Charter to Commission: Pole Disputes Threaten Timely Deployment of Broadband Infrastructure

In two recent FCC filings, Charter Communications, Inc. (Charter) offered further evidence that efforts to connect rural Americans to broadband hinge upon agency action ensuring access to utility poles "on reasonable timelines, terms and conditions." Specifically, the grant, whether through declaratory ruling or notice-and comment rulemaking, of the forms of relief requested by NCTA – The Internet & Television Association (NCTA) in a Petition for Expedited Declaratory Ruling submitted in July 2020 and denied by the Wireline Competition Bureau in January of this year.

As I highlighted in "Charter Announces Ambitious Project to Deploy Broadband to Over One Million Unserved Locations," a February 2021 post to the FSF Blog, Charter is investing $5 billion, including $1.2 billion in subsidies secured via winning bids in the Rural Digital Opportunity Fund (RDOF) reverse auction, to expand its network in 24 states. This will enable it to offer high-speed Internet access – specifically, service that meets or exceeds the FCC's current 25 megabits per second (Mbps) downstream and 3 Mbps upstream definition of "broadband" – to more than one million locations at present unserved.

When it unveiled its plans, Charter cautioned that "pole applications, pole replacement rules and their affiliated issue resolution processes are all factors that can have a significant impact on the length of time it takes to build into these rural areas."

And in conversations last week with representatives of the Wireline Competition Bureau and legal advisors to Chairwoman Jessica Rosenworcel and Commissioner Geoffrey Starks, Charter presented specific evidence of issues relating to the processing of pole applications that threaten its ability not just to connect rural Americans, but to meet deadlines associated with RDOF subsidies.

Maureen O'Connell, Charter Vice President, Regulatory Affairs, detailed one impasse, involving the Warren Rural Electric Cooperative Corporation (WRECC) in rural Kentucky, that jeopardizes its plans to provide broadband to over six thousand unserved locations:

At the permit processing rate currently proposed by WRECC, it would take 14 years to complete the permitting process for attachments to poles to reach these locations – about seven times longer than planned and double the maximum allowed to deploy these federal taxpayer dollars under RDOF. That means a child in kindergarten now will have graduated from high school before the permitting phase is complete.

Charter also identified pole-related disputes in California, Hawaii, and South Carolina and "expressed concern that some pole owners have competitive incentives to delay broadband deployment by attaching entities because they are themselves affiliated with broadband providers who are putative competitors to the attaching entities, including (in the case of WRECC) affiliates or business partners receiving RDOF support."

In July 2020, NCTA filed with the FCC a Petition for Expedited Declaratory Ruling (NCTA Petition) seeking relief in rural areas including: (1) various clarifications regarding the appropriate allocation of pole replacement costs between attachers and owners, and (2) timely resolution of pole-related disputes via the Commission's Accelerated Docket.

Free State Foundation President Randolph May and Director of Policies Studies and Senior Fellow Seth Cooper filed Comments in support of the NCTA Petition.

In a January 2021 Declaratory Ruling, the Wireline Competition Bureau did clarify that "utilities may not require requesting attachers to pay the entire cost of pole replacements that are not necessitated solely by the new attacher and, thus, may not avoid responsibility for pole replacement costs by postponing replacements until new attachment requests are submitted."

As a general matter, however, the Wireline Competition Bureau denied the NCTA Petition, concluding that "it is more appropriate to address questions concerning the allocation of pole replacement costs within the context of a rulemaking, which provides the Commission with greater flexibility to tailor regulatory solutions."

The picture painted by Charter underscores how important it is for the FCC to provide additional clarity and guidance with respect to the respective rights and responsibilities of pole owners and attachers.

In that regard, I point out that, in a statement to Telecompetitor, a self-described "puzzled" WRECC disputed Charter's allegations and expressed "hope than we can come to an agreement soon." Thus, it would seem that the parties involved are not on the same page. Prompt intervention by the FCC holds the potential to accelerate the deployment of network infrastructure.

In other words, the policy goal of rapid rural broadband expansion compels precisely the relief requested in the NCTA Petition: "expedited consideration under the Accelerated Docket."

As noted above, the Wireline Competition Bureau denied NCTA's request for declaratory relief because it believed that a rulemaking of general applicability would be the more appropriate vehicle. It is time to begin that process.

Electric Co-Op Broadband Providers Should Be Held to Non-Discriminatory Rate Requirements

Working its way through Louisiana's State Legislature is Senate Bill 10, which involves entry by electricity cooperatives into the broadband Internet access services market. A previous bill on this subject, Senate Bill 406, was vetoed by Louisiana's Governor, on account of that bill's authorization for electric co-op entry into the broadband market only unserved areas. It was claimed, in Governor Jonathan Bel Edwards' veto message for SB 406, that the Telecommunications Act of 1996 "specifically prohibits any state statute from prohibiting the ability of any entity to provide any telecommunication service." This was an apparent reference to Section 253(a) of the 1996 Act.

However, it is quite unlikely that the 1996 Act prohibits states from conditioning electric co-ops' entry in the broadband market on serving only unserved areas. Such a sweeping result follows from a hyper-literal reading of the statute. Electric co-ops are rate-regulated monopolies that are authorized for the specialized purpose of delivering electricity. It's not reasonable to think that the 1996 Act effectively rewrote the laws of every state to give electric co-ops charter to enter the broadband Internet services business and operate wherever they want. In passing the 1996 Act, Congress undoubtedly was particularly concerned with competitive entry by private market providers and not by government-sanctioned monopolies.

Louisiana SB 10, which is pending as of this post, does not contain the proviso that electric co-ops may only provide service in unserved areas. However, SB 10 does impose on electric co-op providers of broadband Internet services a non-discrimination provision regarding pole attachment rates. If, in the name of increasing access, states want to take the risk of authorizing electric co-ops to enter the broadband market, those co-ops should be required to make their utility poles available to competing broadband providers on a non-discriminatory basis. Otherwise, electric co-ops could use their monopoly power to impose above-market pole attachment rates on other providers and harm competition. SB 10's non-discrimination provision is good sense.

Connolly Paper Analyzes Excessive Pole Attachment Rates

Dr. Michelle Connolly, a former Chief Economist at the FCC and a current member of the Free State Foundation's Board of Academic Advisers, has published a paper titled "The Economic Impact of Section 224 Exemption of Municipal and Cooperative Poles." Muni and co-op pole owners are exempt from rate limits established under Section 224 of the Communications Act. Dr. Connolly's paper found that municipal and electric co-op pole attachment rates are more than double or triple rates charged by investor-owned utilities. 

As Dr. Connelly explains: 

Because local regulations require that firms attaching to poles use existing utility facilities rather than install their own, removal of the Section 224 exemption for Coops and Munis is needed to prevent them from charging monopoly level pole attachment rates. Moreover, making these pole owners subject to the general Section 224 framework would create greater consistency in expectations over future pole attachment rates, reduce uncertainty and help increase overall investment in all communications networks that must rely on pole attachments. Such changes can be expected to offer particular benefits to rural areas where on average more poles must be passed to reach each consumer, and to competitive fairness as Coops and Munis would be prevented from using excessive rates which skew investments by broadband providers away from the areas in which the Coops and Munis are located. 

This issue is even more important now that a number of municipalities and electricity co-ops have expressed interest in moving into the broadband market. Electricty co-ops, in particular, have sought to not only provide broadband Internet service but to obtain financing through taxes, bond issues, or subsidies, including the Universal Service Fund. A number of states have passed or considered legislation going that would authorize their electric utilities to enter the marketplace as a broadband Internet service provider. 

I asked NCTA's Executive Vice President James Assey about this issue at the Free State Foundation's Eleventh Annual Telecom Policy Conference, held in Washington D.C. on March 26, 2019. Here is Mr. Assey's response:

With respect to electricity co-ops, the one glaring issue that really needs congressional action in addressing is the fact that they still have an exemption from the pole attachment regime that was set up. Back at the time the exemption was created, the thought was that pole attachment rates charged by municipal providers or co-ops were very low and that there were going to be incentives that they would stay low. And we have seen in actual practice that flipped on its head. It is hard for me to imagine a Congress and an FCC allowing co-ops to enter the business of broadband and being able to charge super-competitive rates for pole attachments that are different from the federal framework. So if co-ops are going to go into the business, that exemption needs to go. 

Dr. Michelle Connolly's paper is worth reading and considering. It is available online here.

FCC Should Maintain Safeguards to Curtail Spending for Risky USF Experiments

Whenever the FCC proposes to spend Universal Service money, it is important to remember that the subsidies come out of consumers' pockets. In 2015 alone, USF spending totaled $8.35 billion dollars. The Commission has an obligation to consumers to ensure that USF money is spent wisely. Dollars collected from consumers should not be wasted or risked on untried bureaucratic pet projects.

FSF President Randolph May and I have previously raised concerns about the way the FCC's "rural broadband experiments" are run – including funding rural electric co-ops' and other entities' entry into the broadband business to the tune of $40 million dollars. It's not the FCC's job to artificially create and prop up new business competitors through subsidies. And capitalizing entities with no established operations or experience in the competitive broadband market risks wasting USF dollars collected from consumers.

At the very least, "Strong Safeguards of Scarce Funds Should Govern FCC Broadband Experiments." In a prior blog post, I urged the FCC to maintain its bank-issued letters of credit (LOC) requirements before distributing rural broadband experiment money. Requiring recipients to obtain LOCs from banks helps ensure that disbursed dollars will be returned if recipients fail to meet build-out and service obligations.

According to reports in Telecompetitor, some entities remain unable to obtain LOCs and therefore have not received rural broadband experiment money. This inability comes despite the fact that orders issued by the Commission this spring have loosened LOC requirements.

In other words, it looks like some proposed rural broadband experiments are delayed or won't happen because those would-be recipients of USF money still can't get banks to give them LOCs. But this shows the sensibility of requiring LOCs, not of relaxing the standards. If financial institutions in the business of lending money won't risk giving LOCs to entities participating in rural broadband experiments, why should we want money collected from consumers to be thrown at such risky ventures?

In and of themselves, these rural broadband experiments are problematic on FCC institutional and financial responsibility grounds. But the Commission may not be able to undo what's already been done.

Going forward, however, the Commission ought to retain its Letter of Credit protections. To loosen them further will risk dissipating funds collected from consumers to fund an already excessive USF tax.

Strong Safeguards of Scarce Funds Should Govern FCC Broadband Experiments

The Federal Communications Commission has a paramount duty to protect consumers. In fulfilling that duty it must not squander Universal Service Fund “surcharges” imposed on consumers’ telephone bills that have the same economic effect as taxes. Like tax dollars, consumer surcharges must be used efficiently and not put at unnecessary risk.

But the FCC is considering whether to waive important financial safeguards of its rural broadband experiments program. Seven rural electrical co-operatives hand-picked by the FCC to become broadband service providers with the aid of federal subsidies want letters of credit rules watered down. Those subsidies are funded by de facto taxes on voice consumers. Just last year, the FCC deemed establishment of strong safeguards to protect against misuse of funds its “paramount objective.” The FCC should hold fast to that objective by maintaining strong letters of credit requirements.

The Rural Broadband Experiments program is one aspect of the Connect America Fund’s Phase II plan for bringing universal service into the broadband era. All universal service programs are ultimately funded by voice consumers. The 16.8% line-item surcharge on the long-distance portion of consumers’ monthly bills effectively operates like a tax. The FCC sets the surcharge rate and oversees use of the surcharges collected.

Through its Rural Broadband Experiments program the FCC is slated to give nearly $40 million dollars drawn from voice consumers to rural electrical co-operatives. The money is to fund the co-ops’ entry into the broadband business. 

Yet, as I explained in a prior blog post, the “FCC Should Not Use Scarce Universal Service Funds to Subsidize Unproven Start-Ups.” (Also see FSF President Randolph J. May’s follow-up blog.) That post drew upon a basic principle: it is not government’s job to create new businesses using consumers’ hard-earned dollars. Granting special favors to would-be business entrants distorts the role of government as a neutral enforcer of the law. Giving favored interests start-up money to move into new lines of business similarly undermines government impartiality.

In the time since my November blog post, the FCC decided to fund new co-op ventures in broadband. Now what’s done may be done. But another basic principle which that blog drew upon still holds: government must protect consumers by carefully using scarce funds. The FCC must steadfastly adhere to this principle in implementing its Rural Broadband Experiments program.

Right now the FCC is weighing whether it will significantly weaken financial safeguards for funds to be doled out for rural broadband experiments. An alliance of rural electrical co-ops is seeking a waiver from rules requiring letters of credit (LOCs) that were established by the FCC in its Rural Broadband Experiments Order (2014).

The Order sensibly required that recipients of funds for rural broadband experiments obtain letters of credit from banks. LOCs are intended to ensure that the full amount of disbursed funds will be returned to the FCC should the recipients fail to use those funds as pledged or otherwise fail to meet build-out and service obligations.

The FCC’s Order emphasized the financial responsibility and security reasons for its rules: 

LOCs are an effective means of securing our financial commitment to provide Connect America support. LOCs permit the Commission to protect the integrity of universal service funds that have been disbursed and immediately reclaim support that has been provided in the event that the recipient is not using those funds in accordance with the Commission’s rules and requirements to further the objectives of universal service. Moreover, LOCs have the added advantage of minimizing the possibility that the support becomes property of a recipient’s bankruptcy estate for an extended period of time, thereby preventing the funds from being used promptly to accomplish our goals. These concerns are relevant to both new entrants and established providers.

Further:

Our paramount objective is to establish strong safeguards to protect against misuse of the Connect America Fund. We conclude that requiring all entities to obtain a LOC is a necessary measure to ensure that we can recover support from any recipient that cannot meet the build-out obligations and public service obligations of the rural broadband experiments.

The FCC is now taking public comments on the waiver petition filed by the rural electrical co-ops. In their petition, the co-ops contend that banks are unwilling to extend them LOCs on terms required by the FCC. They also claim the FCC’s rules are too financially burdensome.

But the need to protect limited funds from risk should keep the FCC from cutting corners on financial safeguards. The FCC should keep its focus on its paramount objective of safeguarding scarce USF funds against misuse. That certainly means being mindful of the reasons for LOC requirements set out in the Rural Broadband Experiments Order.

Without fixating on specific dollar figures or timeframes that should govern LOC requirements, a few more considerations weigh against rolling back safeguards. First, keep in mind that the FCC is funding experiments. Typically, market investors and entrepreneurs bear the risk of financial mishaps and failures. Here, however, funds collected from consumers are devoted to entrants lacking business and technical experience in providing retail broadband Internet services. Rural electrical co-ops are rate-of-return monopoly service providers that have historically operated in a market environment and line of business quite different from broadband. The highly experimental nature of subsidizing co-op entry into broadband services requires protections against the heightened risk that carries.

Second, prior occasions in which federal agencies allocated limited resources to entities lacking adequate financial and technical capabilities resulted in costly problems. For instance, when the FCC selected certain “designated entities” for favored treatment in its PCS spectrum auction, valuable spectrum allocated to NextWave went unused for years as NextWave’s bankruptcy battle played out in the courts. More recently, the Rural Utility Service’s rural broadband loan program has come under scrutiny for inadequate safeguards. A May 2014 report by the Government Accountability Office, for example, ascertained that of 100 loans approved since 2002, “43 loans are no longer active, either because they have been rescinded or are in default.” The inactive loans constituted 54% of the approximately $2 billion dollars awarded by RUS up to that time. Both episodes serve as reminders of the need for safeguarding rural broadband experiment subsidies.

And third, any unwillingness by banks to provide financial security to rural electrical co-op broadband experiments through LOCs suggests unnecessary risk and lack of feasibility in such undertakings. If banks are unwilling to bear the financial risk of failure by co-op broadband experiments, why should voice consumers be made to take on that risk? When in doubt, safeguarding scarce funds for the benefit of consumers takes priority over inconvenience to subsidy recipients.

In administering the Rural Broadband Experiments program, the FCC must continue to ensure scarce funds collected from consumers are used efficiently and protected from unnecessary risk. The FCC should adhere to its stated “paramount objective” by maintaining strong safeguards to protect those funds against misuse. It should refuse to cut corners on its letters of credit rules. 

FCC Should Not Use Scarce Universal Service Funds to Subsidize Unproven Start-Ups

The Federal Communications Commission is charged with promoting widespread broadband deployment across America. But it’s not the FCC’s job to create new competitors in the space for the sake of creating new competitors. It would be a distortion of agency authority to grant special favors to would-be entrants or to give them start-up money to move into the broadband business.

 
Right now the FCC is weighing whether to effectively grant local governments authority to become broadband Internet service providers by eliminating state laws that restrict such operations by local governments. In addition to promoting government-owned communications networks, the FCC is considering whether to grant funds to non-profit electric cooperatives through rural broadband experiments it will be conducting. The funds for such experiments are collected from consumers as Universal Service Fund surcharges imposed on their existing communications services. These surcharges already result in an additional 16% in fees added to the long-distance portion of consumers’ phone bills.

Differences aside, both proposals are problematic from the standpoint of government artificially inducing the creation of new marketplace competitors by virtue of regulatory favoritism or subsidies. It’s difficult to conceive of private investment and innovation thriving in any marketplace where governments either assume roles as competitors or finance new competitors. We shouldn’t expect it to be any different when it comes to the broadband services market. The FCC should instead keep sustainable marketplace investment and innovation as the focus of broadband policy.

In late July, the FCC launched a process for preempting state laws restricting local governments from owning and operating broadband Internet networks. Federalism principles establish states’ broad authority to define the powers of their political subdivisions. Yet FCC Chairman Tom Wheeler has insisted the FCC should eliminate approximately twenty states’ restrictions on government-owned networks. FCC preemption would effectively grant local governments a right to take on a new line of business as Internet providers.

FSF President Randolph May and I have firmly opposed FCC preemption of state law restrictions on government-owned networks. Through public comments to the FCC, op-eds, essays, and blog posts we have explained the constitutionally problematic aspects of FCC preemption. Moreover, undesirable inherent conflicts-of-interests and local taxpayer risks are also posed by federal agency encouragement of government-owned networks.   

Now it appears the FCC may want to grant to rural electric co-ops several million dollars in funds collected from consumers through universal service surcharges. The money would fund entry by rural electric co-ops into the broadband business. But in important respects, this constitutes another role-distorting proposal by the FCC. It is not the proper function of the FCC to create new competitors through subsidies or other artificial means. Capitalizing entities lacking any established operations or experience in the broadband market also risks wasting finite dollars collected from consumers.

As part of its universal service reform, the FCC has set aside $100 million for rural broadband experiments. The FCC is preparing trial auctions for prospective service providers to rural areas where incumbent local exchange carriers opt out of upgrading their systems to provide broadband services. Those trials will also inform future operations of the FCC’s new Connect American Fund (CAF).

The FCC’s Rural Broadband Experiments Order (2014) indicates that many rural electric co-ops have expressed interest in receiving funding in order to take on new lines of business as broadband providers. And in a speech posted in October, FCC Office of Strategic Planning Chief Jonathan Chambers appears to voice support for future FCC funding of broadband start-ups by electric co-ops.  

Rural electric co-ops are private, non-profit entities incorporated under state laws. They are owned by the electricity customers they serve. The National Electric Rural Cooperative Association indicates that its 905 co-ops serve some 42 million customers across 47 states. Apparently, many co-ops have middle mile fiber assets that are used to monitor their electric networks. It has been suggested by some that special funding could enable rural electric co-ops to build out new broadband networks, leverage their existing fiber assets, and thereby offer retail broadband services to rural consumers.

 
Rural electric co-ops aren’t government entities. However, as a structural matter, rural electric co-ops are rate-of-return monopoly providers of electricity. They are non-profit entities that typically receive subsidized loans from the federal government. And they typically have limited geographic footprints. The point here isn’t to criticize rural electric co-ops with respect to their electric service operations. Rather, the point is that rural electric co-ops operate for a specific purpose in a unique context. Competitive and regulatory dynamics facing the typically staid rural electric co-ops are materially different from those they would face in the dynamic broadband Internet services marketplace. They lack of business and operational experience in providing broadband Internet services. Extensive build-out would be needed to reach rural consumers with last-mile broadband service. These considerations should lead the FCC to think twice before capitalizing new and untried broadband ventures by rural electric co-ops.

For customers of rural electric co-ops, entry into the broadband services market involves significant investment and corresponding financial risk. If a subsidized rural electric co-op broadband venture fails, profound questions exist as to whether electric utility operations would be adversely impacted. Could a failed rural broadband experiment put a rural electric co-op on the ropes? Could electricity customers be saddled with higher charges to make up for shortfalls? Such has already happened in several high-profile government-owned broadband debacles.

For the FCC, the bigger fundamental question is about how best to ensure that finite dollars taken from consumers through USF surcharges – essentially taxes – are effectively allocated to help meet the goal of achieving universal broadband service. That money should be expended wisely to ensure cost-effective, sustainable broadband service. It stands to reason that a bigger bang for the buck would be achieved by directing CAF funds to existing providers of broadband who have both business knowledge and demonstrated competency in delivering broadband services in rural areas.

In sum, FCC policy should remain focused on fostering conditions for sustainable entrepreneurial investment and innovation in the broadband services marketplace. That means the agency should refrain from preempting state restrictions on municipal government provision of broadband services. And it also means the FCC should ensure that limited universal service funds are distributed only in a cost-effective manner to entities with demonstrated knowledge and ability to provide broadband services.