Beyond Telecom Law Blog

Based on developments in 2012 and continuing this year, it is clear that the major carriers will have the necessary spectrum to offer more robust wireless broadband services for years to come.  In addition to spectrum acquisitions, the FCC adopted decisions facilitating mobile broadband operations on spectrum originally allocated to the Mobile Satellite Service (“MSS”) and, in other cases, initially authorized for narrowband voice communications or largely undeveloped because of adjacent channel interference concerns.

The willingness of the carriers to expend billions of dollars for spectrum and FCC decisions “repurposing spectrum” constitute a significant “doubling-down” on the future of wireless broadband.  The downside is that an essential resource for prospective competitors is increasingly concentrated in the hands of the major wireless carriers.  

Major Wireless Carriers Move Aggressively to Enhance Broadband Spectrum Holdings.   As AT&T was acknowledging that DoJ and the FCC would not allow it to acquire T -Mobile at the end of 2011, spectrum deal-making began in earnest. 

• Verizon Wireless announced its agreement with SpectrumCo and Cox Communications to acquire the cable companies’ substantial AWS spectrum holdings.  Even though final approval was not granted until August, this transaction triggered a series of significant spectrum deals.

• On the heels of Verizon Wireless/SpectrumCo/Cox, AT&T initiated a series of transactions to acquire 700 MHz A and B Block licenses and, later in the year, entered into transactions to acquire multiple Wireless Communications Service (WCS) licenses in the 2.3 GHz band.

• T-Mobile and MetroPCS sought FCC approval to their proposed transaction that will consolidate operations, customers and spectrum holdings and enable deployment of “a network capable of supporting at least 20 x 20 MHz LTE deployments in many areas.”

• Relying on an anticipated cash infusion resulting from Softbank’s proposal to acquire control of Sprint, the nation’s 3^rd largest wireless carrier offered to acquire all of Clearwire’s equity interests that it did not already possess in order to control Clearwire’s spectrum at 2.5 GHz.  Dish Network Corporation (“DISH”) countered with its own offer for the Clearwire’s stock and asked the FCC to “stop the clock” on the FCC’s consideration of the Softbank/Sprint/Clearwire transactions.

• This month, AT&T agreed to acquire Atlantic Network’s wireless spectrum and customers, and AT&T and Verizon Wireless announced a transaction in which AT&T will acquire certain Verizon Wireless 700 MHz A-Block and B-Block licenses.  Verizon Wireless is building its nationwide LTE network on the 700 MHz C-Block spectrum it acquired at auction several years ago.

The pending transactions are subject to the FCC’s current “case-by-case analysis” for assessing spectrum holdings in transactions and auctions.  While the FCC has initiated a proceeding reassessing current policies for determining criteria for limiting spectrum holdings, this proceeding will not be resolved until the 2^nd Quarter of 2013, at the earliest.  In view of the closed and pending transactions noted above, the impact of new spectrum holding policies likely will be limited to future spectrum auctions.

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In affirming the FCC’s Data Roaming Order, the D.C. Circuit rebuffed Verizon’s efforts to squash any obligation to enter into roaming agreements with competing wireless carriers. In Cellco Partnership v. FCC, No. 11-1135 (D.C. Cir. Dec. 4, 2012) (“Cellco”), the court found that the Commission had ample authority under Title III to adopt its data roaming rules.

Cellco expands the Commission’s authority under Title III to regulate wireless carriers as these carriers transition to all-IP, data-only services providers. Despite Verizon Wireless’s opposing view, the Data Roaming Order aligns the United States with the rest of the world as data roaming is seen as an impetus for growth in the mobile data services market.

Cellco re-affirms the Chevron deference accorded to the Commission not only in selecting among reasonable policy options, but in determining the agency’s jurisdiction subject to the Supreme Court’s decision in City of Arlington v. FCC.  Chevron deference encourages interested parties to participate in Commission proceedings, although the challenge of securing Commission action in a timely manner remains. 

Assuming 2^nd tier wireless carriers, such as regional and specialized carriers, secure access to sophisticated smart phones and tablets, data roaming arrangements will support these carriers’ efforts to offer compelling service offerings and maintain sustainable businesses.  The caveat is that the Data Roaming Order obligates the major wireless carriers to offer these arrangements on “commercially reasonable terms and conditions,” consistent with the principles governing private carrier arrangements, as opposed to Title II-based “just and reasonable” terms and conditions.  As a result, the FCC has limited authority to influence the terms and conditions of data roaming arrangements. 

Cellco ensures the relevance of the FCC’s spectrum holdings proceeding. Limitations on spectrum holdings, however structured, have modest relevance and impact if only 3 or 4 potential services providers are in the market.

Congress wins, as well. TV Broadcast license incentive auctions may now elicit something approaching the optimistic bids Congress assumed. Smaller wireless carriers will have an opportunity to offer data services beyond the limited footprints of local television broadcast channels, particularly those of TV stations located in 2^nd tier and 3^rd tier markets.    

Despite an energetic reboot earlier this year, the FCC’s most recent effort to reform the rules and policies for funding the Universal Service Fund—USF contribution reform—has lost momentum.  In its Further Notice, the FCC raised every conceivable issue and policy question and sought comment on each of them.  To no one’s surprise, countless services providers and other stakeholders expressed their positions in detail underscoring the undue complexity of the USF contribution rules.

The FCC’s longstanding position that USF contribution obligations are not “taxes” is a legal subtlety lost on customers to whom all the major carriers pass-through their USF contribution obligations.  The USF burden now falls disproportionately on Wireline customers—consumers, enterprises and state and local governments—that rely on circuit-switched voice and other TDM-based services as the Internet has emerged as the Nation’s primary data communications platform. And, with Wireless and VoIP taking center stage for voice, a shrinking number of users will bear an increasing burden as the USF revenue requirement continues to grow.  

As Commissioner McDowell noted earlier this year, the contribution factor is too high and the contribution base needs to be expanded. The current system continues to falter under its own weight. The definitional issues and associated complexity obscure the fact that a contribution factor of 17.4% is intolerable. The rickety revenues approach impedes investment by new services providers that are not backbone ISPs having substantial retail customer bases.  Start-ups are discouraged from being end-to-end services providers and focus unduly on developing business plans to avoid a 17%+ surcharge that is likely to increase over time.  Maximum use of the “intermediate mile” fiber deployments that RUS and NTIA infrastructure grants enabled is being discouraged. 

Rather than try to fix the current rules, the FCC’s limited resources should be redirected to developing a more straightforward, sustainable funding mechanism, such as connections or numbers. Obsessive focus on “equity issues” both in the revenues approach and those attributed to the alternatives is misplaced.  The negative consequences of the revenues approach are evident.  The revenues approach was developed prior to the emergence of Wireless and the Internet as the dominant telecommunications platforms.  That was 1997; fifteen years have passed. It’s time to move on.

In late August, the FCC adopted a Report and Order suspending new grants of interstate special access pricing flexibility for the “Price Caps ILECs”—principally Verizon, AT&T and CenturyLink (formerly Qwest)—adopted in the agency’s 1999 Pricing Flexibility Order.  The Report and Order is a breath of fresh air in terms of acknowledging that a predictive agency judgment proved incorrect and in terms of being a concise, well-written decision.

The FCC summarizes the pricing flexibility principles established in1999 as follows:

The Commission developed competitive showings (also referred to as “triggers”) designed to measure the extent to which competitors had made irreversible, sunk investment in collocation and transport facilities. Price cap carriers that demonstrated the competitive showings were met in their serving areas could obtain so-called “pricing flexibility,” namely the ability to offer special access services at unregulated rates through generally available and individually negotiated tariffs (i.e., contract tariffs).

Not only were the competitive triggers poorly crafted, the geographic areas of relief—entire Metropolitan Statistical Areas (“MSAs”)—were too big.  That is, while some collocation arrangements arose in densely developed areas, these competitive facilities were nowhere to be found throughout the balance of MSAs.  The author finds a measure of vindication in this aspect of the Report and Order. On behalf of an enterprise user group and in multiple special access proceedings, we argued these ILECs are the only facilities-based carriers offering special access services.

This decision also provides a cogent summary of the arguments raised by IXCs, Wireless carriers and enterprise customers that special access services are not subject to competition and the rates for these services are inflated, particularly the compelling points and arguments raised by AT&T in 2003, two years prior to being acquired by SBC.

The Primacy of Special Access Services.  These services provide dedicated transmission paths between customers’ premises to IXCs’ POPs.  Special access services also connect customer locations within a local area, function as backhaul circuits for wireless carriers, and connect enterprise locations to ISPs.  The principal services are DS-1s and DS-3s and, increasingly, Ethernet-based services.  Almost all special access services are subject to the FCC’s exclusive jurisdiction. 

Typically, IXCs and ISPs acquire special access circuits from ILECs to connect their services to their customer’s premises.  Enterprise customers—businesses and state and Federal governments—may have hundreds or several thousand sites all of which must be connected via special access to their IXCs’ and ISPs’ networks.  As compared to the rates for interexchange services (voice and data) and dedicated high speed Internet access services, the rates for special access services have not declined to any measurable degree over the last decade.

Multiple Issues Associated with Inflated Special Access Service Rates and Pricing Flexibility.  The litany of issues associated with special access pricing issues bears repeating.

• Foremost, as the ILEC units of AT&T, Verizon and CenturyLink acquired pricing flexibility they often increased the rates for these services. 
• For these three mega-carriers, in-region, special access services are revenue generators, but for competitive ISPs and IXCs acquiring (and paying for) these services constitute  unavoidable costs. 
• While enterprise customers benefit because the revenue generated by in-region special access services may support lower overall rates for all services being acquired from a mega-carrier, the rates for special access services remain inflated. 
• Were special access rates available “at cost” more competitors could offer more services at better rates.   

These points highlight a basic consideration often overlooked by policy makers and the Department of Justice (in assessing mergers): Because special access services are used in connection with virtually all non-residential services, the rates for these services directly impact the profitability of all carriers and ISPs.

Underlying Problems Remain.  As positive and as grounded in marketplace dynamics as it is, the Report and Order does not confront the reality that the three mega-carriers have deftly dodged and delayed close scrutiny and reductions in special access rates for well over a decade. The FCC is committing only to collect additional data in 60 days to determine whether a more realistic “market analysis” for assessing special competition can be developed.  There is no indication that the more important issue raised by the Report and Order—the current, generally available rates for special access services offered by these Price Cap ILECs are excessive—will be addressed by the FCC. 

In theory, the basic direction of domestic telecommunications policy is set by Congress and implemented through rulemaking proceedings, principally before the FCC.  The reality is that Congress moves at a glacial pace in enacting telecommunications legislation and the FCC often struggles with vexing issues such as whether the special access market is competitive and how to implement USF contribution reform. 

Over the last decade, the focus of Wireless regulation has shifted dramatically to auctions and auctioned spectrum swaps and sales.  Auctions are common ground for Congress in search of revenues, the FCC in promoting broadband and the carriers in expanding the capacity of their networks.  Auctions and acquiring spectrum from auction winners are now embedded in the telecommunications marketplace. 

Wave of  Spectrum Consolidation

We are currently in the midst of a massive wave of spectrum consolidation.  The recent  catalysts are the two agreements between Verizon Wireless and the major cable operators under which the Wireless carrier would acquire the cable operators’ AWS spectrum acquired in Auction 66.  In order to mitigate FCC and DoJ resistance, Verizon Wireless offered the now standard concession of assigning other spectrum to other carriers, in this case a substantial block of AWS spectrum to T-Mobile, conditioned on approval of its acquisition of the cable operators’ spectrum.  The FCC duly inquired into the relationship of the two proposed transactions.     

Not to be outdone, AT&T recently filed multiple applications with the FCC to secure the assignment of licenses in both the Upper and Lower 700 MHz bands and has recently announced an agreement to acquire a company called NextWave whose principal asset is Wireless Communications Service spectrum at 2.3 GHz.

As widely reported, the Verizon Wireless/cable company transactions will move forward.  On August 16, 2012, the Department of Justice announced its acceptance of the transaction, imposing conditions on the joint marketing arrangement.  On the same day, FCC Chairman Genachowski issued a press release outlining the key elements of the FCC’s yet-to-be adopted decision approving the transaction and the related spectrum transaction with T-Mobile.  Accordingly, it is difficult to foresee any scenario in which the FCC would decline to approve AT&T’s proposed transactions.

Closer Regulation of Wireless Carriers’ Business?

As spectrum is concentrated in the major carriers, Wireless carrier business practices may face closer scrutiny.  One condition to the FCC’s approval, announced in the Chairman’s press release, is that Verizon Wireless will “enhance its roaming obligations.”  This could be another example of how challenging policy objectives are often achieved through merger conditions.  The details of this “enhancement” should prove interesting inasmuch as Verizon Wireless appealed the FCC’s 2011 Data Roaming Order for which oral argument is currently scheduled for September 20, 2012.

After almost eight months of dialogue and, possibly, to remove a stumbling block to approval of its AWS spectrum acquisition, Verizon Wireless recently agreed to a Consent Decree—that included a $1.25 Million “Voluntary Contribution” to the US Treasury—to resolve allegations it had violated the FCC’s rules in requesting its Application Store Operator to filter (make inaccessible) eleven tethering Applications that customers could use to tether Verizon Wireless smartphones without paying Verizon Wireless’s monthly tethering fee[,]” which according to the Consent Decree, the Application Store Operator filtered. 

The FCC alleged Verizon Wireless violated Section 27.16 of its FCC rules that provides the “C-Block licensee shall not deny, limit or restrict the ability of their customers to use the devices and Applications of their choice on the licensee’s C-Block network, with certain exceptions.”  The C-Block is the 22 MHz (a pair of 11 MHz blocks derived from the “Upper 700 MHz Band”) nationwide license that Verizon Wireless acquired at auction several years ago.  J. R. Raphael provides a spirited response to the carrier’s efforts to downplay the alleged violation.

While this Consent Decree likely will temper the behavior of all Wireless carriers for some time, it begs the question of why this rule—adopted in the FCC’s 2007 700 MHz Band Second Report and Order — has not been extended to all Wireless carriers or all Wireless broadband spectrum allocations.  When presented with the opportunity, the FCC expressly declined to do so in its 2010 Net Neutrality Order.  Presumably, this hands-off approach will change in the future.

Introduction.   In a recent entry, we noted that the FCC had released a Further Notice of Proposed Rulemaking (“Further Notice”), requesting comment on proposals to revise the manner in which it assesses telecommunications carriers (Wireline and Wireless) for Universal Service Fund (“USF”) contributions.  This entry provides a more in-depth look at these proposals; principally, how, if adopted, the proposals could impact enterprise customers.

The FCC has outlined extensive changes to the current, “end-user revenue” approach for determining USF contribution obligations, focusing on currently excluded services and revenue streams.  The Further Notice also proposes two alternative approaches as potential replacements. 

What’s at Stake.  The annual revenue requirement for the FCC’s Universal Service Program lies between $8 Billion to $9 Billion.  During the first six months of 2012, the USF contribution factor exceeded 17% of Wireline carriers’ end-user revenues on carriers’ interexchange (interstate and international) services.  For the 3^rd quarter, the contribution factor is just below 16%.  USF assessable revenues of Wireless carriers range between 20% to 37.1% of total services charges, excluding texting and data charges.  Reportedly, most Wireless carriers rely on traffic studies to establish what percentage of their traffic is jurisdictionally interstate, rather than rely on 37.1% “safe harbor” set by the FCC.

Carriers recover their USF contributions through surcharges added to customers’ monthly bills.  Depending on the proposals ultimately adopted, business customers could find themselves paying substantially more in USF surcharges.

Why Reform the USF Contribution Rules?  The base of USF assessable revenues is dwindling largely due to the migration to high speed Internet access services (Wireline and Wireless) and IP-based services such as MPLS.  These services are either information services or  do not fall clearly within the statutory definitions of “telecommunications services” or “telecommunications.”  Exclusions and exemptions apply to other revenue streams and/or services.  In addition, the FCC appears to be looking to resolve multiple issues raised in long pending appeals of Universal Service Administrative Company (“USAC”) contribution decisions.

Possible Modifications to the End-User Revenue Approach.  The most significant proposal is to classify the revenues on high speed dedicated Internet access services (residential and business; Wireless and Wireline) and text messaging as USF-assessable; either in their entirety or assessing a set percentage of these revenues.  The FCC also appears intent on clarifying whether MPLS offerings should be subject to USF assessments.

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This is BeyondTelecomLawBlog’s first annual Telecom Legal/Policy Projections for the New Year. While multiple policy and legislative initiatives were launched in 2010 and 2011, we expect the courts, the FCC and Congress to define the scope of these initiatives in 2012.

Net Neutrality Order Heading for Reversal in Court of Appeals.  Assuming the D.C. Circuit Court of Appeals rejects the FCC’s motion to hold in abeyance review of the Net Neutrality Order, this Order likely will be overturned in 2012. Despite legitimate concerns regarding potential abuses by facilities-based ISPs, the FCC is challenged to argue that the Communications Act empowers it to regulate these ISPs as comprehensively as Title II of the Act authorizes regulation of telecommunications carriers and telecommunications services. The D.C. Circuit rejected a far less expansive assertion of Commission authority over Internet traffic management practices in the agency’s Comcast-BitTorrent decision.  

USF Order Likely to Survive Despite Judicial Challenges.  Thirteen petitions for review of the FCC’s USF Order filed in eight circuit courts of appeals are now consolidated in the 10^th Circuit. The migration to “bill and keep” is subject to Petitions for Review and Petitions for Reconsideration filed with the FCC. Wireline carriers (except AT&T and Verizon) are concerned with the adverse revenue impact of “bill and keep” for non-access Wireless-to-Wireline traffic. While petitioners may prevail on some issues, the FCC’s major restructuring of the USF program likely will survive.

Pressure Building for USF Contribution Reform.  The USF Contribution Factor for the 1^st Quarter of 2012 is set at the unprecedented level of 17.9%, driving more data traffic to Internet-based VPNs, accelerating the demise of POTS and undermining growth in Wireless and Wireline services. This should prompt the FCC to revisit its rules governing USF contributions, perhaps migrating to a “numbers-based” approach or assessing a percentage of retail Internet access service revenues attributable to the telecommunications component embedded in this service. This latter makes sense as broadband Internet access service will now be supported by USF.

It May Be Lights Out for LightSquared.  The FCC will rule on LightSquared’s proposal to operate a mobile broadband service on MSS spectrum. While the FCC is unabashedly committed to rolling out Wireless broadband, the interference concerns of government and industry GPS users likely will prove insurmountable. 

Congress Likely Will Allocate the D-Block to Public Safety and Authorize Incentive Auctions of TV Broadcast Spectrum.  Though ultimately stripped from the House payroll tax legislation, provisions allocating the 700 MHz D-Block to Public Safety and granting the FCC authority to conduct incentive auctions of licensed TV broadcast spectrum, elicited an extensive response from FCC Chairman Genachowski. Inasmuch as auction revenues offset Federal budget shortfalls and the House and Senate Commerce Committees largely agree on the D-Block, legislation incorporating these proposals likely will pass in 2012. 

FCC to Address 700 MHz Handset Interoperability; No Indication on Handset Exclusivity Reform.  In authorizing the assignment of Qualcomm’s 700 MHz licenses to AT&T, the FCC committed to initiating a proceeding on the interoperability of Wireless (broadband) devices operating on frequencies in the 700 MHz band. Smaller wireless carriers have secured licenses to operate on the Lower 700 MHz band frequencies in some rural and urban areas, but not nationally. Without interoperability at least with AT&T (Verizon’s C-Block 700 License is in the Upper 700 MHz band), these carriers may be forced to sell or surrender their 700 MHz spectrum. 

Another overarching issue is whether the FCC will review exclusivity arrangements between device manufacturers and the major Wireless carriers. Handset exclusivity was the single claim Judge Huvelle allowed Sprint to pursue in connection with its antitrust suit against the AT&T-T-Mobile merger. Longstanding agency indifference toward this issue contrasts sharply with the FCC’s interest in making Wireless broadband available throughout the country. As demonstrated by the iPhone, advanced devices drive Wireless broadband service adoption. 

In late November, AT&T and T-Mobile withdrew their application for FCC’s consent to their proposed merger because of an anticipated adverse decision signaled by FCC Chairman Genachowski, opting to focus their efforts on the Department of Justice’s antitrust case.  The carriers’ apparent assumption was that the FCC would surely grant a re-filed application consistent with the court’s favorable ruling.

As it initiated the process, AT&T believed its strategy of orchestrating apparent support from every imaginable interest group, conducting a relentless media campaign, leveraging its influence in Congress, and playing to the FCC’s intense interest in broadband deployment would overcome any concerns over market concentration in the increasingly important Wireless market.  AT&T is beginning to grasp that critical decision makers do not share its insular belief of inevitable success.

On December 9, 2011, as reported by Grant Gross, U.S. District Judge Ellen Segal Huvelle responded empathetically to DoJ’s request to stay the litigation or dismiss the lawsuit without prejudice until such time as AT&T and T-Mobile re-file their application with the FCC.  DoJ maintains that the carriers’ withdrawal of their application from the FCC, there is no active deal warranting the court’s deliberations.  Judge Huvelle reportedly has directed DoJ to file a motion in support of its position next Tuesday and scheduled a hearing for December 15, 2012.

As reported by Bloomberg’s Tom Schoenberg and Sara Forden, with apparent equal measures of candor and arrogance, AT&T’s trial counsel responded to DoJ’s position by advising Judge Huvelle “[w]ithout a speedy court case, the deal is dead....It's either a trial on our timetable, or there's no trial at all."  While AT&T may still prevail, it is so very refreshing that the FCC and DoJ, respectively, have taken a hard look and decided to stand up to AT&T.  Judge Huvelle should reject AT&T’s latest demand that the DoJ’s lawsuit be conducted “on [AT&T’s] timetable” or not at all.   

While the text of the FCC’s Report and Order and Further Notice of Proposed Rulemaking on universal service and intercarrier compensation reforms (“USF Order” or “the Further Notice,” as applicable) has not been released, the Executive Summary  of the agency’s decision allows us to project the more prominent “winners” and “losers." 

The Winners

Verizon Wireless, AT&T (Mobility), Sprint and SIP-Based Voice Services Providers.   These carriers will benefit as bill-and-keep replaces the current intercarrier compensation (“ICC”) scheme.  These services providers will realize substantial savings as terminating switched access rates decline progressively during the transition to “bill and keep.”  For the largest price cap incumbent local exchange carriers (“Price Cap ILECs”), the transition period is 6 years; for the rural ILECs subject to rate of return regulation (“Rural ILECs”), the transition is 9 years.  For local CMRS traffic terminating on the local ILEC’s network, bill-and-keep becomes the default pricing rule. 

Mobile Wireless Broadband Providers.  Wireless competitive eligible telecommunications carriers (“ETCs”) must now support voice and broadband services.  Initially, the new Mobility Fund will provide mobile wireless broadband providers up to $300M in “one-time support” for deployment of 3G/4G services in census blocks in which wireless broadband service is not available.  This funding will be made available through a reverse auction tentatively set for the 3^rd quarter of 2012.  Beginning in 2012, up to $500M will be available for annual support to mobile wireless broadband providers.  

Wireless Satellite Broadband and Unlicensed Wireless Broadband.   Taking a new approach,  the USF Order sets aside up to $100M annually for broadband satellite and unlicensed wireless broadband services to be provided to the most remote areas of the nation.  The rules governing the eligibility and service obligations for these providers will be established in the Further Notice.  

The Rural ILECs.   For years, the Rural ILECs were the ‘whipping boys” for USF and ICC reform.   Even though the USF Order adopted numerous reforms relative to these carriers,  the Rural ILECs demonstrated their substantial investment in rural broadband infrastructure and the significant adverse impacts to customers and non-USF funding sources if radical changes to current support levels (particularly on top of ICC reforms) were implemented.  Until 2017, Rural ILECs will receive up to $2B annually in support, approximating current annual USF support. 

The Further Notice will review the Rural ILECs’ current 11.25 % authorized rate of return and funding approaches under the Connect America Fund (CAF)—the broadband focused successor to USF.  To mitigate reductions in ICC payments but taking into account ongoing declines in ICC revenues, Rural ILECs will be allowed to recover some lost ICC revenues through a transitional Access Recovery Charge (“ARC”) mechanism, authorizing limited increases in subscriber line charges (“SLCs”) and supplemental funding from the CAF, if justified. 

Price Cap ILECs (Principally Verizon, AT&T, CenturyLink, Frontier and Windstream).  The FCC froze USF support at current levels for these carriers, offering them the opportunity to pursue additional one-time funding to deploy broadband infrastructure in unserved areas of their service territories.  As with the Rural ILECs, continued support for these carriers (in rural areas) will reflect historical declines in ICC revenues which may be supplemented through the interim ARC mechanism described above.

Federal Communications Commission.  The FCC made a number of challenging policy decisions to promote broadband development in under- and un-served areas of the nation.  The agency deserves credit for addressing USF and ICC rules and policies in a comprehensive fashion.

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When carriers routinely reject risk-balancing contract provisions based on “the business case,” deliver standard agreements that effectively eliminate the possibility of damages no matter how bad their services in a given instance, or demand iron-clad “preferred provider” clauses, the only conclusion is that the carriers do not perceive significant competition. While aggressive carrier positions are based, in part, on the desire to maintain revenues and experience in negotiating thousands of services agreements, their standard agreements and stock responses would be far more balanced were the markets for Wireline and Wireless services truly competitive.

From this perspective, the Justice Department’s complaint seeking to block the AT&T-T-Mobile merger was a welcome rush of fresh air.  It characterized a market subject to significant competitive challenges were the proposed merger consummated. While the Sprint complaint brought under the Clayton Act may be viewed as the legal equivalent of “piling on,” it provides a useful perspective on the domestic market for Wireless services.

It highlights the spectrum resources held by AT&T and Verizon (while deftly understating Sprint’s substantial spectrum resources), the competitive advantages realized by Verizon Wireless and AT&T by virtue of their exclusive/priority handset arrangements, and the dominance of AT&T and Verizon in regard to backhaul networks and special access services.  From the author’s perspective, the anti-competitive consequences of handset exclusivity remain largely ignored by regulators. The Sprint complaint highlights the various Wireless market segments, noting that the combination of AT&T and T-Mobile would result in AT&T and Verizon controlling 83%-85% of the postpaid market which is the Wireless segment of interest for business and government customers. 

As the District Court for the District Columbia moves forward with the complaints that have been brought by DoJ, Sprint and, most recently, Cellular South, a decision by the FCC may be forthcoming in less than 60 days. On August 26, 2011, the FCC “restarted” its informal 180-day “shot clock” for ruling on the merger.  Based on comments by FCC Chairman Genachowski and Commissioner Michael Copps issued shortly after DoJ filed its complaint,  AT&T may be hard-pressed to prevail at the agency even though its core argument that the merger will advance broadband deployment probably carries more weight before the FCC as compared to District Court Judge Ellen S. Huvelle presiding over the antitrust actions. 

The FCC’s USF/ICC Reform proceeding continues to generate a steady stream of ex parte meetings between FCC staff and interested parties.  This is understandable.  The redistribution of  $4 to $5 billion annually in Universal Service Fund/Connect American Fund (“USF/CAF”) support (“Support”) and major changes in intercarrier carrier compensation (“ICC”) are at stake.

On August 3, 2011, the FCC released a Public Notice requesting comment on a number of matters, including three in-depth “plans” proposed by (1) State Members of the Federal-State Universal Service Joint Board (“State Plan”), (2) the proposals put forward by the Rural Associations (“RLEC Plan”), and (3) the “America’s Broadband Connectivity Plan” filed on July 29, 2011, by six Price Cap Local Exchange Carriers (the “Price Cap LECs”), including Verizon and AT&T (“ABC Plan”).  Comments on issues raised in the Public Notice are currently due on August 24, 2011.  

The Joint Letter.  As the ABC Plan was filed, the six Price Cap LECs and the Rural Associations submitted a “Joint Letter” that reflects a series of compromises on major USF and ICC reform proposals; sets separate tracks for ICC/USF reform implementation for Price Cap LECs and Rural Rate of Return Carriers (“RLECs”), respectively; and emphasizes that the proposals in the Joint Letter should be viewed by the FCC as an integrated package. The Public Notice also elicits input on the Joint Letter.

USF Reform.  The prominent compromises in the Joint Letter include agreement that VoIP services that originate or terminate on the PSTN shall be subject to originating and terminating access charges; a reduction in the RLECs regulated interstate rate of return to 10% for purposes of calculating CAF/USF support (“Support”); a “budget” of $4.5 billion per year for Support beginning in 2012 and ending in 2017, plus $300M annually for the new Mobility Fund.  Support for RLECs would be $2.0B per year, including potential increases of $50M per year to compensate for access restructuring, to promote broadband buildout and to recover existing investment in broadband-capable plant. The Price Cap LECs would receive $2.2B annually in Support.  If needed, AT&T and Verizon would forego Support in their service areas for two years to meet all other Support and ICC restructuring obligations.  In the fifth year, the FCC would reassess the program.  

ICC Reform.  The access restructuring proposal consists of two paths toward a uniform ICC rate of $0.0007.  For the Price Cap LECs, the reductions would be phased in over 5-years; for RLECs the phase-in period would extend for 8 years.  These glide paths are subject to the caveat that  “[t]o the extent . . . sufficient funding is not expected for any reason to be available to provide the necessary levels of high-cost support and/or intercarrier compensation restructuring for carriers in any given year, any and all reductions in intercarrier compensation rates shall be deferred until such sufficient funding is confirmed to be available.”  

*  *  *  *  *

The Public Notice reflects the FCC’s commitment to making an informed decision.  While many parties do not support elements of the Joint Letter, its submission reflects emerging areas of consensus on highly contentious issues, providing important reference points as the FCC staff crafts its decision. 

Almost every domestic telecommunications carrier (Wireline and Wireless) are actively engaged in an FCC proceeding reassessing the Universal Service Fund (“USF”) program and the current intercarrier compensation (“ICC”) framework (“the NPRM”).  The breadth of issues and range of opinions approximate those being expressed in the contentious debate in Washington on the Federal debt.

In the NPRM, the FCC proposes to shift USF payments from certain recipients and current USF programs to fund the initial phase of the Connect America Fund (“CAF”) that would support broadband service, as opposed to voice services, as initially proposed in the National Broadband Plan.  Under the interim CAF program, the reallocated USF funds would be targeted for broadband deployment in unserved areas.  Long-term, CAF would become the principal, if not exclusive, USF program. 

USF Reform.  The FCC has proposed a series of changes in existing USF programs for the purpose of shifting some monies historically paid to the RBOCs, major Wireless carriers, other mid-size incumbent local exchange carriers such as Frontier, and small, privately-owned or cooperatively-owned rural local exchange carriers (“RLECs”).  Some proposals such as those intended to limit “traffic pumping” and “phantom traffic” and certain investments by RLECs have received broad support.  Another proposal to limit subsidies paid to “competitive eligible telecommunications carriers,” principally wireless carriers serving rural areas, is also widely supported. 

The “saved” monies would then be made available through a “reverse auction” under which entities would “bid” for CAF payments to construct qualified broadband networks in unserved areas. The low bidder would receive the CAF payment.  The definition of “unserved areas” and the nature of qualifying broadband networks, i.e., minimum uplink and downlink speeds, are also being debated.  

Other proposals that would impact the RLECs are more challenging or draconian, depending on one’s perspective, such as a national cap on per line support.  Coming out of “left field,” House Republicans suggested this past week that USF funds could be used for deficit reduction.

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In an article in The Wall Street Journal, Shayndi Raice and Thomas Catan highlight that FCC and DoJ approvals of the proposed AT&T-T-Mobile transaction are far from certain. Recent FCC reports and decisions adverse to AT&T (as well as Verizon Wireless) signal the FCC will review the transaction with healthy skepticism. And, as noted by Raice and Catan, DoJ recently raised objections to other proposed transactions due concerns over industry concentration.

Until recently, the prevailing view was that the merger would be approved subject to conditions, such as transfers of spectrum to other carriers in certain markets. This view was based on FCC rulings over the last fifteen years on mergers involving Wireless carriers, Wireline carriers and cable operators. By and large, the DoJ’s antitrust review of these transactions largely tracked the FCC’s decision-making.

Recent FCC Wireless Reports and Decisions. In its Mobile Wireless Competition Report of May 2010, the FCC provided its most comprehensive analysis of the Wireless market, noting increasing levels of concentration and suggesting policy adjustments may be appropriate to support competition. In contrast to prior reports, the FCC declined to characterize the Wireless market as “effectively competitive.” This year’s report is expected shortly. Also, in 2010, the Commission reconsidered and eliminated the so-called “home roaming exclusion,” despite objections from AT&T and Verizon Wireless. This exclusion had relieved AT&T and Verizon Wireless from having to enter into roaming agreements with competitors in areas in which the requesting carriers possess spectrum licenses or spectrum leases.

In 2011, the FCC required Wireless carriers to enter into roaming agreements with competitors for Wireless broadband services, such as 4G LTE services, rejecting the arguments of AT&T and Verizon Wireless. Recently, the FCC proposed rules that would permit owners and operators of commercial and residential buildings to install and operate signal boosters, designed and manufactured consistent with proposed standards, without the prior approval of the Wireless carriers. This proposal accommodates the interests of tenants and occupants having difficulty receiving Wireless service. The Wireless industry opposed this approach.

Among the Arguments AT&T Must Overcome. Opponents to the transaction likely will argue that approval would facilitate the emergence of a virtual duopoly (of AT&T and Verizon Wireless) in the smart-phone, calling plan segment of the Wireless market; increase concentration among Wireless carriers having (i) valued spectrum resources, and (ii) nationwide or near nationwide service footprints; and, strengthen AT&T’s position in securing initial access to new handsets—particularly smart-phones—as manufacturers historically have introduced new GSM models prior to releasing CDMA versions.

The FCC likely also will consider that over 25% of adults in the United States now rely exclusively on Wireless for voice communications, cord-cutting continues, Wireless broadband is growing rapidly, and, by statute, Wireless rates cannot be regulated.

FCC’s Procedures. Even though the FCC’s pleading schedule calls for Petitions to Deny to be filed by May 31, 2011, Opposition(s) by June 10, 2011 and Replies to Oppositions by June 20, 2011, a continuous stream of ex parte meetings and filings are expected until the FCC sets a date to adopt a decision.

As widely reported, AT&T and Deutsche Telekom AG have entered into an agreement under which AT&T will acquire T-Mobile USA in a cash-and-stock transaction valued at approximately $39 billion.  Countless critiques and assessments of the deal have been published.  The FCC recently set the pleading schedule  in connection with its review of the  proposed transaction. 

Handset exclusivity is among the more important issues raised by the proposed takeover, as noted in Cecilia Kang’s article AT&T Agrees to buy T-Mobile USA.

The merger was a surprise, as Wall Street speculated in recent weeks that Deutsche Telekom would sell its T-Mobile USA unit to Sprint Nextel. Those two companies are struggling to retain subscribers as giants AT&T and Verizon Wireless pick up customers attracted to exclusive partnerships to carry Apple’s iPhone and Motorola’s Droid.

Exclusive handset arrangements are highly problematic when the largest carriers can lock up the most advanced handsets, smart phones and tablets for months or years.  A wireline service analogy highlights these concerns. Imagine if, in order to buy the latest Cisco routers, major businesses and the Federal government must purchase dedicated Internet access service exclusively from Verizon. Unthinkable.

While these arrangements were not on the horizon when the FCC permitted the bundling of handsets and wireless service, exclusive arrangements were seen as problematic even in 1992.  Skype raised the issue several years ago, but the FCC has declined to act on Skype’s petition.  Ironically, in 2007 the FCC agreed with AT&T and Verizon in banning another form of exclusive contracts—exclusive access agreements  in which a cable company secures from an apartment owner the exclusive right to provide video service to the apartment’s residents.   

Clearly, the FCC should limit exclusive handset arrangements, preferably banning the practice generally or, at least, barring these arrangements as a condition in any decision approving AT&T’s takeover of T-Mobile.