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Better Thinking.Better Results.
Beyond “The Order” – The New Regulatory Horizon for
Rural Carriers
Bob Schoonmaker, President
GVNW Consulting, Inc.
August 7, 2012
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Better Thinking.Better Results.
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Better Thinking.Better Results.
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Overview
• Long-term FCC objectives
• Items implemented
• Items not implemented
• Longer-term impact of items implemented
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Long-term FCC Objectives• Bill and keep for access “compensation”• Increase broadband availability in rural areas
(including price cap rural areas)• Increase broadband capability (speed)• Continue to encourage replacement of wireline
service with wireless• Budget control on USF – no increase• Transform TDM network to IP• Efficiency
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Steps toward bill and keep
• Implemented first step for terminating rates – end game– Price cap companies by 2018– ROR companies by 2020
• Originating rates – FNPRM – unknown
• IntraMTA CMRS – Effective July 1, 2012
• Recovery Mechanism – PC – 6 years, ROR 10+ years
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Increased Broadband Availability
• Price Cap Carriers– Frozen support
• 3 year phase in - 2013 – 2016 to 100% use for broadband in unserved areas
– CAF I - $300 million incremental to unserved broadband locations - $775/location
– CAF II – Start 1/1/2013 or later – Initially model based – Reverse auctions in five years
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Increased Broadband Availability
• Rate of return– CAF for broadband delayed until FNPRM– ROR carriers have responsibility to provide 4
Mbps/1 Mbps upon reasonable request
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Increased Broadband Speed
• Initial requirement - 4mbps/1mbps “actual”
• ETC reporting requirement starting by July 1, 2013 (actual measurements)
• CAF II – indicates a future requirement potential of 6 mbps/1.5 mbps
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Broadband Provisioning
• FCC Projection – US Avg– 4 Mbps in 2015
• Akami - 4th Qtr. – 2011 report- US Avg. - 5.8 Mbps
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More wireless• “White spaces” availability
• Moves to provide more spectrum (500 MHz, 300 MHz in 5 years)
• Mobility I fund– Reverse auction – late 2012– 3G or greater to areas unserved by 3G– Service over 75% of road miles in area– $300 million one-time support
• Broadcast spectrum voluntary auction04/20/23 10
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Budget Control
• FCC implemented budget controls for $4.5 billion – Specified amounts by fund type
• Core Wireless reserve to help fund overruns
• If less than quarterly amount, hold the remainder in reserve
• USAC reports to FCC within 75 days of how to correct overrun
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Transform TDM network to IP
• Transition ICC to bill and keep
• Facilitate IP to IP interconnection
• FNPRM – Should CAF recipients be required to offer IP to IP interconnection?
• Some have proposed specific “shut-off” dates for TDM
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Efficiency
• Corp. Oper. Exp. Cap for HCL and ICLS
• Regression analysis for HCL and ICLS
• $250/month/line cap on ROR USF
• Only one recipient per area – phase out of CLEC and CETC support
• Reverse auctions for some funds
• Price cap existing funds to broadband construction in unserved areas
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Items Implemented• ETC Reporting Requirements
• Urban rate floor at $10
• Corporate Operations Cap–HCL and ICLS
• Intrastate Access Reductions – Step 1
• $250/month/line USF limit
• Regression analysis for HCL
• Recovery Mechanism and ARC rates
• CLEC USF Phase-out04/20/23 14
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Items Implemented (cont.)
• LSS shift into Recovery Mechanism
• Safety Net Additive-elimination begun
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Items Yet to be Implemented• Regression analysis for ICLS
• Change in rate-of-return
• Broadband CAF for ROR companies
• Transition of originating and transport access to bill and keep
• Phase out of Recovery Mechanism
• IP to IP interconnection
• Broadband speed testing04/20/23 16
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Items Yet to be Implemented
• Loss of USF where unsubsidized competitor serves substantial portion of area (but less than 100%)
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Short term Focus–ETC Reports• ETC Requirements – July 1, 2013
– Five-year plan including:• Maps showing planned upgrades (by wire center
or census block)• Describe with specificity planned improvements
and areas• Estimate the area and population that will be
served by upgrades• Service to Anchor Institutions• May want to include appropriate caveats related to
funding
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Short term Focus–ETC Reports• ETC Requirements – July 1, 2013 – (most
by voice and broadband separately)– Outage Reporting– Complaints– Network Performance Reports (not defined)– Unfulfilled requests for service– Price offerings– Audited financial Reports– Lines under Urban Benchmark-$14-6/1/2013
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Longer Term Focus
• Financial Planning
• Operating expense control
• Capital expense control – efficiency
• Broadband expansion– Area and customers covered– Capability
• Area covered by an unsubsidized competitor (75% of households possibly)
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Billed Access Impact (6% minute loss)
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$-
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
Base Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
Current Access Order-Access
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RM Impact (6% minute loss)
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$-
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
Base Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
Current Access Order-Access Order-Access & RM
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RM Impact (2% minute loss)
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$-
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
Base Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
Current Access Order-Access Order-Access & RM
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RM Impact (10% minute loss)
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$-
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
Base Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
Current Access Order-Access Order-Access & RM
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Impacts – Corp. Ops. Cap
• Impacts vary by company size
• Current difference between actual & max
• Examples:– Assume 3.0% growth in corp. op. expense– Assume -5.0% loss in access lines
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Corp Ops. Exp. – Small Co.
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$- $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 $800,000 $900,000
Base Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
400 Line Company
Maximum Actual
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Corp. Ops. Exp. – Med Co.
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$-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
Base Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
3300 Line Company
Maximum Actual
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Corp. Ops. Exp. – Large Co.
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$-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
Base Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
12,500 Line Company
Maximum Actual
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Regression Analysis• April 25, 2012 – Impacts only 100
companies instead of 400+ - (2 in AR, 1 in MO) only two parameters – Op. Exp. and Cap. Exp.
• Continued industry concern re: unpredictability and variability, some coefficients don’t comport with reason
• Need to verify inputs, particularly sq. miles, exchange boundaries, & road miles
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Op. Expense – Possibilities
• Consortiums and/or consolidations
• Shared management
• Shared technicians
• Past due or early retirements
• Depreciation expense (cap. in regression)
• Employee benefits
• Energy use
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Op Expense – Term Access for LD
• July 3, 2012 – Missouri (est.)– AT&T - $0.015 reduction – 49%– Windstream - $0.016 reduction – 22%– CenturyLink - $0.03 reduction – 42%– RLECs - $0.02 to $0.06 – 20% to 40%
• July, 2013 – Similar $ amounts – larger % reductions from 2012 rates
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New Revenue Sources
• Increase Broadband penetration
• Broadband speed and “volume” increases
• Expand technology offerings
• Backhaul for wireless (incl. mini-cell sites)
• “White Spaces” offerings
• “Smart meter/energy control”
• “Smart home” offerings
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Unknown Impacts• Regression analysis – longer term
• Rate of return reduction
• Originating and Transport Access
• ROR CAF for Broadband
• Loss of USF in competitive areas
• Competition from cable, wireless & satellite
• Changes in technology
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10th Circuit Court of Appeals• Several issues under appeal
– Smith vs. Illinois Bell– Bill and Keep– Regression analysis– Preemption of states
• Court denied FCC request to delay until FCC answered all questions
• Briefing schedule for most of the remainder of 2012
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Future Regulatory Horizon
• Uncertainty – unanswered questions
• Financial challenges from current revenue sources
• Need to move toward a broadband service model
• What will it the future horizon be like?
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Better Thinking.Better Results.
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Better Thinking.Better Results.
• THANK YOU!! HAVE A GREAT DAY!!
• Bob Schoonmaker
• 719-594-5809
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