Transcript NMECG PRESENTATION TO THE NEW MEXICO PUBLIC REGULATION COMMISSION APRIL 3, 2012 THE FEDERAL COMMUNICATIONS COMMISSION’S ORDERS TO IMPLEMENT REFORM AND MODERNIZATION OF: UNIVERSAL SERVICE INTERCARRIER.

NMECG PRESENTATION TO
THE NEW MEXICO PUBLIC REGULATION COMMISSION
APRIL 3, 2012
THE FEDERAL COMMUNICATIONS COMMISSION’S
ORDERS TO IMPLEMENT REFORM AND MODERNIZATION OF:
UNIVERSAL SERVICE
INTERCARRIER COMPENSATION
VOICE AND BROADBAND SERVICES
ADOPTED OCTOBER 27, 2011 – RELEASED NOVEMBER 18, 2011
KEY FACTS ABOUT RLECs IN NEW MEXICO
NMECG Totals
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Access Lines 34,411
Square Miles Served 77,124
Customers per Square Mile 2.24
Number of Employees 526
Annual Payroll $28m
Total State and Local Taxes Paid YE 2010 $4.8m
5 Year Capitol Investment Program $210m
Outstanding Loans $225m
Total Fiber Route Miles 6,322
Over 95% Customers Have Access DSL if they want it
Overview of Universal Service
Steven D. Metts
President
New Mexico Exchange Carrier Group
Universal Service
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Concept Has Been In Place Since
the Original Communications Act in
1934
Provide Basic and Essential
Service to as Many People as
Possible
Comparable Rates in Urban and
Rural Areas
Universal Service
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Originally Accomplished By
Shifting Costs Away From Basic
Local Service and To Long
Distance Service
Local Service Considered a
Necessity and Priced Below Cost
Long Distance Considered More of
a Luxury and Priced Above Cost
Divestiture - 1984
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Introduced Competition in Long
Distance Industry
Customer Had A Choice of Long
Distance Providers
Local Exchange Carriers Began
Charging Access Charges to Long
Distance Carriers for The Use of
the Local Network
Access Charges Set Above Cost to
Keep Local Rates Affordable
Subscriber Plant Factor
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Subscriber Plant Factor Was Used To
Shift Local Loop And Some Switching
Costs From State to Interstate
Jurisdictions
Weighting Allocated As Much As 85%
of Local Loop Costs To Interstate
Jurisdiction
Weighting Was Done To Ensure
Universal Service In High Cost Areas
Subscriber Plant Factor
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1985 SPF Eliminated and Replaced With
A 25% Gross Allocation Of Loop Costs To
Interstate Jurisdictions
Transition To The 25 % Gross Allocation
Was Phased In From 1986 to 1993
Original Universal Service Fund Was
Phased In Over The Same Period
Increased End User Charges
Category 3 COE Weighting
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Separations Rules Changed To Make All
Switching Costs Traffic Sensitive
Switching Costs Were Shifted From The
Intrastate Jurisdiction To The Interstate
Jurisdiction
Done In The Interest Of Universal Service
Phased In From 1988 to 1993
Category 3 COE Weighting
Interstate
SLU Factor
20%
Weighting
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Cat 3
Factor
60%
Intrastate
Local
32%
48%
25%
15%
Switched Access Overview
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Switched Access Charges Are
Intended To Compensate Exchange
Carriers for:
Local Loop Costs
End Office Switching Costs
Transport Facilities
Telecom Act of 1996
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Required “Implicit Subsidies” Be
Removed From Rates and Made Explicit
to Enhance Competition
Expanded The Purposes Of The Federal
Universal Service Fund
Requires USF Support To Be Portable
Among Eligible Telecommunications
Carriers
MAG and CALLS Orders
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Implemented in 2001 and 2002
Eliminate Per Minute Charges For
Carrier Common Line
Increase Flat End User Charges
New Elements of Federal USF
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Interstate Access Support
Interstate Common Line Support
Elements of Federal USF
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High Cost Loop Fund
Local Switching Support (LSS)
Long Term Support (LTS)
Interstate Common Line Support (ICLS)
Interstate Access Support (IAS)
Safety Net Additive
New Mexico USF
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Originally Established As Part of
Commission’s ORP Order
Legislature Established State Rural
Universal Service Fund in Rural
Telecom Act in 1999
Legislature Clarified SRUSF in
2005
Intrastate Access Charges
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Intrastate Rates Were Much Higher Than
Interstate Rates
Intrastate Rates Were Reduced to
Interstate Rates With Companies Being
Kept Whole By Payments From The Fund
Instead of Passing it All On To Local
Ratepayers
They Did What?!
Out with the Old &
In with the New
An Overview of the FCC’s landmark Universal
Service and Intercarrier Compensation Order on
Rate of Return ILECs
Doug Kitch, CPA
Outline
 Brief History of the Proceeding(s)
 Events leading to the Order
 National Broadband Plan; Notice of Proposed
Rulemaking; Industry Filings
 What did happen
 What didn’t happen
 Universal Service (USF or CAF)
 Intercarrier Compensation (ICC)
 Reporting Requirements
 Conclusion
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Events Leading to Order
 Growth of competitive markets
 Wireless; IP; Broadband; Video
 Growth in size of FUSF
 CETC Identical Support Rule
• Less than $5M in 1999 to over $1.2B in 2010
 Total fund = $2.6B in 2001 vs. $4.5B in 2011
 FUSC assessment ~ 6.8% in 1Q2002 to 17.4% in 2Q2012
 “A closer look at ILEC USF receipts reveals that ILEC’s non-access
funding is down from $2.16 billion in 2003 to $1.37B in 2011”
(Balhoff & Williams)
 Other factors: growth of Rural Health Care USF program; E-Rate
program
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Events Leading to Order
Expanding availability of broadband
 Behind as ranking world leader
Complicated hodge-podge of rules
addressing various parts of the industry
 Invites “gaming the system”
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Brief History
 The National Broadband Plan
 Released March 16, 2010
 Originated from American Recovery & Reinvestment Act
(ARRA) – Congress directed the FCC to develop the
NBP
 Includes a plan for ensuring every American has access
to broadband Capability
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Brief History
 USF/ICC Transformation Notice of Proposed
Rulemaking
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Released February 8, 2011
Proposed reforms to ICC and current USF
Designated broadband as supported universal service
Connect America Fund outlined
 Order Released November 18th, 2011
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What Did Happen in the Order
 Extends universal service definition to include
broadband
 Establishes “firm” budget for USF ($4.5B)
 Creates the Connect America Fund
 Adopts Bill and Keep regime for all Intercarrier
compensation
 Begins phase-down of legacy universal service support
 Addresses Access Stimulation and Phantom Traffic
 FCC entry into traditionally state-level regulation
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What Did Not Happen
 Contribution reform
 Long Term CAF considerations for RLECs
 Increase in funding to reflect increased investment
to meet NBP goals
 Adoption of target speeds in rural areas of more
than 4 meg/1meg
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Connecting America
UNIVERSAL SERVICE
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Universal Service
 Comprehensive Budget ($s in billions)
Total Fund
$4.5
Price Cap
$1.8
RoR
$2.0
Mobility
$0.5
Remote Areas
$0.1
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Universal Service – Rate of
Return Carriers
 Reforms to legacy support mechanisms
 Framework to limit capital and operating expense
recovery (separate slide)
 New unsubsidized competitor rule (separate slide)
 Phase out Safety Net Additive
 Cap per-line monthly support at $250 (or $3,000 per line
annually)
 Eliminate Local Switching Support (effective 7/1/2012)
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Capital and Operating Expense
Limitation
 Framework adopted
 Subject to comment in FNPRM
 Benchmarks for prudent levels of capital and
operating costs for purposes of determining highcost support amounts
 Called “Quantile Regression Analysis”; to be
implemented no later than 7/1/2012
 Corporate operations expenses: extends current
HCLS cap to ICLS
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Unsubsidized Competitor
Rule
 Definition: “Facilities-based provider of residential
terrestrial fixed voice and broadband service that does not
receive high cost support”
 Where an unsubsidized competitor is competing and covers
100% of a study area, no CAF funding will be available
 Bureau is working on methodology to determine “100% overlap”
 In study areas with 100% overlap, high cost support is
frozen at 2010 levels or $3,000 times the number of lines,
whichever is lower
 Phased out over 3 years
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The road to bill and keep
INTERCARRIER
COMPENSATION
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Intercarrier Compensation
 Immediate Actions – arbitrage practices
 Access Stimulation
 Phantom Traffic
 Adopts uniform national bill and keep regime for all
intercarrier compensation
 In Bill and Keep, carriers look to their customer first, and then to
support mechanisms
 FCC adopts this framework for intrastate, as well as
interstate, rates
 States will continue to play a role
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Recovery Mechanisms
Key Concepts
 Recovery will not be 100% revenue neutral
 Recovery sources
 Access Replacement Charge (ARC) to end user
 Access Revenue Replacement Support from CAF (“ICC
CAF”)
 Eligible Recovery – the amount of ICC CAF revenue
RoR LECs are allowed to recover
 Recovery Baseline – based on calendar year 2011
interstate switched access revenue requirement and
F/Y 2011 state terminating and reciprocal
compensation amounts, reduced each year by 5%
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ARC Recovery
 If eligible (i.e. local rate plus surcharges is <$30),
ARC surcharge of $.50/line/mo (residential and
single line business) up to max of additional $3.00
and $1.00/line/mo (multi-line business) up to max
of additional $12.20
 The ARC charge is part of the $30 benchmark
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Major changes
ACCOUNTING & OVERSIGHT
REQUIREMENTS
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New Section 54.313
 Applies to all high cost support recipients
 Due April 2, 2012 and annually thereafter
 Feb. 3rd clarification Order: postponed until 4/1/2013 except for FCCdesignated ETCs, which are required to file a progress report by 4/2/2012
 State-designated ETCs that currently file information with states included
with 54.313(a)(2-6) per below will now file that information with the FCC,
USAC, etc earlier than 4/1/2013. New Mexico already requires this
information
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Progress report on 5-year service quality improvement plan
Detailed information on outages
Unfulfilled service requests
Complaints per 1,000 connections
Service quality standard certification
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New Section 54.313
6. Certification that carrier is able to remain
functional in an emergency
7. Price offerings
8. Holding company information
9. Documentation of discussion with Tribal
governments
10.Rate certification (starting 4/1/2013)
11.Results of network performance tests
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Highlights of Feb. 3rd
Clarification Order
 Local rate floor: only applies to HCLS, not ICLS ($10/$14 benchmark
issue)
 Financial reporting obligations: RUS reports will suffice in lieu of annual
audit
 High cost recipients still required to annually report ownership
information, however compliance date not set yet for 2012
 VoIP traffic: clarifies that “toll” VoIP traffic (mou-sensitive and flat rate)
will be same as non-VoIP toll traffic
 When state access rate is lower than interstate, state tariffs may NOT
be modified to increase their access rates to interstate levels
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Conclusion
 Still Pending:
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Final regression model
Whether regression analysis should apply to ICLS
Final ICLS corporate expense cap limitation formula
How to account for unsubsidized competitor rule if less than 100%
terrestrial competitor presence
Specific transition of originating rates
Long term reform (ARC phase out; ICC CAF phase out)
Rate of return represcription
NACPL “recycling”
 Next Steps
 Further Notice follow up
 Financial Analysis
 State Impact Handout
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Questions?
[email protected]
719-531-6342
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EFFECTS OF THE FCC’S USF AND ICC REFORMS ON
RURAL CUSTOMERS IN NEW MEXICO AND THEIR
RLEC PROVIDERS
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Significant Reductions of Interstate Revenues for RLECs
Without Alternate Revenues or CAF
Increased Operational Expenses
Forced Reductions of Capital Expenditures
Long Term Service and Network Degradation
Negative Economic Impacts
Increased Customer Rates
Increased Reliance on State Universal Service Funding
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IMPACTS ON NMPRC
Tariff Filings
Lifeline and Link-up
 VoIP
 Rate Increases for Services
 Increased Contributions for New and Existing
Customers – Aid-for-Construction
 Access Recovery Charges – Interstate
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IMPACTS ON NMPRC
Consumer Complaints
Fewer Employees to Support Customer Requests
and Requirements
 Protracted Delays for Essential Network Upgrades,
Replacements, and Maintenance
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IMPACTS ON NMPRC
Increased Requirements and Requests for
NMUSF Support
Careful Management of Regulatory Burdens
FCC’s Actions
 HJM 9 – Inquiry for Streamlining Regulations for
RLECs
 Assure that consumers continue to have access to
high quality and affordable services
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IMPACTS ON NMPRC
Competition –
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Wireless Services are under FCC jurisdiction, but
wireless carriers rely on RLECs to provide essential
connections
Wireline Services remain under the NMPRC’s purview
Access Rates are prescribed by the FCC
Bill and Keep Rates will be developed by the NMPRC
and the RLECs
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IMPACTS ON NMPRC
ETC Reporting Requirements
NMPRC is required to report expanded ETC
requirements to comply with the FCC’s Order
 Inclusion of Broadband matrices in addition to
traditional Voice services
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