FCC Should Keep Verizon/Frontier Merger Clean From Extraneous Conditions

Today, April 2, Communications Daily reported on dueling ex parte filings in the Verizon/Frontier merger review proceeding. The Coalition for IP Transition has urged the FCC to condition any prospective agency approval of the merger on IP interconnection-related requirements. However, the Coalition doesn't identify any specific harms arising from the merger. Under prevailing agency precedents (even if sometimes breached to achieve pro-regulatory ends), merger conditions may only be imposed to remedy transaction-specific harms. 

In its ex parte filing, the Coalition for IP Transition raised what they call "the serious problems faced by competitorsbecause of the Applicants and other price cap Local Exchange Carriers ('LECs') refusals to interconnect on an IP-basis, despite offering IP services to other customers" (emphasis added). Notably, the Coalition addresses the practices of price cap LECs' generally, and not just those of Verizon and Frontier. Also, in the alternative to imposing conditions on the agency's prospective approval of the proposed Verizon/Frontier merger, the Coalition "urged the Commission to consider ordering all price cap LECs" to meet certain disclosure, IP interconnection, and access charge-related requirements. Such an order would require agency action through a separate, industry-wide proceeding. 

 

Thus, on its face, the Coalition's ex parte filing is addressed to matters pertaining to the entire voice services market. Accordingly, the Coalition does not raise potential harms that would arise from the Verizon/Frontier merger. Communications Daily reported that Verizon and Frontier responded by making those same points about non-transaction-specific matters. But one need not take the merging parties' word for it. The Coalition's filing makes it plain. 

 

Regardless of one's policy view about tech transitions from TDM to all-IP networks, network interconnection, and access charges in the voice services market, those matters should be addressed, if at all, through separate inquiry or rulemaking proceedings applicable to the entire market – and not through transactions involving only two merging parties. The Commission should not impose the non-transaction-specific conditions requested by the Coalition. 

 

Moreover, the Commission should be mindful that there is a dwindling amount of time left on the agency's informal "shot clock" for completing its review of the proposed Verizon/Frontier. During review periods, merging parties are vulnerable to lost economic opportunity and regulatory uncertainty costs that can undermine their competitiveness. The agency should complete its review and decide before the deadline expires, if not sooner. 

 

For a brief background on the Verizon/Frontier merger, see my blog post from February 5 of this year, "Verizon/Frontier Merger Would Make Fiber and Fixed Wireless More Competitive."

FCC Copper Retirement Orders Will Boost Next-Gen Network Deployment

 On March 20, the FCC announced a slate of orders that reduced regulatory burdens for voice service providers seeking to retire old legacy copper networks. Chairman Brendan Carr and agency staff deserve credit for taking proactive steps to eliminate and reduce regulations that delay and run up the costs of making technology transitions to more advanced networks. 

The FCC released four orders. The first order clarified the Commission's Adequate Replacement Test criteria for streamlining discontinuances of telecommunications services under Section 214(a), initially adopted in the 2016Technology Transitions Order. The agency found that the rules had been misunderstood in an overly expansive way as requiring pre-discontinuance network performance testing of replacement networks only according to a specific set of requirements. As a result, "there has been a significant delay in carriers availing themselves of the technology transitions streamlined discontinuance process for their own replacement services, to the detriment of consumers who have been slower to receive next-generation services than the Commission expected." Accordingly, the order states: "We thus clarify that a carrier seeking Commission authorization to discontinue a legacy voice service pursuant to the Adequate Replacement Test's totality of the circumstances with respect to its own replacement service need only show, based on the results of the carrier's routine internal testing or other types of network testing, that 'the network still provides substantially similar performance and availability' as the service being discontinued."

 

The agency's second order "waives the filing requirements in the Commission’s network change disclosure rules adopted under section 251(c)(5) of the Communications Act of 1934." In the order, the agency found that "good cause exists to waive any requirement to notify the Commission of network changes" by incumbent local exchange carriers (LECs) such as changes resulting from the retirement of copper networks and transitions to next-generation networks. "As a result, an incumbent [local exchange carrier] LEC now is only required to post public notice of its planned network changes through industry fora, industry publications, or on the carrier’s publicly accessible Internet site, and to provide direct notice to interconnected telephone exchange service providers for copper retirements and short-term network changes." And it found that the waiver’s benefits outweighed any costs given extraordinary developments in the market over the last 30 years – including the dramatic rise of VoIP services to over 75% of fixed retail voice subscriptions at the end of 2023, while switched access lines continue to dramatically decline. 

 

Its third order waives Section 214(a) notice and application requirements for providers seeking to grandfather legacy services – that is, to stop offering those services to new customers. 

 

Additionally, the agency's fourth order waives the "stand alone service" requirement in the Commission’s rules for service discontinuance established in the agency’s 2018 Wireline Infrastructure Order. By granting the waiver, the order provides relief that was requested in a February 2025 petition by USTelecom. According to the order, USTelecom has asserted that adults in landline-only households had fallen to 1.3% of all households, and that bundled voice and broadband options, are available at prices that compare favorably to legacy voice pricing. 

 

In each of the copper retirement orders, the Commission found that relief from the regulatory requirements would free up the investment of resources in the development and deployment of more advanced communications services. 

 

The release of the four copper retirement orders coincides with Chairman Carr's announcement of the opening of the Commission's DELETE, DELETE, DELETE initiative. Under new leadership, the Commission's early actions are hopeful indicators that the agency will modernize its rules and reduce old and wasteful requirements. 

P.S. The reduction and modernization of the FCC's rules will be on the agenda for the Free State Foundation's Seventeenth Annual Policy Conference - #FSFConf17 - on Tuesday, March 25, in Washington D.C. Register online. 

USF Tax Rises to Record High 36.6%

On March 13, the FCC's Office of Managing Director announced that the Universal Service Fund (USF) contribution factor for the second quarter of 2025 will be 36.6%. Absent intervention by the FCC's Commissioners, the proposed rate will soon go into effect. 

The expected rate hike to 36.6% appears to result in another new all-time high for the "USF Tax." It is far higher than the rate from a few years ago. 

 

The U.S. Court of Appeals for the Fifth Circuit rightly called USF surcharges an unconstitutional "USF Tax." They are imposed on voice consumers based on a percentage of the long-distance part of their monthly bills. The money paid by consumers is collected by the voice carriers and passed on to the Universal Service Administrative Company (USAC), the private corporation established by the FCC to administer the USF program and dole out subsidies to program recipients. 

 

The Supreme Court granted a writ of certiorari in FCC v. Consumers' Research, a case involving the issue of whether the USF contribution mechanism is constitutional under the Article I, Section 1 Legislative Vesting Clause. The Court will hold oral arguments in the case on March 26. 

 

USF reform is one of the topics that is sure to be part of the discussion at the Free State Foundation's upcoming Seventeenth Annual Policy Conference – #FSFConf17. The conference will be held in Washington, D.C. on March 25. Conference registration and the conference agenda are available online. 

USF Tax Hike – Now Up to 36.3%

On December 12, the FCC's Office of Managing Director announced that the Universal Service Fund (USF) contribution factor for the first quarter of 2025 will be 36.3%. Early Happy New Year to American consumers! The rate hike to 36.3% appears to be yet another all-time high for USF surcharges – something the U.S. Court of Appeals for the 5th Circuit rightly called an unconstitutional "USF Tax." Absent any unlikely intervention by the FCC's Commissioners, the proposed rate will go into effect. 

USF surcharges are functionally taxes paid by voice consumers on the long-distance part of their monthly bills. The money consumers pay is collected by the voice carriers and passed on to the Universal Service Administrative Company (USAC), the corporation established by the FCC to administer the USF program and dole out subsidies to program recipients. 

The upcoming 36.3% USF surcharge rate is significantly higher than just a few years ago. Free State Foundation President Randolph May wrote about the recent history of spiking USF surcharge rates and concerns about the viability of the USF contribution system in his blog post from June 14 of this year, "The Telephone Tax Rises Again – Now 34%." 

 

As observed in my November 26 blog post, the Supreme Court has granted a writ of certiorari in Consumers' Research v. FCC. The case, which will review an en banc decision by the 5th Circuit this summer, will be closely watched by many, including taxpayer advocates and opponents of the overreaching administrative state. In Consumers' Research v. FCC, the Court will decide the constitutionality of the USF contribution mechanism and the USF Tax.

Competition and Federal Law Preclude COLR Regulation of Wireless

The California Public Utilities Commission (PUC) has an open rulemaking proceeding in which it is considering whether to impose "carrier of last resort" (COLR) regulation on wireless voice providers. COLR rules are outdated and unjustifiable in today’s competitive market environment. And federal law preempts state COLR regulation of wireless voice providers.

A voice services carrier designated as a COLR typically is required to serve all customers within a territory, even if that means requiring them to build out their networks. COLRs must obtain permission from regulators before exiting the market. Also, COLRs typically are required to charge rates that are limited to what the regulating authority deems “just and reasonable.” 

COLR obligations are premised upon the existence of local monopoly conditions for voice telephone services. But those conditions do not exist anymore. Instead, today's voice market gives consumers choices among competing providers. As comments filed by CTIA on September 30 with the California PUC observed: 

Wireless providers in California operate in an intensely competitive market where “there are multiple providers that compete for wireless subscribers” and “consumers have the ability to switch providers” if they wish to do so. Due to this fierce competition, wireless providers in California experience customer switching rates between 9% and 34%.

FSF President Randolph May made a similar point about the competitive landscape for voice services and the outdatedness of COLR obligations in a blog post from June of this year:

In an era before consumers in almost all areas of the country, including California, had more than a single option from which to choose for the provision of basic voice telephone service, it may have made sense for the government to have the power to require that a service provider be designated as the Carrier of Last Resort. Needless to say, nowadays, consumers in most all areas have several options for acquiring voice telephone service from various providers that employ different technologies – copper wires, coaxial cable, fiber, cellular, satellite, and hybrid networks combining these facilities.

Additionally, Section 332(c)(3)(A) of the Communications Act contains a state preemption provision that effectively precludes states from imposing COLR obligations on wireless providers. The statute provides, in relevant part, that “no State or local government shall have any authority to regulate the entry of or the rates charged by any commercial mobile service or any private mobile service.” CTIA’s comments correctly point out that “[r]ate regulation has always been a key element of COLR regulation” and point out various ways that the California PUC regulates the rates of COLRs. Any attempt by California regulators to control the basic rate for wireless service would be preempted by federal law. 

 

Moreover, any COLR obligation that required a wireless provider to build out its network to serve customers surely would be preempted as a regulation of entry under Section 332(c)(3)(A). Indeed, any state COLR regulation regarding wireless providers exit likely would clash with the FCC’s decision, in its 1994 CMRS Order, to forbear from exit approval requirements for wireless providers. As CTIA’s comments described that order:

The FCC specifically elected to forbear from exercising its statutory authority to require CMRS providers to obtain approval for market exit for specific policy reasons, including that “barriers to exit may also deter potential entrants from entering the marketplace” and “the time involved in the decertification process can impose additional losses on a carrier after competitive circumstances have made a particular service uneconomic,” such that “forbearance will better serve the public interest by avoiding the social costs identified in this paragraph.”

COLR obligations impose costs on voice providers, and those costs can undermine a provider’s competitiveness. For the California PUC, the better policy for voice consumers, and the lawful one, would be to promote competition and not undermine it with outdated COLR regulations. 

Legacy Copper Lines Divert Resources from Broadband Upgrades

Participants in an AT&T Policy Forum on Tuesday made a compelling case that "carrier of last resort" regulations – specifically, the costly obligation to maintain little-used legacy copper lines – divert resources away from broadband network construction.

Titled "Network Modernization: Connecting Changes Everything," the forum featured a fireside chat between Jonathan Spalter, USTelecom's President & CEO, and Chris Sambar, AT&T's Head of Network, Executive Vice President, Technology Operations.

During their conversation, Mr. Sambar revealed that AT&T spends upwards of $10 billion each year to maintain its copper lines – only 5 percent of which are still used.

Relatedly, on May 20, 2024, USTelecom published "Network Modernization: A Vital Step Toward Universal High-Speed Broadband," an Issue Brief highlighting the fact that "less than two percent of U.S. households today rely solely on landline connections."

Certainly in low-population-density areas where reliable wireless service is available, the rote enforcement of legacy rules requiring costly copper upkeep today does not serve the needs of residents.

More broadly, Congress, the FCC, and state regulatory bodies should update expeditiously their policies to redirect finite financial resources to their highest and best use: the construction of broadband infrastructure that brings twenty-first century connectivity – including enhanced emergency services – to rural communities.

As USTelecom concluded in its Issue Brief:

Consumer demand is driving the transition to universal broadband. But outdated regulations are pulling us back – siphoning off time and resources away from the goal of universal broadband to maintain old copper networks rather than speeding reliable, high-speed internet to everyone. We need a modern regulatory environment that advances rather than undercuts tech modernization. Achieving the shared goal of universal broadband requires a shared determination to look to the future, not remain stuck in the past.

FCC Unveils Draft Order to Combat New Access Stimulation Schemes

On March 30, the FCC released a draft order for consideration at its April 20 public meeting that is intended to foreclose a new method for evading the Commission's rules and arbitraging the access charge regime.

As the draft order recounts, some local exchange carriers (LECs) in areas with high access charges partner with "free" conference call or chat line services that significantly increase the volume of terminating calls to the LECs and thereby dramatically boost the access charges that the LECs can bill to interexchange carriers (IXCs). Access charges are supposed to cover the LECs' costs of providing service. But access stimulation schemes unnecessarily raise the costs for IXCs – as well as their customers – and such schemes unjustly enrich the LECs and their call service partners.  

 

The tactics employed by arbitragers change over time, requiring periodic updates of the rules to curb access stimulation. According to the draft order, certain LECs have inserted Internet Enabled Protocol Service (IPES) Providers into the call pathway for these conference call and call services. Apparently, some LECs have converted traditional competitive LEC numbers into IPES numbers in order to claim that the Commission's 2019 order does not apply to them. The Commission's draft order would address this. If adopted by the Commission, the draft order would provide that "when traffic is delivered to an IPES Provider by a LEC or an Intermediate Access Provider and the terminating-to-originating traffic ratios of the IPES Provider meet or exceed the triggers in the existing Access Stimulation Rules, the IPES Provider will be deemed to be engaged in access stimulation."

 

The Commission's draft order appears a reasonable and necessary step to halt further gaming of the access charge regime. (For further background, see my July 2022 blog post.)

Debating the Constitutionality of the Universal Service System

For thoughtful discussion and debate about the constitutionality of the universal service's contribution system as currently operated by the FCC, consider checking out the July 19 webinar hosted by the Federalist Society, titled "Consumers' Research v. FCC and the Legality of the Universal Service Fund Contribution Regime." Video and audio of the event are both available online. The event features a very knowledgeable and experienced panel that ably present their cases. Although the webinar is focused on constitutional arguments about USF raised by the Consumers Research v. FCC case, including the non-delegation issue raised by Section 254 of the Communications Act, the panel discussion also touches on USF contribution policy reform.

As noted in an April 19 blog post, the Free State Foundation and FSF President Randolph May joined an amicus brief that was filed by Competitive Enterprise institute in the Consumers' Research case.  

FSF President Randy May also addressed constitutional issues regarding USF in his November 2021 Perspectives from FSF Scholars, "A Nondelegation Doctrine Challenge to the FCC's Universal Service Regime." Also check out our April 2021 Perspectives, "Congress Should Put Universal Service on a Firmer Constitutional Foundation." Also, I addressed USF contribution reform in my June 2022 Perspectives, "Congress Should Require Major Web Platforms to Support Universal Service."

FCC Proposes Rule Clarifications to Stop Gaming of the Access Charge System

On July 14, the FCC voted to adopt a Notice of Proposed Rulemaking to address a new form of access stimulation arbitrage of the intercarrier compensation system that allegedly involves involving call flow IP enabled (IPES) Providers. 

Access charges are a vestige of the legacy intercarrier compensation system. As the Commission's Notice points out, access charges were intended to compensate carriers for use of their networks by other carriers. Although the rates were once cost-based and tied to normal call traffic volumes, they have since been capped. Some local carriers have exploited this by artificially stimulating terminating calls through arrangements with high-volume calling services such as "free" conference calling services and chat lines. According to the Notice, the resulting high call volumes generate revenues far in excess of costs that the access charges were designed to cover.

In its 2011 USF/ICC Transformation Order, the Commission adopted rules to stop the problem of access stimulation (also called "traffic pumping") for those terminating tandem switching and transport services that have not transitioned to bill-and-keep. (The problem was subject of a December 2010 blog post). And in 2019, the Commission updated those rules to prevent new arbitrager tactics. The update to those rules was upheld by the D.C. Circuit in 2021.

Based on input from interexchange carriers (IXCs), the Commission's Notice suggests the rules need to be clarified once more to prohibit new forms of access stimulation involving call flow IP enabled (IPES) Providers. Apparently, some IPES Providers have claimed that the Commission's Access Stimulation Rules do not apply to voice traffic that terminates to "IPES numbers." 

 

To address this apparent problem, the Commission's Notice states: 

[W]e propose that when traffic is delivered to an IPES Provider by a LEC or an Intermediate Access Provider and the terminating-to-originating traffic ratios of the IPES Provider exceed the triggers in the Access Stimulation Rules, the IPES Provider will be deemed to be engaged in access stimulation. In such cases, we propose that the Intermediate Access Provider would be prohibited from imposing tariffed terminating tandem switching and transport access charges on IXCs sending traffic to the IPES Provider or the IPES Provider’s end-user customer. 

To be sure, access stimulation is a complicated and even arcane subject. But there is no justification for gaming the intercarrier compensation system and sticking interexchange carriers with bogus charges. If IPES Provider-related arbitrage is taking place as alleged, then some kind of clarification of the rules by the Commission is in order. To that end, the Commission's vote to approve the Notice makes good sense.  

Court Upholds FCC Efforts to Combat New Forms of Access Arbitrage

On July 7, the U.S. Court of Appeals for the D.C. Circuit upheld the FCC's 2019 Eliminate Access Arbitrage Order to combat gaming of the access charge system by competitive carriers that route calls to rural areas and encourage toll-free conference call centers operate in those areas. The order is intended to counteract unintended incentives for access stimulation schemes caused by peculiarities of the interstate access. The court observed: 

As a result of these incentives, some sparsely populated rural areas receive a disproportionate and overwhelming number of calls. The Commission credited AT&T's observation, for instance, that twice as many calling minutes were routed in a month to Redfield, South Dakota (population 2,300) and one end office as were routed to Verizon's facilities in New York City (population 8,500,000) and 90 end offices. Similarly, Sprint explained that Iowa, with 1% of the U.S. population, accounts for 48% of Sprint’s access fee payments. In addition to higher fees, the Commission notes that access stimulation may result in overloaded networks, call blocking, and dropped calls. 

In Great Lakes Communication Corp. v. FCC, a unanimous panel of the D.C. Circuit rejected Administrative Procedure Act-related challenges to the 2019 Order. The court concluded, the order was within the scope of the Commission's authority, it was reasonable, and it was a logical outgrowth of the notice of rulemaking. 

MEDIA ADVISORY: USF Contribution Factor Tops 31% and May Be Nearing a Tipping Point

The following statement may be attributed to Free State Foundation President Randolph May:

On December 14, the FCC’s Office of Managing Director announced that the Universal Service contribution factor for Q1 2021 will be a record 31.8%. This record amount is a result of a continuing drop in interstate and international revenue, The steady increase over time in the amount of the USF "tax," which is the surcharge added to every consumer’s telecom bill for interstate and international calls, is shocking and ought to receive far more widespread attention that it has. This consumer tax — because that is exactly the economic effect of USF surcharge — is regressive because, perversely, it negatively impacts low income subscribers who can least afford to pay it more than higher income subscribers who can.

 

It ought to be clear that USF surcharge increases can't go on too much longer without reaching a tipping point — that is, the point at which many more current subscribers will rapidly abandon services subject to the tax. When that happens, the current USF regime, like the proverbial house of cards, may come tumbling down. What this means is that it is time for Congress to tackle comprehensive USF reform, including especially consideration of replacing the contribution surcharge mechanism with direct congressional appropriation to fund USF programs. This would be a more sustainable, transparent, and efficient way to support the USF programs, such as Lifeline, that are deemed necessary in the public interest.  

FCC Proposes Order to Remove Old Unbundling and Resale Requirements

The FCC has released the tentative agenda for its October 27 public meeting. Among the items scheduled for a vote, is a draft Report and Order that would eliminate several unbundling and resale requirements. The deregulatory proposal that preceded this order was the subject of my February 2020 Perspectives paper, "FCC Should Go Full Speed Ahead in Removing Unbundling Regulations." As briefly explained in that paper, the rationale for unbundling regulation has long since gone up in smoke, as voice markets are competitive and the retail market share for incumbent local exchange carriers is a fraction of what it was in 1996. The draft order builds upon agency precedent that recognized the market's competitiveness as the basis for removing outdated unbundling regulations. 

The Commission's draft order embodies compromises struck between ILECs and competitive local exchange carriers. If adopted, the Commission's draft order would constitute an important deregulatory achievement in doing away with costly requirements that have outlived any usefulness they once held for consumers and enable communications providers to dedicate additional resources to next-generation broadband networks. Notably, the draft order provides transition periods for eliminating unbundling regulations in competitive areas, and it retains unbundling requirements in areas where there apparently is less competition.

In two paragraphs, the Commission's draft order sums up the competitive and innovative progress that compels the agency's proposed transition to a less-regulatory policy:

22. The communications marketplace has dramatically transformed since Congress passed the 1996 Act. Incumbent LECs controlled 99.7% of the local telephone service market at that time. Incumbent LECs’ wireline voice subscriptions now account for only approximately 39% of all wireline voice subscriptions and only 9% of all voice subscriptions across all technologies. The fixed voice marketplace, once monopolized by incumbent LECs, now includes cable companies offering VoIP, fixed wireless providers, over-the-top VoIP providers, as well as competitive and incumbent LECs. As for fixed broadband, incumbent LECs are just one of many intermodal competitors, providing only about 22% of residential broadband subscriptions at or above 25/3 Mbps, which the Commission has defined as advanced telecommunications capability. As of December 31, 2019, 99% of Americans had access to three providers of mobile voice and broadband. Finally, as the Commission found in the BDS Order, the enterprise market is subject to “intense competition,” with 95% of census blocks with business data services demand in price cap MSAs, representing 99% of business establishments, featuring at least one competitive provider in addition to the incumbent LEC. 

 

23. The communications marketplace has also seen rapid technological change. In the enterprise services marketplace, DS1 and DS3 loops, dominated by incumbent LECs, have been increasingly replaced by packet-based services, provided by a range of providers who benefit from a “considerably more level playing field” compared to TDM-based services. The copper-to-fiber and TDM-to-IP transitions have also increasingly reached residential consumers, as incumbent LECs have been retiring last-mile copper and replacing it with fiber or fixed wireless technologies. And of course, American consumers have themselves transitioned to newer technologies, increasingly moving from fixed legacy voice to fixed or nomadic voice over Internet protocol (VoIP) and mobile voice services, and from DSL to broadband provided over fiber and fixed and mobile wireless. The widespread deployment of 5G wireless networks will only accelerate this process.

The FCC Should Drop its Interstate Access Charge Proposal

The FCC is considering changes to its rules for interstate telephone access charges. There is seeming appeal in the Commission's proposal to eliminate ex ante pricing regulation and tariffing regulation for interstate voice services. Unfortunately, its proposal would face state regulatory obstacles, destabilize the Universal Service Fund, and create a First Amendment problem – while conferring no real benefit on consumers. The Commission should drop the proposal. 

The Commission's rules impose ex ante pricing regulation and tariffing obligations on the portion of local telephone service used to originate and terminate interstate long-distance calls. States have jurisdiction to impose similar obligations on the intrastate portion of such service. Pursuant to Section 203 of the Communications Act, the Commission imposes five different tariff access charges that are meant to align the rates with the costs of providing interstate voice service. Those charges also furnish a basis for calculating Universal Service Fund contributions.  

The Commission's Notice proposes to find that "widespread competition among voice services makes ex ante pricing regulation and tariffing of Telephone Access Charges unnecessary to ensure just and reasonable rates or to otherwise protect customers." There is an important underlying point here. It is no longer the case that voice services are a monopoly. And incumbent local exchange carriers are no longer dominant suppliers. Quite sensibly, the Commission is "concerned that the costs of regulating and tariffing Telephone Access Charges are likely to exceed the benefits, because they impose costs on carriers and hinder carriers' ability to quickly adapt to changing market conditions." 

The Commission proposes to require that voice service providers detariff end-user interstate access charges. And it proposes to ban voice providers from listing interstate access charges on their monthly bills to consumers. But none of this is intended or expected to reduce prices for consumers. Rather, the agency's aim is to make those bills simpler or, supposedly, transparent. 

Yet as Commissioner Michael O'Rielly pointed out in his statement accompanying the Notice: "I find it somewhat strange and ironic to characterize these charges as deceptive, when it was the FCC that established the various access charges and all of their confusing terminology in the first place, and the item proposes to continue to use the charges as proxies for calculating rate-of-return carriers' Universal Service Fund support." Indeed, consumers who peruse their bills might likely be confused by the sudden changes to rates and disappearance of those fees. 

Aside from providing no real benefit to consumers, the Commission's proposal runs into trouble on at least three fronts. First, the proposal depends on the unlikely proposition that state jurisdictions would cooperate in shifting carriers' interstate recovery costs onto intrastate service rates. There is no good reason to think state public utility commissions would go along with significant increases to rates under their jurisdiction. Many state regulators have expressed their opposition to the Commission's proposal. 

Second, the Commission's proposal would disrupt universal service revenues that are tied to interstate access charges. Absent access charges, the Commission would have to come up with a workable replacement method for calculating universal service contributions. So far, neither Commissioner O'Rielly nor numerous voice carriers believe that the agency has come up with such a replacement. Universal service shouldn't be put at such a risk. 

Third, the Commission's proposal to ban inclusion of access charges on consumers' monthly bills raises a First Amendment issue. Under the Supreme Court's test set forth in Central Hudson Gas & Electric Company v. Public Utilities Commission of California (1985), non-misleading commercial speech regulation is permitted where the government can show: (1) it advances a substantial government interest; (2) it directly and materially advances that interest; and (3) it is not more extensive than necessary to achieve that interest. But for reasons recognized by Commissioner O'Rielly, interstate access charges are not deceptive. The Commission would have difficulty showing that its proposed ban would protect individuals from specific and significant harm – and that such a ban would directly and materially achieve that purpose. 

Broader deregulatory reform is needed for voice services. But that reform must come from Congress. In our book #CommActUpdate: A Communications Law Fit for the Digital Age, Free State Foundation President Randolph May, myself, and several colleagues urge Congress to take up that task. The current disparate treatment of voice, video, and data services, based on legacy techno-functional constructs, should be replaced with a market-oriented framework that applies to all digital communications services. Prescriptive rule-based regulation should be jettisoned and competitive concerns should be addressed through case-by-case adjudications based on market power analysis.

Until Congress acts, the Commission should exercise its forbearance authority and pursue deregulatory reforms where it can reduce unnecessary restrictions and costs as well as provide on-balance benefit to consumers. The Commission is on the right track, for instance, in its proposal to pare back unbundling regulations. But, despite its seeming appeal, as a practical matter, the interstate access charge proposal takes a wrong track, and the Commission should discard it. 

US Telecom Report for 2020 Spotlights Booming Broadband

Earlier this month, US Telecom released its report "Industry Metrics and Trends 2020: The Broadband Boom." Among the report's key projections for 2020:

• 84% of U.S. households (109 million) will subscribe to fixed broadband by the end of 2020;

• Wireless will account for 79% of voice connections, compared to 4% for traditional phone lines;

• 6% of U.S. households will use traditional phone lines, while 65% will be wireless-only and 29% will be Internet-based voice service, mostly from cable operators; and

• Traditional switched telephone subscriptions will be 24 million, down from 186 million in 2000. 

US Telecom's report data and projections regarding the decline of switched access lines and the concomitant rise of wireless and VoIP service are particularly striking, yet not at all surprising in light of trends over the last several years. 

A public policy implication of such dramatic declines in traditional voice services should be the elimination of the FCC's unbundling and resale regulations. The Commission has an ongoing proceeding in which it proposes to remove certain unbundling mandates. For more, see my February 13 Perspectives from FSF Scholars paper, "FCC Should Go Full Speed Ahead in Removing Unbundling Regulations."   

FCC Proposes Undoing More of its Unbundling Regulation

At its November 19 public meeting, the FCC is scheduled to vote on a proposed rulemaking that would update and pare back some of its legacy "unbundling" regulation "to reflect [competitive] marketplace realities and to remove unnecessary regulatory burdens that can inhibit the deployment of, and transition to, next- generation networks." This proposal appears to constitute another step in right direction by the Commission in reducing forced-access mandates that date back to the mid-1990s and were supposed to be temporary but have the effect of dis-incentivizing investment in new facilities.  

Roundup of Recent FCC Reform Actions

At its October 25 public meeting, the FCC took a number of actions, including a vote to approve its Effective Competition Order. This order was discussed in My Perspectives from FSF Scholars paper, "FCC Action Would Finally Eliminate Local Cable Rate Regulation." Additionally, the order is the subject of Free State Foundation President Randolph May's Media Advisory from October 4. Given the choice of video services consumers have today, the Commission's grant of relief from the last remains of early 90s-era local cable rate regulation is welcome.

Also at its October 25 public meeting, the Commission voted to approve a declaratory ruling that provides parity and prohibits discriminatory fees on VoIP services. My October 17 blog post discussed that ruling.  

At its September 26 public meeting, the Commission approved an order eliminating forms of access arbitrage involving the intercarrier compensation system. Prior blog posts called attention to that order. 

Former State Regulators Call on FCC to Reform Legacy Rules

A report published on September 20 by Mr. Tony Clark and Ms. Monica Martinez connects the reshaping of the competitive landscape in communications services since the mid-1990s with the need for eliminating regulatory mandates that can no longer be justified in today's marketplace. "The More Things Change, the More Things Need to Change: Why New Realities Require New Rules," is written by two former state public utility commissioners and published by USTelecom. 

The occasion for the report is the FCC's establishing of the Rural Digital Opportunity Fund for funding universal service for high-speed broadband via a proposed two-phase reverse auction framework. As Mr. Clark and Ms. Martinez explain, as the FCC increases competitive awarding of universal service subsidies, it should eliminate unfunded mandates on incumbent local exchange carriers that no longer receive such subsidies. They outline a handful of reform proposals that merit careful consideration by the FCC: 

• "[C]larify that any regulatory obligations placed on a service provider in a particular territory no longer apply to that provider when it stops receiving an associated subsidy"; 

• "[S]treamline or eliminate rules that prevent carriers from discontinuing service and exiting the market where competitive alternatives exist, particularly when the competitor is being funded by the government with support previously earmarked for the incumbent";

• "[E]liminate any ETC obligations where a provider is no longer receiving a subsidy through a Universal Service program"; and

• "[S]tate [carrier-of-last-resort] COLR obligations should be preempted where an incumbent provider loses the federal subsidy, unless the state steps in to make up the difference." 

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FCC to Vote on Proposed Rules to Stop Access Arbitrage Schemes

At its September 26 public meeting, the FCC will vote on a proposed rulemaking to eliminate access stimulation arbitrage schemes. I called attention to this proposal in a May 2018 blog post. There is no good reason for the Commission to permit abuses of the intercarrier compensation system such as access stimulation. The Commission's proposed rule changes are sensibly targeted to the problem and deserve agency approval.

The FCC is Finally Undoing its Unbundling Regulation

On August 2, the FCC released its order granting forbearance relief from legacy telephone "unbundling" regulation. The order puts an end to requirements that certain legacy telephone companies provide their competitors analog voice-grade copper loops on an unbundled basis at government-set rates. Free State Foundation scholars, including President Randolph May, have long pointed to the disincentive for network investment that results from forced sharing mandates tied to rate regulation, and also have long called for the end of unbundling regulation. 

To the FCC's credit, its order recognizes that market changes have rendered legacy copper-based telephone networks increasingly obsolete. Its order also recognizes that there is no warrant for prolonging the life of unnecessary and costly unbundling regulation. As the order points out, in 1996, Time Division Multiplexing (TDM) using traditional copper wires was the dominant technology for providing voice services, and incumbent local exchange carriers (LECs) were the dominate providers of local voice service. But dramatic market changes, including the rise of interconnected VoIP services offered by traditional cable companies, as well mobile and fixed wireless services, have dramatically altered the voice services market. Residential and business consumers have a number of choices that didn't exist in 1996. According to the order: 

Commission data reflect that between December 2008 and June 2017, the TDM share of all wireline voice telephone connections, including both switched access lines (POTS) and interconnected VoIP, fell from 82% to 37%, while the number of interconnected VoIP connections increased by almost 300% over the same period. Further, residential reliance on traditional switched access services fell by 71%, while residential interconnected VoIP subscriptions increased by 104%. Similarly, over this same time period, business reliance on traditional switched access services fell by 49%, while business interconnected VoIP subscriptions increased by over 1,062%. This is due to a number of factors, including a shift in both consumer and supplier choice to migrate to other types of communications networks such as fiber or wireless.

The order sets a timetable for ending its unbundling mandates, enabling competing providers and those customers still using the older analog copper wire technologies to transition to newer alternatives. Additionally, the order forbears from enforcing against certain legacy telephone providers so-called Avoided-Cost Resale obligations. Under those obligations, legacy providers must resell their retail services at wholesale, and at regulated rates, to their competitors. As the order observes, those obligations largely benefit competitors serving business customers. 

The costs of maintaining analog telephone networks and complying with legacy regulation such as unbundling mandates divert market provider resources away from investment in next-generation networks. At long last, this forbearance decision by the FCC will enable market providers to direct more of their resources to higher quality services for retail and business customers in the Digital Age.