Federal Communications Commission

WTA Conference

April 21st, 2010 by Admin User

WTA Conference
Las Vegas, Nevada
April 20, 2010
Remarks of Carol Mattey, Deputy Chief,
Wireline Competition Bureau, FCC

Thank you for that kind introduction.  And thank you to WTA for inviting me to speak with you today about the National Broadband Plan.  I am delighted to be here with you this morning. 

This is quite a busy week at the FCC.   The FCC will be considering a Notice of Inquiry and Notice of Proposed Rulemaking on universal service at the monthly agenda meeting tomorrow, and the Bureau Chief, Sharon Gillet, is scheduled to testify before the House Commerce Committee tomorrow regarding the Broadband Plan’s conclusions on broadband deployment.  I feel almost guilty slipping away to come out here to talk to you when so much is going on back in DC, but it’s so important to talk to you.  

There’s no question that broadband is a key communications medium of today, and is central to our economic growth and future as a nation, just as electricity and highways were in the last century.  

In the 2009 American Recovery and Reinvestment Act, Congress tasked the FCC to develop a National Broadband Plan that ensures “all people in the United States have access to broadband capability.”  The National Broadband Plan is about building the networks of the 21st century and making sure that everyone is connected to broadband.  Congress also mandated that the plan include:

  • A detailed strategy for achieving affordability of such service and maximum utilization of broadband infrastructure by the public;
  • An evaluation of the status of deployment of broadband service; and
  • A plan for use of broadband infrastructure and services in advancing public purposes such as community development, health care delivery, energy independence, education, and job creation.

The FCC engaged in an intense fact finding mission to develop information and analyses to inform its recommendations in the plan, with 31 public notices and over 30 public workshops and field hearings.  This was an open and transparent process, complete with periodic status reports to the full Commission as the plan was being drafted.  And the public responded with more than 23,000 filed comments, both traditional and on our blog. 

After months of intensive work across every bureau and office in the agency, the FCC’s broadband team presented its final report to the FCC on March 16, 2010.  The FCC transmitted that report to Congress, and now the real work is beginning.

The National Broadband Plan set several goals for the United States.  One of those goals is that every American should have affordable access to robust broadband service and the means and skills to subscribe if they so choose.

While Congress directed us to develop a plan, a plan by its nature is not self-executing.  The plan contains over 200 recommendations with roughly half of the recommendations directed to the FCC, and the remainder directed to Congress, the executive branch, and elsewhere.  The plan is a strategic vision for where we want to go as a nation, and some key concepts of how we’re going to get there.  But it’s up to all of us to figure out the details.

Given that Congress asked us to ensure that “all people in the United States have access to broadband capability,” it should come as no surprise that universal service is a centerpiece of the National Broadband Plan.

There is a consensus that the time has come to migrate our 20th century universal service programs focused on voice telephone service into 21st century programs focused on the broadband networks and services of the future. 

But stating the high level vision, and charting the path to get there are two different things.  There’s momentum for change, but we need everyone to help us work through the difficult implementation issues that come with any change.

I want to highlight several of the major conclusions in the National Broadband Plan. 

First, some areas of the country need help with broadband deployment. 

While the private sector has done a great job of getting broadband to most of the country, in some areas, the private sector business case just doesn’t add up.    Low density areas just don’t have the customer base to justify the significant costs of network upgrades to provide broadband service.  There simply aren’t enough revenues coming in the door to turn a profit.  We understand that.

In order to develop a plan, the first step was to size the gap – that is, determine where we are today on broadband deployment and where we need to be.  That wasn’t an easy task, given the limited data that is publicly available about where broadband infrastructure and services are available in the United States.  The team gathered the limited but available data to incorporate into a model to extrapolate an answer.  The National Broadband Plan team developed an economic model that estimated that across the country, there may be 7 million housing units that are not close enough to  terrestrial broadband infrastructure today to receive broadband of speeds of 4 Mbps download and 1 Mbps upload – meaning they don’t have access to cable broadband, they don’t have access to DSL, and they don’t have access to a fixed wireless broadband service.  That’s roughly 14 to 18 million people.  But we realize that just because a home can be served doesn’t mean it is served.  The model was estimating whether it was technically feasible to serve those households, not whether a provider actually was offering a retail service in a particular area.

Based on the model’s estimates, two-thirds of those 14 to 18 million unserved people live in the territories of price-cap carriers today.  The remaining one-third are served by small rate of return companies.  

The National Broadband Plan model estimated that $24 billion would be needed to make a positive business case to serve all of these unserved areas with terrestrial broadband. 

We are releasing a technical paper this week that explains in detail the data sources, assumptions and statistical modeling that led to these estimates in the National Broadband Plan.  It’s important to realize these are just estimates – the number could be lower, it could be higher.  In fact, the FCC’s broadband subscriber data, known as the 477 data,suggests that the number of unserved households could be higher, as many as 24 million people. 

The point is that the FCC is working hard to develop a real understanding, a ball park sense, of the size of the problem to be solved, and how much it could cost to extend service to those areas where there is no private sector business case to proceed.  Later this year, the FCC will propose revisions to its ongoing broadband data collection so that we have better data to track progress.  And we’ll get a better picture of how many households and where they are once the nationwide mapping is done, next February.   Whether the gap is $24 billion or some larger number – the point is, it’s a lot of money.

A second key conclusion in the National Broadband Plan is this:  USF resources are finite. 

We can’t lose sight of the fact that USF has grown significantly over the last decade – with the contribution factor to collect revenues for USF at a historic high – over 15%.  That’s real money from real people – collected from wireline and wireless telephone companies, from cable VoIP providers, and ultimately passed through to consumers on their phone bills. 

To the extent we are going to expand the mission of USF to include broadband, the natural question is – where’s the money going to come from?  As they say, “money doesn’t grow on trees.”

Big picture, revenues for a network operator in rural America typically come from three sources –customers.  Other carriers.  And the government.   It really is very simple.  We get that.

As we started down the path of thinking about how to get broadband to the unserved areas and how to maintain phone service for consumers everywhere – we quickly came to the conclusion that we need to be serious about limiting growth in the USF.  Consumers across the country bear the burden of USF.  We are living in challenging economic times, and there are limits to what is fair or appropriate for consumers to bear.  High cost is projected to be over $4.6 billion this year.  So, we started off operating from the premise that USF dollars are finite, and our job was to figure out how to use those finite dollars in a way that best serves the American public.    Raising the existing contribution factor by 25 or 50% or more over the current 15% to extend broadband to those unserved areas is just not feasible in today’s world. 

The implication of these conclusions is that we need, as a nation, to make some hard choices. 

Given a finite amount of money available for USF, we’d like to focus our efforts in the near term on getting a baseline level of broadband to everyone, rather than continuing down a path where some consumers have fiber to the home, while others have nothing. 

To get broadband to everyone while living within our existing budget, we will have to shift how we spend our high cost dollars today, without removing money from the broadband ecosystem overall.  And we will have to make the transition gradually, avoiding flash cuts along the way. Solving hard problems requires making hard choices, and that is what we have had to do. 

Specifically, we have designed a phased transition – with three phases over 10 years – to ensure that providers that require universal service funding to serve their communities can make the migration successfully.  In the first phase, roughly 2010-2011, we will establish a Connect America Fund targeted to supporting broadband, and a Mobility Fund that will target one-time support to states that significantly lag the national average for 3G service. 

The Connect America Fund will provide support for broadband only in areas where there’s no private sector business case to offer affordable service. 

Eligibility for the Connect America Fund will be technology and provider neutral. In some areas, the most economical solution may be extending fiber closer to the home.  In other areas, a fixed-wireless solution may be best.  But let me be clear – I am talking about fixed wireless technology.  Your companies can and do offer wireless solutions.

Because USF resources are finite, the FCC’s objective based on Congress’ mandate is to spend those dollars wisely to maximize the number of households that are served with broadband.  The idea is in a given geographic area, the Fund will subsidize only one network.  If there are areas where more than one provider seeks support, we will consider a market-based mechanism to select the provider offering the most bang for the buck, meaning whoever can serve the entire area at the lowest cost.

We recognize that USF historically has been part of a social compact between the government and private sector firms, who are required to serve all customers.  Our notion is that whoever receives the subsidy has to be the provider of last resort for the area – and accept all the obligations that entails.  We need to proceed in a thoughtful way to make sure we are preserving service to rural consumers. 

Fund recipients need to be accountable for what they do with the money, and subject to timelines for achieving universal broadband access.  

Establishing the structure of these funds is not enough – we must also begin repurposing existing USF funding streams into these new structures.  The National Broadband Plan recommended specific shifts to existing funds in a balanced way across all USF participants.  The first proposal is to reduce support flowing to Competitive Eligible Telecommunications Carriers, known as CETCs.  In the near term, this reduction will happen naturally as a result of merger commitments made by Verizon Wireless and Sprint.  Over the coming five years, the remainder of the CETC support should be phased down. 

The second shift is to retarget towards broadband some of the existing High Cost funds provided to price-cap carriers – specifically the access replacement mechanism known as IAS.  Many parties have told us they already depend on these funds for existing broadband deployments, but making such use explicit will help with the accountability that we all agree is a good idea.

Finally, the plan recommended that rate-of-return carriers move to incentive regulation.  Rate of return regulation made sense in a world of monopoly providers in which regulated telephone service was the only source of revenue.  But honestly, the world is very different today.  Virtually all companies have significant unregulated revenues, and almost everyone is facing competition in at least some portion of their market.  We are well aware that you are facing cable competition in your towns, and consumers are cutting the cord for wireless.  I understand that every company needs to earn a return on investment, but we need to think about what makes sense in the current marketplace.  Let’s have a conversation about what works and what doesn’t work so well with the current regulatory scheme. 

We recognize that many rate-of-return carriers have taken out loans to finance past broadband projects, and that you may be counting on your USF revenues to be able to pay back those loans.  Consistent with past practice in price cap conversions, one approach would be for access replacement funds (ICLS) to be frozen per line.  For a transitional period, you would continue to receive ICLS and the other USF support for your past investments, but new broadband deployment would need to be paid for out of the Connect America Fund.  The point isn’t to eliminate the old system cold turkey – the point is to transition everyone to the new funding mechanism.  And then, in time, all the legacy programs would be eliminated, and all funding would come from the Connect America Fund.

We will also have to address intercarrier compensation, or ICC -- the system through which carriers pay each other when handing off phone calls.  We understand these intercarrier revenues are an important source of revenue for many of you.  But we also know that these revenues are declining on their own through market forces.  Minutes of use are declining, and will continue to decline.  One way or another, this is not a sustainable system.

Our goal is to eliminate inefficient practices that are a product of current per-minute rates that are both above cost and wildly non-uniform.  Starting in the second phase of the transition, roughly 2012-2016, we will gradually reduce per-minute charges, for example by using the FCC’s authority to set a methodology to bring intrastate rates more in line with interstate levels. 

Let me emphasize – elimination of per-minute charges doesn’t mean there is no way to recover your costs.   You have three potential sources of revenue – your customers, other carriers and governmental subsidies.  The Plan recognized the need to take into account the impact of lower access revenues when determining which areas are uneconomic to serve with broadband and voice and therefore need federal support.  We also intend to look at whether you have other opportunities to recover your costs from your customers.  And we want to see what your state is doing to share the responsibility for ensuring universal service.  By the third phase, roughly from 2017-20, we’d expect intercarrier compensation arrangements to look more like they do in the all-IP world, in which carriers typically pay each other through flat charges rather than per-minute arrangements. 

So, let’s spend a few minutes talking about some feedback I’m hearing about these recommendations in the National Broadband Plan.

First, some are concerned that the FCC doesn’t understand that there’s a need for ongoing support in some areas.  Let me be perfectly clear – the Connect America Fund will provide ongoing support where it’s necessary.   It’s not just funding for new capital expenditures.

Second, I’ve heard some argue that the Plan is perpetuating a digital divide by setting a national goal of 100 Mbps but proposing 4 Mbps as the target for USF funding.   Here, I think people may be confusing aspirational goals with the requirements of the law.     The law requires the FCC to consider, when deciding what services to support with universal service, whether a service has been subscribed to by a substantial majority of residential consumers through the operation of market choices. What that means in plain English is that we shouldn’t be using USF to fund something that a majority of the country isn’t choosing to buy today.  It’s fine to set ourselves a stretch goal, but it’s just that – a goal.

The plan concluded that the median actual speed purchased by consumers today – meaning that half of U.S. households have subscribed to this service – is 4 Mbps in 2010.  In fact, only 6% of consumers today subscribe to service that exceeds 10 Mbps.  Today, it simply is not the case that “a substantial majority” of consumers subscribe to something in excess of 4 Mbps, much less 100 Mbps.  The National Broadband Plan made clear that the proposed target of 4 Mbps actual download speed was a target, and it should be revisited every four years.  If and when consumers actually start purchasing higher speed services in significant numbers, we can revisit what the USF funding target should be. 

Third, some of you may not understand why we want to change the current high cost system, which has enabled so many smaller companies to make significant progress in extending broadband to their customers. 

We recognize that your companies have done a phenomenal job of bringing broadband to some of the hardest-to-serve areas of America with support from the universal service fund, but we need a solution that will connect all of the remaining unserved households, wherever they are.

One of the critical questions we wrestled with was whether the shift of USF from voice to broadband should be accomplished through modifications to the existing program – in particular the High Cost fund – or through creation of something new.  We ultimately concluded that the existing High Cost fund was beyond repair. A new funding structure is needed, with a gradual and phased transition from the old to the new. 

USF today doesn’t do a good job of targeting the money evenly across the hard-to-serve areas that can be found in practically every state.  High Cost support today is determined by complicated formulas that depend in part on the regulatory status and size of the firm receiving support, instead of the economics of serving consumers in a particular geographic area.  The result is that some consumers are served with broadband, and others are not.  In fact, the National Broadband Plan model estimated that one-third of unserved households live in areas served by rate of return companies, while two-thirds of the unserved live in areas served by price cap companies.  In my view, that’s not fair to the American public. 

Many of your companies are small, but for the larger companies serving exchanges next door to yours – it’s just as expensive for them to deploy broadband in those rural areas as it is for you.  They have the same problem as you do – they are facing fierce competition from cable broadband in their urban markets or towns and they are losing customers, just like you, as people increasingly are cutting the cord and relying exclusively on wireless. 

Another problem with the current USF system is that while USF does indirectly support some broadband deployment, there is no way today to track that investment.   Officially only voice is supported, and there’s no obligation to let the FCC know how USF revenues are being spent to advance broadband.  To be effective, the fund needs consistent and measurable targets for broadband availability for the nation, and we need to know what progress each of your companies are making. 
The government effectively is financing new broadband deployment in areas that otherwise would be unprofitable – but we don’t have any ability to manage how much funding goes out the door in a given year.  If you were seeking a BTOP or BIP grant or loan, you would have to present a case of why your project is sustainable.  We don’t have anything like that in place for USF today, even though the USF has financed far more broadband deployment over the last decade than BTOP or BIP ever will.  It is time for us to get a handle on who’s building what where, so that we can manage effectively the overall size of the fund.

To sum up, it is possible to get broadband to everyone, but it will take a while and require patience.   This is not going to happen overnight.  We project that the plan I’ve just described will bring broadband to over 99% of Americans within 10 years.  In the near term, however, the only way the FCC could accelerate the transition would be to make changes that potentially could cause significant dislocation, and we are trying very hard to avoid that. 

I realize some people might suggest that the FCC can just raise more money for USF by “broadening the contribution base.”  But at the end of the day, we have to remember - it’s consumers who pay.  If you extend USF to broadband revenues, or adopt a connections based scheme – you aren’t really tapping into new sources of funding – you just are redistributing the relative assessment levels that ultimately flow to different groups of consumers.  Fundamentally, the public policy dilemma is how much will each of us be willing to pay for the networks that bring the promise and benefits of a digital age to other Americans.   

If Congress wants to accelerate the pace of broadband deployment, it could appropriate additional funding to accelerate the process.  Given our current fiscal climate, however, we didn’t want to depend on that option being selected, and the plan I’ve described today is designed to get the job done without any new Congressional funding. 

I’ve focused so far on the 10-year transition of the 4.6 billion High Cost fund into a new Connect America Fund that will deliver broadband where it’s not available now and build better networks to support not only voice but also tomorrow’s applications and services. 

But getting the networks out there is only half of the job.   At the end of the day, what matters is whether consumers are subscribing to those services.

As part of the National Broadband Plan, we conducted a survey regarding adoption, asking people to report whether they had broadband at home.  Nationwide, the average self-reported adoption rate was 65%, while it was 50% for rural consumers.  Anecdotally, I’ve heard small companies say that they have penetration rates in the 40 percent range, some lower, some higher. 

There are a number of reasons why penetration is lagging in rural areas.  On average, your customers are older, have lower incomes, and are less educated – all factors that are associated with lower adoption rates.

I commend the companies that have proactively worked in their communities to support customers that are trying broadband for the first time, and that are working to develop innovative strategies to increase usage on those networks.  We need more of that, and we need you to share successful strategies with each other. 

We recognize that for some, the cost of broadband is an issue.  For instance, consumer research conducted for the Plan revealed that only 40% of Americans with annual incomes under $20,000 have broadband, compared to 91% of those living in households with incomes over $75,000.  That disparity suggests that the cost of broadband may be a barrier for lower income households today, a problem that we need to address. 

The National Broadband Plan recommended that support for broadband should be added to the Lifeline and Link Up universal service programs.  In the past year, these programs have begun reaching many more low-income Americans, primarily through the efforts of wireless providers recently certified as Lifeline ETCs.  The FCC commissioners are considering an order to ask the Federal State Universal Service Joint Board to look into how initial certification, ongoing verification of eligibility, and outreach are being handled today, to identify best practices before we extend support to broadband. We’ll be holding a roundtable discussion, probably in June, to discuss key elements of a broadband pilot.  We need to carefully design pilot programs to determine the most effective support structure to make broadband accessible to those for whom it is out of reach today.

The Plan also made a number of recommendations to modernize both the E-Rate and the Rural Health Care programs to expand broadband availability for schools, libraries and health care providers, and enable those institutions to better serve their constituencies.  We have an NPRM to consider changes to E-rate coming very soon, and also an NPRM this summer to improve the Rural Health Care program. 

I get particularly passionate about the power and promise of broadband for healthcare because my husband is a physician and I see first hand how health IT is going to change the way he does business. 

A decade ago the FCC created the E-rate program, and we all know how it has made it possible for schools in your communities to provide your children the same opportunities for education as those in larger cities.  The FCC’s health care program, in contrast, has not made such a visible impact on its target audience, to date. 

There’s a revolution about to take place in medicine, and broadband is key to making it happen.  I am excited about the prospect of aligning the FCC’s rural health care program with some very important initiatives of the US Department of Health and Human Services to bring health IT to this sector.  This means better health care for Americans, lower costs, and new business opportunities for your companies.

Over the next few months and years, the real work will be done – working together to make the necessary changes that will ensure that all Americans have access to broadband and experience its transformative benefits.     

If USF and ICC reform were easy, they would have been done long ago.  I am heartened by the consensus that has already begun to emerge, not only on the need to shift USF and ICC to broadband, but also on many specifics, including the need to repurpose segments of the existing High Cost fund to target broadband explicitly, to target funds to the areas that truly need the funding, and to move away from per-minute inter-carrier payments. 

I honestly mean this when I say it – we need your input.  We need better information about the cost to deploy broadband in your territories, the penetration levels you are achieving, and what your business case looks like.  We need better information about your intercarrier compensation revenues.  We don’t want to develop USF policies based on high level advocacy: we are looking for facts.

I look forward to continuing the dialogue with you and other companies – based on your crucial experiences of bringing broadband to rural Americans – as we undertake this once-in-a-generation task.  Thank you.

I’d be happy to take a few questions but want to make clear - because the FCC is going to be voting on a USF NPRM on Wednesday, we formally in a quiet period known as “Sunshine.” You aren’t allowed to lobby me. 

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