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Gigabit Cities

FCC Plan Could Stymie Rural Broadband

Rural telcos are pushing back against the FCC's proposed new model for cost recovery that they say creates unpredictable swings in the smaller companies' ability to fund their broadband buildouts.

In trying to move forward with funding of broadband-only networks, the Federal Communications Commission (FCC) has proposed a bifurcated approach that applies a cost recovery model to all forward-looking broadband-only networks. What the agency plans to use is a complex model, known as the Alternative Connect America Cost Model, or A-CAM for short, to determine how rural telcos can recover the costs of their investment. But there is such concern about the unpredictability of A-CAM among rural carriers that some are delaying their investments altogether, according to leaders of NTCA - The Rural Broadband Association

Their concerns were spelled out in a letter sent to the FCC earlier this summer, which you can see here.

The key problem, says NTCA's CEO Shirley Bloomfield, is that the FCC is trying to use a model it developed for so-called price cap telecom service providers -- the 12 largest US carriers, whose regulated service rates are capped -- and apply it to smaller companies, known as rate-of-return companies because their rates are still set by a process that takes into account how much money they spend to provide service. While the model's uneven results may work out when applied to a large service territory, she says, when they are applied to small telco footprints, the unpredictable swings in ability to recover actual costs could cripple rural broadband deployments, which is exactly the opposite result to what the federal government is seeking, she notes.

NTCA CEO Shirley Bloomfield
Addressing members in July meeting in Portland, Ore.
Addressing members in July meeting in Portland, Ore.

A-CAM also seems to have little connection to actual costs. When the NTCA compared A-CAM results with the actual capex costs of 144 real-world fiber-to-the-premises projects, the difference between A-CAM's capex results and the actual project costs differed by more than 20% in one direction or the other, according to the association.

The model is intended to provide a "forward-looking" way of allowing telecom service providers to move away from regulated voice and into the era where broadband is the key service. And many rural carriers would actually like to take this approach -- which right now is a voluntary move on their part -- if a more predictable and practical model can be developed.

Under A-CAM, there is almost no way to predict funding changes for her association's members, which includes small rural telcos and co-ops or cooperatives that are actually owned by the customers they serve, Bloomfield tells Light Reading in an interview. In some cases, companies that have already invested in fiber and next-gen systems would see their funding jump, while those still needing to deploy fiber to reach the FCC's minimum broadband requirements would face funding cuts, making those deployments less likely. In general, two-thirds of the NTCA's members would see changes in funding of 50% or more, in one direction or the other.

"When you have a model where the results swing so wildly back and forth -- some companies would get much more than under an actual cost system and some would be taken down nearly to zero -- you have to ask what is going on in this particular model," she says. "Regardless of whether it is voluntary or not, let's have a model that makes sense and have some rational results."

Bloomfield points to less use of Rural Utility Service loans this year -- a significant portion of available money went unused this year -- as an indication of how uncertainty is affecting her members. They aren't as willing to borrow money to build out fiber networks, because they aren't confident they will be allowed to cover those costs, and thus pay off the loans.

At this point, there is no final decision on the proposed model or even the bifurcated approach, which is why the NTCA and other rural telco allies in Washington are pushing hard for their members to make their voices heard with the FCC and with their Congressional representatives. They have found some support in Congress already: At a time when it's hard to get consensus on anything in Washington, the NTCA and its rural allies got 61 senators to sign a letter to the FCC, urging the agency to decouple broadband and phone regulation -- a major point at a time when consumers are increasingly cutting the wireline cord.

Bloomfield tells her members she'd like to get FCC Chairman Tom Wheeler's attention on this issue, something that hasn't yet happened but could be in the cards. Wheeler is a keynote speaker at the NTCA's fall meeting in Boston September 19-23.

Oh, and she says NTCA would like the model to be less complex -- a goal even Bloomfield admits isn't terribly likely.

— Carol Wilson, Editor-at-Large, Light Reading

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mhhf1ve 8/6/2015 | 6:11:13 PM
Re: Too much of a bad thing BTW, seven, where's your blog? 
mhhf1ve 8/6/2015 | 6:07:16 PM
Re: Too much of a bad thing What's stopping a private equity firm from doing what you propose without the fed govt as a partner? (It's probably not a great investment? It might be prohibited by state laws...?) 

Maybe there's a better solution? Is there a vendor that can unify all the little telcos with an infrastructure-as-a-service product to get all the little guys more reliable and efficient? Leave the govt out of your plan...? 
mendyk 8/4/2015 | 2:36:39 PM
Re: Too much of a bad thing seven -- Yes, in theory that holds up. The questions are whether the smaller operators want to vacate, and whether there is an aggregator that wants to take on this kind of business. There's also the issue of state regulations, which can be hugely restrictive with little apparent rhyme or reason.
brooks7 8/4/2015 | 2:28:52 PM
Re: Too much of a bad thing So, here is the thing.

Suppose the Fed Gov stepped in with some corporate partners (say a P/E firm or something like that) and picked up some adjacent properties and added together some of these companies to the point that they are now over 100K - 200K lines (say the size of TDS).  Now you have enough bulk to be able to build a company around.  

So would the little telcos (the 10K or so line guys) go away?  Yes, but a better sounder structure might emerge.  The big telcos get to dump some rural properties (win).  The little telcos get stronger (win).  Just requires some jiggling and some will.

seven

 
mendyk 8/4/2015 | 2:09:11 PM
Re: Too much of a bad thing The difference with rural telcos, at least in most of the US, is that the big operators really don't want this business, at least on the wireline side. This is probably the biggest reason to maintain some sort of federal oversight and regulation. That said, there's probably a strong case to be made for small wireline operators going away once mobile broadband networks are in place.
Ariella 8/4/2015 | 1:45:01 PM
Re: Too much of a bad thing <But there's something fundamentally -- dare I say it -- American about them, > @mendyK I know what you mean, but it today's economic climate, they do seem doomed. I just heard another report today about small mom and pop type businesses being squeezed out by tho bigger chains with deeper pockets. The same principle applies across all industries.
mendyk 8/4/2015 | 11:56:03 AM
Re: Too much of a bad thing If there's a way to collectivize smaller rural carriers into a reasonably efficient and effective operating group without involving direct central governmental oversight if not outright control, I don't think anyone has found it yet.
brooks7 8/4/2015 | 11:40:47 AM
Re: Too much of a bad thing Carol,

I agree with your contact.  As things get more complicated, the IOCs will have to hire and manage lots of IT teams that they have no way of obtaining.  Seems like the right answer.

Dennis,

I get it.  I sold a lot of stuff to the IOCs when I was at AFC.  I like the people.  I like the notion.  The question I have is about practicality.  We have 2 problems:

1 - Our large carriers don't get good ROI in investing in Rural Properties.  They lag the IOCs in deployments.  So, the FCC and State PUCs need to set up rules that make this work for them.

2 - The rules that make it work for the big carriers probably crush the smallest of the IOCs.  

The Rate of Return carriers are a small subset of the IOCs.  They in turn are a small subset of the total line count of the IOCs (much less the US).  Many IOCs converted to Rate Cap Carriers.  So, is there a way to make these smallest of companies (many of which are municipal co-ops aka muni carriers) bigger?  

seven

 
mendyk 8/4/2015 | 8:35:45 AM
Re: Too much of a bad thing seven -- In a lot of ways, the mom and pop telcos are analogous to family farms in the era of big agribusiness. In terms of pure economics, there are more reasons for them to be subsumed than there are to keep them going. But there's something fundamentally -- dare I say it -- American about them, warts and all. And of course big businesses have their own levels of inefficiencies.
cnwedit 8/3/2015 | 6:53:33 PM
Re: Too much of a bad thing I just had an interesting conversation with someone from one of those companies and he is predicting some substantial change when they get around to looking at virtualization. Instead of all of them doing themselves, he expects a group of wholesale providers to step up and essentially do it for them. 
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