USF Reform NARUC Panel Presentation

1. USF ReformNARUC Panel Presentation Dale Lehman Director, Executive MBA in Information and Communication Technology Alaska Pacific University dlehman@alaskapacific.edu

2. A Budgeting Problem • Current high cost fund (HCF) ($4.096B) • Projected increases in CETC funding (conservative estimate: +$1.5B) • AT&T Broadband “pilot” (+$1B/year) • Eliminating Rural/Nonrural distinction (at wire center level: +$3B) • Funding at sub-wire center level (conservative estimate: +$15B) • ILEC “inefficiencies” (-$1B) are not credible

3. Essential Reforms and Diversions • These are all interesting issues, but most are not essential and threaten to divert the Joint Board (and FCC) from needed reforms • Necessary reforms: decide whether to support 1 or 2 network technologies; fix wireless CETC support; fix funding mechanism • The other issues are more complex than usually portrayed and require further analysis

4. One Technology or Two? • If One, it should be the most efficient • Reverse auctions cannot determine this • RFP specifications will determine “the winner” • Stranded investment an issue, except in “greenfield” applications • Evidence from other nations supports these conclusions • If Two, reverse auctions may play a role

5. Nonrural Carriers and De-averaged Support Calculations • Price cap carriers differ from rate-of-return regulated (RoRR) carriers • Symmetry between regulatory commitment and carrier commitment: both are required for incentive regulation to work • RoRR guarantees an “opportunity” to earn a competitive return • Evidence required; appropriate intervention could involve USF, but there are alternatives • Acquired exchanges raise similar issues • Broadband makes things different

6. Adding Broadband as a Supported Service • Price cap carriers have no obligation to undertake “uneconomic” investments • However, incentive regulation plans sometimes involve infrastructure investments • Many States have done so; will “early adopters” need to be compensated? • Plan renewals with investment requirements should be voluntary (fallback to RoRR otherwise) • More study needed on why broadband adoption lags in rural areas (is it availability or adoption? What is the best policy intervention?) • “universal” broadband speed is likely to be slower than what economic development requires

7. The Wireless CETC Mechanism is Broken • ETC designation and the Identical Support Rule produce absurd results • Funding is tied to handsets (multiple) and addresses (no service guarantee, people move, etc.) • ILECs receive funding based on total costs; CETCs are funded based on per-line costs of a different carrier/technology

8. Ratio of CETC/ILEC lines, in relation to ILEC cost, by study area, 2Q 2004 and 2Q 2007 • 13 study areas had ratio > 1 in 2004; 88 in 2007 • CETC study areas increased by 24%, CETC lines increased by 89%, while ILEC lines decreased by 8%

9. MTA: a case study • 4 wireless CETCs; total CETC lines > total ILEC lines • Coverage area has not markedly changed • Competitive neutrality between wireless carriers is what is being funded

10. Ideas about a Mobility Fund • Decide what needs to be supported: construction of towers in under-served areas? (operation of service is more questionable) • Attach appropriate conditions to support: cost-based collocation and roaming? • Reverse auctions, cost models, and cost reporting are alternative methods for determining and awarding support

11. Conclusions • Broadband, deaveraging, and mobility are all important, but complexities require more analysis • They should not divert the Joint Board’s attention from the essential reforms • These are: deciding whether to support one network technology or two; fixing the wireless CETC funding mechanism; and, fixing the contribution mechanism