Carriers of Last Resort in an Age of Competition

1. Carriers of Last Resort in an Age of Competition Peter Bluhm Rolka, Loube, Saltzer, Associates pbluhm@r-l-s-a.com

2. Classical COLR Policy • One tool of universal service policy. • COLR responsibilities were classically assigned to Public Switched Telephone Network (PSTN) providers, now known as ILECs. • Also sometimes applied to toll service. Peter Bluhm

3. Bundle of COLR Obligations – Primary Duties • Duty to serve. • Must serve any potential customer within its franchise area on request, subject only to reasonable conditions. • Usually covers “basic” service with add-ins such as touch tone or equal access. • Service must meet reasonable service quality standards, such as call blocking rates, dial tone availability. • Line extensions. • A COLR must extend its lines throughout its service territory, including unserved and newly built areas, subject to reimbursement by customers for certain construction costs. • Rule of thumb sometimes used – two poles means no charge. • Exit barriers • A COLR must continue providing service until the state commission grants permission to exit. Peter Bluhm

4. Bundle of COLR Obligations – Mandated Retail Benefits • Regulator may require rate designs with large contributions to common cost from certain customers. • Business customers • Frequent toll users • Customers with short loops • Additional economic and service benefits to specified customers. • Flat-rated “local” calls • Low-income discounts • “Relay” or 711 services for hearing impaired • Other benefits for visually or hearing impaired customers • Other requirements that may increase overall cost. • Power backup • Pay telephones • Paper phone books • Modem transmission speed • “Left in” or “soft” dial tone Peter Bluhm

5. Bundle of COLR Obligations – Carrier-to-Carrier • The “Linchpin” network • AT&T “Long Lines” • Must interconnect with other carriers • Accept other carriers’ traffic and terminate it • Use common numbering, signaling, systems • Must offer services used by other downstream carriers. • Special access • Switching and transport • The 1980s and “equal access” for IXCs • Necessary if every PSTN telephone to call any other PSTN telephone. Peter Bluhm

6. Who is the COLR? • The ILEC • Some states apply some duties to CLECs • Usually as part of universal service eligibility determinations. • The “ETC” under federal and state law. Peter Bluhm

7. Historical eras – 1880 to 1990 • Regulatory Agencies merged common carriage and franchise: • Common carriage • Duty to serve all who seek service • Nondiscrimination • Just and reasonable rates • Exclusive franchises • Extend service to unserved areas • Exit barriers Peter Bluhm

8. The Regulatory Compact in 1990 • Not an explicit contract – a practical quid pro quo. • COLR Duties • Many duties to retail customers, to other carriers. • COLR Benefits • In many states, COLR received exclusive franchise • Economic advantages of scale and scope • Alarm lines • Special access lines • The state commission also had an obligation to set rates that allowed a prudently operating company to earn a reasonable return on equity. Peter Bluhm

9. The Age of Competition Message #1: All LECS Are Equal • Primary aim is to promote competition in local exchange markets. § 253 market opening provisions. • Universal service benefits - § 214(e) and “ETCs” • TA96 strongly encourages multiple ETC designations. • No COLR requirements • Even in rural telco areas, states “may” designate multiple ETCs. • ETCs must “offer” service, but with an important twist. • CETCs can use resale. • Resale avoids the costliest traditional COLR duty, constructing networks to serve all parts of the service area. • Does this make any sense for wireless? • Service areas defined by states. • CLECs can carve areas worth overbuilding and also get some support. • Result: support goes to all carriers who provide minimum level of service, whether or not they serve everyone. Peter Bluhm

10. The Age of Competition Message #2: COLRs are Different • But, COLR duties remain: • § 251(c) interconnection (UNEs, expanded interconnection). • § 251(g) requires LECs to continue providing access and exchange services. • § 271 and the 14-point competitive checklist (RBOCs only). • § 214(e) (ETCs) • Prescribes exit procedure when there are multiple ETCs. • No exit procedure for sole ETC. ILECs forever? • “Common carrier” can be assigned to serve an unserved area, even if it is not an ETC. § 241(e)(3). Peter Bluhm

11. The FCC’s Initial Gloss on ETCs • Competitive neutrality principle (1997) • Avoid anything that “unfairly advantage or disadvantage” a provider or technology. • Limit states’ ability to add ETC requirements (1997) • No real public interest test • Discouraged large service areas that minimize cream skimming (1997) • Possible § 253 violation • Cannot require facilities be constructed in advance (2000) • When, if ever, must a wireless carrier serve all customers? Peter Bluhm

12. FCC’s Portability Rule • When a CETC “captures” a customer from an ILEC or signs up a previously unserved customer, the CETC receives high-cost support in the same amount per line as the ILEC serving that service area, • FCC intended to increase the CETC’s incentives to be successful, and thereby promote competition. • But the policy isn’t neutral. • ILEC support based on ILEC costs. • CETC support based on ILEC costs. • Assumes ILECS can take support losses in stride. • Doesn’t the ILEC need more support when it loses customers? Peter Bluhm

13. Effect of TA96 and FCC Policy • Universal service expands. • ETCs can meet COLR-Lite requirements. • Increased opportunity for cream skimming • Support based on ILEC costs can promote inefficient entry. • Total societal cost increases if multiple networks are built: • Subscriber revenue will be divided among competitors • Need for subsidy increases • ILECs at risk if they lose lines. Peter Bluhm

14. FCC’s Retreat to COLR • 2004 FCC directly decided two ETC designations from Virginia (Virginia Cellular and Highland Cellular). • Authorized broad public interest analysis, including: • Effect on high cost fund • Possibility for cream skimming • Carriers must submit detailed construction plans for serving their entire service area. • Separate statements: • Compliance with state COLR obligations should be a precondition of ETC designation (Powell, Abernathy, Martin). • Criticized the effects of earlier FCC policy including the hazard of uneconomic entry, needless subsidies, and the harmful effect on ILECs. (Martin) • Concern about “the consequences that flow from using the fund to support multiple competitors in truly rural areas.” (Copps) • 2005 – FCC issued order codifying the Virginia principles. Peter Bluhm

15. State Post-96 Actions • States frequently drew policy and even language from TA96 and FCC policy. • Use of TA96 terminology, such as “eligible telecommunications carrier,” has been common. • A few states have also followed substantive federal policies: • Eligibility for state universal service support. Peter Bluhm

16. The Regulatory Compact Today • COLRs still have most traditional duties • Economic advantages are dissipating. • Monopoly franchises illegal • Losing high-margin subscribers to competitors, both wireless and wireline • Bypass of access minutes • Large wireless calling areas • VoIP and local termination • Some economic advantages remain • Economies of scale in areas without facilities-based competitors Peter Bluhm

17. Challenge #1 – Multi-Subscriber Properties • ILEC / COLR still has duty to serve, but • The owner or manager of a multi-subscriber property has made an economic arrangement with a competitive provider, • Exclusive facilities access • Owner mandates or facilitates subscriptions to competitor. • E,g, Collects cable and Internet fees as part of condominium fees • Effect is that COLR might be required to build in locations where it cannot recover marginal costs. Peter Bluhm

18. Challenge #2 –Competitive Overbuilds • Competitive carrier has built facilities in an entire exchange. E.g. Terry, Montana. • When does first carrier’s COLR duty abate? • When does second carrier assume COLR duties? • FCC cases deal with interconnection issues • Mid-Rivers Telephone Cooperative. • Indiana law – silent? Peter Bluhm

19. Indiana Law on Competitive Entrants • Competitor has sole facilities • IC 8-1-32.4-13 seems to address. • COLR can petition for relief from COLR duties. • Only where COLR does not have facilities built and competitor does. • Commission then appoints new carrier as COLR. • Competitor has exclusive service arrangement • Applies where competitor is “exclusive provider” • Question of fact? • IC 8-1-32.4-16 covers exclusive provider arrangements • (a) – COLR duties extinguished if new provider has exclusive service arrangement. • (b) and (c) - ILEC-COLR duties may revive if new entrant fails or exits. ILEC has 12 months for takeover. • What if a condominium owner: • Collects fees for competitive provider? Peter Bluhm

20. Challenge #3 –Competitive Carrier Failure • Many more possibilities for business failure in competitive markets. • Lots of failures when Internet bubble burst in 2000-01. • States responded with “mass migration” rules to manage orderly exits from local exchange markets. • Advance notice required to public, commission. • Plan to migrate customers • Notice to customers and opportunity to vote • May involve requiring ILEC or other ETC to take some customers as “default provider.” See 47 U.S.C. § 214(e)(4). • Plan to migrate wholesale services • 911, numbering resources, presubscribed toll carriers Peter Bluhm

21. Challenge #4 – ILEC / COLR Failure • Changed regulatory compact suggests increased risk of economic failure by ILECs. • Loss of subscribers • 28% from 1999 to 2007 • Greatest losses among customers making the greatest contribution to common costs. • Loss of access revenue through bypass • Possible access rate reforms • How does a state find a substitute provider when an ILEC is unable to continue providing satisfactory service? • Mass migration rules may not work. • No default carrier available. • ILEC failures can cascade through network. • ILECs serve linchpin functions to other carriers. • Federal law imposes duties on “common carriers” to serve areas assigned by state commission “with respect to intrastate services.” 47 U.S.C. § 214(e)(3). • Does the area have to become “unserved” first? Peter Bluhm

22. Business Risk Analysis for ILECS Peter Bluhm

23. Importance of Linchpin Services • Hawaiian Telecom bankruptcy – • “While numerous competitors have entered the telecommunications market in the state, [Hawaiian Telecom’s] facilities and services remain necessary for competitive carriers to continue to provide telecommunications services in the State. Without the ability to interconnect with Hawaiian Telcom’s facilities and purchase its services, these competitors would need to recreate the company’s existing infrastructure, or large portions of it, at great expense, to continue to provide services to their customers.” • Statement of Hawaii Public Utilities Commission Chairman CarlitoCaliboso to United States Bankruptcy Court for the District of Hawaii, January 8, 2009. Peter Bluhm

24. Indiana Law on Failures and Exit • CLECs and ILECs • IC 8-1-32.4-12 requires notice of exit from all carriers. • IC 8-1-32.4-14 explains prescribes how to find an pay a successor provider when none are willing. • New COLR can seek funding from Indiana USF. Is this realistic? • No provision for customers voting for new carrier • ILEC/COLRs • IC 8-1-32.4-15 establishes procedure for emergency failures of local exchange service. Peter Bluhm

25. Challenge #5: - Broadband • Eventually, most customers will get voice as a rider on broadband pipes. • But, applying COLR policies to broadband would be costly and require careful phase-in. • States instead are taking a more cautious approach: • No guarantees of service Peter Bluhm

26. Non-COLR Options for Broadband • Administer and support federal programs • Broadband mapping • Stimulus grants • State funding for broadband expansion • Construction grants, • Broadband authorities • Use other regulatory tools • Price caps (Pennsylvania) • Acquisitions and mergers (Northern New England) • Municipal and cooperative passive networks • Reggefiber in Netherlands • Three layered model reduces conflicts Peter Bluhm

27. Analysis - Do We Need COLRs? • Opinion - States still need COLR policies for most geographic areas. • Ubiquity • Consistent with universal service goals of TA96 • Nondiscrimination • Adequate quality • Reliability • Linchpin services to other carriers • Tandem switching, transport • Special access • SS7 services • E911 services • Provide default service on CLEC exit • But, Florida legislature allowed COLR statutes to sunset. Peter Bluhm

28. Recommendation: A Single Wireline COLR • Advantages: • Higher economies of scale in rural areas • Minimized total economic cost of providing service • Limited demand for universal service support • Continuity of essential carrier-to-carrier services. • Federal law allows single COLRs. • Prohibits states from barring entry into local exchange markets. • Assigns special duties to “Common Carriers.” • Possible exceptions: • Area overbuilds get 2 COLRs • Highly competitive areas get 0 COLRs. Peter Bluhm

29. Additional Suggestions • Differentiate between duties that attach when a carrier is a COLR and when, as an ETC, it receives financial support. E.g. • Default service (on CLEC failure) required of COLRs • Lifeline required of ETCs • Flat rated calling plans required of ETCs • Create separate ETC designations for wireless carriers and broadband providers. • Provide explicit compensation or universal service support to COLRs. Peter Bluhm