The more things change, the more things need to change, according to a new report with the same name that was supported by USTelecom. Telecom service providers once were essentially guaranteed a monopoly in exchange for being required to provide service to everyone in their territories, but today, even though telcos no longer have a monopoly, they are still subject to carrier of last resort (COLR) and other requirements originally put in place during the monopoly era, the authors argue. The upcoming Rural Digital Opportunity Fund (RDOF) may have some important implications for this discussion.

The report was written by Tony Clark, a former chairman of the North Dakota Public Service Commission and past president of the National Association of Regulatory Utility Commissioners, and Monica Martinez, a former Michigan public services commissioner. USTelecom makes a point of noting that the views expressed are those of the authors, but the authors’ arguments align closely with USTelecom policy objectives. USTelecom represents large and small U.S. incumbent telcos, including the nation’s largest price cap carriers – AT&T, Verizon, CenturyLink and others.

A current concern expressed by the authors pertains specifically to the price cap carriers – the expectation that these carriers may lose Universal Service Fund (USF) subsidies, at least in some areas, assuming the FCC moves ahead with plans for the Rural Digital Opportunity Fund (RDOF).

Traditional monopoly regulations called for these carriers to receive subsidies from the USF to help cover the cost of providing voice service in rural areas that are costly to serve. When the FCC transitioned the voice-focused USF to the broadband-focused Connect America Fund (CAF) program, it gave price cap carriers the right of first refusal on funding to bring broadband to areas of their local service territory where broadband wasn’t available.

Most price cap carriers accepted most of the funding they were offered. The remaining funding rejected by the carriers was awarded through a reverse auction, with money going to the network operator that pledged to provide broadband for the lowest level of government support. Price cap carriers such as Verizon and Frontier won relatively small amounts of funding in that auction, but the majority of funding went to other entities, who agreed to provide service at speeds up to a gigabit per second for less money than the incumbents were offered to deliver service at speeds as low as 10 Mbps.

As Telecompetitor has previously noted, the results were not surprising, considering that price cap carriers must answer to stockholders that want them to spend their time and money where they can get the biggest returns. Entities that won funding, such as wireless internet service providers and telecom and electric cooperatives, are likely to be more open to investments that have a long payback period.

RDOF Impact
The CAF II auction results had a big impact on the FCC’s proposal for the RDOF, which is expected to replace the CAF program for the price cap carriers when that program expires in 2021. The current proposal for the RDOF calls for awarding funding for price cap territories using a reverse auction similar to CAF II – and as recent comments from Frontier CEO Dan McCarthy suggest, the price cap carriers aren’t expecting the results from the RDOF auction to be much different from what happened with CAF II.

The upshot is that while the CAF II auction diverted a relatively small portion of subsidies that would normally have gone to the price cap carriers to other entities, the RDOF has the potential to trigger a more dramatic shift away from the price cap carriers.

As the report authors, note, “[c]ompletely shutting off access to federal universal service support to an incumbent in favor of a competitor is a new frontier in the evolution of the support mechanism.”

As subsidies for price cap territories go to companies other than the incumbents, “the ILEC should be relieved of all federal and state obligations to provide service in such areas,” the authors argue.

The report makes several policy recommendations, including:

  • Where a new entrant wins the subsidy for a specific territory, the COLR obligations for that territory should automatically transfer to the new provider
  • The FCC should streamline or eliminate rules that prevent carriers from discontinuing service and exiting the market where competitive alternatives exist, particularly when the competitor is being funded by the government with support previously earmarked for the incumbent
  • The commission should eliminate any eligible telecommunications carrier (ETC) obligations where a provider is no longer receiving a USF subsidy
  • State COLR obligations should be preempted where an incumbent provider loses the federal subsidy, unless the state steps in to make up the difference

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