Carriers of Last Resort: Updating an Old Doctrine

Presented to Mid-America Regulator’s Conference

June 16, 2008Peter Bluhm, Principal,

TelecommunicationsNational Regulatory Research

Institute

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Overview

Historical review Several historical phases

Challenges Competition

Broadband Recommendations

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Duties of a COLR

Varieties Provide local exchange service (local COLR) Provide toll service (interexchange COLR)

Retail Serve all customers who seek service

Wide service areas, including high cost areas Line extensions and CIAC

Service elements Service quality

Carrier-to-Carrier Terminating switched calls, special access, tandem transit,

database management Exit barriers

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History #1 – Common Law (1500-1880) Common law sets framework

Common carriers Special care in handling packages Nondiscriminatory treatment

Franchises Originally called monopolies Must serve an entire area

Sovereignty went to the states State laws covered common carriage

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The classical regulatory bargain Carrier burdens

Common carriers must serve all customers equally But, may require contributions for line extensions

Provide standard service E.g.: no party lines, extended calling areas

No unreasonable discrimination Carrier benefits

Legal monopoly (now repealed) Cost of service-based rates (now largely repealed) Economies of scale and scope

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History #2 – Utility Laws (1880-1990) Merged common law principles

Franchise areas Mapped non-overlapping service areas Nondiscriminatory service

All customers treated equally All calls treated equally

Duty to serve all customers Contributions required for line extensions

Regulated entry and exit from markets Retail service quality measurements Carrier-to-carrier duties imposed

“Interconnection”

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History #3 – Competition and Universal Service (1990-2005) – Two Theories Theory #1: COLRs are essential

TA96 affirmed duties of COLRs (quietly) Carrier-to-carrier duties continued

Interconnection (§ 251(c), 271) Pole attachments Originating access for toll carriers Tandem transit

Default service upon CLEC failure (§ 214(e))

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Two Theories (cont)

Theory #2: It unfairly discriminates against new entrants if they cannot get USF support. Act defined a new class of competitive carrier – the

“Eligible telecommunications carrier” One who can receive support in return for meeting eligibility

criteria FCC adopts “Competitive neutrality” as USF principle

Originally means that new entrants get support, even if they aren’t quite the same as COLRs.

Key FCC decisions: Competition versus universal service is a “false choice.” States cannot create new prerequisites for eligibility. States cannot set unreasonably large service areas. States cannot require build-out as condition of entry.

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Challenges

Entry issues more complex Limited carrier access to multi-subscriber sites Overbuilds

Exit issues more complex CLEC failure ILEC failure

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Challenge #1 – More than one carrier Multi-subscriber properties

An issue of entry – who is the COLR and what must they do?

Arises frequently: Apartment houses, condominiums, housing developments, industrial parks

The issue: what is an incumbent LEC’s duty if the property owner gives exclusive benefits to a broadband provider?

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Challenge #2 – Over-builds

Infrequent but serious question Two competing networks Older network has minority of customers Newer network doesn’t have COLR duties

Terry Montana illustrates FCC’s process. RBOC had traditionally served the exchange New entrant built new facilities, quickly got 95%

market share. FCC ruled that new entrant was now an

“incumbent” for purposes of interconnection duties

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Challenge #3 – CLEC Failure

Competitive failures The issue: how protect society when a

competitive LEC fails? Answer: mass migration rules

Detailed procedures for CLEC exit. Notice to customers, notice to commission Customers get opportunity to pick new carrier Exiting CLEC must migrate customer records to new

carrier.

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Challenge #4 – ILEC failure

Can ILECs really fail? Dependency on access revenues, federal USF. Erosion of subscriber base

Costs not reduced Recent cases

Hawaiian Telecom FairPoint

What procedures to follow if nobody wants the job? Assign neighboring ILECs? Auctions?

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Broadband #1 - Preemption

Broadband Internet access services of all stripes are “information services,” and are probably “interstate information services.”

FCC says they are not “telecommunications services” for purposes of federal law, and they are not intrastate.

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Broadband #2 – State Promotion of Broadband But, Congress and the FCC are looking to the

states to help deploy broadband in rural areas.

Should states use anything like traditional COLR policies to do this?

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Does a State Need a COLR Policy? Goals still relevant:

Ubiquitous facilities Service quality and nondiscrimination Reliability (manage carrier exits) Linchpin carrier-to-carrier services

Exceptions Where independent facilities-based competition is

well established and there are no linchpin carrier-to-carrier services.

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Conclusions

USA has historic commitment to providing quality communications to every resident.

Traditional regulatory bargain has eroded. Absent state action, the affordability,

reliability, security and longevity of "carrier of last resort service" is in doubt.

COLR policy can be modernized to reflect current conditions, but not in a way that avoids controversy.

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Recommendations – Single Wireline COLR Economies of scale more likely, reducing

subsidy costs of providing ubiquitous reliable service.

Limiting support to one carrier avoids the hazard that USF funding will induce uneconomic entry.

Manages growth in fund size Recognizes importance of linchpin carrier-to-

carrier services

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Recommendations – Multiple COLR Classes Several types of COLRs possible:

Wireline COLR Wireless COLR Broadband COLR Federal ETC State ETC (optional)

Complex task to sort out which duties and benefits attach to which class

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Recommendations – Service Areas Service area size – policy tradeoff:

Small areas promote competitive entry But they may also induce uneconomic entry

Large areas limit the need for explicit subsidy But they may make incumbents noncompetitive in low-

cost areas

Recommend relatively large areas. Difficult to make implicit subsidies explicit

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Recommendations – Define duties for each class of carrierDuty Details Carriers assigned

Duty to serve Accurate voice reproduction from 300 to 3,000 hertz; no party lines; touch tone dialing; call waiting; call forwarding; 3-way calling; equal access for IXCs; modem transmission

Offer service to all qualified customers

COLR and ETC

Rate designs Offer an affordable flat-rate calling plan, Lifeline program

ETCs

Carrier-to-carrier services

Interconnection, UNEs, and resale, special access

COLRs

Regional wholesale services

Tandem transit Large COLRs

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Recommendations – COLR Entry

Adopt a procedure to adjust COLR duties for multi-subscriber properties: Limit COLR duties when COLR cannot obtain

entry or cannot earn a profit. For overbuilds, need process to replace old COLR

with new COLR.

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Recommendations – Carrier Exits CLECs

Adopt mass migration rules Apply to COLRs and all other LECs, except where

federally preempted. ILECs

Process for identifying substitute carrier when nobody wants the job. Use auctions?

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Recommendations – C2C

Identify linchpin wholesale services that support other carriers Intrastate special access Terminating incoming calls Equal access for IXCs

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Recommendation - Compensation Should COLRs receive explicit support from their

states? Funding options:

Charge for stranded capacity when customer leaves Workable for gas, but not telecom

Charge CLEC customers for benefits provided by COLRs – Economically efficient but politically controversial

Universal service surcharges Common but not very common

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The End

Peter Bluhm National Regulatory Research

Institute pbluhm@nrri.org

802 878 0760