their part of the country.
The challenge of bringing robust broadband services to rural
America is not an easy one, as members of this committee can
attest, but it's an important one, and we look forward to
working with the FCC and the Congress, in 2013 and beyond, to
continue improving the state of rural communications.
Thank you.
[The prepared statement of Mr. Davis follows:]
Prepared Statement of Steve Davis, Executive Vice President, Public
Policy and Government Relations, CenturyLink
Good morning, Mr. Chairman and Members of the Committee. My name is
Steve Davis, and I am Executive Vice President for Public Policy and
Government Relations for CenturyLink. CenturyLink offers communications
services to over 14 million homes and businesses in all 50 states and
select international markets. Our services include voice, broadband,
video entertainment and data, as well as fiber backhaul, cloud
computing and managed security solutions.
We appreciate your leadership in calling today's hearing on ``The
State of Rural Communications.'' In our view, the central issue in
rural communications is the availability of broadband access and the
challenge of bringing it to markets with low population densities and
often challenging terrain. In the 21st Century economy, being connected
has become an integral part of nearly everything we do, in work,
education, medicine, agriculture and numerous other pursuits. And for
rural communities seeking economic development, a robust broadband
infrastructure is often a prerequisite before any business, large or
small, will consider moving to that area.
CenturyLink's local service territory encompasses 37 states, with a
handful of major urban areas, numerous smaller cities and towns, vast
plains of rural agricultural communities, national parks and forests,
tribal lands, mountainous and desert regions, and areas with a great
number of lakes. In other words, our service footprint is
representative of the various markets in your respective states.
CenturyLink serves thousands of rural communities, often with household
densities below 15 people per square mile, many of which do not have
access to any other provider of voice or terrestrial broadband. By
comparison, the population of the greater Washington, D.C. metropolitan
area is about 13,000 people per square mile.
Over the past five years, under the current system of Universal
Service and intercarrier compensation, CenturyLink has invested more
than $4 billion of its own capital to bring broadband access to every
corner of our service territory where it is economically feasible. And
despite the rural nature of our markets, we are making high speed
Internet service available to more than 91 percent of the homes and
businesses in our local service areas. This includes many places where
CenturyLink is the only terrestrial broadband provider and where,
without such support, the investment would not be sustainable.
America is a vast country, however, and there are many far-flung
places, away from town centers and spread over challenging terrain,
where the cost of investment is too great and terrestrial broadband
availability simply won't be feasible under today's system. According
to the Federal Communications Commission (FCC), nearly 18 million
consumers in rural areas still do not have access to broadband and, as
such, aren't even at the table in today's digital economy. This is a
scope and scale problem that can be largely addressed through targeted
investments to areas where the greatest opportunities lie to reach
hundreds of thousands of Americans as quickly as possible. CenturyLink
and other large rural providers have the opportunity to reach nearly 80
percent of those who do not have broadband today. In addition, the
fiber-fed broadband we deploy is important to the provision of both
fixed and mobile broadband services. Wireless broadband is generally
provided today with fiber connections to the towers that communicate
with handsets.
In the last several years, Federal policies have sought to address
these challenges in a number of ways, through the FCC's National
Broadband Plan, various policies to eliminate barriers to deployment,
and the USF/ICC Transformation Order. Broadband availability has
definitely increased, but more must be done. As the FCC and rural
providers of every stripe have worked together, several guiding
principles that have emerged over time:
We must target support on a granular basis, to places where
market forces would not otherwise make it available.
We must ensure that support goes only to those uneconomic
places and where there is not an unsubsidized competitor
providing adequate service.
We must ensure that supported services are reasonably
equivalent to those available in urban markets, in features,
quality and price.
We must match support and obligations to serve--obligations
cannot exceed the available support and they should be limited
to the supported areas.
In the near term, the challenge is to keep reaching unserved
households and bring more consumers and communities into the broadband
economy. A critical feature of the FCC's broadband deployment plan is
the interim support component of the Connect America Fund (frequently
referred to as CAF I). This fund is intended to jumpstart the unserved
deployment process by allocating approximately $300 million annually to
the deployment of broadband services in high cost, unserved areas.
These funds have already been collected from customers, as directed by
the FCC.
Unfortunately, only a small portion of these CAF I funds have been
allocated for use. Specifically, only $115 million of the $600 million
targeted for unserved markets has been accepted for deployment in the
field. The states and local markets that will benefit from this funding
are eager to see the release and use of these CAF I funds to build
broadband networks and take part in the services that will be provided.
With spring's arrival, the time for providers to build networks is now.
Most of us in this room know there are hundreds of thousands of
consumers who are still unserved, and are eager to be connected.
Unsurprisingly, support for moving forward with this approach has
been bipartisan and widespread across both urban and rural
affiliations. Nearly 100 members of Congress, including members of this
Committee, have contacted the FCC within the last 90 days about
completing its work on CAF I incremental support. Governors, mayors,
business owners and consumers from across the country have also weighed
in with their letters and words of support. Timely FCC action could
significantly narrow the rural digital divide, and faster broadband
speeds and greater availability of broadband services will give rural
consumers access to new educational opportunities, cloud computing
services, healthcare applications, IP television, streaming video and
faster wireless speeds. These are just some of the important components
you must consider in determining the true ``State of Rural
Communications.''
The good news is that it appears the FCC is ready to move forward
on this important initiative. We believe and hope that the FCC is
prepared to adopt an order which would lay the groundwork for use of
these CAF I dollars sooner rather than later. For the hundreds of
thousands of households and businesses that have little hope of
receiving high speed Internet services today, a speedy decision by the
FCC would be a welcome and meaningful action from Washington that would
improve both lives and economies in these markets for years to come.
You should also be aware of the accountability aspects of the CAF I
funding process. The ability of CenturyLink and other large rural
providers to invest millions of dollars of their own capital
demonstrates both a willingness and a firm commitment to help our
country close its broadband gaps and accelerate the deployment of these
high speed networks in areas where it would not otherwise be
economically efficient to do so and others will not serve.
Because this hearing focuses on the State of Rural Communications
in America, we must also talk about the country's long-term broadband
deployment goals and challenges. The FCC is also working on Phase II of
Connect America Fund (CAF II) support for high-cost areas served by
large rural carriers where there are no unsubsidized competitors and
where broadband will not exist without support.
We are hopeful this program will move forward successfully, with
most of the funding being accepted and put to work supporting expanded
broadband availability in high-cost rural areas where remaining gaps
still exist. For this to happen, the cost model must provide adequate
support, while also avoiding overpayment. In this regard, CenturyLink
supports a forward-looking, or ``greenfield'' approach, which is the
approach the FCC has consistently adopted for cost modeling extending
back at least to passage of the 1996 Act.
We must also acknowledge America's rural broadband challenges are
greater than any one provider or group of companies. At CenturyLink, we
recognize the challenges faced by our smaller industry contemporaries,
particularly those operating under rate-of-return regulation in high
cost areas. The different forms of regulation have created different
incentives and obligations for many years, and this disparate treatment
has only increased with recent reforms. However, consumers who do not
have broadband service today do not care about obscure regulatory
regimes that may delay deployment in their areas. We believe the FCC
should work with rate-of-return carriers to address their concerns and
can do so in a way that does not slow the benefits of reform for the 80
percent of rural customers served by CenturyLink and other large rural
carriers. Small carriers and large carriers receive support from
separate USF mechanisms. Moving forward on one does not hurt the other.
The ``greater good'' is bringing as many people online as quickly as
possible and remaining focused on helping the rest as quickly as
possible.
Too often, conversations in rural America take place among
neighbors, family and friends about helpful technologies and advances
that they have witnessed in other parts of the country. Sadly, they are
accustomed to waiting many years for these advances to be available in
their part of the country. The challenge of bringing robust broadband
services to rural America is not an easy one, as members of this
committee can attest, but it's an important one, and we look forward to
working with the FCC and Congress in 2013 and beyond to continue
improving the state of rural communications.
Senator Pryor. Thank you.
Mr. Carlson.
STATEMENT OF LeRoy T. CARLSON, JR., CHAIRMAN.
UNITED STATES CELLULAR CORPORATION
Mr. Carlson. Yes, thank you. Chairman Pryor, Ranking Member
Wicker, and--excuse me, we'll get that. Thank you very much.
Chairman Pryor, Ranking Member Wicker, and members of the
Subcommittee, good morning, and thank you for this opportunity
to speak with you today about the challenges confronting those
companies that want to serve rural America.
At U.S. Cellular, we focus on having the world's best
customer service and delivering industry-leading innovations
across our entire territory. We are expanding our world-class
4G LTE high-speed broadband network and will cover 87 percent
of our customers with this network by the end of this year.
So, as a company that serves West Virginia, Missouri,
Washington, Nebraska, New Hampshire, Indiana, Wisconsin,
Minnesota, Virginia, and many other states, I can affirm our
commitment to excellent service. I'm also proud of the fact
that U.S. Cellular has served these rural areas and been
recognized with awards for offering the, ``highest network
quality performance among wireless cell phone users,'' as well
as being identified as the, ``best place to buy a cell phone.''
In short, what this means is that rural customers can be
provided with the best elements of a 21st century network, and
that being rural doesn't have to equate to being left behind.
Providing those services in less densely populated areas
does present a different set of business and regulatory
challenges. We believe there are several core principles, in
addition to the ones that have been mentioned here, that should
guide your efforts to improve rural communications in this
country.
First, the government must ensure that sufficient spectrum
is made available to a broad range of wireless carriers,
including midsized and smaller carriers operating in rural
America. Spectrum is the raw material of the wireless industry.
Without sufficient spectrum, calls won't be completed, and
consumers' demand for high-speed mobile broadband will go
unmet.
In regard to the upcoming incentive auctions, the FCC must
adopt small geographic area sizes that will allow carriers,
such as U.S. Cellular, to compete for spectrum in the areas
that they serve, without being required to bid against national
carriers for giant cities. For the same reason, package bidding
needs to be rejected by the FCC. National carriers shouldn't be
allowed to foreclose midsize and smaller carriers from access
to spectrum in rural markets by tying those markets to more
expensive licenses for big urban markets.
Second, FCC rules must provide for interoperability across
spectrum bands to ensure consumer needs, such as roaming and
device portability, are met. A huge problem exists today in the
700 megahertz band, which was auctioned several years ago.
Decisions by national carriers to deploy handsets that used
customized designer bands, subset bands, has led to handsets
that only work on one or two carriers' networks, which
suppresses intercarrier roaming opportunities for 4G service
and effectively assures that customers are locked into a large
carrier's network.
Today's increasingly concentrated wireless industry does
pose a threat to competition. The FCC must fix this problem in
the 700 megahertz band and restore interoperability by adopting
proposals to solve this problem. And the FCC should act before
the 600 megahertz auction repeats this problem, because the 600
megahertz band also is very essential to providing service in
rural areas.
Third, we must acknowledge that consumers desire both
wireless and wireline services, and the distribution of support
under the Federal Universal Service Program needs to
appropriately balance those interests. We did not agree with
all of the decisions the FCC made, and we're actively asking
the Commission to fine-tune the mobility fund programs, going
forward. Consumer demand for mobile broadband continues to
skyrocket at a time when deployment to the most rural areas of
the country remains uneconomic and, thus, still incomplete.
Unfortunately, the FCC's Mobility Fund fails to allocate
sufficient resources to wireless. Less than 10 percent of the
overall funding is going to wireless.
In conclusion, the challenges that we face in rural America
are not insurmountable. The issue is how to ensure that the
regulatory regime is sensitive to the business challenges of
serving rural markets for equipment that could serve 250,000
people in an urban market has to see its costs spread over
maybe 5,000 or 10,000 people in a rural area. Government
support is necessary, in some instances, where the economics
will never work for the private sector to invest alone.
Your urgent attention to these three major issues is kindly
requested by our company and by other companies that are like
us that intend to serve rural America to the best of our
abilities.
Thank you for the opportunity to testify.
[The prepared statement of Mr. Carlson follows:]
Prepared Statement of LeRoy T. Carlson, Jr., Chairman,
United States Cellular Corporation
Chairman Pryor, Ranking Member Wicker and members of the
Subcommittee, I am Ted Carlson, Chairman of United States Cellular
Corporation. Thank you for the opportunity to speak with you today. I
am pleased to provide you with my observations on the state of rural
communications and the challenges we face in serving the people of
rural America.
Introduction
At U.S. Cellular, we deliver a world class customer experience and
industry-leading innovations across our entire territory, not just in
densely populated urban markets. We are expanding our state of the art
4G LTE network and will cover 87 percent of our customers by the end of
this year. As the Chairman of a company that serves West Virginia,
Missouri, Washington, Nebraska, New Hampshire, Indiana, Wisconsin,
Minnesota, Virginia, and many other states, I can affirm that our
commitment to a superior network and excellent customer service not
only rivals, but beats, what is provided to consumers in urban areas.
We are proud of the fact that, despite challenges of serving rural
markets, U.S. Cellular has been recognized with awards for offering the
``Highest Network Quality Performance Among Wireless Cell Phone Users''
as well as being identified by various sources as the ``Best Place to
Buy a Cell Phone'' and the ``Number One Large Company to Work For.'' We
have proven that rural consumers don't have to settle for second best
and that being ``rural'' doesn't equate to being left behind.
But providing those services in less densely populated areas does
present a different set of business and regulatory challenges that
urban providers don't encounter. That is why we appreciate the
Committee's willingness to take the time today to examine those
differences and, we hope, consider effective solutions to them.
For nearly thirty years, U.S. Cellular has been a leader in
providing high-quality mobile wireless telecommunications and
information services in rural America. Today, we operate in over 150
FCC-licensed markets throughout the nation, serving over 5 million
customers, employing approximately 8000 associates, deploying the
latest 4G mobile broadband technology and providing our customers with
excellent service.
Providing an outstanding customer experience is an integral part of
our success and should reassure you that ``rural'' can also mean
``excellence'' when it comes to communications services. We have won
the J.D. Power Award for Highest Network Quality in the North Central
Region of the United States for fifteen consecutive periods over eight
years. We scored first in Forrester's 2013 Customer Experience Index
for wireless providers, surpassing the ``big four'' wireless carriers
by a wide margin.\1\ For the last three years, Consumer Reports has
named U.S. Cellular the top service provider amongst post paid wireless
carriers.\2\
---------------------------------------------------------------------------
\1\ See Forrester Research, http://www.forrester.com/home
(registration required); See also, ``Ninetendo, Fios, U.S. Cellular Top
Forrester's Consumer Rankings,'' http://news.cnet.com/8301-1023_3-
57565208-93/nintendo-fios-us-cellular-top-forresters-consumer-
rankings/.
\2\ www.consumerreports.org/cro/phoneplans0113.htm
---------------------------------------------------------------------------
Despite our consistently high performance, the wireless industry
remains very challenging, especially for mid-sized and smaller carriers
like us who tend to focus on rural areas. Let me provide some
observations on what we're seeing in the marketplace, the challenges we
face as rural wireless providers, and some solutions.
Lower 700 MHz Interoperability
First, as wireless providers deploy services in new spectrum bands,
FCC rules must provide for interoperability across those bands in order
to ensure that consumer needs such as roaming and device portability
are met. A huge problem exists today in the 700 MHz Band. Decisions by
national carriers to deploy handsets using customized designer band
classes, have fractured the handset ecosystem, suppressed inter-carrier
roaming opportunities for 4G service and locked customers into large
carrier networks. Interoperability in the wireless industry is a pro-
competitive concept that was first adopted by the Reagan-era FCC which
recognized the potential for the then-dominant wireline companies to
exclude non-affiliated cellular providers from the emerging wireless
equipment ecosystem. The FCC must return to these principles, fix the
problem in 700 MHz, and once again restore interoperability and, thus,
competition and broader consumer choice, by adopting the proposals made
by our Company, The Competitive Carriers Association (``CCA''), and the
Interoperability Alliance. The FCC must also act to avoid a repeat of
this problem as it considers the rules for 600 MHz incentive auctions.
Failure to do so would undermine the competitive marketplace and have a
significant adverse impact on auction revenues in the incentive
auctions. Wireless interoperability was established by the Reagan era
FCC at the start of the industry in order to foster a level playing
field and to drive the development of roaming and a robust device
ecosystem.
Fast forwarding to today, we face a world where a lack of device
interoperability across the Lower 700 MHz band has largely prevented
Lower 700 MHz A Block licensees from gaining access to consumer devices
capable of operating on their spectrum. In turn, this lack of available
devices has significantly hindered network deployments by these
licensees. Notably, because ``a significant number of Lower A Block
licenses are held by smaller, rural, and regional licensees,'' \3\these
deployment difficulties have had a disproportionate negative effect on
consumers in rural and unserved areas.
---------------------------------------------------------------------------
\3\ Promoting Interoperability in the 700 MHz Commercial Spectrum,
Notice of Proposed Rulemaking, 27 FCC Rcd 3521, 3532 (2012)
(``Interoperability NPRM'').
---------------------------------------------------------------------------
This lack of interoperability arose because the 3rd Generation
Partnership Project (``3GPP'') developed two separate, duplicative, and
incompatible band classes for Long-Term Evolution (``LTE'') wireless
broadband operations in the Lower 700 MHz band. Specifically, Band 12
covers operations in the Lower A, B, and C Blocks, whereas Band 17 only
covers operations in the Lower B and C Blocks. AT&T, the only national
carrier providing service in the Lower 700 MHz band, operates in the
Lower 700 MHz using only Band 17 equipment, which cannot be used by
Lower A Block licensees. Because AT&T is the only licensee operating in
Lower 700 MHz band which is large enough to be capable of driving the
device ecosystem, the Lower A Block licensees have found themselves
with essentially no LTE mobile devices to sell to their existing and
prospective subscribers. The lone exception is U.S. Cellular, which,
through great effort, managed to secure a small portfolio of LTE
devices capable of operating on band 12 and thus utilizing the Lower A
Block spectrum. The 2012 launch of LTE service by U.S. Cellular in
conjunction with its partner, King Street Wireless, remains the only
Band 12 network launch since Lower 700 MHz licenses were auctioned in
2008. However, U.S. Cellular is the exception, and even it remains
constrained in its ability to gain access to a wide variety of LTE-
capable devices. Notably, because of the ongoing lack of
interoperability between Band 12 and Band 17 in the Lower 700 MHz band,
a number of Lower A Block licensees were compelled to request an
extension of their interim construction benchmark deadlines, which the
FCC recently granted.\4\
---------------------------------------------------------------------------
\4\ See Wireless Telecommunications Bureau Extends 700 MHz A Block
Licensee Interim Construction Benchmark Deadline Until December 13,
2013, Public Notice, DA 13-210 (rel. Feb. 13, 2013).
---------------------------------------------------------------------------
The industry has been actively seeking intervention by the FCC
since 2009. Back in September of that year, after discovering that AT&T
had begun to issue Requests for Proposals that specified Band 17-only
equipment, an alliance of Lower 700 MHz A Block licensees (the ``Good
Faith Alliance'') filed a petition for rulemaking asking the FCC to
adopt an interoperability requirement for the Lower 700 MHz band.\5\ In
doing so, the Good Faith Alliance warned the FCC that various public
interest harms would arise if it failed to prohibit AT&T from deploying
Band 17-only devices. The FCC sought comment on this petition in
2010.\6\ Commenters in support of the petition included small and
regional 700 MHz licensees, a coalition including Sprint Nextel and T-
Mobile, trade associations representing rural and smaller providers, a
coalition of public interest groups, and public safety associations.
Nevertheless, the FCC took no further action regarding the lack of
interoperability in the Lower 700 MHz band until March 2012, when it
released a Notice of Proposed Rulemaking seeking additional comment on
the issue.\7\ Once again, the vast majority of commenters, representing
various carriers and organizations, urged the FCC to adopt an
interoperability requirement. Unfortunately, although it has been more
than three and a half years since the Good Faith Alliance filed its
petition, the FCC still has not adopted an order in that proceeding.
And this is despite the fact that the FCC has acknowledged that ``a
unified band class across the Lower 700 MHz band has the potential to
yield significant benefits for all licensees.'' \8\
---------------------------------------------------------------------------
\5\ See Petition for Rulemaking Regarding the Need for 700 MHz
Mobile Equipment to be Capable of Operation on All Paired Commercial
700 MHz Frequency Blocks, 700 MHz Block A Good Faith Purchasers
Alliance, RM-11592 (filed Sept. 29, 2009).
\6\ See Wireless Telecommunications Bureau Seeks Comment on
Petition for Rulemaking Regarding 700 MHz Band Mobile Equipment Design
and Procurement Practices, Public Notice, 25 FCC Rcd 1464 (2010).
\7\ See Interoperability NPRM, 27 FCC Rcd 3521 (2012).
\8\ See id.at 3522.
---------------------------------------------------------------------------
Interoperability across the Lower 700 MHz band would greatly
benefit the public. For instance, as noted, the current and ongoing
lack of interoperability has severely impeded the competitive roll-out
of LTE broadband coverage by Lower A Block licensees because the lack
of interoperability undermines the business case for smaller carriers
to deploy networks. In turn, the lack of interoperability has impeded
access to broadband services in the many parts of the U.S. not served
by AT&T. In other words, consumers across the country are being
deprived of the substantial benefits of broadband access due to the
lack of interoperability in the Lower 700 MHz bands.
More broadly, the difficulties faced by Lower A Block licensees
decrease competition in the wireless marketplace to the detriment of
consumers. This is because significant opportunities for small and
regional carriers--who otherwise would be in a position to provide
robust competition to the dominant national carriers--have been lost
due to the artificial barriers created by their inability to obtain
devices capable of operating on their spectrum holdings. The importance
of continuing to advance robust competition is especially crucial at
this time given that the wireless industry is in its most precarious
competitive state in over a decade. For instance, in its most recent
Competition Report issued in March, the FCC, for the third straight
year, was unable to find the existence of ``effective competition'' in
the wireless industry.\9\ In fact, the weighted average of the FCC's
Herfindahl-Hirschman Index (``HHI'') calculations increased to 2873
since the FCC's previous report.\10\ Notably, an HHI exceeding 2500
indicates that a market is ``highly concentrated.'' \11\ The FCC also
noted that, from 2003 to year-end 2011, the average HHI has increased
from 2151 to 2873, which represents a 33.6 percent increase in market
concentration over this time.\12\If Lower A Block licensees are
provided a level playing field, they could help to correct this
competitive imbalance. Unfortunately, at this time, the potential for
Lower 700 MHz A Block deployments to spur increased competition has not
come to fruition because additional competitive carrier LTE deployments
have been delayed and/or limited by the continued fragmentation of the
Lower 700 MHz spectrum band.
---------------------------------------------------------------------------
\9\ See Implementation of Section 6002(b) of the Omnibus Budget
Reconciliation Act of 1993; Annual Report and Analysis of Competitive
Market Conditions With Respect to Mobile Wireless, Including Commercial
Mobile Services, Sixteenth Report, WT Docket No. 11-186, FCC 13-34, 2
(rel. Mar. 21, 2013) (``Sixteenth Competition Report'').
\10\ See id. 59.
\11\ See id.at 54.
\12\ See id.at 59.
---------------------------------------------------------------------------
Moreover, absent interoperability, Lower A Block licensees likely
will never be capable of providing effective competition because they
will not be able to provide the quantity and quality of devices
necessary to attract a substantial customer base. As the Commission
recognized in the Sixteenth Competition Report, mobile handsets and
devices ``directly affect the quality of a consumer's mobile wireless
experience and can factor into a consumer's choice of a wireless
provider.'' \13\ As such, a carrier's ``portfolio of handsets and
devices may be a significant non-price factor affecting its ability to
compete for customers.'' \14\
---------------------------------------------------------------------------
\13\ Id. at 83.
\14\ Id.
---------------------------------------------------------------------------
To date, Lower A Block licensees have found themselves with
essentially no LTE mobile devices to sell to their existing and
prospective customers, which is not surprising considering that vendors
seek first to serve the demands of their largest possible customers,
where volume (and profitability) is greatest. Smaller carriers simply
cannot drive handset development. Moreover, even if smaller carriers
manage to gain access to some devices, those devices will cost more
because these carriers lack the economies of scale necessary to reduce
costs. These higher device costs for Lower A Block licensees must
either be passed on to the consumer (in the form of higher retail
prices, which most consumers will not pay if given the choice of
service providers), or absorbed by the Lower A Block licensee if it
chooses to instead price LTE devices comparably to similar devices
offered by the national operators. The consequences of this latter
approach, however, would be unsustainable. Because device subsidies
result in slim--or in some cases nonexistent or negative--profit
margins, Lower A Block licensees may become unprofitable and could
eventually be forced out of business, which results in even less
marketplace competition.
In addition to increasing their negotiating leverage and economies
of scale, volume purchases afford the larger carriers with considerable
market power vis-a-vis handset manufacturers, which can be used to
demand particular customer features, compel prioritization of
proprietary specifications, and achieve exclusive or extended first-to-
market positions. As a result, even if additional Band 12 devices
become available, they likely will be delayed for months or years after
the introduction and refinement of multiple Band 13 \15\ and Band 17
devices. Lower A Block licensees therefore will not have available to
them all of the ``cutting edge'' phones, further entrenching the
largest carriers' dominant market positions. In sum, Lower A Block
licensees, like all carriers, require a sufficient quantity and variety
of handsets to meet consumer demand.\16\ However, the lack of
interoperability has produced a device ecosystem in which widely
available, economically reasonable handsets cannot function on the
Lower A Block spectrum. The resulting higher device costs and the
associated lack of a device ecosystem for Band 12 devices slows
deployment by Lower A Block licensees and puts these carriers at an
even greater competitive disadvantage.\17\
---------------------------------------------------------------------------
\15\ Band 13 supports the Upper 700 MHz C Block, the vast majority
of which is licensed to Verizon Wireless.
\16\ See id. at 220 (``In addition to competing on price and
network quality, mobile wireless providers continue to compete by
offering consumers a variety of different mobile wireless devices with
innovative features.'').
\17\ See id. at 184 (``When competing mobile wireless service
providers deploy compatible network technologies, greater economies of
scale in the production of both end-user devices and network
infrastructure equipment can result, lowering the unit cost of
handsets, chipsets, and other network equipment. This, in turn, may
promote more rapid adoption of mobile wireless services, a greater
variety of handsets, and more price competition.'').
---------------------------------------------------------------------------
Moreover, even if most Lower A Block licensees managed to obtain a
sufficient quantity and quality of handsets and could find a way to
cost-justify deploying their networks, they would find themselves at a
serious competitive disadvantage because large carriers already will
have established a substantial customer base that, absent
interoperability, will not be able to take their phones and switch to
competitors, no matter how much better or less expensive the competing
service may be. Thus, in addition to conflicting with consumers'
expectations, the inability of a subscriber to seamlessly switch to
another carrier further exacerbates the ``head-start advantage'' large
carriers already enjoy because consumers will be less willing or likely
to seek service from Lower A Block licensees for a considerable period
of time. As a result, unless the FCC promptly adopts an
interoperability requirement, the harms to both Lower A Block licensees
and, more importantly, the consumers they serve, will be baked into the
competitive landscape and will continue indefinitely.
The current, and potentially future, dearth of rural LTE networks
will be problematic not only for potential customers and for commercial
licensees in rural markets, but also for public safety users who may
desire to roam on commercial systems in those areas. This is
significant because FirstNet, the First Responder Network, is required
to enter into roaming agreements with commercial providers to ensure
nationwide coverage, and the nature of any interoperability requirement
for commercial users will have a profound impact on the ability of
FirstNet and the FCC to meet these roaming obligations. Moreover,
because Lower A Block licensees include many rural carriers, the areas
they serve are exactly the places where public safety may most need to
roam onto commercial networks. A lack of interoperability therefore
could impede first responders' ability to respond to emergencies.
Likewise, absent an interoperability requirement, roaming options
for Lower A Block licensees will remain severely limited because they
still would be prevented from roaming on AT&T's network. And, because
AT&T is the only carrier that can be expected to operate a nationwide
LTE network using Lower 700 MHz spectrum, the result will be that Lower
A Block licensees will have no potential nationwide roaming partner. In
other words, the existence of Band 17 has the effect of denying any
carrier using Band 12 access to nationwide roaming on the Lower 700 MHz
spectrum.\18\ As the FCC recently acknowledged, ``roaming remains
particularly important for small and regional providers with limited
network population coverage to remain competitive by meeting their
customers' needs for nationwide service.'' \19\Thus, the absence of
nationwide roaming likely will cause many consumers to avoid regional A
Block licensees in favor of the national networks of AT&T or Verizon.
---------------------------------------------------------------------------
\18\ See id.at 208 (``Many of these non-nationwide providers are
able to offer voice coverage and service plans that are national in
scope through roaming agreements with other mobile wireless
providers.'').
\19\ Id.
---------------------------------------------------------------------------
Although the FCC would prefer an industry solution to the current
lack of interoperability in the Lower 700 MHz band,\20\ no industry
solution has been forthcoming since this issue was identified over
three and a half years ago. And there is no reason to believe that the
industry will change its course absent a regulatory requirement. In a
highly concentrated market, large carriers gain little, and could
potentially lose much, by voluntarily agreeing to interoperability.
Large carriers derive little or no benefit from affording their
customers the ability to roam on rival networks because these carriers
own geographically extensive networks, making the potential incremental
coverage available to them (and to their customers) via roaming quite
small. Moreover, interoperability would enhance the competitiveness of
rival carriers by affording them the ability to offer their customers a
variety of cutting edge devices and comparable geographic coverage.
---------------------------------------------------------------------------
\20\ SeeInteroperability NPRM, 27 FCC Rcd at 3543.
---------------------------------------------------------------------------
Ensuring that the core principles and rules that support
interoperability are maintained also would reduce customer switching
costs, and thus enhance the potential for increased churn by making it
easier for customers to migrate to rival providers. In sum, the current
competitive state of the wireless industry, as well as ongoing
resistance to interoperability in the Lower 700 MHz band by the largest
carriers, demonstrates that the possibility of a voluntary industry
solution is highly unlikely. As a consequence, Commission action is
necessary.
In terms of a regulatory solution, U.S. Cellular has offered a
measured and incremental proposal to the FCC in order to restore
interoperability across the Lower 700 MHz band while minimizing the
impact on existing network deployments by AT&T. Specifically, the FCC
should require that, within six months of the FCC's adoption of an
order in its interoperability proceeding, all Lower 700 MHz licensees
provide only devices that are capable of operating on all paired Lower
700 MHz bands. The only hardware design change required by this
approach is replacing, on newly ordered devices, the Band 17 duplexer
and RX filter with Band 12 components as well as a simple software
update that would be required to support both Band 12 and Band 17.
These new devices deployed going forward would be able to operate on
Band 12 or Band 17 networks. In other words, network upgrades would not
be required. Such a regulatory requirement would be consistent with the
Commission's ``longstanding interest in promoting the interoperability
of mobile user equipment in a variety of contexts as a means to promote
the widest possible deployment of mobile services, ensure the most
efficient use of spectrum, and protect and promote competition.'' \21\
---------------------------------------------------------------------------
\21\ Id. at 3523, n. 5.
---------------------------------------------------------------------------
In the early 1980s the FCC wisely perceived the potential risks to
competition if the wireline incumbents were permitted to build an
exclusive ecosystem that lacked interoperability with their ``non-
wireline'' competitors. As competition blossomed in the wireless
industry, the market ensured continued interoperability as, by
necessity, the industry worked together to foster a vibrant ecosystem.
As the wireless industry has again reached high levels of
concentration, preserving the viability of strong, rural-focused
competitors demands that we restore interoperability.
600 MHz
In addition to restoring broad interoperability of networks and
user devices, the government must ensure that the primary ``raw
material'' of the wireless industry, licensed spectrum, is made
available to a broad range of wireless carriers, including smaller
carriers focused on rural America. Without sufficient spectrum,
consumers' insatiable demand for high speed broadband will go unmet.
U.S. Cellular wholeheartedly congratulates this Committee for its
efforts and success in the 2012 Middle Class Tax Relief and Jobs
Creation Act (``Spectrum Act'') \22\ to identify and free up additional
commercial spectrum.
---------------------------------------------------------------------------
\22\ See Pub. L. No 112-96, 125 Stat 156 (2012)
---------------------------------------------------------------------------
The FCC must auction spectrum using geographic area sizes that
allow smaller, non-national carriers to compete. There are a number of
benefits enabled by this. First, smaller geographic areas will increase
the number of bidders, which has been proven to generate more revenue.
Second, smaller license areas ensure that rural markets that are won at
auction will see faster build out than if those areas are the merely
the most sparsely populated zones within larger regions. A build out
requirement, applied to each license, will result in the urban areas
being built long before the more rural areas see any attention.
For the same reason, package bidding must be rejected by the FCC.
Smaller carriers whose aspirations are rural should not be handicapped
in the bidding process simply because they don't have business plans
that allow them to bid on a large aggregation of licenses.
A third core principle is that the government should endeavor to
maximize the amount of spectrum auctioned not only in order to meet
consumer demand and foster competition, but also to raise revenues and
provide funding for FirstNet, which is a national priority.
While these efforts will help address the increasing demand for
spectrum, we also know that even more spectrum will need to be
repurposed to keep up with consumer demands. Therefore, further work
needs to be done to identify additional spectrum, some of which is
currently used by Federal agencies including the Department of Defense.
So how should the government approach this situation? We believe
the 600 MHz incentive auction provides a unique opportunity to address
our Nation's skyrocketing spectrum demands, and meeting those spectrum
needs ``is essential to continuing U.S. leadership in technological
innovation, growing our economy, and maintaining our global
competitiveness.'' \23\ Led by the efforts of CTIA, CCA, and others,
many in the wireless industry are devoting significant efforts towards
making this auction a success. In response to the FCC's Incentive
Auction NPRM, U.S. Cellular focused on several issues critical to
ensuring that the substantial public interest benefits made possible by
the Spectrum Act's grant of incentive auction authority are fully
realized. For instance, U.S. Cellular urged the FCC to maximize the
amount of paired spectrum made available in the forward auction for
wireless broadband services, which will greatly promote the
availability of wireless broadband services in rural locations. The
excellent propagation characteristics of the 600 MHz band make this
spectrum particularly well-suited for the rapid and efficient
deployment of mobile and other advanced services in high-cost rural
areas. This is true because sub-1 GHz frequencies travel farther at a
given power level, which enables a larger area to be served from a
single cell site. In other words, the superior propagation performance
of this spectrum means that fewer towers will be needed to serve a
given area, and thus networks can be deployed at lower cost.
Accordingly, the 600 MHz band provides a particularly valuable
opportunity for licensees to provide cost-effective services in rural
and underserved areas.
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\23\ Expanding the Economic and Innovation Opportunities of
Spectrum Through Incentive Auctions, Notice of Proposed Rulemaking, 27
FCC Rcd 12357, 12358 (2012) (``Incentive Auction NPRM'').
---------------------------------------------------------------------------
But identifying, repurposing, and auctioning the spectrum is only
part of the story. It is also critically important that, the FCC adopt
interoperability requirements for the 600 MHz band. Otherwise, it would
risk a situation like that in the Lower 700 MHz band, which has
stranded investment in spectrum licenses and drastically delayed the
deployment of advanced services to many rural and underserved areas. As
detailed in this testimony, an interoperability requirement would
expand roaming opportunities, enhance economies of scale, promote
network deployment, and increase competition in the wireless industry,
which would spur investment and innovation and lower costs for
consumers. Also as noted, absent an interoperability requirement, the
financial incentives of the largest carriers, which drive device
development, would drastically reduce the likelihood of an
interoperable 600 MHz band. For that reason, interoperability in the
600 MHz band, and the substantial benefits it would create, will only
become a reality through an express requirement. Adopting an
interoperability rule at this stage also is necessary so that potential
bidders that are not large enough to drive device development will know
in advance that the 600 MHz band will conform to the FCC's traditional
model of full interoperability. In other words, if the FCC declines to
adopt an interoperability requirement, this failure would deter auction
participation by all but the largest carriers, and thus harm the
competitiveness of the forward auction.
Several licensing and auction rules also are critical to ensure
adequate opportunities for small and regional carriers to purchase 600
MHz licenses and thereafter deploy rural networks. Providing such
opportunities to these carriers is critical in light of the current
state of sub-1 GHz spectrum holdings. Specifically, when measured on a
licensed MHz-POP basis, Verizon Wireless holds approximately 45 percent
of the currently licensed sub-1 GHz spectrum, while AT&T holds
approximately 39 percent.\24\
---------------------------------------------------------------------------
\24\ See id.at 129.
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In this respect, U.S. Cellular urged the FCC to license the 600 MHz
band on the basis of geographic license areas no larger than Economic
Areas (``EAs''). Only by offering smaller license areas can the FCC
preserve opportunities for small and regional carriers, as well as new
entrants, to provide an important source of competition, variety, and
diversity in rural and less densely populated areas. Small license
areas permit entities which are only interested in serving rural areas
to acquire licenses for these areas alone and avoid acquiring licenses
covering high population areas that would be prohibitively expensive
for these carriers.
Of vital relevance to today's hearing, licensing the 600 MHz band
using service areas no larger than EAs therefore would be the most
effective means for the FCC to foster the prompt availability of
competitive wireless broadband services to rural markets. At the same
time, all carriers would benefit because small license areas would
allow more targeted spectrum acquisitions, while not discriminating in
favor of any single business plan.
In contrast, nationwide or super regional license areas, which U.S.
Cellular strongly opposes, would significantly disadvantage small and
regional carriers, as well as consumers in small and rural markets, to
the benefit of the already dominant national carriers. The use of these
large service areas skews auctions in favor of large financially
stronger bidders, effectively foreclosing smaller bidders from
participating in an auction. Not only do small carriers lack the need
for large swaths of territory, they lack the financial resources to
compete for nationwide or large regional licenses. Unlike the national
carriers, smaller carriers cannot afford to acquire and ``warehouse''
spectrum for future use that does not meet their near-term business
objectives. Thus, the practical effect of having a band plan that
includes very large market areas is to place a significant portion of
the auctioned spectrum in the hands of the few national carriers, which
historically have not given priority to small and rural markets. As a
consequence, rural deployment of the innovative and advanced types of
services made possible by the 600 MHz spectrum would likely be
significantly delayed, if not precluded entirely, if the FCC licenses
this spectrum on a nationwide or large regional basis. At the same
time, larger carriers would not be disadvantaged by the use of smaller
license areas because they would still have realistic opportunities to
aggregate licenses individually.\25\ In other words, auctioning small
license areas benefits all carriers by allowing them to take a building
block approach and assemble as much coverage area as is needed.
---------------------------------------------------------------------------
\25\ See Incentive Auction NPRM, 27 FCC Rcd at 12411 (``EAs nest
within and may be aggregated up to larger license areas . . . for
operators seeking larger service areas.'').
---------------------------------------------------------------------------
U.S. Cellular further urged the FCC to ensure that smaller carriers
are adequately protected if the FCC decides to auction generic licenses
in the forward auction. For instance, the generic licenses should be as
similar and technically interchangeable as possible, and the FCC should
establish only two classes of generic licenses--those for paired
spectrum blocks and those for supplemental, downlink-only blocks. Not
only would additional subdivisions further complicate the auction, they
would make interoperability less likely because the largest carriers
could dominate a particular subdivision to the exclusion of other
bidders. In addition, the subsequent license assignment process must be
entirely random. If the FCC instead incorporates any preferences into
this process, it would greatly advantage the largest carriers, which
will be both more likely to have multiple blocks in the same market and
licenses in adjacent markets. The result could be to force all other
600 MHz licensees into distinct portions of the 600 MHz band that are
devoid of the largest carriers and their ability to drive the device
ecosystem. Even more important, under no circumstances should the FCC
establish an allocation process that involves additional bids. Such a
process would leave bidders who have already made financial commitments
subject to an uncertain further commitment and would increase the
likelihood of relegating smaller carriers to spectrum assignments which
lack any of the largest carriers and a device ecosystem.
Another action necessary to ensure adequate opportunities for small
and regional carriers is for the FCC to adopt an auction-specific
spectrum aggregation limit that prohibits any applicant from acquiring
more than 25 percent of the 600 MHz spectrum made available in a single
geographic market. Absent such a limit, the FCC would risk another
Auction 73, which was dominated by the two largest carriers and which
resulted in a lack of interoperability among Lower 700 MHz band
handsets and the ``stranding'' of 700 MHz A Block licenses. Such a
limit also would be consistent with the mandate of Section 309(j)(3)(B)
of the Communications Act \26\ to ``avoid excessive concentration of
licenses'' and to disseminate licenses among ``a wide variety of
applicants.'' \27\The FCC should impose this limit in advance of the
forward auction, which would deter applicants from acquiring more
spectrum than they can use and preventing smaller bidders from
acquiring the spectrum. Allowing post-auction divestitures is not
really a solution because this would enable the largest carriers to
choose among the competitors to which to divest their spectrum, which
could further harm competition. U.S. Cellular does not ask for a ban on
the ability of the largest carriers to participate, but only a
reasonable limit on how much spectrum one carrier may acquire.
Prohibiting the use of combinatorial, or ``package,'' bidding is
another action necessary to ensure adequate competition during the
auction by small and regional carriers. Permitting combinatorial
bidding for any portion of the 600 MHz licenses would harm small, rural
and regional carriers, as well as prospective new entrants, while
benefiting only the largest carriers. Combinatorial bidding would add
unnecessary complexity to what is already likely to be the most
complicated spectrum auction in the Nation's history. The burden of
such complexity and the increased risk it creates, would fall
disproportionately on smaller bidders and could deter their
participation. The lesson of past auctions is clear. The rules required
to enable combinatorial bidding create unintended opportunities for
larger bidders to enhance their bidding power, exploit the rules, and
ultimately win licenses at lower prices. Even absent the use of
``strategic bidding'', combinatorial bidding would increase the
likelihood that large bidders will tie-up multiple licenses in
nationwide or super-regional package bids, and thereby exclude smaller
carriers with targeted business plans from acquiring the spectrum
necessary to serve rural areas. The benefits achieved by offering small
geographic license areas can be undone by package bidding rules.
---------------------------------------------------------------------------
\26\ 47 U.S.C. Sec. 309(j)(3)(B).
\27\ See Incentive Auction NRPM, 27 FCC Rcd at 12484.
---------------------------------------------------------------------------
Further, unlike a license-by-license aggregation strategy,
combinatorial bidding could create a situation where the FCC is forced
to accept a package bid for a group of licenses even though small or
rural carriers may have placed higher bids, on a per-pop basis, for one
or more of the licenses included in the package. The result is that
combinatorial bidding biases auction results in favor of the
combination bid, disadvantaging all but the largest bidders and likely
excluding small bidders from any meaningful auction success. These
adverse consequences of combinatorial bidding raise legal issues as to
whether the Commission has actually granted licenses to the parties
that valued them most highly. Moreover, the bias against all but the
largest bidders potentially has the effect of forcing all other bidders
to bid more aggressively on the remaining licenses that are not
included in any package. This distortion would increase the prices of
these licenses, resulting in an extra burden on smaller bidders that
may easily deprive them of licenses. At the same time, package bidding
is unnecessary because adequate spectrum aggregation opportunities are
available under the FCC's standard auction procedures.
Similarly, if the FCC is seeking a robust auction that will truly
allow the spectrum to be sold at its highest value, all participants
should know the identities of the other bidders, their bid amounts, and
their eligibility. Particularly for smaller bidders, license valuations
are based on certain factors that are dependent on the business plans
of other licensees, who together provide the scale to support an
interoperable ecosystem of devices, network equipment, and roaming
arrangements. While a large bidder may be able to ``go it alone'' and
may in fact be advantaged by an exclusive ecosystem, smaller bidders
need to know they will have help building that ecosystem. Because these
opportunities are essential for a smaller carrier's network to be
economically viable, a lack of such information would create
substantial risks for these bidders, likely reducing or eliminating
their participation in the forward auction.
A transparent auction process is particularly important for small
and regional carriers for other reasons as well. For instance, the
process of valuing spectrum is extremely complex and challenging, all
the more so here because of the uncertainty about what spectrum will be
available in the forward auction. In this way, smaller bidders face
additional risks from the use of blind bidding because they lack the
more sophisticated market intelligence and analytical capabilities of
the larger bidders. An open auction therefore would help to level the
playing field, as well as to provide information that is uniquely
beneficial to smaller bidders. For instance, because smaller bidders
may have less experience with spectrum auctions and lack the resources
used by large carriers in making valuation decisions, smaller bidders
often find it helpful to take note of how larger carriers value
spectrum. Smaller bidders also may assign a lower value to a market in
a region dominated by a few larger carriers, compared to a region with
several other smaller carriers. Because blind bidding prevents these
carriers from knowing this information, they face greater risks in the
auction process compared to large bidders, and therefore rationally
reduce their level of participation and the size of their bids. For
these reasons, the information disparities created by blind bidding
will have a disproportionately adverse effect on smaller bidders.
Further, while blind bidding gives rise to substantial public
interest harms, its advantages are largely theoretical and marginal,
making blind bidding unnecessary. There have been no serious
allegations of collusive bidding in recent auctions and, since the
early auctions that were affected by collusion, the FCC and the
Department of Justice have revised their standards and pursued
enforcement actions. Moreover, publicly disclosing bidding information
actually assists the FCC with enforcing its anti-collusion rules
because the FCC is most likely to learn of collusive behavior by being
alerted to suspicious activity by other auction participants. In
contrast, when participants are denied bidding information, they are
less likely to be able to identify and disclose suspicious bidding
patterns.
Additional Federal and Non-Federal Auction Spectrum
As the FCC recently noted, it is critical that additional spectrum
be made available for mobile broadband in order to ``help ensure that
the speed, capacity, and ubiquity of the Nation's wireless networks
keeps pace with the skyrocketing demand for mobile service.'' \28\ It
is for this reason that the Spectrum Act required the FCC and NTIA to
take a number of actions to make additional wireless broadband spectrum
available for commercial licensed use. Specifically, the Spectrum Act
identified the spectrum to be withdrawn from Federal uses so that it
could be allocated, auctioned, and licensed by the FCC for commercial
use. It also required the FCC to auction and license additional non-
Federal bands and set a February 2015 deadline by which the auctioning
and licensing of all such Federal and non-Federal spectrum must be
completed.
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\28\ See Service Rules for the Advanced Wireless Services H Block--
Implementing Section 6401 of the Middle Class Tax Relief and Job
Creation Act of 2012 Related to the 1915-1920 MHz and 1995-2000 MHz
Bands, Notice of Proposed Rulemaking, 27 FCC Rcd 16258, 16259 (2012).
---------------------------------------------------------------------------
The FCC is currently preparing to hold the auctions involving three
sets of spectrum that must be auctioned and licensed before the
February 2015 statutory deadline, including: (i)an auction of AWS-2/H
Block non-Federal spectrum commencing possibly late in 2013; (ii) 1.6
GHz reallocated Federal spectrum to be paired with unidentified
spectrum commencing in 2014; and (iii) a proposed auction of 1.7 GHz
reallocated Federal spectrum to be paired with AWS-3/Upper J Block non-
Federal spectrum to be held in late 2014/early 2015. The following
table provides additional detail regarding these auctions, which likely
will be completed prior to the 600 MHz incentive auction, which is not
subject to the same statutory deadline.
------------------------------------------------------------------------
Auction/ Date
Service Sequence Frequency Bureau /Rule
(Estimate)
------------------------------------------------------------------------
Auction of AWS-2/H 4th Qtr. 2013 1915-1920 MHz and WTB/Part 27
Block PCS Subject to 1995-2000 MHz
resolution of
technical
interference
issues affecting
PCS spectrum
------------------------------------------------------------------------
Auction of 1.6 GHz 2014 1695-1710 MHz, WTB/Part 27
paired with 15 NTIA Recommended and (as
MHz of spectrum Federal determined by
to be identified Reallocation of FCC)
by FCC 1695-1710 (per
Spectrum Act);
FCC has not
identified 15 MHz
for this pairing
(2095-2110 MHz is
an option)
------------------------------------------------------------------------
Auction of 1.7 GHz Late 2014/Early 1755-1780 MHz, WTB/Part 27
paired with 2.1 2015 2155-2180 MHz
GHz (Proposed Contingent on
Pairing Supported Federal
by FCC) \29\ Reallocation
which is
currently under
consideration by
NTIA
------------------------------------------------------------------------
Considering the skyrocketing demand for mobile broadband services
and the fact that the last FCC auction for commercial mobile spectrum
took place more than five years ago, deployment of the spectrum to be
offered in these upcoming FCC auctions is expected to play a critical
role in ensuring that rural carriers, as well as other wireless
providers, meet rising consumer demand and continue to provide the
public with transformative innovations. This spectrum is particularly
well-suited for mobile broadband as it is adjacent to the widely-
deployed PCS and AWS bands, which are used by carriers of various sizes
to offer mobile service across the Nation. The fact that this spectrum
can be auctioned and made available for deployment sooner than the 600
MHz band also makes this spectrum uniquely valuable to rural and
regional providers in meeting their near-term needs, considering that
they have not been able to meet their spectrum needs through auction
purchases for many years.
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\29\ The 1.7 GHz portion of the 1.7-2.1 GHz pairing will only be
available for auction if it is repurposed from Federal to non-Federal
uses, which the FCC requested that NTIA consider in a recent FCC letter
to The Honorable Lawrence E. Strickling dated March 20. 2013.The upper
half of this pairing particularly AWS-3 is required by statute to be
auctioned before February of 2015.
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For the same reasons discussed above in connection with the 600 MHz
incentive auction, U.S. Cellular strongly supports the competitive
participation of rural and regional providers in each of these three
upcoming spectrum auctions. The spectrum blocks to be offered in these
auctions should not be so large as to make them unaffordable by the
smaller rural and regional providers. The H Block already has a 2x5 MHz
pairing, which is suitable. We recommend that a similar 2x5 MHz channel
block size be uniformly implemented as the basic spectrum block size to
be offered in the other two upcoming auctions. U.S. Cellular also
supports small geographic license areas, such as CMAs, that match the
service needs of rural and regional providers, and opposes any license
area size larger than EAs. We also reiterate our opposition to the use
of package bidding and blind bidding procedures in these auctions.
Universal Service Support is Critical to Improving Service in Rural
Areas
We must acknowledge that consumers desire both wired and wireline
services and the distribution of support under the Federal Universal
Service Program needs to appropriately balance those interests in areas
that are simply uneconomic to serve without effectively managed support
mechanisms. The FCC's underlying goals to reform the Universal Service
Program back in 2011 are to be applauded. Although we supported the
FCC's overall goals, we did not agree with all of the decisions the FCC
made, and are actively asking the Commission to fine tune the Mobility
Fund programs going forward. As we have stated before, consumer demand
for mobile broadband continues to skyrocket. Unfortunately, the FCC's
Mobility Fund auction failed to allocate sufficient resources to
wireless (less than 10 percent of overall funding) and two-thirds less
than was allocated under the legacy program that is currently being
phased out. Even though it is readily apparent that consumers suffer
from inadequate coverage in many rural areas across the country, the
Commission failed to allocate any funding to a number of states
including a significant number of the states represented on this
Committee. This resulted in an unfair and uneven distribution of funds
that may not reflect the true needs of consumers. Those oversights must
be addressed if we hope to address the needs of rural consumers
everywhere.
In late 2011 the FCC revamped the Federal universal service
program. Market participants from all quarters have praised and
criticized the FCC's decision, and it will be another year before the
U.S. Court of Appeals for the Tenth Circuit decides its fate. Today,
our focus is on what the program has done, and can do going forward, to
improve mobile coverage in rural areas.
How Universal Service Has Helped Rural Areas We Serve
Historically, our government has furthered the societal benefit of
ensuring that basic services are made available to all of our citizens.
We are a stronger country when everyone has access to modern services.
A high-quality mobile wireless network is critical to public safety, it
accelerates economic development, and it ensures the viability of rural
areas in the same way that water, electricity and basic telephone
service did in the last century.
We have strongly endorsed the universal service program and our use
of funding support over the years has delivered high-quality services
to rural areas that would not otherwise have had them. To summarize, in
1997, we began applying for eligibility to participate in the universal
service fund and by 2008 we were eligible in sixteen states. Using
Federal support, we have built well over 1000 new towers and upgraded
many more in areas where we would not otherwise have built, and in
areas that oftentimes had no access to wireless service. We built
towers in places with just a few hundred residents. We built in remote
areas of West Virginia, in eastern Washington, eastern Oregon, central
Maine, central Virginia, northern Wisconsin, central and northern
Missouri, central Nebraska, and many more.
In some of these areas, Federal funding has helped us keep cell
sites on the air when customer revenue was insufficient. We have also
used universal service funds to build links between cell sites and add
power generators in remote areas, providing critical redundancies that
ensure continuous service during catastrophes. In every state where we
are eligible, our coverage and service quality has improved
commensurate with the support we received. As you might expect, we
invested more in areas where we received significant amounts of
support. Wherever support was made available, our rural networks are
now demonstrably better as a result, and our customers see it. I also
truly believe a significant part of the company's success in J.D. Power
network and Forrester customer experience satisfaction surveys is the
high-quality network experience we provide in rural areas.
Investments made possible with support generate additional economic
activity from local businesses. This is known as the multiplier effect.
When we enter a community, it takes people to perform a myriad of jobs.
Among other things, people build networks, construct stores, sell
devices, and advertise our services. These are high-quality, good
paying jobs. In addition, local businesses use mobile wireless service
to become more efficient and to access markets around the world. This
creates more jobs and local economic activity. Every place we construct
a cell site is now a candidate to attract investment from business
owners considering a potential move away from areas that lack
sufficient telecommunications infrastructure.
The FCC's discontinued mechanism is phasing out support to
participating carriers. As of July 1, 2013, our support will be reduced
by 40 percent and by July 1 of 2016 our support will be gone. As a
result of the reduction in support, we are adjusting our investments in
new cell sites accordingly, reducing our capital expenditures and using
remaining funds to cover operating expenses in existing rural areas we
serve. At its peak in the latter part of the last decade, we were
building over 200 cell sites per year with this support. This year,
we're planning to construct only 35 sites and as of this date we have
no plans to build additional universal service sites in areas funded by
the legacy program after 2013 due to this reduction of the program's
funds. We have made that painful decision because we know there simply
is no business rationale to build in areas that will never be
profitable even though we know from conversations with Federal
officials, local officials, and consumers that there is a desperate
need for those services.
In our experience, the FCC's now discontinued Federal universal
service mechanism was very effective in enabling us to build
telecommunications facilities in rural areas. We embraced that program
and successfully expanded service in ways that would not otherwise have
been possible, to the benefit of rural citizens. As discussed below, we
are now turning to the new FCC Mobility Fund to assist us in
constructing 4G networks in rural areas.
Observations on the FCC's Mobility Fund
We participated in the FCC's first auction of mobility fund
support, held in September of 2012. This auction provided $300 million
in ``one time'' support for eligible carriers to invest in modern 3G
and 4G networks. We won the right to access approximately $40 million
in Federal support, which must be used to serve 2,162 total road miles
in 10 states. We anticipate that the FCC will grant our applications in
the near future and we intend to implement 4G mobile broadband service
in all of those eligible areas. This is a very exciting time for us as
a builder of rural networks, to be able to tell rural communities that
high-quality mobile broadband service is on the way.
It is important for this Committee to understand the magnitude of
the task at hand for our nation. The map below, taken from the FCC's
website, illustrates where Mobility Fund Support was awarded in the
Continental United States.\30\ As you can see from the FCC's mapping
software, the blue areas represent how small are areas that the $300
million in Mobility Fund will cover infilling in dead zones.
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\30\ Support was also awarded in Alaska, however, we have not
included a map here. Suffice it to say there remain significant
unserved areas in places where Alaskans live, work and travel.
When you compare this map to the one above, you get a sense of the
magnitude of the gap to be bridged. The FCC's National Broadband Plan
estimated that $24 billion is needed to provide access to terrestrial
broadband infrastructure for the 14 million people who currently do not
have such access. If half of that gap were filled by private
investment, then the FCC could finish the job of providing access in
twelve years by allocating $1 billion per year to the task. That is
roughly 30 percent less than the FCC was providing to mobile carriers
under the legacy universal service program.
My observation here is that the task of finishing ubiquitous
deployment is too large for the amount of funding that the FCC
allocated to mobile broadband. Rural communities can't wait twenty more
years. If the Committee believes as I do that mobile broadband is so
critical, then we must bring to bear sufficient resources to cover
substantially all of the area where rural people live, work and travel.
Moreover, the current Mobility Fund auction mechanism was designed
to provide funds to the lowest-cost areas first, in order to maximize
the number of road miles covered. While we do not dispute that there is
value in the FCC's choice of how to distribute funds, it has left
behind the highest-cost areas. For example, none of our bids to cover
rural New Hampshire were selected, simply because we had to bid more
per road mile to cover more mountainous areas in the central and
northern areas of the state.
Within the next year, the FCC is expected to conduct Phase II of
the Mobility Fund. It proposes to distribute up to $500 million per
year, dedicated to construction and operational support for mobile
broadband infrastructure. We are active in the FCC's rulemaking
proceeding that will finalize rules for how support is distributed.
We continue to oppose the use of auctions to distribute support,
because while auctions may create competition in the auction room, they
drive out competition in the markets themselves. We believe the better
course is for the FCC to use a forward-looking cost model, as they are
proposing to do in the Connect America Fund, to determine how much
support is needed in a particular area, and then permit carriers to
compete for that support in the marketplace, with the same construction
obligations currently expected of all carriers receiving funds. In our
experience, providing support only to the service providers that
consumers choose drives greater efficiency, investment and competition.
We support a mechanism where carriers charge a market price and
consumers receive a credit for any service they choose. The carrier
with the most efficient cost structure, lowest prices, and best
services would have the advantage, as they should in a normally
functioning marketplace.
In sum, our observation is that basic economic forces apply here.
It costs more to serve some areas and policy makers must seek efficient
providers to deliver services at the lowest possible cost. Without
additional funding and increased efficiency, the higher cost areas are
going to be left behind for a substantial period of time. We therefore
urge both the Congress and the FCC to reassess the task at hand and set
a goal to deliver mobile wireless coverage to substantially all of
rural America within ten years.
Suggestions for Increasing Program Efficiency
At the outset, it is important to note that the FCC has decided to
reduce universal service funding for mobile broadband by two-thirds, at
a time when consumer demand for mobility is skyrocketing and when the
coverage maps show much work left to be done.
We are mindful of the program's financial constraints and competing
policy interests. So, we are suggesting ways to increase funding for
mobile networks without increasing the overall fund.
First, there is approximately $185 million of unused support from
the Connect America Fund Phase I program. Some $300 million was offered
to telephone companies and only $115 million was accepted. The rejected
funding lies fallow. The FCC could easily add that $185 million to the
Mobility Fund, where wireless carriers are ready, willing and able to
deploy service to rural areas and their bids to serve additional areas
of Rural America went unfunded. We ask for your support in getting
those funds invested in rural areas at the earliest possible date.
Second, we would support the same result for any funds that may be
rejected by winners of the Mobility Fund Phase I auction. If any
winning bidder does not follow on auction bids, the funding can be
distributed to fund the bids that were not accepted at the initial
auction. Rural areas where bidders, including us, sought funding to
construct would see immediate benefits.
Third, in the new Connect America Fund for wireline carriers, the
FCC adopted a Right of First Refusal (``RoFR'') which allows the
largest carriers to accept an amount of support offered by the FCC for
five years, without competition. We have opposed this from the very
beginning, because reserving support for one class of carrier for five
years will inevitably confer enormous market power on that carrier.
Here is the worst thing about the RoFR: A large wireline carrier
that also owns wireless licenses can meet its wireline build out
obligations by building a 4G wireless network. That is, the FCC will
provide exclusive support to a wireline carrier based on the costs of
building a wireline network, but if it is more cost effective to use 4G
wireless, the carrier is free to do so and to pocket the windfall.
Ironically, the FCC just rejected this methodology for distributing
support when it did away with the identical support rule for wireless
carriers.
There is no public benefit to segregating support to one carrier in
a market, and then allowing that carrier to build without competition.
As explained by William P. Rogerson, Professor of Economics at
Northwestern University and formerly the FCC's Chief Economist,
limiting universal service support to a single carrier in a market may
create:
very powerful competition for the market that can be used to
drive down the price of the subsidy that government pays.
However, the cost of creating this very powerful competition
for the market is that after a winner is declared, there will
be a significant reduction in competition within the market for
customers. . . . It is local competition among competing
carriers that creates powerful ongoing incentives for firms to
charge lower prices, to improve their quality of service and
level of coverage, and to introduce new advanced services as
rapidly as possible.\31\
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\31\ Ex Parte Letter from David A. LaFuria, Counsel to U.S.
Cellular, to Marlene H. Dortch, Secretary, FCC, GN Docket No. 09-51, et
al., filed Jan. 28, 2010, Enclosure, William P. Rogerson, ``Problems
with Using Reverse Auctions To Determine Universal Service Subsidies
for Wireless Carriers,'' Jan. 14, 2010 (prepared for U.S. Cellular) at
6-7 (emphasis in original). http://apps.fcc.gov/ecfs/document/
view?id=7020384141
Our position represents healthy competition policy because it
extracts efficiency from the marketplace: The FCC should immediately do
away with the RoFR and allow any carrier willing to take on the
universal service obligations to compete for customers and support. If
a competitor can deliver broadband to an area for less money than
another carrier, why should the government fund the less efficient
provider?
There is no valid public policy rationale supporting the FCC's RoFR
decision and we urge the committee to ask the FCC to reconsider this
policy, as a way of stretching program dollars much farther in rural
areas and ensuring that universal service mechanisms do not drive out
competition in rural areas. The costs of imposing antiquated monopoly-
era price regulation in areas where competition fails are very high and
in the end consumers are not well-served.
Infrastructure Built With Support Can Be Leveraged to Accelerate
Construction of a Nationwide Interoperable Public Safety
Network
All of the above actions we recommend are intended to increase
construction of new towers in rural areas. They will also accelerate
deployment of a nationwide interoperable public safety network. For
U.S. Cellular's part, we want to see the public safety network
constructed as soon as possible, and we can help. The FCC has mandated
that all towers we build with support must be made available for
collocation--that is--we must permit others to install antennas on our
towers at a reasonable cost. In rural areas, we can think of no better
way to leverage the government's investment in our towers through
universal service than to collocate public safety transmitters that
will enable first responders to deliver critical health and safety
benefits to rural citizens.
In closing my testimony on universal service, we urge Congress to
continue to support policies that promote access to high-quality mobile
networks so that rural citizens receive the public safety and economic
development benefits already available to urban citizens. Although we
sometimes disagree with how the FCC has implemented the National
Broadband Plan, we agree completely that Federal universal service
funds must be used to invest in our Nation's broadband infrastructure,
both mobile and fixed. With these investments, rural areas will have
access to the most powerful economic development tools of the new
century. Without them, there will be a flight of capital and talent
toward only those areas that are connected.
Infrastructure Deployment is Critical to Rural Citizens
The era of mobile broadband is now exploding upon us, with an
incredible array of devices enabling our citizens to do truly amazing
things. Throughout the country, wireless carriers are deploying 4G
networks that enable our citizens to access e-mail, applications and
the Internet at download speeds that are supersonic compared to the 2G
networks deployed a decade ago. Even faster speeds are on the near-term
horizon.
Anyone who owns one of the latest 4G enabled smartphones knows how
amazing they are at these speeds. But this growth in appeal and usage
presents a critical challenge as well: In the U.S., wireless data
traffic has increased by 486 percent from the second half of 2009 to
the first half of 2012 and demands for capacity are going to continue
to escalate, meaning we cannot rest on our current achievements or
infrastructure. We must continually build and upgrade to keep the U.S.
consumer at the cutting edge of technology and innovation.
Smartphones are increasingly considered to be a necessity by
consumers across the country. Over the past three years, American
smartphone adoption has increased from 16.9 percent to 54.9 percent.
and smartphones currently account for 133 million of these devices. By
2014, the number of smartphones used by consumers in the United States
is projected to exceed the number of consumers' personal computers by
more than 200 million units.
Widespread consumer adoption of mobile broadband has also fueled
rapid growth and innovation in mobile applications. For example, the
number of applications available at the iPhone App Store has grown
1,900 percent from April 2009 to September 2012, and the number of
Android applications reached 700,000 in the fourth quarter of last
year. To take another example, a recent study forecasts that within the
next five years about 50 percent of all new car radios sold in the
North American market will feature downloadable apps.
Among low-income households, many of whom cannot afford multiple
subscriptions, the primary means to access the Internet is a high-speed
mobile device. For example, the Center for Disease Control's June 2012
report shows that 51.4 percent of adults living in poverty lived in
households with only wireless telephones, compared with 39.6 percent of
adults living near poverty and 28.9 percent of higher income adults.
These are startling facts which begs one of the main questions we
confront as a company and government must confront in its policy
analysis. How can we ensure that these high-speed networks and
incredible devices are not available only in urban and suburban areas?
I'm sure each member of this committee has traveled in rural areas
within your respective states where coverage is lacking, service
quality is poor, and modern 4G service is unavailable.
As you know, rural economic development increasingly depends upon
the availability of high-speed mobile broadband. Just a few weeks ago
at the Mobile World Congress in Barcelona, one of the keynote speakers
reported that in developing countries a 10 percent increase in mobile
data penetration is associated with a 1.21 to 1.38 percent increase in
GDP. Every 4G cell we build multiplies economic activity and increases
consumer welfare in its coverage area. In areas receiving improved
coverage, E911 and location-based services save lives and enable
critical communications. In areas where a competitor enters, consumers
receive improved service and greater choices.
As shown in the FCC's National Broadband Map, high-speed mobile
wireless service (>6 MBps) is now available in many urban areas, but
not in most rural areas. There remains a lot of work to do to provide
rural citizens with service quality that is reasonably comparable to
that which is available in urban areas, as envisioned by the 1996
Telecom Act. Many communities can receive service from only one
wireless provider and citizens living in these areas do not receive the
benefit of competitive choice. We therefore urge the adoption of
policies that could increase competition and reduce the need for
monopoly-era regulatory structures. These better policies include
allocation of more spectrum, the use of small geographic license areas,
promoting market-based universal service mechanisms, increasing
interoperability of devices, as well as other reforms which we have not
focused on here today but which are important, including
interconnection rights and special access reform.
Conclusion
In conclusion, the challenges that we face are not insurmountable.
Companies like U.S. Cellular have it in their business DNA to bring
great communications services to the people of rural America.. The
issue is how we can ensure that the regulatory regime that governs the
market place is sensitive to the business challenges of serving markets
where a piece of equipment that might serve 250,000 people in an urban
market may serve just a few thousand or a few hundred. Government
support may be necessary in some instances where the economics will
never work for the private sector to invest alone, but ensuring that
rural service providers have meaningful access to spectrum, have
interoperability standards that make devices truly affordable, and that
middle mile and backhaul services are at reasonable rates, all play a
critical role in maintaining a healthy and robust industry.
Your time and attention to each of these items is extremely
important for your constituents and our consumers and I thank you for
inviting me to appear before you today.
Senator Pryor. Thank you.
Ms. Boyers.
STATEMENT OF PATRICIA JO BOYERS, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, BOYCOM CABLEVISION, INC. AND BOARD MEMBER, AMERICAN
CABLE ASSOCIATION
Ms. Boyers. Well, good morning. Thank you for giving me the
opportunity to tell my story.
My husband and I started our small cable business in 1993.
With our own money, we built our first system to serve
consumers in the foothills of the Ozark Mountains of southeast
Missouri. Real close to you, Senator. To stay competitive, we
continuously reinvest in our network to provide digital and
advanced services. Because banks aren't eager to lend to small
rural providers and getting RUS loans as a cable operator is
nearly impossible, we did it on our own, which meant taking out
a second mortgage on our home and our farm as collateral for
our capital investment.
Now, we've always said that we have done so much for so
long with so little that we are absolutely qualified to do
everything with nothing at all. So, we obtained our broadband
equipment and services through the National Cable TV
Cooperative. We can secure better prices from vendors who can--
before we could obtain than on our own. We provide broadband to
about 3,000 residential subscribers. We also provide broadband
to local businesses and anchor institutions, including free
service to our middle and elementary schools. Our private
investments have allowed us to offer broadband speeds
comparable to those in the urban areas. With the new--the
DOCSIS 3.0 technology, BOYCOM will cost-effectively deliver 100
megabytes over our existing networks, and we continually seek
to push our services out to unserved markets, wherever
possible.
Now, when I say ``rural,'' we have a population density of
18 homes per mile passed. All eight of our core systems are
located in what Missouri calls ``perpetually impoverished
counties,'' which means they have been below the poverty line
consistently since the 1960 census. Now, when combined, these
statistics mean we have a very price-sensitive population that
is expensive to reach in those end-of-the-world-and-turn-left-
places. Now, that said, BOYCOM has not had a rate increase in 4
years, because our customers just simply can't afford it.
Now, despite these significant challenges, small cable
operators are delivering broadband services in rural areas.
We've benefited from the historic light touch of broadband
regulation. Now, this must continue. We need flexibility in the
way we manage our networks and that we charge our customers.
It's also vital that the government not subsidize the buildout
of broadband networks in areas where unsubsidized companies
already provide that service. When we spend private capital to
bring broadband to communities, there's no reason for the
government to step in and aid others. The FCC is now fixing
this problem regarding USF, but it continues to be a problem
with RUS.
As the Committee with the oversight responsibility over the
implementation of the Connect America Fund, there are three
policies that are essential to be part of this program:
First, no support should go where competitive providers are
already offering that service.
Second, support must be distributed efficiently, and only
in the amounts necessary to deliver the level of service
required by the FCC.
Third, all providers, including cable operators, should be
able to participate when the FCC holds the reverse auctions.
Therefore, we urge you to exercise your oversight, because
the unintended consequences are severe for rural consumers.
Now, there are targeted areas where government can play an
important role. The government needs to address the cost of
middle-mile transport facilities that carry local broadband
traffic to an Internet backbone access point. Now, due to the
distance traveled and the lack of competitive choice, the
middle-mile cost for rural providers is significantly higher.
As consumer demand for broadband capacity increases, the cost
differential will only get worse.
We also need to revisit that 1978 Pole Attachment Act to
expand the FCC's authority to address the practices of the
exempt electric cooperatives and municipalities. The
unregulated co-ops charge us between $12.50 and $15 a pole per
year, while others just charge us 3 bucks. While not
particularly sexy, pole attachment rates are one of the core
issues that affect our deployment. As I said earlier, I've got
a population of 18 homes per mile passed. Now, that's a lot of
poles to reach those folks. Government must also be sensitive
to the reality that there are rules and regulations that cannot
be borne by small providers. Even well-intentioned regulations
often fail to take account of our size.
Now, due in large part to increased regulatory costs like
these, on December 31, 2011, my company shut down 13 rural
systems, causing these communities to go black. And once a
small cable system shuts down, it eliminates the prospect of
future broadband connections to the Internet from the system.
Finally, skyrocketing program costs are reducing available
capital for broadband. The video programming market for pay-TV
providers is becoming unviable, particularly for smaller ones.
The market is governed by outdated rules and regulations that
were enacted before residential broadband even existed. So,
therefore, we urge you to revisit these rules and ensure that
regulations reflect marketplace realities. My company is
offering service to rural areas, but the business is tough.
What we've accomplished so far has been with brains, balls, and
bald money, not necessarily in that order.
[Laughter.]
Ms. Boyers. Now, all I can really ask is that y'all
continue to keep a heightened awareness of the challenges that
rural providers face, and remember that those solutions that
address the concerns of St. Louis would not work in the Ozarks.
Thanks, y'all.
[The prepared statement of Ms. Boyers follows:]
Prepared Statement of Patricia Jo Boyers, President and Chief Executive
Officer, BOYCOM Cablevision, Inc. and Board Member, American Cable
Association
BOYCOM Cablevision and the other small and medium-sized cable
operator members of the American Cable Association (ACA) provide three
vital services throughout smaller markets and rural areas--video, voice
and broadband Internet. Often, we serve very rural areas--those ``end-
of-the-World-and-turn-left'' areas that no large company wants to
touch. I am proud of what BOYCOM and other small cable operators have
brought to their communities in these past decades, and there continues
to be opportunity for us to invest private capital to maintain and
expand our state-of-the-art communications networks and services.
When my husband and I started our business in 1993, many people
thought we were crazy. We faced a new law, the 1992 Cable Act, which
imposed a lot of regulations on the cable industry. There was plenty of
doom and gloom in those days. Still we built our first system in rural
Missouri. Today we have 5 core systems in the region that provide video
to about 2,000 subscribers and broadband to 3,000. However, it hasn't
been easy. We've always said that ``we have done so much, for so long,
with so little that we are now qualified to do absolutely everything
with nothing at all.''
Our story is similar to other small cable operators who have
invested huge amounts of their own money in rural areas to build,
maintain, upgrade, and expand their networks. In fact, we actually have
a second mortgage on our personal residence as collateral for our
capital investment. The industry initially invested billions to deliver
analog cable service throughout the country, and then in the 1990s, we
reinvested billions more to upgrade our plant to provide more advanced
services. The cable industry is still in the midst of this great
privately funded evolution. As a result of all our investment, cable
today is the best catalyst for broadband growth.
Cable Operators are the Country's Leaders in Broadband
Today the cable industry offers access to broadband service to 95
percent of the country with nearly all cable operators providing
download speeds of at least 4 Mbps and upload speeds of at least 1.
With the advent of DOCSIS 3.0, these operators can deliver speeds of
100 Mbps over their existing fiber/coaxial networks. The next
generation, DOCSIS 3.1, which is moving from the lab to market, will
provide even greater capabilities. By keeping pace with technological
change and investing in our networks, we have become the country's
leaders in broadband deployment. The recent Federal Communications
Commission (FCC) report ``Measuring Broadband America'' once again
demonstrated that when it comes to broadband, cable operators deliver
what they promise.
I know the President wants to get broadband into ``the rural-est of
rurals,'' and small cable operators, like my company, are key to
achieving that goal. It's not only the larger operators in urban areas
making these investments, but I'm proud to say that BOYCOM and nearly
850 other small and medium-sized members of ACA are investing to bring
these capabilities to small and rural markets. For instance, BOYCOM is
deploying fiber-to-the-home in all of our core systems. This will
ensure that our customers will have the broadband performance
capabilities they need for their businesses, education, health-care, as
well as for just interacting with each other. For rural areas, this
capability is critical to their future viability. We are not the
exception. There are many ACA companies like ours, with fewer than
5,000 total subscribers, serving smaller markets and rural areas, which
now have the opportunity to be full participants in the Nation's
broadband future.
Of course, as smaller operators in rural areas, we sometimes need
to be more creative in addressing the needs of our customers and
overcoming some of the market disadvantages we face. The National Cable
Television Cooperative (NCTC), a national buying group serving all ACA
members, helps in this regard. By providing market efficiencies to
broadband equipment manufacturers and service providers, the NCTC can
negotiate lower prices from these vendors than individual broadband
providers can on their own. Members, like BOYCOM, can then opt into
NCTC's master agreements, which enable us to lower the costs of
broadband services. NCTC is an important actor in independent cable's
broadband deployment story and will continue to play an important role
in the future.
The cable story is not just about upgrading our existing
infrastructure. Small cable operators like BOYCOM are also expanding
their footprint to provide broadband to previously unserved areas.
In the foothills of the Ozarks, as you know, that presents a
challenge. But we have developed an efficient way to build plant using
a combination of fiber and wireless. We take fiber all the way out as
far as it is economical and then install a wireless tower. This
provides coverage to those folks that are still in those ``hills and
hollers where you have to have your own Tom Cat if you want kittens,''
and it is working really well.
Cable operators in rural areas also are expanding in other ways. We
have found that demand from owners of cell towers for fiber backhaul
connections presents new business opportunities to deploy fiber into
less densely populated communities. Once the connections to cell towers
are made, the cost to branch off the installed fiber to residences is
lower. It provides an economic means to provide high speed Internet to
the households along the fiber route, enabling us to serve previously
unserved areas, and to do so without any government support.
And our story is not just about providing households with our
state-of-the-art networks. Many of us have also moved into providing
dedicated broadband services and other related services to business
customers. Moreover, we're helping to connect anchor institutions, such
as K-12 schools, universities, libraries, hospitals/emergency medical
facilities, and public safety facilities. These are great opportunities
for us, especially as our old video business model changes.
All of us understand that our networks provide an incredible
platform for our future. Our networks allow us to innovate in ways
unthinkable just a short time ago, enabling us to respond to our
customers and create new services that meet their needs. Our networks
are not only our fundamental asset. They are a fundamental asset for
our communities. They enable people and local institutions to interact.
They enable businesses to develop and grow. They enable community
discussion and political debate.
Because we understand the tremendous value of our networks, we
continue to invest to upgrade them with new capabilities and to build
them out to new areas.
Challenges Facing Small Cable Operators Serving Rural Areas
That said, smaller cable operators serving rural areas still face
significant challenges. Some of these are also faced by big companies
serving urban areas, but some are unique to small rural providers.
When it comes to broadband Internet service, upon which our
customers rely increasingly for essential activities, we are constantly
working to ensure a great experience for all. That sometimes means we
need to control those few customers who use excessive amounts of
bandwidth through reasonable network management and billing practices.
We also need to be able to tailor our broadband service to unique
customer needs by offering specialized or ``managed'' services. As
someone who oversees our networks, develops our services, and works
with our customers, I need to emphasize how critically important it is
that Congress and the FCC continue its historic ``light touch''
regulation of broadband Internet services. In an industry that is so
dynamic, that has so many competitors, and that requires continuing and
significant levels of investment, it would be counterproductive for the
government to impose any greater regulation, particularly on small
rural providers, like BOYCOM.
Moreover, as some Senators have already recognized, it is vital
that the government not subsidize competitors to build their networks
in areas where our companies already provide broadband. When we spend
our own capital to bring broadband and other services to communities,
there is absolutely no reason for the government to step in and aid
others. Not only does this discourage private investment, it is a waste
of taxpayer dollars.
This is not to say the government should not work to bring
broadband to all communities. Many ACA members, which include rate-of-
return and price cap carriers, are the sole providers of broadband in
high-cost areas. These are places where it will never be economically
viable for the private sector to fully shoulder the financing of
buildout because the cost to do so cannot be recovered in these
markets. Some partnership with the Federal Government may be necessary
in these places. However, if support is given, we need to make sure
that support is targeted to only areas that lack an unsubsidized
broadband provider and that it is distributed efficiently. This has
been a problem with the old universal service fund, and other
government programs, but recently the FCC has correctly recognized that
the world has changed, and the universal service program must change
along with it. It is critical that the FCC hold true to its stated
goals and that other programs that support broadband deployment, like
the U.S. Department of Agriculture's (USDA) Rural Broadband Loan
Program that is administered by the Rural Utilities Service (RUS), are
changed to make sure the government does not subsidize competitors to
privately funded broadband providers.
The FCC's Implementation of the Connect America Fund
With respect to the implementation of the FCC's reform of the
universal service fund and establishment of the broadband Connect
America Fund (CAF), there are three principles that must be followed.
First, as I just indicated, no support should be provided in areas
where competitive providers already offer broadband service. Second,
support should be distributed efficiently, that is, support should be
only the amount necessary to deliver the level of broadband service
required by the Commission. Third, all broadband providers, including
cable operators, should have a fair opportunity to access support when
the Commission holds reverse auctions.
Let me elaborate on how these principles should be implemented by
the FCC with respect to the development of the cost model for CAF Phase
II, the program that will be used to award $9 billion in support over 5
years in high-cost areas served by the larger telephone companies, the
so-called price cap telephone carriers. The purpose of the cost model
is to precisely estimate the amount of support that would be required
to build baseline broadband (4/1 Mbps) in areas unserved by any
competitor. As a consumer who contributes to the USF program, and as a
small cable operator who competes against a price cap carrier, it is
critical that the FCC gets the model right. Otherwise, the American
consumer could be paying in excess of hundreds of millions of dollars
per year for something but getting nothing in return. As a rural cable
operator, my concern is that this excessive support, could be used to
compete with me and other ACA members. We urge this Committee to
exercise its oversight authority regarding this matter.
Another important part of CAF implementation is the plan to hold
reverse auctions to provide broadband services in areas where the large
price cap telephone companies do not accept CAF Phase II funding. We
support the use of reverse auctions. This process can result in the
selection of the best and most efficient providers if as many broadband
providers as possible can participate, including cable operators.
However, there is a major barrier standing in the way--under the law
today, only an ``Eligible Telecommunications Carrier'' (ETC) can
participate. Few cable operators are ETCs because the state-run process
to become an ETC is so onerous, and ETC status comes with burdensome
requirements. Quite frankly, ETC status is irrelevant to reverse
auction participation because it is the FCC who establishes all the
requirements to obtain CAF support. The FCC can remedy this problem. We
ask that Congress encourage the FCC to take steps to make it easier and
less burdensome for cable operators to become ETCs so that they may
participate in the reverse auctions when such auctions are used.
In addition to the issues associated with the CAF implementation,
there are four specific areas where government has an important role to
play in helping ensure that broadband is brought to all Americans: the
lack of middle mile infrastructure and rising middle-mile costs;
outdated pole access attachment regulations that result in both higher
fees and delayed access; challenges to obtaining public and private
rights-of-way; and decreasing resources available to small cable
operators to offer broadband due to the imposition of onerous
regulations and declining video margins.
The Lack of Middle Mile Infrastructure and Rising Middle-Mile Costs
First, the marketplace is rapidly changing--demand for bandwidth
has been rising exponentially over recent years as consumers expect
increasingly fast connection speeds to access new services such as
streaming video. And this is expected to continue, with U.S. broadband
speeds estimated to more than triple by 2016. While this trend holds
true in urban and rural areas alike, it is significantly more difficult
for smaller cable operators to meet this new demand than it is for
larger operators with scale. That is, the high cost to serve rural
areas with essential facilities is getting higher.
As our customers increase their use of broadband service, we need
to upgrade not only our last-mile connections to the home, but also the
``middle-mile'' pipes which carry traffic from our local networks to an
Internet backbone access point. This presents a number of challenges
for ACA members. The FCC has recognized that middle-mile costs increase
as the distance from the network to the backbone access point grows,
and rural providers generally operate networks that are among the
farthest from these access points.
Additionally, unlike in urban areas, there may be few middle-mile
links available. In fact in many rural areas there may be only a single
link. And many of these links use outdated technologies, which means we
often can only access lower capacity pipes--this in turn limits the
data speeds we can provide to our customers. It also means we often pay
much higher prices for each byte we transmit.
Some of us have explored constructing our own middle-mile links,
but because the distances involved are extremely long and the density
of our users too low, the cost is prohibitive. As our subscribers
continue to expect faster connection speeds, poor middle mile
infrastructure and rising middle-mile costs make it more difficult for
us to maintain current prices, upgrade our services, and build out to
new locations.
In its National Broadband Plan, the FCC identified the lack of
adequate middle-mile infrastructure and the high costs of access to be
a significant problem. The FCC is examining the issue in a further
rulemaking with respect to CAF implementation. The record in this
proceeding closed one year ago, and we urge the FCC to conclude its
work shortly and issue a decision. Where prices are too high, it should
use its regulatory authority to ensure they are consistent with
competitive market rates. Where capacity is inadequate, it should use
the CAF to support the deployment of middle-mile capacity.
Outdated Pole Attachment Regulations That Result in Both Higher Fees
and Delayed Access
Second, smaller operators generally serve less dense areas, which
necessitates that to reach each location their networks must attach to
many more poles than larger operators serving more urban areas. While
the FCC has done much to improve the cost and speed of pole access, the
1978 Pole Attachment Act stands in the way of the Commission addressing
some significant problems in the market. For instance, it does not
contemplate access for standalone broadband service. It only permits
the FCC to regulate via national rules where states decline to act.
Moreover, it does not cover cooperative and municipal pole owners, who
remain exempt from any regulation, allowing them to set much higher
fees and delay access. All of this drives up costs and makes broadband
deployment even more uneconomical in rural areas.
The FCC's National Broadband Plan wisely suggested that Congress
should eliminate the exemption for cooperatives and municipalities to
restore fairness and competitive rates to the market. We encourage
Congress to take action to deal with the obvious shortcomings in the
existing law.
Challenges Obtaining Public and Private Rights-of-Way That Hinder
Broadband
Deployment
Third, ACA members face many restrictions, delays, excessive fees,
and competitively discriminatory policies imposed by private and public
entities when they seek to extend service to new communities. These
problems stem from public and private entities that control rights-of-
way. ACA members like BOYCOM generally do not have teams of lawyers and
consultants to deal with all these ``gatekeepers'' and so are
particularly vulnerable to unfair, unreasonable and discriminatory
treatment.
We were pleased last year when the President issued an executive
order requiring Federal agencies to develop new uniform policies and
practices for accessing the Federal Government's assets for the purpose
of broadband deployment. It included the ``dig once'' provision, a
smart idea that was previously recognized by some Senators and
Representatives, which would require the deployment of conduit for
broadband facilities in conjunction with Federal or federally assisted
highway construction whenever possible.
However, the executive order only applies to Federal lands,
buildings, and rights of way, federally assisted highways, and tribal
and individual Indian trust lands (tribal lands). More needs to be
done. We need the government's assistance to ensure we are treated
fairly and reasonably when seeking access to all rights-of-ways.
Decreasing Resources Available to Small Cable Operators to Offer
Broadband Due to Onerous Regulations and Declining Video
Margins
Fourth, many smaller operators face increasing burdens stemming
from new regulatory compliance obligations and decreasing video margins
which cut into the financial resources available to build, maintain,
upgrade, and expand broadband.
Despite the commendable efforts of the FCC to minimize the burdens
on smaller operators regarding some new rules and regulations, smaller
operators have been unable to obtain exemptions to avoid being forced
to upgrade their Emergency Alert Service (EAS) equipment; participate
in the National EAS test and associated reporting requirements; comply
with new Communications and Video Accessibility Act of 2010 (``CVAA'')
requirements and recordkeeping obligations; and to satisfy new Open
Internet disclosure requirements. In addition, the FCC is considering
imposing additional compliance obligations on small operators, such as
the FCC's recent comprehensive and mandatory special access data
collection and requirements to include home networking functionalities
in deployed two-way HD set top boxes. Moreover, there are additional
CVAA related obligations on the horizon. While such efforts seek to
achieve commendable public policy goals, the cost of these many
separate compliance obligations adds up, straining the resources of
smaller operators, and making the offering of broadband services at
reasonable prices more difficult.
For decades, cable operators supported infrastructure and service
investment through revenues derived solely from the provision of video
services. However, a lot has changed in the last twenty years. In 1992,
cable was the dominant provider of video service in their markets. It
was a time before direct broadcast satellite and before telephone
companies launched video. It was before the Internet and over-the-top
video providers such as Netflix and Hulu. Today, cable faces robust
competition across the country, and its share of the market has
steadily decreased. In many rural areas, satellite TV has more
subscribers than cable, and Internet video traffic represents the
majority of overall Internet traffic. At the same time, the cost of
video programming has increased sharply, particularly for
retransmission consent and sports networks offered regionally and
nationally. While video revenue has increased for most cable operators,
video expenses have grown faster, sending video margins to historic
lows five years running, according to respected industry analyst SNL
Kagan. The story is a little bit different for BOYCOM. The state of
Missouri has seventeen ``Perpetually Impoverished Counties''--counties
with an average income below the national poverty level since the 1960
Census. BOYCOM services are available in five Missouri counties and all
five counties are ``Perpetually Impoverished.'' As such, BOYCOM has not
been able to have a rate increase in four years. Our subscriber base
simply cannot afford to pay another dime. We're eating the cost
increases. The reduced profit from video puts pressure on cable
operators, particularly smaller ones, and reduces available capital for
broadband. This is one area where the sad irony of competition at the
retail video level has resulted in higher wholesale programming prices
as new entrants have been willing to ``pay up'' simply to enter the
market. Making matters worse, the video market continues to be governed
by outdated rules and regulations passed decades earlier. We urge
Congress to revisit these rules, and ensure that regulation reflects
marketplace realities.
For cable operators, all of these problems are driving many to shut
down their smallest systems. For the FCC's 14th Annual Report on Video
Competition, ACA presented data showing that the number of cable
systems has significantly decreased over the past five years. Using the
FCC's own data, ACA calculated that since October 2005, the number of
cable systems has declined by 26 percent (from 7,208 to 5,312) and that
for systems with fewer than 10,000 subscribers, the percentage drop in
the number of systems was even greater. ACA also has presented data
from the NCTC that shows similar results. During the last five years,
NCTC members closed a total of 793 small and rural cable systems
serving a total of more than 35,000 customers. BOYCOM is a perfect
example of this harsh reality. On December 31, 2011 we were forced to
shut down thirteen very small rural systems in Southeast and South
Central Missouri-causing these communities to ``go dark.'' Congress
must take notice of the changing landscape for facilities-based
operators because when a small cable system serving a rural area shuts
down, it not only results in the loss of multichannel video service,
including local TV service, but also the prospect of future broadband
connections to the Internet.
The Government Can Help Small Cable Bring Comparable Broadband to More
Rural Areas
These concerns--the lack of middle mile infrastructure and rising
middle-mile costs; outdated pole access attachment regulations that
result in both higher fees and delayed access; challenges to obtaining
public and private rights-of-way; decreasing resources available to
small cable operators to offer broadband due to the imposition of
onerous regulations and declining video margins--each require Congress'
attention so that small cable operators like BOYCOM can continue to
compete and can invest in modern networks that are capable of providing
faster broadband to greater numbers of rural communities.
Senator Pryor. All right. Well, thank you.
Mr. Strode, let me go ahead and ask you the first question.
By the way, we're going to do 5-minute rounds. I was not
planning on doing a second round, but if anyone wants to stay
until the end and ask some cleanup questions, we'll be glad to
do that.
So, Mr. Strode, let me start with you. And I would just
like to hear a little bit more from you on USF and how your
company has relied on it, and how your customers have benefited
over the years from USF. And then also--you laid out some of
the things that we need to make sure, on USF, as we go forward,
and I'd just like to get a sense from you of how you think it's
working right now, and how we can make it better, going
forward.
Mr. Strode. Yes, Senator.
The Universal Service Fund has worked well. In the rural
areas where we serve, we are able to provide broadband to 95
percent of the customers that we provide voice services to.
That has been through a lot of effort, a lot of investment,
both recovery from Universal Service Fund, but a lot of private
investment in there, as well. And the system has worked well,
so far. But, the uncertainty that we have now, because of the
factors I mentioned, especially the regression analysis, has
put us in a position where it's hard for us to plan, hard for
us to know what investments to make, because the recovery is--a
part of that recovery is uncertain. The regression analysis has
drawn a hard line at 90 percent. Companies that are above the
90th percentile in costs of similarly situated companies are
penalized; their recovery is capped at that 90th percentile
level, with no examination of why they're above the 90th
percentile. There are legitimate reasons that companies are--
have costs that are above the 90th percentile. You know, some
of the service territories--very, very expensive to serve in.
And you're familiar with some of our service territory, the--80
miles of the Buffalo River runs through our service territory.
That's rugged terrain.
The regression analysis--I'll make a real, hopefully,
quick, simple analogy--imagine 10 cars going down the highway.
State police stop all 10 of them, say, ``We measured your
speed, a couple of miles back down the road, and, car number 3,
you were the fastest, so we're going to write you a ticket.''
Doesn't matter whether they were over the speed limit or not;
they were the fastest, so they get a ticket. And then they say,
``We're going to check you again further down the road, and
whoever is fastest is going to get another ticket.'' And so,
everybody slows down. But, still, somebody is going to be the
fastest. You can't see the other cars; you don't know how fast
they're going. And so, somebody gets a ticket after the next
checkpoint. And so on and so on as they go down the road. So,
that's what the FCC's doing. They're saying, ``Somebody's most
expensive, somebody's in the top 10 percent of costs. We're
going to penalize them, with no indication that they've done
anything wrong.''
At the same time, the FCC's requiring us to provide 5-year
plans of the investments we're going to make to push broadband
further out into our networks, and, every year, update that 5-
year plan and report on the progress that we've made. So,
while, on one hand, we're being pushed to make more investment,
on the other hand, we don't know which investment is going to
be penalized, put us over the limit.
Senator Pryor. All right. I'm going to reserve some of my
time for the end.
Senator Wicker?
Senator Wicker. Thank you very much.
Mr. Davis, when the FCC created the Connect America Fund,
which we'll call CAF-1, they really had companies like
CenturyLink in mind. You state, in your testimony, that,
unfortunately, only a small part of these CAF-1 funds have been
allocated for use; specifically, only $115 million targeted for
unserved markets has been accepted for deployment in the field.
Did CenturyLink accept these funds?
Mr. Davis. Senator, that's an important question. And the
answer is that CenturyLink accepted a portion of the funds that
were available to us. The FCC set a benchmark as to how the
funds would be allocated per customer household or business.
And the benchmark they set was insufficient for CenturyLink and
many other companies to deploy broadband into the higher-cost
area. So, some areas that were relatively lower-cost still--
substantially above the benchmark, because we add a substantial
of our own capital, as did the other companies. So, we did use
some of the money to get to the next tier of areas. But, what
we need to do now is look at the customers that still don't
have broadband and can't be served, even with private capital
on that benchmark, to create another standard so we can get
broadband out to those areas.
Senator Wicker. How much did you accept?
Mr. Davis. I believe we accepted about $35 million,
Senator.
Senator Wicker. OK. And explain, then, if you will, the
problem with the benchmarks, specifically.
Mr. Davis. OK. So, what the FCC did----
Senator Wicker. For example.
Mr. Davis. For example, the FCC said, ``We will contribute
$775 per household for deploying broadband to new areas that
are unserved.'' And the certain amount was made available to
different companies. So, we looked at that, and we said,
``Well, we can afford to put in this much of our own capital,''
and so, we added our own capital to it, and were able to use
about 300--about $35 million of their capital, a significant
amount of our own capital, and, together, that's how far we
could go. But, when you go to the next tier, broadband can--
becomes more expensive and more expensive. So, the FCC needs to
re-address the benchmark so we get it further out, and look at
it from a customer perspective, in how we get service to
customers.
Senator Wicker. Is it your understanding that the FCC is
moving in that direction with CAF-2?
Mr. Davis. Based upon the public comments that we've seen
and the conversations we have, we're hopeful that they're
moving that direction to complete CAF-1, and we're also
simultaneously working on CAF-2, and we're hopeful that they're
moving forward on both of those. I believe that CAF-1--
completing CAF-1 is immediate and will create additional
substantial investment in rural America, and then CAF-2 will be
a long-term solution that will continue that and provide
additional service to additional households.
Senator Wicker. But, in the meantime, it's not working so
great.
Mr. Davis. CAF-1 has not worked the way we intended. I
don't think it's worked the way the FCC intended. But, I
believe we can--we're on track to fix that, if we just move
forward.
Senator Wicker. OK. Now, are you on the same page with Mrs.
Boyers--where, in her testimony, she says, ``Three principles
must be followed with the Connect America Fund: First, no
support should be provided in areas where competitive providers
offer broadband services. Second, support should be distributed
efficiently. And, third, all broadband providers, including
cable operators, should have fair opportunity to access support
when the Commission holds reverse auctions''? Do you differ
from Mrs. Boyers position?
Mr. Davis. I don't believe so. I think those were the
principles that I announced, as well, is that we need to target
the money to places that don't have service, where there's not
an unsubsidized competitor, and--and I do agree that, when
there's a competitive bidding process, allow all technologies
to compete, so long as they provide the level of service that
is deemed appropriate and necessary for that particular area or
for that customer.
Senator Wicker. Mrs. Boyers, has Mr. Davis pretty well
outlined it correctly, or would you like to elaborate?
Ms. Boyers. Yes, he has. But, one of the most important
things is the oversight of that. You know, the FCC is moving
toward what they are calling ``greenfield approach,'' which
means--greenfield means building it from day 1, from the ground
up. What will be done initially with these CAF dollars, it's my
understanding, is that they will be upgrading existing systems,
which is called the ``brownfield approach.'' And so, the FCC
has been bantering back and forth with this, and seem to be
leaning toward green field. But, whenever the price-cap
companies, who are the only providers allowed access to these
CAF-1/CAF-2 funds--whenever they get that money for greenfield,
and then they use it to upgrade existing, what happens to the
excess money? That's what I--that's where the oversight comes
in. That's where I want to know how I can be assured that, in
my Van Buren, Missouri, system, on the current river of the
Scenic Ozark National Riverways, that they're not coming in
there, CenturyLink, which we compete with them in that market--
they've been great competitors, great competitors, very
respectful of our plant, we're respectful of their plant, but
we're just a little small mom-and-pop. I'm the mom. The pop's
sitting two rows behind me.
[Laughter.]
Ms. Boyers. So, we can't compete with those big guys.
We can't compete with government-subsidized money. We just
simply----
Senator Wicker. I'm not going to ask which of those three
aspects he's supplying, there.
[Laughter.]
Ms. Boyers. I'll be glad to speak with you after the
hearing.
Senator Wicker. Let me just say--my time is out, and----
Ms. Boyers. We just want the oversight. We believe it when
they----
Senator Wicker. We're going to need all four of you to help
us with follow-up testimony for the record as to how we can
make CAF-1 and CAF-2 work better for rural America.
Ms. Boyers. Thank you.
Senator Wicker. Thank you very much.
Senator Pryor. Thank you.
And we've been joined by our Ranking Member, Senator Thune,
and I'll go ahead and recognize you now for your questions.
Thank you.
STATEMENT OF HON. JOHN THUNE,
U.S. SENATOR FROM SOUTH DAKOTA
Senator Thune. Thank you, Mr. Chairman.
I appreciate you, Mr. Chairman, and Ranking Member Wicker,
having this hearing and leading off with a very ambitious
agenda for the Communications Subcommittee, and particularly
focusing on rural areas, which you know is very important to
me.
And I am interested, not only in deployment in rural areas,
but also adoption, and trying to do more to get people to adopt
broadband services in rural areas. And that is something I
address in an opening statement, which I'd like to have
included for the record, if I might, Mr. Chairman.
[The prepared statement of Senator Thune follows:]
Prepared Statement of Hon. John Thune, U.S. Senator from South Dakota
Chairman Pryor, thank you and Ranking Member Wicker for working
together on an ambitious agenda for the Communications Subcommittee and
for leading things off with a hearing focused on rural America,
something that is obviously very important to me.
The Commerce Committee has several new members, and I know we will
all benefit from an up-to-date look at today's communications
landscape.
I do think, however, that the Committee could have been served well
by also hearing from a satellite provider today.
For many households, satellite is their only option for video and
Internet services.
While satellite broadband has a reputation of being the option of
last resort, my understanding is that a new generation of satellites
may offer many Americans a competitive alternative to wired broadband
choices.
To tackle the so-called ``digital divide,'' we should seek to
understand the entire communications experience in rural areas, and
satellite is certainly part of that story.
As the subcommittee begins its work, we have an opportunity to
examine these critical issues from many angles.
For example, policymakers have spent a lot of time focusing on
deploying networks in unserved areas, which is certainly very
important, but I also think it is necessary for us to examine broadband
adoption in rural communities.
Census Bureau surveys show that nearly 60 percent of rural
households not connected to the Internet say they either do not need it
or it is too expensive; lack of availability is cited by less than 6
percent of rural non-adopters.
But even when rural Americans see the benefit of the Internet,
sometimes they still do not go online.
In a recent survey of South Dakota farmers, 85 percent said that
the Internet adds value to their agricultural operations but only 69
percent actually use the Internet.
Even though these folks can get online to check commodities prices,
pay bills, or research new agricultural products, they are choosing not
to do so despite the acknowledged benefits.
What is keeping these people off the Internet? And are the
broadband adoption challenges in rural America unique from the issues
seen in the big cities? We should explore the answers to those
questions.
Thanks to companies like CenturyLink, South Dakota is one of the
national leaders in fiber deployment, ranking third amongst the states
with nearly 70 percent availability according to the National Broadband
Map.
But the tremendous benefit of that kind of connectivity may be
wasted if people aren't taking advantage of it.
I hope that the witnesses today will spend some time talking about
the demand side of rural communications and that we further explore the
actual experiences of rural broadband users in future hearings.
Thank you.
Senator Thune. But, if I could just ask a quick question
and have you react to it, if you would.
For those of you who compete head to head with other
providers of voice, video, and Internet services, do you feel
that you are competing on an even regulatory playing field with
your competitors? And, if not, could you identify what you
believe are the main regulatory disparities?
Anybody want to take--feel free. Mr. Carlson.
Mr. Carlson. Well, I'll--thank you very much. I will speak
to the wireless area. And one of the key areas that we feel
there is not a level playing field today is the 700 megahertz
and the issue of the lower 700 megahertz band interoperability.
We, like many midsized and smaller carriers, went into the
auction, 3 years ago, acquired licenses on the A block, only to
find, after the auction, that one--the two largest companies in
the Nation changed the way the frequency allocations were
aggregated to effectively exclude the A block from their
handsets. As a result of that, manufacturers--many
manufacturers will not produce handsets that include the lower
700 megahertz A block, which means that our handset selection
at U.S. Cellular is not as extensive as other carriers. In
fact, some of the most popular handsets in America, we cannot
get access to for our newly launched LTE broadband network on
700 megahertz. We can't get access to that. So, that's a lack
of consumer choice that was created because the FCC did not
require interoperability across the lower 700 megahertz band.
That's very, very important to correct. The FCC, to their
credit, has a proceeding in front of them to correct that. We
would hope that, as soon as the new leadership of the
Commission is settled, that they will get that across the
finish line. And we would ask for your help in doing that.
Senator Thune. Anything else?
Mr. Davis. Senator, I--as an incumbent telephone company,
we are subject to substantial regulations regarding the
provision of service, obligations to serve, unbundling of our
networks. So, there are a number of obligations that are
imposed on incumbent telephone companies that don't apply to
cable or don't apply to wireless. And so, the regulatory field
is not level; it has different bumps and bruises, but it's not
level.
The one thing I would also just mention very briefly about
adoption, which you raised, is that we find that when we bring
broadband to a community, there is a great need for it and a
great desire for it. And so, adoption does occur very rapidly
across a very broad base. We also offer a discounted $9.95
broadband offer for low income customers. So, we're trying to
do things to address adoption through various communications,
but as well as looking at lower income customers and deciding
if there's something we can do there.
Mr. Strode. If I may.
Senator Thune. Go ahead.
Mr. Strode. Not necessarily in areas where we're competing,
but just the regulatory burden on small companies, particularly
companies like ours, and smaller than ours, the regulatory
burden is very heavy. You know, the company I work for, we're
fortunate--we're actually large, in the realm of some small
companies, but I can tell you that the regulatory burden is
difficult for us to comply with. We spend--it takes a great
deal of my time, and our staff, trying to comply with the
reports that are required of us, both as an incumbent telephone
provider and as a cable and broadband provider. And for smaller
companies, I can't imagine how they are able to keep up. I know
it's a terrible challenge for them.
On adoption, we have engaged in making some promotional
offerings. A couple of schools in the areas we serve got grants
to provide children, in one grade, laptop computers.
We offered a promotional broadband offering to those
students' families so that they could make complete use of
those computers. We have worked with community organizations,
trying to provide Internet education, broadband education,
classes for adults. A problem--a common problem is the--their
children know more about the Internet than they do, and they're
concerned about the things that are out there in the world.
They want to keep their children safe. And we've tried to
develop some programs to help educate them so they can engage
in monitoring their children's usage and being able to keep
them--have some comfort that their children are safe.
Senator Thune. Thank you, Mr. Chairman.
I thank all of you for your input and perspective.
Senator Pryor. Thank you.
Senator Begich.
STATEMENT OF HON. MARK BEGICH,
U.S. SENATOR FROM ALASKA
Senator Begich. Thank you very much, Mr. Chairman. Thank
you for holding this hearing and an opportunity to kind of
explore the issues of remote areas.
And I use the word ``remote'' because, in Alaska, rural is
one thing, but remote is clearly what we are, with 200 villages
off the road system, almost 600,000 square miles of land, when
you think of the size. It's enormous. And some of you have
mentioned how hard it is to do some of your areas; you can
imagine what it is in Alaska.
And I know, Mr. Strode, in your written testimony, you
noted, I think, Barrow, if I remember right, in the North
Slope. And so, I thank you for that.
You know, we've been fortunate, with some work with the USF
fund, the RUS loan program, the stimulus program, to start to
reach out and make some efforts. But, some of your testimony is
pointing out some areas we still need to go.
So, I want to start, if I can, Mr. Strode, in your
comments. And I--and, as you know, Congress retired the NTIA to
develop a--with assistance from the FCC--a national broadband
map. And, you know, we hear rumblings, a little bit, of our
accurate the map is, but can you give me a little feedback on
how you see this map and how accurate their broadband map is,
at this point?
Mr. Strode. We have diligently tried to provide information
to the organization that's doing the mapping for our States,
and tried to make sure that the map was accurately--accurately
reflects where we provide service.
I believe the method that's used is--presents a--perhaps an
uneven picture of the ability of our--of where we have service.
Senator Begich. Is it fair to say it's not that accurate?
Mr. Strode. Well, it's just not----
Senator Begich. In the rural areas.
Mr. Strode. It's--it--we have--as you're, I'm sure,
familiar with, there--if you look at the map, it looks like
there are great unserved areas. And the reason it's--some of
those areas are unserved is because there's no one there.
Senator Begich. Right.
Mr. Strode. There's no one there to provide service to. I
have concerns that the map does not accurately reflect the
service that's available from some of our competitors. I think
it perhaps overstates what some of the competitors can do.
Senator Begich. Do you think they're being--do you think
they'll be receptive, or not, in trying to get these maps more
accurate? Because it is important for the consumer to know
where the service is and where it's not.
Mr. Strode. It's very important. And, like I said, we've
worked with the organization that's doing the mapping in our
State, and I think it pretty accurately reflects where we are;
and they've been good to work with, in trying to do that. Like
I said, I--one of my concerns is that it overstates what some
of our competitors can provide and do provide.
Senator Begich. I understand.
Let me ask you another question, on intercarrier
compensation. As you know what the purpose of this is. It's
money the telephone company is paid to transport and--and as
that continues to go down, which pretty much almost nothing at
some point, what are you doing, as a company, to try to
compensate what that--particularly where USF is kind of
stagnant or lacking in its capacity? What do you do, as a
company, to compensate for that?
Mr. Strode. Well, we have made staff reductions. We've
engaged in taking a hard look at our expenses, trying to
control costs. We are looking at other lines of business, other
ways to expand our business. We've been fortunate to get into
the transport business. We're providing back haul for cellular
companies from their towers. Looking at other ways to provide
revenue to replace that lost revenue.
Senator Begich. Gotcha. Let me ask you--and this will--one
area that I want to ask you particularly about, and then I'm
going to broaden it to the 700 megahertz issue--and that is the
issue of roaming agreements. Tell me just kind of your ability
or fairness, or what's--how do you see that?
Mr. Strode. I don't have direct experience. Our company's
not a provider of wireless services, but I know other companies
that are similarly situated to us have problems getting roaming
agreements that let their customers be able to use their
service at reasonable prices when they travel outside of their
home area. It's a--it is a major problem for----
Senator Begich. It's a big challenge.
Mr. Strode.--small/mid-sized carriers.
Senator Begich. Very good.
Mr. Carlson, I'm going to ask you this, because you
mentioned it. First, on the 700 megahertz, I--that's very good
testimony, and I--I'm hopeful that they'll get through their
next order. You mentioned that they're in the process. And I
always get concerned about how long FCC takes on these orders.
They--it seems like a never-ending cycle. But, you mentioned
the 600 megahertz issue that--to make sure we don't repeat the
problem. I don't--I may have expanded the verbiage there, but
explain that to me, just so I understand.
I understand the 700. We've got some issues there. And
hopefully the order will help rectify that. And it sounds like
they're moving that way. But, my worry is always, again, FCC
moving in a timely manner. But, the 600, tell me what your
issue there was.
Mr. Carlson. Well, the 600 megahertz auction will be even
larger, in terms of--at least many people think it will be--in
terms of spectrum availability, than the 700 megahertz auction
was. And the 600 megahertz auction is expected to come either
late 2014 or early 2015. And the rules for 600 megahertz are
probably going to be written this year by the FCC. So, it's
very important to get those rules right.
So, we believe, as do many midsized and small companies,
that we need to have interoperability standards established at
the beginning----
Senator Begich. Instead of what we did with the 700.
Mr. Carlson. Exactly.
Senator Begich. Gotcha.
Mr. Carlson. Before the auction instead of after the
auction.
Senator Begich. And do you think the FCC is responsive to
that?
Mr. Carlson. Well, I would certainly hope so. I think so.
At the staff----
Senator Begich. I knew you were going to say ``hope so.''
Let me----
Mr. Carlson. No, I will say this. I think many of the staff
members are responsive----
Senator Begich. OK.
Mr. Carlson.--to that. And, of course, you know, the
commissioners, you know, are--I would hope they would be
responsive. And we'll do our best to educate them. But, the old
kind of oversight that Patty talked about is wonderful and--to
make sure that they realize that, you know, that's part of
their responsibility, too.
Senator Begich. OK, let--thank you very much. My time has
run out.
Mr. Chairman, that is obviously--because the 700 megahertz
has taught us some lessons. It may be worthwhile, as the
Committee just--this is one of those issues we should dog to
make sure we're not here, 2 years from now, having this same
panel, having the same conversation. Just food for thought.
But, thank you all very much.
Senator Pryor. Thank you. And we are keeping the record
open for 2 weeks, so if you want to submit additional
questions----
Senator Begich. Excellent. I have a couple more. I'll do
that.
Senator Pryor. Great.
Senator Begich. Thank you.
Senator Pryor. Senator Blunt.
STATEMENT OF HON. ROY BLUNT,
U.S. SENATOR FROM MISSOURI
Senator Blunt. Thank you, Mr. Chairman. And thanks, to you
and Senator Wicker, for holding this hearing.
You know, when we had the commissioners in the other day, I
asked them specifically about the underserved, unserved, how we
really focus on people who don't have service out--Ms. Boyers,
I know, of course, you and Steve well. I'm glad you're both
here today. I know you're also involved in the American Cable
Association. And, from that perspective, do you think it's
possible for the FCC to develop a set of rules that really
allow money to be spent only as it's targeted toward people who
don't currently have service? How--what kind of advice would
you give there as to how they should set these standards?
Ms. Boyers. I certainly think that it's possible. I just
don't know if the focus will be there. Because if the money is
allocated and goes out the door first, then it's really hard to
close the barn door after the cows have already gotten out. I
mean, it just really is. Once the money goes out and they
decide that it's going to be spent in greenfield components
rather than brownfield, and before they would have to present
plans--or even the way RUS does it on a loan--you have to spend
the money before they give you the money. So, maybe an--I don't
know how they would do that, Senator, but I do know that it
must be done, because little people like us--and I say ``little
people,'' figuratively speaking--little folks like us have no
recourse, you know.
I understand USF. I understand--I get that. I get the CAF
fund. I get that. Because I understand where we're at in the
concept of the--of ``but for.'' But for United Service Fund,
you couldn't call your grandmother in Blue Eye, Missouri, if
you liked in New York City. That's what universal service is
all about. The Connect America Fund is the same thing. But, you
can't use those funds, much like RUS has done in the past, to
subsidize someone else to overbuild a suburban area, where an
unregulated company that's using private company, unsubsidized,
is already serving. That's where the rubber meets the road for
the BOYCOMs of the United States.
Senator Blunt. Right.
Ms. Boyers. Because we have no recourse, we have no voice
but y'all.
Senator Blunt. Thank you. Thank you all for--that you for
that comment.
Mr. Davis and Mr. Carlson, both, you know, we really
haven't had any buildout in Missouri, based on the USF reform
order. Do you have a sense as to why that is and what can be
done to further encourage buildout in the parts of the country
that haven't had it yet?
Mr. Davis first.
Mr. Davis. Well, I think that--first of all, I do
absolutely agree that subsidies should not go to areas where
there's an unsubsidized competitor providing adequate service.
And so, I agree with that concept. And I think part of the
problem with the current round of the CAF-1 funding that the
FCC has authorized is that it was insufficient to allow
companies like ours to go to the higher-cost areas. And so, the
purpose of the fund is to do that, to get us to the higher-cost
areas. So, we need a new benchmark. We need the FCC to
readdress the CAF-1 funding, which we are hopeful and believe
they are trying to do. But, they need to look at the--how much
it costs to get to some of these areas. And it's not without
additional capital from private companies, also, but to
recognize that these areas are very expensive, and getting that
broadband out there benefits those customers, but also benefits
everybody across the country, to have everyone engaged in the
digital economy.
Senator Blunt. Yes.
Mr. Carlson?
Mr. Carlson. Yes. So, in the wireless world, the way the
FCC has organized the new Mobility Fund, which is the one that
did not provide funding for Missouri, is that that fund is
targeted at those highway miles that are the least expensive to
serve that have not yet been covered by good service. So, it
has a very specific targeting. And the amount of the fund being
only $300 million, compared to $1.2 billion per year of funding
under the prior Universal Service Program for wireless, meant
that the fund availability was much, much smaller.
So, areas like Missouri, which is--are more difficult to
serve per highway mile, under the current FCC regime will be
forced to wait--and we don't know how long--until the areas
that are the least expensive to serve of the unserved areas are
served and we work our way up to the more expensive areas to
serve.
This was not one of our ideas as a company. We wanted to
continue with a system which allocated funds based on all areas
that had high cost, which would have covered states like your
own, sir, states like New Hampshire and other states. But, this
is what the FCC currently has decided to do.
We would recommend that more funding be provided for
mobility and that the FCC take a new look at this method of
funding that only targets the least expensive areas to serve.
Senator Blunt. Right.
My time's up. I'm going to submit a question--Mr. Carlson,
you reminded me, there in your comment, of whether that 300
million was all subscribed, and, if it was subscribed, if it's
all, then, being used, or do we have some idle money sitting
around that was designed for a specific purpose that's not
being used for that purpose of connecting these highway miles.
And I'll submit that in writing.
Thank you, Chairman.
Senator Pryor. Thank you.
Senator Fischer.
STATEMENT OF HON. DEB FISCHER,
U.S. SENATOR FROM NEBRASKA
Senator Fischer. Thank you, Mr. Chairman.
I'd like to focus on a concern that many companies in my
state have problems with. They believe it's hindering their
goal to meet the needs of their customers. And that's the QRA.
They're concerned about the formula, which we've talked about,
and also about the unpredictability of the year-to-year caps.
And, Mr. Strode, I'd like to ask you some questions on
that. With your experience, how do you believe that these QRA
caps are affecting the companies that you represent? And I'd
like you to talk about the planning process and the problems
that some of these companies may have in even forming a
business plan because of that unpredictability. And you
mentioned, I think, earlier in your testimony, about a 5-year
plan. And is that required?
Mr. Strode. Thank you, Senator. Yes. The FCC requires from
us a 5-year plan, starting this year, on July 1. By July 1, we
have to submit a 5-year plan of how we're going to make
broadband available in areas where it's not available now or
increase bandwidth in areas where it is available today. So,
it's investment in broadband services. We are required to make
that plan, provide some other information, in terms of
unfulfilled requests, if there are any, for broadband services,
and submit that plan by July 1, describing how we're using
Universal Service funds that we receive.
A year from now, or in July 2014, we're going to have to
submit another 5-year plan, update, you know, prospective 5-
year plan, and report on the progress that we've made on the 5-
year plan that we presented the year before.
In a environment in which we don't know, are unable to
accurately predict what our recovery is going to be on
investments that we make because of the QRA, the regression
analysis, we don't know what companies are in the same group
with us. We can't--we don't know how we're investing, in
comparison to them. We don't know if we're making investments
that are going to push us over the 90 percentile, or not. It's
very difficult to make plans, to know that this investment is
going to--what recovery, what revenues we will receive from the
Universal Service Fund on that investment. And so, it makes it
difficult to look into the future for 5 years and make plans,
not knowing what's next, in terms of recovery. And, as I said,
the Commission is still considering further caps and cuts in
the fund, and we don't know what impacts those will have. So,
trying to make a 5-year plan is extremely difficult.
Senator Fischer. You know, I have a company in my state
that--in their plan, I believe it is, that they need a million
dollars for investment, and they received, I think, $125,000.
How would you suggest a company can plan, unless we change it?
Should the Commission be looking at maybe a--at regions instead
of the entire country with regards to the formula to look--
instead of having such diverse companies involved in trying to
divvy out the money that way, should you look more for
companies that are alike, at least in the regions that they
serve?
Mr. Strode. My understanding is that the companies that are
in the sample, or that are in the regression analysis with our
companies, are companies that are similarly situated, have
similar terrain, similar customer densities. My recommendation
is that the FCC use the regression analysis, not as a hard cut,
at 90th percentile, but use that as a method to identify
companies that need further investigation. Rather than saying,
``Because you're above the 90th percentile, we're going to
limit you,'' look at the companies that are above the 90th
percentile and say, ``Okay, why is it expensive to serve in
that area? Show us what you've done. Justify these costs to
us.'' And if a company can't justify the costs, then limit
their receipts.
But, if the company is spending that money in a good faith
effort to provide broadband to customers in its service
territory who aren't going to get it otherwise, in many cases,
then they shouldn't be penalized simply because the areas where
they serve is very expensive to serve in.
Senator Fischer. Thank you very much.
Mr. Strode. Thank you.
Senator Pryor. Thank you.
Senator Klobuchar.
STATEMENT OF HON. AMY KLOBUCHAR,
U.S. SENATOR FROM MINNESOTA
Senator Klobuchar. Thank you very much, Chairman Pryor.
Thank you, to our witnesses. I'm--this is incredibly
important to my state and other states here. I truly believe
people that grow up, kids that grow up, in rural Minnesota
should be able to stay in rural Minnesota. And, in today's
world, that means they have to have Internet that works, they
have to have phone service that works. And this is truly our
rural electrification issue of our century, and that means
expanding broadband. And I'm going to put some questions on the
record on that, especially with the middle-mile issue.
But, there are two things I want to focus on today. First,
the call-completion issue, which, I have to tell you, was a
complete surprise to me, about a year ago, when I was visiting
a town that was almost decimated by a tornado, and all they
wanted--they missed the tornado, but all they wanted to talk
about was their ``phone tornado,'' which was that their calls
were not being completed.
And, just recently, we've had an uptick in call-completion
complaints, and I know the FCC is making progress, that there
was a settlement with one company, with Level 3. But, in
Minnesota, businesses like Up North Sports, in Bemidji, John
Deere dealers that sell $300,000 worth of tractors in Hoffman,
they depend on quality phone service. And, bizarrely, I guess
to save money, some of these companies are not just--they're
just bumping these calls and not completing them, because it
costs too much. And they literally have shown me graphs of when
this happens.
Mr. Strode, do you want to comment about this and what your
experience is and what you hear from customers and businesses?
Mr. Strode. Yes, Senator, thank you.
We have experienced call-completion issues in our service
territories. A manufacturing plant in Marked Tree, Arkansas,
one of our exchanges, was unable to receive calls either from
customers or suppliers. They were--they called us, desperate.
They were complaining that, ``You've got to come over here and
fix this problem.'' And when they described the problem to us,
we said, ``It's not our problem. We'll be glad''--and we went
to them and worked with them to show them that it's not our
fault----
Senator Klobuchar. Right.
Mr. Strode.--that the problem is on the originating end.
Senator Klobuchar. I understand.
Mr. Strode. And we were able to create a workaround for
them, create--we set up a number, in another area that was not
having call-completion issues, and let them give that number
out, then we route that across our network to deliver it to
their facility so that they could get those calls. They're a
major employer in our service territory, and we were trying to
help them be able to continue in business.
I appreciate what the FCC's done on--in their settlement
with Level 3. However, we don't--have not seen a significant
change----
Senator Klobuchar. Agree.
Mr. Strode.--in the amount of call-completion issues we
have.
Senator Klobuchar. Yes.
Mr. Strode. I confirmed that yesterday. I was----
Senator Klobuchar. Thank you.
Mr. Strode.--in contact with one of our offices, and they
confirmed that we're still having problems. Had two calls
yesterday----
Senator Klobuchar. It's----
Mr. Strode.--from customers----
Senator Klobuchar. I think people, in this day and age,
would be shocked that we can't have high enough quality
service--and it's not because we don't have the capability,
it's because they're choosing to shut them off.
And I just wanted to read one letter, and then go on to one
last issue, from one of our small phone companies. And they
said, ``The level of frustration has reached such a height
that, rather than enforcing, educating, and assisting rural
customers and companies, our regulatory bodies are informing a
customer to switch their local provider to a bigger company,
even though the local provider,'' as you pointed out, Mr
Strode, ``has no control of the situation and is fully
compliant with FCC rules.''
So, I know that we've had a bipartisan letter on this with
a large number of Senators, and I think we're going to have to
do something more. The Level 3 settlement was good, but it's
clearly not enough, when, in response, we're now seeing an
uptick.
Mr. Strode. Yes. It--we actually, in working with that
manufacturing plan in Marked Tree, they told the people who
were trying to call them, you know, that the problem was on
their end. And when the callers contacted their phone company,
they were told that the problem was because the manufacturing
plant was in an area that was served by a small telephone
company that just did not have----
Senator Klobuchar. No, this just----
Mr. Strode.--the facilities to provide that service.
Senator Klobuchar. Right. This just can't be how business
works in America, ``Sorry, you have a small carrier, so you
don't get service,'' even though it's not their fault. That's
what they're saying.
OK, the second thing is unlocking of cell phone service,
something that--there are a number of bills out there right
now, coming out of a recent issue, which is too detailed,
legally, to go into right now. I'm a strong believer in
unlocking. I think it'll lead to more competition. I have a
bill with Senator Mike Lee to require the FCC to put rules
forth so that, basically, and especially in rural areas, that
you're not locked into your carrier when you have a phone, and
that you can keep your number, and that you can--if you're--
move or if you are in another part of your--especially a rural
area, where the phone service isn't working, you don't have to
change your phone.
I guess I would start with you, Mr. Carlson, if you agree
that unlocking is an impediment for consumers choosing to
switch carriers, and, therefore, a barrier to competition.
Mr. Carlson. Yes, Senator, we would agree with you, that
unlocking is something that is a good thing to do, and is a
necessary thing to do.
The only thing we would add is that if you unlock and you
have not gotten interoperability, then the unlocking may not
really have any effect, in certain cases.
Senator Klobuchar. Right. Could you just follow up on that?
And then, I'm out of time; I'll do the rest on the record,
here. But, how does the lack of interoperability impact the
rollout of, say, 4G service to rural areas?
Mr. Carlson. Right. Well, to give you another example, many
of the licenses in the 700 megahertz were won by companies
smaller than ourselves, and they, frankly, were not able to get
any manufacturers to produce phones for them. So, as a result,
a large percentage of the 700 megahertz A-block licenses, which
probably, in aggregate, are worth hundreds of millions, if not
billions, of dollars are sitting unused today, even though
that's clean spectrum, good spectrum that could be put to work
in rural America for the benefit of the public, all because we
lack interoperability.
Senator Klobuchar. OK, very good.
I want to thank all of you and just put everyone on notice,
here, that you just can't mess around with rural areas by not
completing calls. This is not going to work, so there must be a
better solution. And that I think there's a lot of hope here,
and bipartisan interest, in doing something on unlocking.
Thank you.
Senator Pryor. Thank you.
Senator Ayotte.
STATEMENT OF HON. KELLY AYOTTE,
U.S. SENATOR FROM NEW HAMPSHIRE
Senator Ayotte. Thank you, Mr. Chairman.
I want to thank the witnesses for being here.
And, Ms. Boyers, I wanted to follow up on some of the
questions you were asked by Senator Blunt. I've had a lot of
concerns about the Universal Service Fund. You know, New
Hampshire's a $25 million annual net donor to this fund, yet
we've got areas of New Hampshire that are rural, particularly
in Coos and Grafton Counties, that are not getting the capacity
that would provide very needed economic development and
broadband access. So, as I look at your experience, you are
receiving no government subsidies, and yet, in many instances,
you're having to compete your distinction between greenfields
of money not, for example, going to places where, because of
the rural nature, we do need the assistance to build capacity.
Instead, it's going to brownfields to upgrade systems where
there already are systems in place and where competition would
take care of itself.
So, I'm really concerned about that. I appreciate your
testimony. And one of the ideas I wanted to get your thought on
is, since we give the money up front, is there a phased way we
could give the money? Is there a way that we can make sure
that--you said FCC oversight, that this money doesn't go to
brownfields to subsidize areas where--for example, you're
competing against them with no subsidies? There are areas that
are underserved that really exemplify the purpose of the
Universal Service Fund. What thoughts do you have on how we
could have greater oversight on how funding is allocated?
Because it seems to me, that would be the greatest area of
oversight we could push forward.
Ms. Boyers. Well, thank you, Senator. One of the benchmarks
that the FCC has set forth is a 4 megahertz availability for
downstreaming, and upstreaming of 1 megabyte. So, that is the--
that says this area is underserved or it's unserved. So, if you
have a system that already exists, and you're only offering 3
megabytes, and that's the max that you can offer, they will go
in, and they're going to get money to rebuild the whole thing,
but they're just going to--just going to revamp it so that they
can get it up to the level that the FCC is requiring, which is
the 4 megabytes, but then you've got the rest of this money out
there. That gets----
Senator Ayotte. But, tell that to the people that don't
have any access.
Ms. Boyers. That's exactly right. If you are truly building
brand new plant in areas where there is absolutely no one
serving, then greenfield is the only way to go, because it
truly is greenfield. But, that's where the oversight comes in.
That's where the FCC--and, quite frankly, I have been the
recipient of a $9.3 million RUS loan, of which we sent back--we
didn't send it back--we only took $1.5 million of it, and then
adjusted our loan documents so that that's all that we took
from them, because of the laborious process that we have to
reprove our loan every time. We get to a next--new point of our
project, we have to present all the invoices, then we get our
money.
I have no problem with the FCC making that happen with the
CAF fund. That's accountability. You know? Put your money where
your mouth is, and then we'll reimburse you. But, that's the
way--that's the way most construction loans--for a home, you
get your money, there it sits. You go in, you present your
invoices and your lien waivers from your carpenters, and
everybody signs off, they get their check. I don't have a
problem with that. I think that would be an excellent way to do
it. That's the way I've been required to do it with an RUS
loan, so why not do that with the RUS stimulus money or with
the CAF fund?
Senator Ayotte. That way, we know it's going to places
where we really need it.
Ms. Boyers. Absolutely.
Senator Ayotte. I appreciate your advice on that.
And, Mr. Davis, I know that, when it comes to New
Hampshire, we're similarly situated to Missouri, in that we did
not receive any of the Connect America funds. And, in fact, as
I understand it, there certainly have been applications that
were denied for New Hampshire because of the cost of a
mountainous terrain. It's a beautiful state, but the areas that
aren't covered, there's a reason why they're not covered: the
geography and the nature of those areas. Yet, there is huge
economic capability there if we could have broadband access.
So, what do we need to do for states like New Hampshire?
Mr. Davis. Well, yes. And I think one of the changes the
FCC is making, or is intending to make as they move from the
Universal Service Fund to the Connect America Fund, is to fund
only areas which they've identified, through a national
broadband map or through whatever research they have, as not
having service. So, find areas that don't have adequate
service, and only provide support in those areas.
But, what we need to do, what the FCC needs to do is--
they've set a benchmark, and that benchmark allowed a limited
amount of funding to be used, and of broadband to be deployed.
And what we need is--in the CAF-1 process, is to refine the
benchmark. The benchmark needs to be changed so that we get
more money out there, we get more broadband deployed, and we
bring it to areas of rural Massachusetts, rural Missouri, of
all 50 states, where we don't have broadband.
Senator Ayotte. And can we combine that with a proposal to
make sure that it goes to the areas that really need it: the
greenfields capacity? Because, I do think it ends up being
unfair that you're subsidizing competitors, where there are
places that don't have capacity.
Mr. Davis. Yes. Right. I agree that we should not be
subsidizing a competitor where another competitor is already
providing adequate service. I absolutely agree with that. The
greenfield/brownfield discussion goes into the cost model that
the FCC is looking at, with respect to the long-term CAF
funding and how do you base that model. The FCC has always
looked at a greenfield model. They did so when they adopted the
unbundled network elements, because that was the cheapest way
to price those. So, it's a more difficult discussion regarding
cost modeling, which we can have, but that's kind of the
greenfield/brownfield. It's not that we're in any way
suggesting subsidies of areas where someone's already providing
broadband service.
Senator Ayotte. Thank you.
And I may have some follow-up questions for the record, but
I want to thank all of our witnesses for being here for this
important issue.
Senator Pryor. Thank you.
Senator Fischer.
Senator Fischer. Thank you, Mr. Chairman.
I have--just have a couple of questions I wanted to follow
up on since we have a few minutes left.
Mr. Davis, when Senator Wicker and, I think, Senator Blunt
also was asking you about the CAF-1 question, and the money
that was accepted--I think it was $115 million, is that
correct?--and that----
Mr. Davis. That's correct.
Senator Fischer.--was out of $300 million?
Mr. Davis. That's correct.
Senator Fischer. Can you tell me how many carriers accepted
the money?
Mr. Davis. I don't know the actual number. We can provide
that for you, though.
Senator Fischer. OK. And do you know how many were turned
down?
Mr. Davis. The----
Senator Fischer. Were there any?
Mr. Davis. It was not as much ``turned down'' as the--the
commitment would be to build to a certain number of households
for every $775 received. And so, I don't believe any were, per
se, turned down. Proposals that companies made to provide
different benchmarks were turned down.
Senator Fischer. By the companies that didn't receive the
money, correct?
Mr. Davis. By companies who had the option to receive the
money but could not make----
Senator Fischer. They didn't----
Mr. Davis.--$775 work for their rural constituents.
Senator Fischer. They didn't reach the benchmarks that were
set. Were those benchmarks realistic?
Mr. Davis. The benchmark, as it turns out, was not
realistic for most rural customers. And so, it was set too low
to serve the vast majority of rural unserved customers.
Senator Fischer. Have you or any of the other companies
given suggestions on how those benchmarks might be changed?
Mr. Davis. We have. We've had extensive discussions with
the FCC about creating new benchmarks that allows us to put
this money to use. It's just sitting on the sidelines. And we
are hopeful--and I--and members of this committee and the
Congress have weighed in and said, ``Let's get this money and
put it to use and build broadband in unserved parts of
America.'' And we're hopeful that the FCC is moving that
direction.
Senator Fischer. OK, thank you.
And then, Mr. Strode, a follow-up question for you. You
outlined three steps in--that the FCC should take to uphold the
legal requirement, that the funds should support sufficient--
that fund support should be sufficient, predictable, and
specific. So, what are the steps that you think need to be
phased in for the caps over a longer period of time in order to
meet those?
Mr. Strode. Well, the QRA analysis, the regression
analysis, should be clarified and used, as I said earlier, as a
tool rather than--it should be used as a tool to identify areas
that need further examination. The FCC should not implement any
new changes until they evaluate the changes that have been made
and see what impact they've had, see if they've helped.
The FCC needs to also define a clear path, a plan for the
broadband for rural areas that is understandable and
achievable, and that gives rural--people in rural areas a
realistic opportunity to receive broadband services that work,
that are comparable--reasonably comparable to what's available
in the urban areas.
Senator Fischer. Right. But, do you believe that the FCC
should phase in those caps over a certain amount of time? And
what kind of timeline would you give them?
Mr. Strode. I'm--I don't agree that the caps are
necessarily appropriate. Like I said, there are legitimate
reasons that companies' costs are high. And I--while I
understand that the FCC has set a budget and is trying to work
with that budget, I think they've got the regulatory cart
before the horse. They set a budget before they knew what the
real cost to provide broadband to people in rural areas is.
You know, it's--I don't agree that caps are necessary or
that they're even useful if they prevent people in rural areas
from getting broadband services.
Senator Fischer. OK, thank you.
Thank you, Mr. Chair.
Senator Pryor. Thank you.
I do have just a very few follow-ups, as well.
Mr. Strode, let me start with you. Earlier in your
testimony, and in response to a question, you talked about the
regulatory burden. And, just for clarification, is that
regulatory burden coming from the Federal Government, State
governments, or local governments, or all of the above?
Mr. Strode. Primarily from the Federal Government. The
regulatory burden at the State level is much less than it was
at one time. Regulatory burden from local governments is very
small. It's primarily from the Federal Government, from the
FCC.
Senator Pryor. Thank you.
And, Mr. Carlson, I do want to follow up on a couple of the
questions that my colleagues have asked, and that is about
interoperability, and also data roaming. Are those issues
different in a rural setting compared to a more urban or
suburban setting, or are they sort of the same wherever you
are?
Mr. Carlson. Well, I think the interoperability is
particularly acute in a rural setting, because the 700 and 600
megahertz licenses are particularly useful in rural areas. In
other words, those spectrum bands, the signal travels farther
and can be used to serve rural areas effectively. And those are
two bands that the FCC can really do something about in the
near term. So, I would say there is something different there.
In terms of data roaming, I think the data roaming need is
universal. Fortunately, there was a court decision that upheld
the FCC on roaming. And so, we--we're very encouraged by that.
But, that will need continual oversight, from all of you here
in the Senate, to make sure that the FCC continues to be
aggressive in making sure that roaming is possible between
carriers.
Senator Pryor. OK. I want to say thank you to our entire
panel.
We are going to leave the record open for 2 weeks. And, by
the way, we know that we had a very small sliver of the
industry here today, and I don't want to create a myth, here,
that it's only small carriers that serve rural America. If the
larger carriers were here, they'd tell you they've invested
billions in rural America to try to provide service, as well.
But, we would love for the Senators to submit further
questions, if they have them. We also would welcome any
comments from the public to be part of this record.
And I just want to say thank you very much to all of our
panelists today. We're going to leave the record open for 2
weeks. And I just want to, again, say thank you all for coming.
Some of you traveled a great distance to be here.
Thank you.
[Whereupon, at 12 p.m., the hearing was adjourned.]
A P P E N D I X
Prepared Statement of Hon. Frank R. Lautenberg,
U.S. Senator from New Jersey
Mr. Chairman, our nation's telecommunications networks are some of
our most valuable assets. Wide access to broadband, in addition to
voice and video, is critical to spreading economic growth and
opportunity to every corner of the country. But far too many Americans,
including some in New Jersey, live in areas where there is no broadband
access. Too many others live in areas where there may as well be no
access because broadband is so expensive. So we must continue to look
for ways to ensure that residents in rural and low-income areas have
affordable broadband access.
In underserved areas, we need to look beyond traditional means to
make sure everyone has access to broadband. For example, we should
consider the role that municipal governments can play in providing
access. Municipal broadband can help lower costs and expand access in
areas that currently lack service, or where service is insufficient or
unaffordable. The United States should be encouraging these innovative
networks. Yet, many states have already passed laws that restrict
municipal broadband access. Instead of creating obstacles for
municipalities that want to provide affordable broadband access, we
should be working to ensure everyone has access to the Internet.
Another important issue is improving how we fund the extension of
broadband access. I have long supported the Universal Service Fund. But
as it stands, states like New Jersey--large net-contributor states--
bear too much of the financial burden, donating nearly $200 million a
year to the fund. We certainly recognize the value and importance of
the USF, but if we are to make it a sustainable program that helps make
universal broadband access a reality, we must reassess the way we
contribute to the fund. As the Federal Communications Commission works
towards contribution reform efforts, it must consider the impact of any
reform proposals on net contributor states.
I thank the Chairman for calling this hearing on our
telecommunications network, which is important to this country's
continued growth, and I thank the witnesses for speaking about the
communications needs of the Nation.
______
Prepared Statement of Albert S.N. Hee, President,
Sandwich Isles Communications, Inc.
Chairman Pryor, Ranking Member Wicker, and distinguished members of
the Committee, thank you for holding this hearing to address the State
of Rural Communications. My name is Al Hee and I am the Founder and
President of Sandwich Isles Communications, Inc. (SIC), the only Rural
Local Exchange Carrier (RLEC) located in Hawaii. SIC provides service
to Hawaii's indigenous people on Hawaiian Home Lands (HHL), Hawaii's
``tribal lands'', which were created by Congress through the Hawaiian
Homes Commission Act of 1921 (HHCA). The Hawaiian Homes Commission
(HHC) approached me twenty-five (25) years ago to insure the lands set
aside by Congress by the HHCA would have adequate communications
services. SIC is a beneficiary owned RLEC which has provided advanced
telecommunications services since 1995.
Prior to SIC, the only HHL areas receiving telephone service from
the monopoly incumbent local exchange carrier (ILEC) were those where
HHL paid for the infrastructure improvements. This resulted in the vast
majority of HHL not having service. SIC worked with the Department of
Agriculture, Rural Utilities Service (RUS) to design and build
communications infrastructure capable of delivering both voice and
broadband. Repayment of the loans is dependent on receiving Universal
Service Funds (USF). SIC then borrowed the money from RUS to pay for
the infrastructure. These plans were reviewed and approved by RUS and
all information about the plans submitted to the FCC. SIC is audited
every year and has had numerous annual and special reviews by both the
RUS and FCC since beginning to provide service.
SIC provided comments in the numerous efforts leading up to the
final Transformation Order finalized in December 2011. However, the
final Transformation Order differs from the draft(s) substantially. We
viewed the Transformation Order as pivotal in keeping up with the
changes that are occurring in communications. These changes are not
only technological, but more importantly the changes are societal. In
its' Transformation Order, the FCC took great pains to meet the
requirements of the underlying statute in particular Section 254 of the
statute specifying that ``support must be sufficient and predictable.''
The Transformation Order contains a ``waiver'' to meet the ``sufficient
and predictable'' statutory requirement.\1\ In addition to the waiver,
the Transformation Order contains a 45 day timetable to act on the
waiver petition when the petitioner is serving Tribal Lands.
---------------------------------------------------------------------------
\1\ In Re: FCC 11-161; On Petitions for Review of an Order of the
FCC; U.S. Tenth Circuit Court of Appeals; No. 11-9900; Federal
Respondents' Uncited Response to Tribal Carriers' Principal Brief,
March 20, 2013.
---------------------------------------------------------------------------
Ten months ago, I testified before the Senate Committee on Indian
Affairs about the devastating impacts the FCC's Transformation Order
issued in December 2011 had and would continue to have on insuring
Tribal Lands obtained advanced communications services. At that time, I
believed the impacts were unintended. However, today it is difficult
for me to understand how the devastating impacts can be anything other
than intentional.
SIC was the first to file a petition for waiver in December 2011.
We are now sixteen months from our petition date and we have not
received a ruling despite the 45 day rule. We have however, learned the
following: i) the FCC does not believe it has any obligation to
continue to support any legal financial obligations a company made
under the previous rules; and, ii) any waiver will not be retroactive
regardless of when the petition was filed or when the ruling should
have been made.
Communications infrastructure requires millions of dollars of loans
that are paid back over a period of 20 plus years. Furthermore,
utilities customarily enter into long term obligations to lease
facilities, real estate and rights of ways. SIC did all of these and
based our waiver petition on fulfilling only the obligations made under
the old rules. Before the Transformation Order SIC met these
obligations primarily through the USF payments received under the FCC's
rules. SIC has been told it must renegotiate these obligations before
the waiver can be acted upon. SIC does business with several affiliate
companies. All of the necessary transactions are in accordance with
existing FCC rules and reviewable. SIC has never been told these
transactions are in violation of rules, fraudulent or unethical.
However, SIC has been told to eliminate all affiliate transactions
including those which are necessary to continue to provide service. You
heard oral testimony about the Regression Analysis singling out the
company receiving the most support, regardless of whether that support
is justified. Rural companies are therefore not making any future
investments. Despite overwhelming evidence that the cost of doing
business in Hawaii is more expensive than in the continental US, the
regression analysis does not account for this. Therefore, SIC cannot
make future investments nor can it meet its obligations for investments
made under the old rules.
Not only has the FCC not acted as per the 45 day period, SIC is now
being told any action will not be retroactive. We are now approaching
500 days since SIC filed its waiver petition. SIC filed the waiver
petition quickly in hopes of averting the devastating financial impact
of the Transformation Order. SIC has been using its own monies, not
paying some creditors, reducing the number of employees and where
possible deferring payments. SIC has also tried to use those portions
of the Transformation Order to increase its revenues by serving more
customers with its existing infrastructure. The Order contains a
streamlined process to expand a carrier's study area, a process that
normally takes years and requires voluminous filings and comments. SIC
has been planning for years to expand its study area to include all of
HHL however, has not done so because of the time and expense it takes
under the old rules. SIC filed to expand its study area under this
streamlined provision in the Order however, because the FCC has not
acted on SIC waiver petition, the streamlined process of expanding
SIC's study area is not available to SIC.
In issuing the new Order, the FCC seems to have forgotten the
reason this universal service program exists. There are and always will
be high cost areas that the incumbent exchange carriers will not serve.
If Congress continues to believe that all citizens deserve a universal
level of communications, then the Transformation Order must be amended.
Thank you for the opportunity to submit comments.
______
[Each of these people individually submitted the following memorandum.]
Jon Saunders, General Manager, SECOM, Inc.
Vince Kropp, CEO/GM, PC Telecom
Thomas J. Kern, President, Northwest Colorado Broadband, Inc.
To: United States Senate Committee on Commerce, Science, and
Transportation, Subcommittee on Communications, Technology
and the Internet
Re: April 9, 2013 hearing entitled ``State of Rural Communications''
``Broadband is the great infrastructure challenge of the early
21st century.'' See, Federal Communications Commission,
National Broadband Plan, Introduction, p. 19 (2010) (available
at http://download.broadband.gov/plan/national-broadband-
planchapter-1-introduction.pdf (emphasis in original).
By way of introduction, Colorado is the Nation's eighth largest
state covering more than 104,000 square miles. It could contain the
states of Maryland, Virginia, West Virginia, New Jersey, Connecticut,
Delaware and Rhode Island and still have more than 4,000 square miles
to spare. Several of Colorado's counties are the size of small states.
And Colorado is the Nation's most mountainous state, boasting 54 peaks
over 14,000 feet in elevation, 1,000 peaks over 10,000 feet in
elevation and the highest mean elevation (6,800 feet) of any state in
the Nation. Colorado also is the only U.S. state that lies entirely
above 1,000 meters (3,281 feet) elevation. The lowest point (3,317
feet) in the state is higher than the highest elevation point of 18
states and Washington, D.C. As a result, Colorado's topography presents
unique infrastructure challenges. This is especially true in
mountainous areas where population densities are extremely low,
construction windows narrow due to mountain weather, and construction
methods extremely difficult due to topography.
Silverton Colorado, for example, lies at 10,000 feet above sea
level. Travel in and out of Silverton is accomplished via two routes
one of them being Red Mountain pass, known as the ``million dollar
highway'' as it was carved right into the side of near vertical rock
walls and cost a million dollars a mile to build at the time. Right now
Silverton relies on long haul microwave relay systems built decades
ago. Other towns like Steamboat and Craig are served by only a single
fiber optic route spanning hundreds of miles and may pay up to $100 per
megabit for Internet connectivity when urban networks charge less than
a 1/10th of that. Mountain towns throughout Colorado have suffered
lengthy and extensive outages because any fault or cut along the route
renders entire counties without any means of communication to the
outside world for up to a day at a time. One need not think for long to
imagine the crippling economic impact that can have in today's always-
on, location independent, hyperconnected world.
At the same time, there are private market providing 100mbps down/
50mbps capacities across areas the size of West Virginia at prices
competitive with Denverites receiving 20mbps down/6mpbs up capacities.
Carriers have built very high capacity networks in the world's highest
alpine valley the San Luis Valley--including six diverse routes in and
out of that area and offer 50mpbt capacities or better.
Still, intense challenges remain in mountain communities and with
the recent extensive overbuilds by the NTIA's BTOP-funded entity
EagleNet Alliance (ENA), including complete duplication of several
rural fiber optic networks and entry into these markets as a
government-backed competitor, means that this state's rural broadband
connectivity challenges have been exacerbated rather than improved by
ENA. The American Recovery and Reinvestment Act of 2009 appropriated
funds to the NTIA to provide broadband infrastructure and services to
unserved and underserved parts of rural America. In September, 2010,
NTIA awarded $100.6 million to Colorado's EAGLE-Net Alliance (ENA) to
build broadband to parts of rural Colorado that lack the high-speed
Internet service needed by schools, businesses and Colorado residents.
ENA has committed roughly $70 million of that $100 million. Coloradans
statewide are working very hard to see this money redeployed to where
it is needed.
What the state has learned from its rural broadband failures and
successes, however, is the following:
1. Rural telecommunications providers have successfully provided
fiber optic and high speed dedicated connections statewide.
Overbuilding these carriers irreparably impairs rural
connectivity and harms local economies.
2. Rural connectivity is a difficult and expensive undertaking.
Funds must be prioritized for unserved and underserved areas.
Any thought that government funds would be used to create
competition are severely damaging, misguided and result in
wasteful duplicative spending.
3. Government funds must be accountable to local interests.
Throughout the state of Colorado local communities have worked
hand in hand with their local providers to identify places
lacking connectivity. These are precisely the areas where money
can be efficiently spent.
4. Where there is direct government investment, it should be limited
to infrastructure--conduit and cable--and leave the
complexities and economic bets on rapidly changing private
markets to the private market.
5. Given the apparent failure of ENA to build where there is true
need, the network must be turned over to carrier and community
control. New funds must be apportioned to address the broadband
limitations in the truly unserved western slope communities.
On a statewide basis, rural carriers and communities statewide
recommend an infrastructure-based approach to locally controlled and
supported public/private partnerships. While the rules may be state or
national level, implementation and accountability must occur on the
ground at the local level. This avoids the government entering into and
disrupting through use of taxpayer money very complex and rapidly
changing private markets. It allows government to lower barriers to
entry in high cost/low density rural markets while simultaneously
invigorating local private investment.
We recommend that the United States Senate Committee on Commerce,
Science and Technology, Subcommittee on Communications, Technology and
the Internet adopt policies along these lines and recommend to the FCC
and NTIA both that an infrastructure-based approach to government
investment in unserved and underserved communities leverages the best
of what the government has to offer, empowers local private markets and
ensures long-term viability of local community economies.
______
Response to Written Questions Submitted by Hon. Barbara Boxer to
John Strode
Question 1. How is Ritter Communications approaching the industry-
wide transition from time-division multiplexing (TDM) to Internet
Protocol (IP) based communications?
Answer. Ritter has embraced the transition from TDM to IP in order
to improve network efficiency and gain the survivability inherent to IP
based communications systems. While clearly the dominant protocol
utilized by our customer base, we are deploying Ethernet/packet-based
transport to provide a more flexible foundation to support IP services
than the complexity introduced by going to all IP.
We have made significant investments over the last 5 years to
transition our service and access platforms (voice switching, DSL,
GPON, etc.) to IP or Ethernet based systems. In our opinion this is the
necessary first step in transitioning the entire infrastructure to
efficiently support current and future IP demands.
At this point, our service platforms are 75 percent transitioned to
IP and our access infrastructure remains approximately 40 percent TDM.
We are continuing to make investments in 2013 and 2014 to complete the
transition of these components to 100 percent packet-based.
We are also continuing to make investments in our backbone/core to
convert the remaining 60 percent to packet-based transport by the end
of 2014.
Question 2. In your comments, you state that Ritter Communications
is not as adversely affected as many other rural telecommunications
providers by the FCC's recent changes to the Universal Service Fund and
intercarrier compensation. Which categories of telecommunications
providers are most--and least--affected by changes to USF and
intercarrier compensation?
Answer. The telecommunications industry embraces many categories of
providers. For purposes of this discussion, I will address two
categories of providers who provide services in rural areas. They are,
specifically, locally-owned and operated rural providers (RLECs) and
large, national providers (e.g., AT&T, Verizon and others).
The RLECs were very concerned as the FCC publicized notice of
potential changes to the USF and ICC structures, and during the periods
leading up to and following publication of the final rules, the RLEC
industry alerted policymakers to the adverse impacts certain changes
would precipitate. Unfortunately, those predictions have proven correct
as the combination of retroactively-applied rules and regulatory
uncertainty has depressed investor confidence.
These assertions are not mere rhetoric. In February 2013, the
Honorable Thomas J. Vilsack, Secretary of the U.S. Department of
Agriculture, informed then FCC Chairman Julius Genachowski that demand
for RUS loan funds dropped to roughly 37 percent of the total amount of
loan funds appropriated by Congress in FY 2012. Current and prospective
RUS borrowers have communicated their hesitation to increase their
outstanding debt and move forward with planned construction due to the
recently implemented reductions in USF support and Inter-Carrier
Compensation (ICC) payments.'' See, Connect America Fund; National
Broadband Plan for Our Future; Establishing Just and Reasonable Rates
for Local Exchange Carriers; High-Cost Universal Service Support;
Developing a Unified Intercarrier Compensation Regime; Federal-State
Joint Board on Universal Service; Universal Service Reform Mobility
Fund: Ex Parte Presentation of United States Department of Agriculture,
Rural Development, Docket Nos. 10-90, 09-51, 07-135, 05-337, 01-92, 10-
208 (Feb. 15, 2013) (available at http://apps.fcc.gov/ecfs/document/
view?id
=7022122067).
It should be noted that RUS telecom borrowers have a sterling
record of repayment, and that these programs actually generate income
to the Federal Treasury. The slowdown in these loans results in
diminished revenues for the Federal Government, and the potential for
repayment failures could result in a negative impact on the Federal
budget.
Decreased interest in investment can be viewed from another
National perspective, as well. A survey of NTCA members in January 2013
found that 69 percent of respondents had postponed or cancelled fixed
network upgrades as a result of the uncertainty surrounding the FCC's
on-going USF and ICC reform. The total aggregate value of those
postponed or cancelled projects was $492 million. The average was $4.9
million; the median was $2.0 million; the high was $145 million; and,
the low was $80,000. These impacts are especially disturbing given the
impact of the rural telecom industry on the National economy. A 2011
study found the rural telecom industry generates $14.4 billion in
economic activity, translating to more than 70,000 jobs (based on 2009
data). Notably, 66 percent of the economic activity ($9.5 billion) and
45.7 percent of the jobs (32,385) were found to accrue to urban areas,
demonstrating that rural telecom policy affects the entire Nation. See,
``The Economic Impact of Rural Telecommunications: The Greater Gains,''
Hanns Kuttner, Hudson Institute, Washington, D.C. (2011) (available at
http://www
.frs.org/images/documents/hudson-study-paper.pdf).
A recently-released study found that in Iowa alone, changes to the
USF and ICC regulations will result in a decrease of $47.1 million to
Iowa RLECs from 2012-2017. During this period, that reduced cost
recovery will result in a direct loss of employment of 9.7 percent,
translating to a direct loss of $14.9 million in wages among the
companies. The indirect impacts show a total statewide wage loss of
approximately $25.8 million and an estimated $2.3 million decrease in
sales and tax revenues during that period. See, ``Impact Analysis of
the USF Transformation Order on the State of Iowa,'' Center for
Economic Development and Business Research, W. Frank Barton School of
Business, Wichita State University (2013) (available at http://
c.ymcdn.com/sites/www.broadband4iowa.com/resource/resmgr/news
letter/usf_impact_study_may_2013_fi.pdf).
Although Ritter Communications has not had the same level of
immediate support cuts as many other RLECs, the regulatory uncertainty
arising out of the FCC's reforms has affected Ritter (and every other
RLEC) adversely. As I said in my testimony, the FCC's Quantile
Regression Analysis (QRA) caps prevent any company from having a clear
picture of their standing within the model, or how other companies'
investments could alter their USF receipts over time. In fact, because
of the way the USF and the QRA are structured, investments that RLECs
made two years ago determine the amount of USF they are eligible for
going forward. Additionally, regardless of what the companies in the
industry do to prevent cuts from occurring, they will occur to at least
10 percent of them. This is because the very nature of a QRA is that 10
percent (or whatever percentage the FCC picks) will be cast as
outliers, regardless of the actual investment or cuts made by an
individual company. It is because of the potentially ever-shifting
nature of the QRA, together with the prospect of the FCC dropping even
more retroactive changes atop the USF and ICC support mechanisms upon
which we rely, that investment in the RLEC sector of the
telecommunications industry has ground to a halt.
While the USF/ICC changes have precipitated negative impacts on the
RLECs, corollary impacts arising out of ICC reductions have accrued to
the Nation's largest carriers that will be required to pay diminishing
amounts of ICC compensation to the rural carriers. Over the first six
years of the transition alone, the FCC has estimated the total ICC
``savings'' to be realized by long distance and wireless carriers at $9
billion--with no specific commitment for those billions of dollars in
``savings'' to flow through to consumers or to be reinvested in
broadband-capable networks in rural or other hard-to-serve areas.
Question 2a. How is Ritter Communications adapting or planning to
adapt to these changes?
Answer. Ritter Communications has taken several steps to adapt to
the changes in the USF/ICC mechanisms and expects to make more moves in
the future. Ritter recognized several years ago that changes were going
to come at some point and began expanding into different lines of
business in the communications sector. Ritter has started a CLEC,
invested in cable television systems and made significant investments
in transport facilities in an effort to spread overheads, gain
operational synergies and access wholesale markets more directly to
reduce costs of Internet access and long distance termination. Ritter
has also provided incentives to employees to retire/leave to reduce
payroll expenses.
Ritter continues to review its operations and anticipated revenues/
expenses to identify changes necessitated by the expected impacts of
the USF/ICC transformation.
Question 3. For years, rural telephone consumers across the country
have been reporting that they frequently experience dropped calls and
poor call quality. The FCC is currently investigating the causes of
these problems. Has Ritter Communications received similar complaints
from its subscribers?
Answer. Yes, Ritter has had numerous complaints from customers who
were experiencing call completion problems.
Question 3a. What is the extent of the rural call completion
problem in the communities you serve?
Answer. Call completion problems have been experienced by customers
of Ritter Communications at both ILECs operated by Ritter in Arkansas.
It is difficult to quantify because there are likely many more problems
than get reported to Ritter. Suffice it to say that it is significant
and that even one call dropped because a carrier doesn't want to pay
lawful access charges to complete the call is one too many.
Question 3b. How has Ritter Communications responded to rural call
completion issues?
Answer. Ritter customer service representatives have spent a great
deal of time with customers trying to explain to them what causes the
problem and in many cases helping the customer prove that the problem
is not caused by any problem in the Ritter system. In addition, we have
worked with businesses to either establish toll-free numbers for their
vendors and customers to call or implementing work-arounds that involve
giving the customer a number in another exchange served by Ritter's
CLEC and forwarding calls to that number across Ritter's network to
deliver them to the manufacturing facility that is a major employer in
Ritter's rural service area. We have also, unfortunately, spent time
responding to inquiries from the FCC and the Arkansas Public Service
Commission trying to help them understand that the problem lies with
underlying long distance carriers and is not a problem in the network
of Ritter Communications of other similarly situated rural carriers.
______
Response to Written Questions Submitted by Hon. Amy Klobuchar to
John Strode
Question 1. Middle mile projects that connect the backbone of the
network to the hubs are an underappreciated aspect of broadband
expansion projects. Every communications service from wireless to cable
needs a strong backbone, which means investing in middle mile lines in
order to bring higher speeds and quality to rural consumers. How does
access to middle-mile facilities affect your business model?
Answer. Access to middle mile facilities plays a major role in
managing the cost of our services, as well as the overall performance
for our customers. With limited access to middle mile suppliers, we see
this component contributing as high as 60 percent to the cost of our
services.
Question 1a. Mr. Strode--Can you speak to the importance of middle
mile investment and discuss any barriers to investing in upgrading or
building out?
Answer. Ritter is making investments to build many of our middle
mile connections in order to see a cost reduction over our current
leased facilities over the next 5 years. While this is feasible in some
of our serving areas, the cost to construct will not provide a return
in our more rural properties. These rural properties continue to
require leased facilities from a limited amount of suppliers which
keeps the lease costs of these facilities anchored at a very high price
point.
______
Response to Written Questions Submitted by Hon. Richard Blumenthal to
John Strode
Question 1. Lifeline Program and Broadband Adoption. Your companies
and the FCC have been working very hard to expand the availability of
broadband access across the country. Yet, while more homes have
broadband available to them, the actual adoption of the service seems
to have stagnated of the past several years. This seems to especially
be the case in rural areas. According the FCC, only 36.8 percent of
rural Americans with broadband service available have actually
purchased the service. In the past, when the Commerce Department has
studied the issue of adoption they have found two major obstacles--
digital literacy and the cost of service.
Mr. Strode, what can your companies do to make broadband service
more affordable for households that have yet to adopt the service? What
can the FCC do to help increase adoption?
Answer. There are many steps both individual companies like Ritter
Communications and the FCC can take to ensure increased adoption rates
across the country. It is worth noting in the first instance that the
high-cost portion of the universal service fund (USF) program supports
both availability and adoption. This is often overlooked--especially in
recent years as people focus on using USF support to build out in
``unserved'' areas--but the fact is that high-cost USF support helps to
ensure that rates are ``reasonably comparable'' in rural and urban
areas. Without sufficient USF support, consumers in high-cost rural
areas would need to pay far in excess of what consumers in urban areas
pay for the same service. Thus, high-cost USF should be seen as the
primary adoption program in rural America.
The FCC should therefore seek out ways to ensure regulatory
certainty through more predictable and sufficient support mechanisms
for high-cost areas. Consumers in rural America will not be able to see
the full benefits of a robust, reasonably comparable broadband
connection if companies that serve these high-cost areas face cuts,
caps, and constraints in the form of ever-changing models and further
proposals to reduce USF support. Additionally, the FCC should seek out
ways to ensure that regulatory burdens do not push the cost of
broadband further upwards, pricing many groups out of the market.
RLECs, on the other hand, can and do take their own steps to
promote adoption of their services and productive use of their
networks. Specifically, RLECs are able to identify unique ways to serve
their communities because the employees also live in their service
territory. For example, a company can work with the local community
college, library, or school district to design a series of classes on
computer basics tailored to fit an individual community's needs.
Additionally, the local telecom provider can work with a local hospital
to provide remote monitoring or telemedicine services targeted towards
senior citizens or other population groups which might not see the
relevance of broadband until they learn about uses beyond accessing the
World Wide Web.
Question 1a. Mr. Strode, in your assessment, would low income
households benefit from an expansion of the Lifeline and Linkup
programs to broadband services? What has been the experience of rural
telecommunications companies with the FCC's Lifeline Broadband Pilot
program?
Answer. The FCC's Lifeline Broadband Pilot program is in the very
beginning stages of implementation. NTCA-The Rural Broadband
Association, an association representing nearly 900 companies of which
Ritter Communications is a member, has 11 participating member
companies in the Pilot. In much of the research surrounding barriers to
adoption, cost of Internet has been identified by reluctant broadband
adopters. This program should assist both the FCC and
telecommunications providers create best practices to ensure that as
the Lifeline fund shifts towards broadband network support the program
will be able to target adoption efforts to proven strategies and
techniques. But it is also worth noting once again that rural networks
will not be built in the first instance, and reasonably priced services
will not be available to rural consumers in the first instance, without
an underlying high-cost program that is sufficient and predictable as
well.
______
Response to Written Questions Submitted by Hon. Barbara Boxer to
Steve Davis
Question 1. How has CenturyLink been affected by the FCC's recent
changes to the Universal Service Fund and intercarrier compensation?
Answer. The FCC's November 2011 ``USF/ICC Transformation Order''
and subsequent implementation have had a significant impact on the way
companies like CenturyLink provide voice and broadband service to
rural, high-cost communities, bringing long-needed reform to the
Universal Service Fund.
Most significantly, the order created the Connect America Fund
(CAF) to support broadband service on a targeted, granular basis in
those places where it would not be available without such support. By
supporting broadband explicitly and targeting support on a granular
basis, the Order sought to bring broadband access to many places that
were left behind under the previous rules, while avoiding those places
where unsubsidized competitors were already providing service.
So far, CenturyLink has been awarded roughly $87 million under the
CAF Interim Support (``CAF 1'') program, enabling us to begin extending
service to more than 250,000 previously unserved customers. The Connect
America Fund implementation process is still ongoing, and we are
working with the FCC to ensure its success. Once the final ``CAF 2''
changes are implemented, we'll be able to provide a complete picture of
its impact on CenturyLink and our customers.
Question 2. Do you believe it is necessary for the contribution
base for the Universal Service Fund to be broadened?
Answer. Yes, we believe the contribution base for the Universal
Service Fund should be broadened in a way that is competitively
neutral, sufficient to fund program's goals, and administratively
efficient.
Question 3. According to the FCC, approximately one third of
Americans who have access to broadband do not to subscribe to the
service, and the broadband adoption rate in non-urban areas is
significantly lower than in urban areas. In your experience, what are
the barriers to broadband adoption in the United States?
Answer. While broadband adoption has risen steadily in recent
years, we understand from leading studies by the Pew Foundation and
others, that the most common barriers to broadband adoption are the
cost of service, the perceived relevance to individual users, the level
of digital literacy among users, and the availability of broadband
access.
Question 3a. Which of these barriers to broadband adoption
contribute most to the gap between urban and non-urban adoption rates?
Answer. Because areas of low population density are generally more
expensive to serve, a higher percentage of rural households do not have
broadband access to begin with. Among those who do have broadband
access, surveys by the Pew Foundation and others indicate that
broadband adoption rates are generally higher among younger customers
and those with higher household incomes, while the population
demographics in rural communities generally skew toward older consumers
and lower income households.
______
Response to Written Questions Submitted by Hon. Amy Klobuchar to
Steve Davis
Question 1. Middle mile projects that connect the backbone of the
network to the hubs are an underappreciated aspect of broadband
expansion projects. Every communications service from wireless to cable
needs a strong backbone, which means investing in middle mile lines in
order to bring higher speeds and quality to rural consumers. How does
access to middle-mile facilities affect your business model?
Answer. Middle mile facilities are a significant part of the
company's capital investment, and like all parts of our network, must
be justified by a reasonable cost recovery outlook.
Question 2. As CenturyLink is a provider of middle mile backbone
you acknowledge that the fiber-fed broadband you deploy is important to
the provision of both fixed and mobile broadband services. How do you
determine where to invest in middle mile and what are some of the
barriers you and other carriers face in building out middle mile?
Answer. CenturyLink generally bases its decisions to invest in
middle mile and other facilities on the outlook for cost recovery,
which is affected by the cost of investment, the number of potential
customers, the likely adoption rate, the presence of anchor
institutions, the danger of adverse price regulation, and the
availability of additional sources of support, such as the Connect
America Fund.
Some of the barriers we face in building out middle mile
infrastructure include the longer routes and fewer customers in rural
areas, permitting and right-of-way access, as well as weather and
difficult terrain conditions in some regions.
______
Response to Written Question Submitted by Hon. Richard Blumenthal to
Steve Davis
Question. Lifeline Program and Broadband Adoption. Your companies
and the FCC have been working very hard to expand the availability of
broadband access across the country. Yet, while more homes have
broadband available to them, the actual adoption of the service seems
to have stagnated of the past several years. This seems to especially
be the case in rural areas. According the FCC, only 36.8 percent of
rural Americans with broadband service available have actually
purchased the service. In the past, when the Commerce Department has
studied the issue of adoption they have found two major obstacles--
digital literacy and the cost of service.
Mr. Davis, what can your companies do to make broadband service
more affordable for households that have yet to adopt the service? What
can the FCC do to help increase adoption?
Answer. CenturyLink has already taken measures to make broadband
more affordable to low-income households through our ``Internet
Basics'' program. Through this program, any household that qualifies
for the FCC's Lifeline program can also receive discounted broadband
service for $9.95 per month for up to three years and a discounted
netbook computer for $150.
The FCC has so far encouraged broadband providers to pursue a
variety of approaches to boost broadband adoption and eliminate
barriers to adoption. Continuing this flexible approach can help
increase adoption as providers are able to observe each other's
successes and setbacks and use the lessons to improve their own
approaches.
______
Response to Written Questions Submitted by Hon. Barbara Boxer to
LeRoy T. Carlson, Jr.
Question 1. Last month, the FCC released its Sixteenth Mobile
Competition Report, which states that, based on its Herfindahl-
Hirschman Index calculations, wireless market concentration has
increased by 33.6 percent since 2003. In your comments, you note that
many consumers have access to only one wireless provider and recommend
the adoption of policies to increase competition among wireless
providers. In your experience, is there effective competition in the
wireless market?
Answer. For the last three years, the Commission has concluded that
the wireless industry is highly concentrated, and becoming more
concentrated. That trend unfortunately continues, to the detriment of
competitive carriers, and ultimately consumers. The Commission should
use its latest analysis of wireless competition as a springboard to
focus more intensely on developing and implementing pro-competitive,
pro-consumer policies that reduce concentration, restore competition,
and ensure that competitive carriers have a level playing field to
compete with the supercarriers. Specifically, the overly concentrated
status of the wireless sector has caused scarce spectrum to be amassed
in the hands of the two largest carriers, to the detriment of smaller
rivals. In addition, the market power enjoyed by the two largest super
carriers has enabled them to thwart interoperability across the 700 MHz
band. Non-interoperability, coupled with exclusivity arrangements for
cutting-edge devices, has hindered deployment by competitive carriers.
Unless the Commission acts to restore competition and creates a
regulatory structure that will protect all carriers' access to these
critical inputs, competition will suffer.
Question 1a. If not, how has the lack of competition affected
consumers?
Answer. For consumers, effective competition offers greater
innovation for applications and devices, lower prices, and better
quality network service. In markets where consumers are captured by the
two major providers it means there is less pressure to control costs of
service and devices. A competitive marketplace creates essential
incentives for companies to invest in their networks while keeping
prices as low as possible.
______
Response to Written Questions Submitted by Hon. Amy Klobuchar to
LeRoy T. Carlson, Jr.
Question 1. Middle mile projects that connect the backbone of the
network to the hubs are an underappreciated aspect of broadband
expansion projects. Every communications service from wireless to cable
needs a strong backbone, which means investing in middle mile lines in
order to bring higher speeds and quality to rural consumers. How does
access to middle-mile facilities affect your business model?
Answer. Middle mile, also referred to as special access, is
essential for deploying rural wireless broadband service. It is a
significant operating expense for regional wireless carriers. Excessive
special access charges divert funds from network expansion and
broadband upgrades. Middle mile lacks competitive alternatives in many
rural areas which lead to higher costs. Middle mile cost can be 25
times higher in rural than urban areas. With the dramatic reductions in
universal service support for wireless carriers occurring under the
FCC's USF Reform Order, the cost of middle mile facilities is becoming
a bigger impediment to not only maintaining existing network coverage
but to expanding it. The FCC is evaluating the proper regulatory
framework to adopt for special access service pricing, which is
necessary to protect consumers, spur market entry and foster
competition. Such evaluation needs to consider the implications of the
conversion of traditional special access back haul facilities to IP
based transmission facilities which are key to the expansion of
broadband services supporting 4G technology we support robust reform of
special access regulations.
Question 2. Mr. Carlson--Many people don't realize that wireless
service is built on a wired network. How does larger and faster
capacity middle mile to your towers impact the service that consumers
get?
Answer. Access to high capacity middle mile is crucial to providing
LTE services. Consumer demand for mobile broadband is expected to reach
nine times current levels by 2016. U.S. Cellular is launching LTE
service throughout the country, but in order for our customers to
receive the significant benefits of LTE capacity and speed, our
advanced LTE radio systems must be accompanied by robust, high capacity
backhaul and core networks. Without sufficient middle mile capacity,
the powerful innovation engine of LTE is simply not possible. Our
challenge is to build out both the wireless and wired infrastructure in
the most rural areas of the country. Our commitment to our customers is
to provide the most advanced service no matter where they live in our
service areas. Sufficient middle mile capacity from wired networks, as
well as the use of fixed microwave are each important components of
providing LTE to consumers.
______
Response to Written Question Submitted by Hon. Kelly Ayotte to
LeRoy T. Carlson, Jr.
Question. Mr. Carlson, in your testimony you state that none of
your bids to cover rural New Hampshire were selected, simply because
you had to bid more per road mile to cover more mountainous areas in
the central and northern areas of my state. How do you suggest the
mobility fund be structured in Phase II to account for these challenges
that companies such as yours face?
Answer. Senator Ayotte, it was a privilege to testify before the
Committee and I thank you for the question. Our company competes with
the Nation's largest carriers by building high-quality networks and
delivering superior service. In areas that are sparsely populated and
difficult to serve, assistance from Federal and state universal service
mechanisms are critical to building new cell towers.
In Phase I of the FCC's new Mobility Fund, the FCC awarded bids
based on the cost per road mile served. This mechanism was designed to
stretch the limited funds available to cover the most road miles. As a
result, the lowest-cost rural areas were awarded support first, while
the higher-cost areas were not. Mountains and trees in rural New
Hampshire limit a cell site's coverage, increasing costs to serve. As a
result, our bids in New Hampshire were higher than other areas, and
they fell ``below the line'' in the FCC's auction process. That is, the
$300 million in funding ran out before our bids were reached. For your
reference, a copy of the bids as posted by the FCC is attached hereto
as Exhibit A.
This is not the first time that the State of New Hampshire has
drawn the short straw in obtaining access to Universal Service funding.
In 2008, the FCC implemented a cap to the original universal service
program for wireless carriers which froze funding at whatever amount an
individual state was receiving at the time. As a consequence of this
policy decision by the FCC, New Hampshire continued to receive annual
funding of approximately $250,000. That amount is enough to build New
Hampshire one new cell site every two years and is a tiny fraction of
the overall universal service fund for rural areas, $4.3 billion. New
Hampshire's citizens, who have paid into the fund since its inception,
have never received the benefits that Congress intended for the program
to deliver.
In Phase II, the FCC will award $400 million each year (plus
another $100 million to tribal lands) in Mobility Fund support and I
fear that New Hampshire, an undeniably rural state,may fare no better
than it has in the past. There are, however, numerous things the FCC
can do to ensure that rural areas such as those in New Hampshire
participate in a meaningful way in the program. Below, I discuss just a
few.
1. Repurpose CAF I Funds That Large Carriers Refused to Invest
In Phase I of the FCC's Connect America Fund (``CAF'') program, the
Commission awarded $300 million to the Nation's largest wireline
carriers, to build broadband in rural areas.
This $300 million in funding became available because the FCC
reduced support to wireless carriers by nearly $1 billion per year.
Of the $300 million offered, carriers declined over $180 million of
that amount, ostensibly because it was insufficient. This suggests that
a more efficient alternative should be considered.
The FCC could rapidly accelerate investment in rural areas,
including in New Hampshire, by quickly repurposing the $180 million of
rejected funds over to Mobility Fund Phase I. When you look at Exhibit
A, you can see that a number of bids, including those in New Hampshire,
did not win an award because funding ran out. It is well within the
FCC's authority to decide to repurpose the rejected funding and award
it to Mobility Fund bidders, who have declared themselves ready to
construct networks at the prices bid. Alternatively, the funds could be
added to the FCC's upcoming Mobility Phase II auction.
Instead, the FCC just last month proposed to offer the largest
wireline carriers an additional $480 million in Phase I support,
representing $300 million plus the funds previously declined by such
carriers. And the Commission proposed to relax the standards for such
companies to receive this funding.
It may be too late to reverse this decision without a court action,
however it is bad policy that short changes rural Americans who live,
work and travel in areas with poor mobile broadband service.
Unquestionably, the fastest way to increase access to broadband in
rural America today is through the rapid deployment of fast, 4G LTE
broadband services. If the FCC is not willing to reverse its decision,
then they should simply increase the amount of funding within the
existing program for the services that provide the most bang for the
buck and which consumers want most. Unquestionably that is mobile
broadband.
2. Require Some Baseline Level of Funding for Each State
Every citizen who incurs charges for interstate or international
calling pays into the Federal universal service fund. For over a
decade, the FCC's formula for providing support to rural New Hampshire
yielded enough funding to build a single cell site approximately every
18 months. Other states saw many millions in support flow in, resulting
in higher quality wireless networks that give such places a competitive
advantage. This is not fair to New Hampshire's rural citizens, who pay
into the fund but do not get the benefits that Congress intended in the
1996 Act (i.e., access to reasonably comparable services and prices as
are available in our Nation's urban areas).
The FCC could make a rule that every state must receive some
baseline amount of support, based on a formula such as the percentage
of state road miles or households that are unserved or underserved in
that state. It could serve to ensure that difficult to serve places
such as rural New England and the Appalachian region receive investment
sufficient to achieve meaningful infrastructure improvement.
3. Reverse the Right of First Refusal
Perhaps the most regressive decision made by the FCC in its CAF
Order was to allow the Nation's largest wireline carriers to have a
``right of first refusal'' (``RoFR'') for five years in the CAF Phase
II process. This means, the carriers may file an election with the FCC,
allowing them to be the sole recipient of support in the states they
serve. This prevents any other carrier from competing with them for
support for five years. In year six, they will have a huge advantage
when competition for support is permitted, having built a subsidized
network free from competitive forces.
In addition to providing this five year set aside, the FCC has
bestowed a potentially large windfall on the largest wireline carriers
who also own wireless networks. The FCC intends to provide support in
CAF Phase II based on the modeled cost of providing wireline service in
a rural area. That is, when a wireline carrier builds in an area, the
amount of support is not determined by its actual costs, but on what it
should cost, as determined by a model. That model estimates the cost of
building wireline broadband.
Here is the problem: The FCC will allow a wireline carrier to use
mobile broadband to meet its build out obligations. Thus, a wireline
carrier can build an efficient mobile broadband network that
potentially costs much less, while at the same time receiving support
based on the higher cost of building a wireline network. There is no
downward adjustment in support when a wireline carrier does this.
Essentially, this is the continuation of the FCC's ``identical
support rule,'' which it did away with in the CAF Order for wireless
carriers. Worse yet, it is identical support without the possibility of
competition.
To sum up:
Support will be reserved for one class of carrier for five
years.
Independent wireless companies seeking to compete in the
broadband market will now face subsidized competition from the
Nation's largest telecommunications companies for five years,
potentially freezing new investments.
The largest wireline carriers are free to build lower-cost
wireless facilities while receiving support based on the cost
of building wireline networks.
There is no reason why support should be reserved for one class of
carrier, and we have appealed this decision to the courts. It is not
too late for the FCC to reverse itself and permit any company willing
to participate in the CAF Phase II process to compete for the funding
needed to build out rural high-cost areas with modern broadband
infrastructure.
4. Target Scarce Public Dollars to Mobile Broadband Service
Prior to the adoption of the FCC's 2011 Connect America Fund Order,
the FCC provided mobile wireless carriers with $1.4 billion per year
construct wireless networks in rural areas. This amount was twenty
percent of the total universal service fund of $7 billion. The Connect
America Fund Order reduced funding for mobility to a mere $400 million,
while funding available for wireline deployment is being increased to
over $3 billion.
Given the substantial abandonment of wireline services by ``cord
cutters'' over the past decade--where according to the CDC's latest
data nearly 40 percent of households use wireless communications
exclusively, this is exactly backwards policy. The FCC should restore
balance to funding for mobile services and restore the $1B in annual
mobility funding which has been redirected to wireline networks that
consumers continue to abandon in droves. This is the surest way to
ensure that states like New Hampshire and its residents receive their
fair share of a fund that they have been paying into for almost twenty
years.
______
Response to Written Questions Submitted by Hon. Barbara Boxer to
Patricia Jo Boyers
Question 1. How is BOYCOM Cablevision approaching the industry-wide
transition from time-division multiplexing (TDM) to Internet Protocol
(IP) based communications?
Answer. Although TDM networks remain widely in use, particularly by
Incumbent Local Exchange Carriers (ILECSs), BOYCOM Cablevision launched
voice services over a Cable Modem Termination System (CMTS) with an
advanced symmetrical Ethernet IP service--it's an Internet Protocol
(IP) based communications network. Provided that the interconnection
rules continue to apply to telecommunications providers whether they
employ TDM or IP based communications, we have no concerns with ILECs
transitioning from TDM to IP networks.
Question 2. In your comments, you state that ``the video market
continues to be governed by outdated rules and regulations passed
decades earlier.'' How have the FCC's regulations governing video
providers adversely affected BOYCOM Cablevision?
Answer. First and foremost, outdated retransmission consent rules
have adversely affected our company and its customers. BOYCOM's
retransmission costs have increased an average of 133 percent between
January 2008 and January 2012, and because of escalation clauses in our
existing contracts, our per-subscriber rates for individual broadcast
stations will continue to increase through December 2014.
Comparatively, a sampling of satellite delivered programming in one of
our systems increased and average of 29.3 percent from January 2008 to
January 2012.
Second, rules intended to assure the commercial availability of
cable set-top boxes have adversely affected our company and customers.
The FCC's integration ban, which prohibits cable operators from
providing consumers with boxes in which the security functions are
integrated with other functions, was adopted in 2007. As a result of
this regulation, the price of set-top boxes increased significantly.
Although imposing the integration ban on only the largest cable
operators would have been sufficient to achieve the FCC's public policy
goals, the FCC imposed this regulation on all cable operators. There
were no exemptions for small cable operators. The integration ban
adversely affected BOYCOM and its customers because it needlessly
increased the costs of our set-top boxes. Moreover, the higher costs
delayed our company's digital transition plans, stalling the
reclamation of bandwidth that could be used for broadband and other
advanced services.
Finally, while the FCC has done much to improve the cost and speed
of pole access, the 1978 Pole Attachment Act stands in the way of the
FCC's addressing some significant problems in the market. In
particular, the Act does not cover cooperative and municipal pole
owners, who remain exempt from any regulation and leverage it to set
much higher fees and delay access. In areas where BOYCOM provides
service, our company must rely upon poles that are owned by
cooperatives, and the lack of regulation adversely affects our company
and our customers.
Question 2a. In what ways do these regulations need to be updated?
Answer. Retransmission consent rules should be updated in at least
the following three ways:
First, Congress or the FCC should prohibit separately owned,
same market broadcasters from coordinating their retransmission
consent negotiations. Small cable operators have documented
separately owned broadcasters operating in the same market
colluding in the sale of retransmission consent in at least 43
television markets. Available evidence shows that when
broadcasters engage in this anticompetitive conduct, they can
extract at least 22 percent higher fees than if they negotiate
separately. To put this price increase in perspective,
antitrust authorities are generally concerned whenever
horizontal consolidation results in price increases greater
than 5 percent. These price increases are passed along to
consumers, who end up paying for them in higher costs.
Second, Congress should eliminate the basic service tier buy
through obligation imposed on cable operators. Cable operators
are required by regulation to offer a basic service tier that
must include all local broadcast television stations that all
subscribers must purchase before subscribing to additional
video programming. Tier placement and subscriber penetration
levels are critical terms of negotiation between cable
operators and non-broadcast programmers. Non-broadcast
programmers highly value lower tier placement and higher
subscriber penetration, and cable operators who provide lower
tier placement and higher subscriber penetration pay lower
carriage fees. By providing broadcasters who elect
retransmission consent an automatic right to appear on the
basic service tier and obtain 100 percent cable subscriber
penetration, Congress has taken off the table a critical term
of negotiation that cable operators could leverage with
broadcasters to obtain lower rates.
Third, Congress should prevent broadcasters from pulling
signals from cable operators during sweeps periods if the
retransmission consent agreement expires during sweeps, or
other times important to consumers as Congress deems
appropriate (i.e., marquee events). In 2012, millions of
Americans went without access to their local broadcast signals
after station owners cut off programming 91 times. This was a
78 percent increase over `11, and even more over `10. Existing
law prevents a cable operator from pulling a station during the
sweeps period if its retransmission consent agreement expires
during sweeps. Such periods are the four national four-week
ratings periods--generally including February, May, July and
November. While cable operators are prohibited from pulling
broadcast signals during periods of time financially important
to broadcasters, there is no constraint on broadcasters pulling
signals from cable operators during these same periods or other
times important to consumers (i.e., marquee events). In fact,
broadcasters often pull signals from cable operators during
periods of time important to consumers in order to extract
higher fees from cable operators (e.g., ABC pulled its signal
from Cablevision prior to the Academy Awards; Fox pulled its
signal from Cablevision during baseball playoffs.)
With respect to the FCC's integration ban, Congress should repeal
Section 629 of the Communications Act--Competitive Availability of
Navigation Devices--or at least limit application of the provision to
the extent it applies to small MVPDs through statute or direction to
the FCC.
Finally, the FCC's National Broadband Plan wisely suggested that
Congress should eliminate the exemption for cooperatives and
municipalities to restore fairness and competitive rates to the market.
We encourage Congress to take action to deal with the obvious
shortcomings in the existing law.
______
Response to Written Questions Submitted by Hon. Amy Klobuchar to
Patricia Jo Boyers
Question 1. Middle mile projects that connect the backbone of the
network to the hubs are an underappreciated aspect of broadband
expansion projects. Every communications service from wireless to cable
needs a strong backbone, which means investing in middle mile lines in
order to bring higher speeds and quality to rural consumers. How does
access to middle-mile facilities affect your business model?
Answer. As our subscribers continue to expect faster connection
speeds, poor middle mile infrastructure and rising middle-mile costs--a
particular problem in rural areas--make it more difficult for BOYCOM to
maintain current broadband prices, provide speeds that meet consumer
demand, and build out to new locations.
Question 2. Ms. Boyers--Can you speak to the importance of middle
mile investment and discuss any barriers to investing in upgrading or
building out?
Answer. As discussed above, in order to keep broadband pricing at
current levels, deliver speeds that meet subscriber demand, and deploy
services to new areas, especially those that are unserved, it is
important to have access to capable middle mile infrastructure at
reasonable costs. The need to upgrade the middle mile pipes that BOYCOM
uses to carry traffic from our local networks to an Internet backbone
access point is not unique: nearly all broadband providers will need to
obtain higher capacity pipes in the years ahead. However, obtaining
access to robust pipes at reasonable costs is more difficult for
smaller broadband providers serving rural areas than for larger
operators in urban areas. Middle-mile costs increase as the distance
from the network to the backbone access point grows, and rural
providers generally operate networks that are among the farthest from
these access points. It means rural providers using these pipes often
pay much higher prices for each byte transmitted. Additionally, unlike
in urban areas, there are often few middle-mile links available. In
fact, in many rural areas there may be only a single link. And many of
these links use outdated technologies, meaning there is often access
only to lower capacity pipes--which in turn limits the data speeds that
can be provided to customers. Some broadband providers, including
BOYCOM, have explored constructing our own middlemile links, but
because the distances involved are extremely long and the density of
our users too low, the cost is prohibitive without outside support.
In its National Broadband Plan, the FCC identified the lack of
adequate middle-mile infrastructure and the high costs of access to be
a significant problem. The FCC is examining the issue in a further
rulemaking with respect to the Connect America Fund. The record in this
proceeding closed one year ago, and we urge the FCC to conclude its
work shortly and issue a decision. Where capacity is inadequate, it
should use the CAF to support the deployment of middlemile capacity.
Further, where prices are too high, it should use its regulatory
authority to ensure they are consistent with competitive market rates.
______
Response to Written Question Submitted by Hon. Richard Blumenthal to
Patricia Jo Boyers
Question. Lifeline Program and Broadband Adoption. Your companies
and the FCC have been working very hard to expand the availability of
broadband access across the country. Yet, while more homes have
broadband available to them, the actual adoption of the service seems
to have stagnated over the past several years.
This seems to especially be the case in rural areas. According to
the FCC, only 36.8 percent of rural Americans with broadband service
available have actually purchased the service. In the past, when the
Commerce Department has studied the issue of adoption it has found two
major obstacles--digital literacy and the cost of service.
Ms. Boyers, what can your company do to make broadband service more
affordable for households that have yet to adopt the service? What can
the FCC do to help increase adoption?
Answer. Broadband services and current prices for consumers in
rural areas are highly dependent on the availability and cost of bulk
bandwidth from middlemile providers. Although technology continues to
improve and advanced broadband services become more available and
affordable to households, the ``cost'' of bandwidth is still one of the
biggest expenses in delivering these advanced services.
The FCC should use its regulatory authority to ensure that middle-
mile rates are consistent with competitive market rates. If we can get
the cost of middlemile broadband services reduced, the price to the end
user will become more economical. Moreover, the FCC can focus on
increasing digital literacy among consumers that have not yet adopted
broadband, and consider other competitively neutral strategies.