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Bar News - September 20, 2013


Environmental, Natural Resources & Utilities Law: Tough Times for Land Lines

By:

Sweeping changes leave rural carriers at crossroads

New Hampshire’s rural telephone companies today face a difficult choice.

Since 2011, regulatory policy at both the state and federal levels has undergone the most sweeping changes since the Telecommunications Act of 1996. But the state and federal policy changes are pulling in opposite directions, leaving rural carriers little guidance in how to reconcile the regulatory conflicts while continuing to meet their service obligations to their rural customers.

In 2011, the Federal Communications Commission swept away decades of regulatory policy regarding inter-carrier compensation and federal support for “universal service.” In a 750-page decision that is widely known as the “Transformation Order” (In re: Connect America Fund, et al., WC Docket No. 10-90, et al., Report and Order and Further Notice of Proposed Rulemaking (FCC 11-161, Nov. 18, 2011)), the FCC adopted the National Broadband Plan and committed the federal government to support wireless and Internet-based services – rather than traditional landline telephone service – through a combination of direct subsidies and mandatory reductions in state carrier-to-carrier access rates. The decision is presently on appeal at the 10th US Circuit Court of Appeals.

While the new federal policy holds out the promise of nationwide connectivity over time, the immediate reality is a harsh one for rural carriers.

By capping and freezing the total amount of support available to carriers nationwide and redirecting most of it into Internet services, the Transformation Order has sharply reduced the amount of federal support for rural telephone service. At the same time, however, the FCC imposes a minimum basic service rate – higher than the basic rates currently in place among New Hampshire’s rural carriers – and substantially increases the complexity and cost of regulations as a condition of receiving continued federal support.

Once the Transformation Order is fully implemented, carriers will be required to meet five-year construction targets and demonstrate annual network improvements, in spite of the reduced funding they will receive, or else lose their federal support entirely.

The new paradigm erodes the ability of rural carriers to serve as “carriers of last resort” (COLRs) – companies that will provide universal service, even to areas where it is uneconomical to serve. The role of the COLR has historically been essential to the success of universal service, because COLRs were able to provide basic telephone service where the marketplace would not otherwise go.

While market forces would normally cause a carrier to “cherry pick” its customers – that is, to build networks only in densely-settled areas where revenues will justify the costs of construction and operation – public funding allowed COLRs to serve all customers, whether in dense, low-cost areas or rural, high-cost areas, without discrimination. But the FCC’s slashing of federal support for rural carriers while imposing higher rates and demanding costly network upgrades means that rural customers will face significant increases in the cost of basic telephone service.

State Shifts in Opposite Direction

Just as this “transformation” in federal telecommunications policy was getting under way, New Hampshire undertook a regulatory transformation of a different sort.

In 2012, the New Hampshire General Court enacted Senate Bill 48 (Laws 2012, 177:1, eff. Aug. 10, 2012), a landmark deregulation bill that allows New Hampshire’s rural carriers to elect exemption from nearly all state utility regulation. The new law gives COLRs the same regulatory freedom that competitive carriers have enjoyed in New Hampshire for nearly a decade.

Under SB 48, the state will continue to regulate wholesale telecommunications transactions (involving access to network elements and the use of transmission facilities by competitive service providers), as well as consumer protection matters like “cramming” and “slamming” prohibitions and the Dig Safe requirements for underground utility facilities.

In all other respects – from retail rates to retail service quality to corporate transactions such as mortgages, mergers and state licensing issues – the new legislation allows the state’s rural telephone companies to elect exemption from state regulation.

The SB 48 exemption removes state regulatory requirements that place rural carriers at a disadvantage with their competitors. Rural carriers will no longer have to seek approval from the Public Utilities Commission before bundling together services, adjusting prices or offering promotions or discounts. Until now, state utility regulation has constrained rural carriers from responding to dynamic market forces, and as a result, they have lost significant market share to competition from wireless and cable broadband providers.

Competitive providers are not COLRs and so are not obligated to provide “universal service” throughout a service area. Consequently, competitors have cherry-picked the highest-revenue, least-cost customers, leaving rural COLRs with only the lowest-revenue, highest-cost customers. The purpose of SB 48 is to give rural carriers a chance to meet their competitors head-on, on a level playing field, and to foster long-promised competition in rural areas.

But the dilemma for rural carriers in the midst of these sweeping regulatory changes is all too clear. With federal support for universal service rapidly evaporating, and with costly new federal mandates for network construction and upgrades, New Hampshire’s rural carriers are unable to take full advantage of the regulatory freedom offered by SB 48. Price deregulation at the state level has little practical meaning when federal regulatory policy is forcing rural carriers to raise their basic rates.

Rather than being freed to compete on a level playing field, rural carriers find themselves at a regulatory crossroads. Federal policy now requires COLRs to raise their rates to justify continued federal universal service support. But state policy is directed instead at encouraging COLRs to match the pricing flexibility and discounts offered by their competitors.

Resolving these regulatory conflicts may produce an unintended consequence. Rather than raise local rates uniformly across the board in response to the changes in federal policy, carriers who elect exemption under SB 48 can rebalance their rates – raising rates where costs are higher but competition is non-existent, while lowering rates in population centers where competitive choices exist. Freedom from state regulation has come to New Hampshire’s rural carriers. But, in the struggle to meet the challenges of the FCC’s Transformation Order, the impact may hit hardest the most rural customers in New Hampshire, for whom the promise of competition will likely remain unfulfilled.


Paul J. Phillips is an attorney and shareholder at Primmer Piper Eggleston & Cramer PC in Manchester.

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