Federal Telecom Policy

1. Federal Telecom Policy August 12, 2014

2. John HunterChief Policy CounselPricing Policy DivisionWireless Competition BureauFederal Communications Commission john.hunter@fcc.gov

3. Disclaimer • The views expressed are my own and do not necessarily represent those of the Commission, its staff, or any Commissioner. • Many of the statutes have been edited to make them more teachable. This presentation cannot be relied upon for any legal interpretations.

4. Presentation’s Focus • Universal Service and Intercarrier Compensation • FCC Report and Order and Further Notice of Proposed Rulemaking – October 2011 and subsequent decisions • 10th Circuit Decision – May 2014 • Net Neutrality • Brief History Pre-2010 Open Internet Order • Comcast P2P Order (2008) • Comcast v. FCC (2010) • FCC Open Internet Order – 2010 • D.C. Circuit Decision – Verizon v. FCC – January 2014 • Subsequent FCC Action • FCC Notice of Proposed Rulemaking – May 2014 4

5. Part I Universal Service and Intercarrier Compensation

6. The Universal Service Fund/Intercarrier Compensation Report and Order and Further Notice of Proposed Rulemaking Adopted by the FCC on October 27, 2011 and subsequent decisions

7. The Universal Service Fund • Historic commitment to universal service • Expanded in 1996 Telecommunications Act • Statutory Goals: • Promote availability of quality services at just, reasonable, & affordable rates for all consumers • Provide nationwide access to advanced telecom and information services • Make available such services to all consumers, including low income and those in rural, insular, & high-cost areas at rates reasonably comparable to those charged in urban areas • Increase access to advanced telecom services in schools, libraries & rural health care facilities • Require equitable and non-discriminatory contributions from all telecom providers to the fund supporting universal service programs 7 7

8. The Universal Service Fund Contributions flow from telecom and interconnected VoIP providers via an assessment on their interstate end user revenues . . . Wireline telco Wireless telco Cable 8 8

9. High-Cost Program Before 2011 Reform: Complex, Outdated and Not Effectively Targeted • System designed for telephone network, not broadband access • Unintended consequences of outdated rules: waste, inefficiency, and poorly targeted support • Subsidizing multiple competitors in the same area • Subsidizing companies in areas where consumers already have multiple options from unsubsidized competitors • Support amounts not well correlated to needs of areas • Complex, outdated intercarrier compensation system created substantial uncertainty and widespread disputes, while imposing hidden costs on consumers 9

10. L Connect America Fund – Objectives and Policy Innovations Objectives • Universal service: Get broadband to over 18M unserved in rural America; expand mobile broadband and voice coverage where lacking; preserve and advance voiceand broadband service in high-cost areas; update reforms to evolving marketplace as result of ongoing technological innovations • Fiscal responsibility: Fairness to consumers who bear burden of paying; address bipartisan Congressional calls to eliminate inefficiency and control costs • Business realities: Reasonable transition periods Policy Innovations • No subsidy for areas served by unsubsidized competitor • Dedicated support for highest cost areas • Dedicated support for mobile service • Competitive bidding (reverse auctions) for the first time to award universal service support • Explicit, accountable public interest obligations • Budget for CAF support 10

11. Connect America Fund Overview FCC adopts support for broadband-capable networks as an express universal service principle (as recommended by the Federal-State Universal Service Joint Board) 11

12. The Connect America Fund Strong voice/broadband public interest obligations for CAF recipients (speed, latency and capacity) ETC designation required for participation in CAF, maintaining current state and FCC roles for designation of ETCs State authority to protect consumers through carrier-of-last-resort obligations Specific and enforceable reporting requirements, and penalties for failure to meet obligations or reporting requirements National framework for reporting and certification of compliance with new public interest obligations All reports to be jointly provided to the FCC and state commissions Federal-state partnership in oversight 12

13. The Connect America Fund: Price Cap Carriers • 80% of unserved locations in country served by incumbent price cap carriers • Connect America annual budget set at $1.8 billion to expand broadband infrastructure in those areas • Cost support provided through: • Forward looking cost model to estimate necessary support • Competitive bidding process • CAF Phase I • All existing legacy high-cost support to price cap carriers frozen • Carriers electing to receive CAF I support required to deploy broadband to locations lacking broadband, serving a location for a set amount of incremental support

14. The Connect America Fund: Price Cap Carriers • CAF Phase II • No support for areas with unsubsidized competitor or low-cost areas • Carriers may receive support if they commit to serve high-cost, supported areas in their service territories within a state for a specific level of support, based on cost model • Carriers refusing to accept level of support based on cost model and commitment to serve that area are eligible to participate in competitive bidding process • Competitive bidding process • Support for 10 years • Winner must seek ETC designation after notified, if not already • Bidding to be conducted by end of 2015

15. The Connect America Fund: Phase 2 Challenge Process Map of Initial Eligible Areas (dark green) – currently subject of Phase II challenge process

16. The Connect America Fund: Rate-of-Return Carriers Support continued under existing USF mechanisms, but increased accountability and incentives for efficient use of public resources No mandatory requirement to deploy broadband-capable facilities to all locations within service area, but obligated to provide broadband service meeting specific performance requirements upon “reasonable request.” 16

17. The Connect America Fund: Rate-of-Return Carriers • Updates to existing formula limiting corporate operations expense • Support reduced over time for carriers that maintain artificially low end user voice rates • Safety Net Additive phased out • LSS as a separate mechanism eliminated; addressed through CAF ICC recovery • Phase out of support in study areas that overlap completely with an unsubsidized facilities-based provider of fixed terrestrial voice and broadband • Cap per-line support at $250 per month, with a gradual phase down to that cap over a three-year period • FNPRM on establishing a long-term sustainable CAF mechanism for rate-of-return carriers and on reducing the interstate rate-of-return from its current level of 11.25 percent • FNPRM on providing standalone broadband support for rate-of-return carriers

18. The Connect America Fund – Remote Areas Fund (RAF) Order sets dedicated budget of at least $100 million for extremely expensive areas (technology neutral) Must be an ETC to receive support (provide voice and broadband) FNPRM seeking comment on structure, implementation details Definition of Remote Areas (eligible areas) Commission may use forward looking cost model to determine areas above a cost threshold which will be included in RAF Cost model developed FNPRM seeks comment on including in RAF areas that do not receive CAF Phase II support Distribution of support (FNPRM) One time support, ongoing, or both Use of portable consumer subsidy, competitive bidding, or RFP process Minimum speed of 4/1 with potentially modest relaxing of some broadband performance obligations (latency, capacity) 18

19. The Connect America Fund: Mobility For first time, Commission recognizes mobile voice and broadband service as and independent goal of universal service Mobility Fund Phase I: $300m one-time support to upgrade areas with no 3G using market-based competitive process: reverse auction Auction completed on Sept. 27, 2012 33 winning bidders eligible to receive $300 m to provide mobile services covering nearly 84,000 road miles in 31 states and 1 territory Phase I: An additional $50 million for Tribal Mobility Fund Phase II: Ongoing annual support for areas that depend on USF for service - $500m/year including up to $100 million for Tribal areas (budget subject of ongoing FNPRM) Special considerations for Tribally owned and small carriers Eliminates identical support rule CETC support levels frozen per study area as of year end 2011, and phased down over five-year period beginning on July 1, 2012 CETC phase down will stop if Mobility Fund Phase II is not implemented by June 30, 2014   19

20. The Connect America Fund: Phase 1, Round 1

21. The Connect America Fund: Phase 1, Round 2 where funding has been authorized to date

22. CAF: Further Notice Issues Under Consideration Revise broadband performance obligations from 4 Mbps downstream to 10 Mbps, applicable to all carriers receiving Phase II support Exclude from Phase II eligibility any area served by any provider offering voice and broadband service meeting FCC service obligations, whether subsidized or not ETC designation process Details of CAF Phase II Auction Remote Areas Fund (defer until 2016) Mobility Fund phase II for ongoing mobile support CAF Phase II treatment of rate-of-return carriers Reviewing interstate rate of return (now 11.25%) 22

23. CAF: Rural Broadband Experiments • Experiments will inform agency’s broader Connect America efforts • $100 million in total funding available for experiments, including experiments in deploying higher speed networks and serving extremely costly areas • Will be open to diverse technologies (fiber and wireless) and non-traditional providers (electric utilities, WISPs, etc.) • Over 1,000 expressions of interest received – final applications due October 14, 2014; support expected to be awarded in early 2015 • Key goal: Test the competitive bidding process before it is used in Connect America Phase II

24. Intercarrier Compensation Decision addresses: • Access Charges (terminating) • Reciprocal Compensation

25. Access Charges Tandem Switch Tandem Switch IXC Section 201 Interstate and intrastate rates Intrastate access rates generally higher than interstate access rates Usually tariffed, sometimes by contract LEC End Office LEC End Office

26. Access Charges $Terminating Access Payment to LEC Tandem Switch Tandem Switch $Originating Access Payment to LEC IXC Carrier 2: IXC LEC End Office LEC End Office Carrier 3: LEC Carrier 1: LEC Federal Communications Commission

27. Reciprocal Compensation: Two Carriers (LEC to LEC) Tandem Switch Local Calling Area Carrier 1: LEC Carrier 2: LEC End Office End Office Federal Communications Commission

28. Reciprocal Compensation $Reciprocal Compensation Payment Tandem Switch Local Calling Area Carrier 1: LEC Carrier 2: LEC End Office End Office Federal Communications Commission

29. Overview of Key ICC Reforms: Summary ICC system is complex, outdated (PSTN) system of payments between carriers that has been marked by substantial uncertainty and widespread disputes Carriers faced declining access revenues and uncertainty regarding payment for VoIP traffic; also, arbitrage schemes developed whereby carriers sought to avoid payment of access charges; consumers ultimately pay CAF/ICC Transformation Order: Adopted immediate reforms to crack down on wasteful attempts to game the system that cost carriers, and ultimately consumers, millions of dollars a year Provided a gradual transition away from carrier dependence on per-minute payments from other carriers, and a CAF recovery mechanism to provide certainty and predictability for carriers to invest in broadband Provided certainty in treatment of VoIP, reducing dispute costs Unleashes over $1.5 billion in annual benefits to consumers by eliminating hidden calling costs 29

30. Overview of Key ICC Reforms Adopts bill-and-keep methodology as ultimate endpoint for all ICC charges under 251(b)(5) (interstate, intrastate, and reciprocal compensation traffic) Caps all interstate/reciprocal comp rates and most intrastate rates Establishes specific transition path for certain terminating rates - 6 years for price cap or 9 years for rate-of-return carriers Creates a recovery mechanism for incumbent LECs Optional Access Recovery Charge (ARC). Order includes protections to mitigate any impact of the ARC on end users, including low-income consumers ICC CAF recovery available if incumbent LECs are eligible, and is subject to obligations to extend broadband and accountability/reporting requirements of CAF 30

31. Overview of Key ICC Reforms Adopts rules to deter phantom traffic and access stimulation Adopts bill-and-keep methodology for non-access LEC-CMRS traffic Reaffirms FCC’s 2005 T-Mobile Order, enabling ILECs to compel CMRS providers to negotiate Clarifies FCC expectation of good-faith negotiations for IP-IP interconnection for voice traffic 31

32. ICC Recovery Mechanism – What Carriers Can Recover: • Carriers calculate their “Eligible Recovery” (ER) • Carriers recover some of their ER from customers • Carriers can elect to recover ER that can’t (because of constraints we adopted) be recovered from customers from USF (but there are strings attached including broadband obligations and oversight) • What a Carrier Can Recover: Calculating Eligible Recovery • Establish a baseline amount (Certain ICC revenues or revenue requirements from FY11) • Reduce the baseline a bit each year (10% annual reduction for PC, 5% for RoR)) • Subtract the analogous current year ICC revenues (actual or projected – depending…) from this baseline • This amount (roughly) is the basis of ER for a year

33. ICC Recovery Mechanism – What Carriers Can Recover:

34. ICC Recovery Mechanism – What Carriers Can Recover: • Access Recovery Charge (ARC): • ARC is like a SLC – an end user charge • A company’s total ARC can’t exceed its ER for a year • ARC Constraints: • $30 line cap: ARC can be charged for a res. line only if the cost of basic local service plus taxes and fees for that line is under $30 (and then ARC is limited by the amount the cost is under $30) • Phase-in schedule: • For Res - $.50 / year for each of 5 years (6 for RoR) • For Bus - $1.00 / year for each of 5 years (6 for RoR) • ARC + SLC can’t exceed $12.20 for multiline business line • CAF for ICC • 2012 - 2016: ER not recovered through the ARC • 2017 - 2019: Phases out by 1/3 each year for price cap carriers

35. ICC Reforms: ICC and IP Prospectively, all VoIP-PSTN traffic brought within the 251(b)(5) framework. For the transition: Default rate for toll VoIP-PSTN traffic: interstate Default rate for non-toll VoIP-PSTN traffic: reciprocal compensation rates Carriers may tariff these defaults in intrastate and interstate tariffs, in absence of alternative agreement In the limited circumstance of implementing the new intercarrier compensation for VoIP regime adopted in the USF/ICC Transformation Order, when a carrier’s intrastate access rate is lower than its corresponding interstate access rate, that carrier may not, in its intrastate tariff, include a rate for toll VoIP-PSTN traffic that is higher than its intrastate access rate (clarified by February 3, 2012 Order) VoIP traffic is defined as “traffic exchanged over PSTN facilities that originates or terminates in IP format” Not a classification of VoIP retail service No change to the status quo No changes to VoIP contributions to state USF 35

36. ICC Reforms: State Role Arbitrating negotiated interconnection/compensation agreements under the framework in Sections 251 and 252 of the Act Glide path for rates as a default in arbitrations Includes resolving disputes over the network edge for purposes of bill-and-keep Overseeing reforms to intrastate tariffs to reduce intrastate rates Ensure carriers not shifting costs among rate elements or otherwise “double counting” to gain excess recovery Protections in recovery mechanism for “early adopter” states 36

37. ICC Further Notice of Proposed Rulemaking Bringing remaining rate elements to bill-and-keep Originating access, transport, transit, other charges Bill-and-keep implementation Points of interconnection; the network edge; role of tariffs; possible arbitrage Reform of end user charges and CAF Access recovery charge phase-out; CAF ICC support phase-out; treatment of demand for ROR eligible recovery; subscriber line charges IP-to-IP interconnection Scope; standards and enforcement for good faith negotiations; statutory authority; measures to encourage or require IP-to-IP interconnection 37

38. Appeal of The Universal Service Fund/Intercarrier Compensation Order Decided by the 10th Circuit Court of Appeals on May 23, 2014

39. 10th Circuit Decision (2014) Overview • The Court affirmed the FCC’s authority to condition the receipt of subsidies from the Universal Service Fund on construction of broadband-capable facilities • The Court affirmed Section 706(b) as a separate, independent source of authority for its revised universal service rules designed to support broadband networks • The Court affirmed the FCC’s authority to establish a national default bill-and-keep framework for all telecommunications exchanged with a local exchange carrier, which includes local, long distance, interstate and intrastate traffic • Will eliminate many implicit subsidies and inefficiencies and continue to implement a uniform, national ICC framework

40. 10th Circuit Decision (2014) – USF holdings • FCC's determination that it was authorized to condition receipt of funds from universal service fund on recipients' agreement to provide broadband Internet access services was not arbitrary. • Petitioners argued the FCC exceeded its authority under 47 U.S.C.§254. • Court determined the FCC had not exceeded that authority, because “it seems highly unlikely that Congress would leave it to USF recipients to determine what ‘the support is intended for.’” The FCC must fill the gap by determining how the funds may or must be used. • FCC's determination that federal universal service support for rural carriers was sufficient to preserve and advance universal service was not arbitrary. • Petitioners argued the FCC failed to ensure the USF support was sufficient to achieve Congress’ goals. • Court determined the FCC’s interpretation of “sufficient” from §254(b)(5) and§254(e) was not arbitrary, capricious, or manifestly contrary to the vague statute. 40

41. 10th Circuit Decision (2014) – USF holdings (cont’d) • Rule for limiting reimbursable capital and operating expenses from USF (“regression rule”) did not violate predictability requirement. • Petitioners argued the “regression rule” is inconsistent with the predictability mandate in §254(b)(5). This leads to unpredictability because “a carrier simply cannot know from year to year which investment or expenses will be supported and which will not;” therefore it is difficult to plan for the future. • Court waived petitioners’ arguments because the FCC was never given an opportunity to pass on them prior to appeal. However, in general the Court said the FCC Wireline Bureau’s method of arriving at the annual HCLS disbursement amounts is far from unpredictable. • Use of auctions to determine distribution of USF funds in geographic areas did not violate Telecommunications Act. • Petitioners argued the FCC violated 47 U.S.C. §214(e), in which Congress gave state commissions the job of deciding who would receive USF and where the services would be advertised and provided. Petitioners also argued against the FCC’s bidding mechanisms. • Court determined the FCC “reformed the distribution . . . [but] left intact the state commissions’ authority to designate ETCs and their service areas.” The Court also agreed that “nothing in the statute compels that every party eligible for support actually receives it.” 41

42. 10th Circuit Decision (2014) – USF holdings (cont’d) • The Order did not unlawfully deprive rural carriers of reasonable opportunity to recover their prudently-incurred costs. • Petitioners argued “they are required to continue to provide current services and, at considerable additional expense, to provide broadband service as well . . . at the same time their ICC revenue streams are being narrowed and their USF support will be capped, reduced or eliminated.” • Court determined that the FCC had been reasoned and reasonable in its analysis: the FCC was authorized to implement changes to the USF mechanisms. The Court also noted that any rate-of-return carrier can submit a waiver request and receive additional support if they can effectively demonstrate the need. • FCC's refusal to relieve ETCs of their ongoing duty to serve all comers without USF support if unsubsidized competitor offered service in particular study area was not arbitrary. • FCC's decision to eliminate high-cost USF support to rate-of-return incumbent local exchange carriers (RLEC) if unsubsidized competitor offered voice and broadband to all of RLECs' customers in same study area was not arbitrary. • Petitioners argued “unsubsidized competitors have no obligation to either continue providing voice or broadband service to existing customers or to serve new ones once the RLEC’s support is eliminated, much less an obligation to provide services comparable” in price and quality. • Court agreed with the FCC’s predicative judgment that an ‘unsubsidized competitor’ would have an incentive to recover its investment by continuing to serve every possible customer. 42

43. 10th Circuit Decision (2014) – USF holdings (cont’d) • FCC's decision to cut USF funding to many rate-of-return carriers serving Tribal lands was not arbitrary. • Gila River Telecommunications, Inc. challenged the FCC’s decision to cut USF funding to many rate-of-return carriers serving Tribal areas, making several different arguments in support. • Court determined none of the petitioner’s arguments had any merit. The Court agreed with the FCC, that the agency was being fiscally responsible while still allocating sufficient funds to these areas. The Court also held that the FCC was not wrong in treating carriers serving Tribal lands in a manner similar to rate-of-return carriers, or in giving certain funding to price-cap carriers and not to rate-of-return carriers. 43

44. 10th Circuit Decision (2014) – ICC holdings • FCC’s rules establishing a national bill-and-keep framework for the exchange of telecommunications with a local exchange carrier were affirmed. • Court determined it was reasonable to interpret Section 251(b)(5) to apply to all telecommunications traffic exchanged with a LEC, giving the FCC a basis for preempting intrastate access charge regimes • Challenges to bill-and-keep framework to originating access found to be unripe because issue is subject to further rulemaking. • Court determined that Section 252(d)(2) specifically authorizes bill-and-keep and the FCC’s rules leave states sufficient authority to arbitrate “terms and conditions” of reciprocal compensation. • The Court rejected challenges to the FCC’s recovery mechanism. • FCC has jurisdiction over both the interstate and intrastate traffic subject to Section 251(b)(5), and the recovery mechanism provides a way to recover lost intrastate ICC revenues. • Challenges to the Access Recovery Mechanism dismissed on procedural grounds.

45. 10th Circuit Decision (2014) – ICC holdings (cont’d) • Court rejected series of miscellaneous challenges to ICC rules. • CLEC claims that it was arbitrary and capricious not to extend the recovery mechanism to CLECs as well as incumbent LECs. • Challenges to move more quickly to bill-and-keep for LEC-CMRS traffic than for other traffic exchanged with LECs. • Challenges to the rule limiting CLEC recovery for traffic resulting from access stimulation schemes. • AT&T challenge to allowing VoIP-LEC partnerships to collect ICC charges for services performed by the VoIP partner.

46. What’s next? • FCC will proceed with further implementation of USF/CAF and ICC reforms and promote broadband deployment • One party to appeal, Transcom, has filed petition for en banc hearing with the 10th Circuit on the narrow issue regarding the intra-MTA rule. • Other opposing parties could appeal, either to full 10th Circuit or Supreme Court

47. Part II Net Neutrality

48. What is Net Neutrality? • Regulatory efforts to compel broadband providers to treat all Internet traffic the same regardless of source (Verizon v. FCC – 2014 10th Circuit decision) • Proponents fear that consumers will receive degraded Internet service from edge providers as a result of actions by broadband service providers favoring certain edge providers over others • Opponents claim marketplace abuses have not occurred and that regulation will stifle technological advances

49. Current infrastructure:

50. What the proponents of “Net Neutrality” fear: