1. Carriers of Last Resort: Updating an Old Doctrine Presented to Mid-America Regulator’s Conference June 16, 2008 Peter Bluhm, Principal, Telecommunications National Regulatory Research Institute

2. NRRI 2 Overview Historical review  Several historical phases Challenges  Competition Broadband Recommendations

3. NRRI 3 Duties of a COLR Varieties  Provide local exchange service (local COLR)  Provide toll service (interexchange COLR) Retail  Serve all customers who seek service Wide service areas, including high cost areas Line extensions and CIAC  Service elements  Service quality Carrier-to-Carrier  Terminating switched calls, special access, tandem transit, database management Exit barriers

4. NRRI 4 History #1 – Common Law (1500-1880) Common law sets framework  Common carriers Special care in handling packages Nondiscriminatory treatment  Franchises Originally called monopolies Must serve an entire area Sovereignty went to the states  State laws covered common carriage

5. NRRI 5 The classical regulatory bargain Carrier burdens  Common carriers must serve all customers equally But, may require contributions for line extensions  Provide standard service E.g.: no party lines, extended calling areas  No unreasonable discrimination Carrier benefits  Legal monopoly (now repealed)  Cost of service-based rates (now largely repealed)  Economies of scale and scope

6. NRRI 6 History #2 – Utility Laws (1880-1990) Merged common law principles  Franchise areas Mapped non-overlapping service areas Nondiscriminatory service  All customers treated equally  All calls treated equally Duty to serve all customers  Contributions required for line extensions  Regulated entry and exit from markets  Retail service quality measurements  Carrier-to-carrier duties imposed “Interconnection”

7. NRRI 7 History #3 – Competition and Universal Service (1990-2005) – Two Theories Theory #1: COLRs are essential  TA96 affirmed duties of COLRs (quietly) Carrier-to-carrier duties continued  Interconnection (§ 251(c), 271)  Pole attachments  Originating access for toll carriers  Tandem transit Default service upon CLEC failure (§ 214(e))

8. NRRI 8 Two Theories (cont) Theory #2: It unfairly discriminates against new entrants if they cannot get USF support.  Act defined a new class of competitive carrier – the “Eligible telecommunications carrier” One who can receive support in return for meeting eligibility criteria  FCC adopts “Competitive neutrality” as USF principle Originally means that new entrants get support, even if they aren’t quite the same as COLRs. Key FCC decisions:  Competition versus universal service is a “false choice.”  States cannot create new prerequisites for eligibility.  States cannot set unreasonably large service areas.  States cannot require build-out as condition of entry.

9. NRRI 9 Challenges Entry issues more complex  Limited carrier access to multi-subscriber sites  Overbuilds Exit issues more complex  CLEC failure  ILEC failure

10. NRRI 10 Challenge #1 – More than one carrier Multi-subscriber properties  An issue of entry – who is the COLR and what must they do?  Arises frequently: Apartment houses, condominiums, housing developments, industrial parks  The issue: what is an incumbent LEC’s duty if the property owner gives exclusive benefits to a broadband provider?

11. NRRI 11 Challenge #2 – Over-builds Infrequent but serious question  Two competing networks  Older network has minority of customers  Newer network doesn’t have COLR duties Terry Montana illustrates FCC’s process.  RBOC had traditionally served the exchange  New entrant built new facilities, quickly got 95% market share.  FCC ruled that new entrant was now an “incumbent” for purposes of interconnection duties

12. NRRI 12 Challenge #3 – CLEC Failure Competitive failures  The issue: how protect society when a competitive LEC fails?  Answer: mass migration rules Detailed procedures for CLEC exit.  Notice to customers, notice to commission  Customers get opportunity to pick new carrier  Exiting CLEC must migrate customer records to new carrier.

13. NRRI 13 Challenge #4 – ILEC failure Can ILECs really fail?  Dependency on access revenues, federal USF.  Erosion of subscriber base Costs not reduced  Recent cases Hawaiian Telecom FairPoint What procedures to follow if nobody wants the job?  Assign neighboring ILECs?  Auctions?

14. NRRI 14 Broadband #1 - Preemption Broadband Internet access services of all stripes are “information services,” and are probably “interstate information services.” FCC says they are not “telecommunications services” for purposes of federal law, and they are not intrastate.

15. NRRI 15 Broadband #2 – State Promotion of Broadband But, Congress and the FCC are looking to the states to help deploy broadband in rural areas. Should states use anything like traditional COLR policies to do this?

16. NRRI 16 Does a State Need a COLR Policy? Goals still relevant:  Ubiquitous facilities  Service quality and nondiscrimination  Reliability (manage carrier exits)  Linchpin carrier-to-carrier services Exceptions  Where independent facilities-based competition is well established and there are no linchpin carrier- to-carrier services.

17. NRRI 17 Conclusions USA has historic commitment to providing quality communications to every resident. Traditional regulatory bargain has eroded. Absent state action, the affordability, reliability, security and longevity of "carrier of last resort service" is in doubt. COLR policy can be modernized to reflect current conditions, but not in a way that avoids controversy.

18. NRRI 18 Recommendations – Single Wireline COLR Economies of scale more likely, reducing subsidy costs of providing ubiquitous reliable service. Limiting support to one carrier avoids the hazard that USF funding will induce uneconomic entry. Manages growth in fund size Recognizes importance of linchpin carrier-to- carrier services

19. NRRI 19 Recommendations – Multiple COLR Classes Several types of COLRs possible:  Wireline COLR  Wireless COLR  Broadband COLR  Federal ETC  State ETC (optional) Complex task to sort out which duties and benefits attach to which class

20. NRRI 20 Recommendations – Service Areas Service area size – policy tradeoff:  Small areas promote competitive entry But they may also induce uneconomic entry  Large areas limit the need for explicit subsidy But they may make incumbents noncompetitive in low- cost areas Recommend relatively large areas.  Difficult to make implicit subsidies explicit

21. NRRI 21 Recommendations – Define duties for each class of carrier DutyDetailsCarriers assigned Duty to serveAccurate voice reproduction from 300 to 3,000 hertz; no party lines; touch tone dialing; call waiting; call forwarding; 3- way calling; equal access for IXCs; modem transmission Offer service to all qualified customers COLR and ETC Rate designsOffer an affordable flat-rate calling plan, Lifeline program ETCs Carrier-to-carrier services Interconnection, UNEs, and resale, special access COLRs Regional wholesale services Tandem transitLarge COLRs

22. NRRI 22 Recommendations – COLR Entry Adopt a procedure to adjust COLR duties for multi-subscriber properties:  Limit COLR duties when COLR cannot obtain entry or cannot earn a profit.  For overbuilds, need process to replace old COLR with new COLR.

23. NRRI 23 Recommendations – Carrier Exits CLECs  Adopt mass migration rules  Apply to COLRs and all other LECs, except where federally preempted. ILECs  Process for identifying substitute carrier when nobody wants the job. Use auctions?

24. NRRI 24 Recommendations – C2C Identify linchpin wholesale services that support other carriers  Intrastate special access  Terminating incoming calls  Equal access for IXCs

25. NRRI 25 Recommendation - Compensation Should COLRs receive explicit support from their states? Funding options:  Charge for stranded capacity when customer leaves Workable for gas, but not telecom  Charge CLEC customers for benefits provided by COLRs – Economically efficient but politically controversial  Universal service surcharges Common but not very common

26. NRRI 26 The End Peter Bluhm National Regulatory Research Institute pbluhm@nrri.org 802 878 0760