Tribal Telecom 2013

Telecom 101:The History of Independent

TelecommunicationsPresented by:

Doug Kitch, CPA

TimelineTelephony Discovered and Patented (1870)Introduction of Independent Telephony (1892)Interconnection (early 1900’s)The Great Depression (1930’s)Smith vs. Illinois (1930)The Communications Act of 1934Settlement Negotiations (1935-1950)Rural Electrification Act (1949)Changes in Separations (1950-1971)Wireless Debut (1960’s & 1970’s)AT&T Divestiture (1984)

AccessUniversal Service Funding

Wireless Debut #2 (1980’s & Early 1990’s)Telecommunications Act of 1996Wireless Debut #3 (Late 1990’s Through Current)Current Issues

Telephony Discovered (1870)

When Bell started his early experiments he wasn't thinking about a telephone

Cutting-edge technology of his day: the multiple telegraph and trying to improve upon its design.He accidentally discovered that voice could traverse over the line

In 1870, both Bell and a gentleman by the name of Elisha Gray were independently working on devices that could transmit speech electrically (the telephone)

Both men rushed their respective designs to the patent office within hours of each otherGray and Bell entered into a famous legal battle over the invention of the telephone, which Bell won

Telephony – The Early Days (1870 – 1892)

Bell had to run the gauntlet of scoffing and adversityThe very idea of talking or yelling at a piece of sheet-iron was so new and extraordinary that the normal mind repulsed it

Businesses and government scorned Bell’s invention seeing no practical use for this invention

In 1875, Bell established a legal entity, Bell Telephone Company, to protect its patent

In 1877, construction of the first regular telephone line from Boston to Somerville, Massachusetts was completed

Service between New York and Chicago started in 1892, and between New York and Boston in 1894At this time, this long distance business was formally incorporated as American Telephone & Telegraph, or AT&T

Independent Telephony (1892)

Expiration of the Bell patents in 1892 allowed the introduction of independent telephone companies

Individuals, communities and co-operatives provided telephone service in rural areas and small towns

A number of competing telephone systems had blossomed in the early part of the century, and in some cases people served by one system could not be connected with people hooked to another in the same area

By 1900, Bell served 800k phones compared to 600k served by IndependentsBell once again took the lead by completing the first coast-to-coast telephone line in 1915

Interconnection (1900s)To stave off competition from Independents, AT&T would not let them interconnect

Although there existed quasi-competition, the most serious threat to AT&T was not competition from other companies; it was the threat of being taken over by the federal government to be run as an arm of the Post Office.

Facing the threat of anti-trust actions, AT&T wrote a letter to the US Attorney General allowing independent telco's to connect to AT&T toll lines (“the Kingsbury Commitment”)

Origin of settlements: board-to-board settlementsBell companies compensated independents for jointly handled businessToll costs included only interexchange switching and facility; no local

The Great Depression (1930s)

The Great Depression had severe effects on the telephone industry

Total telephones in service ↓ 10%Long distance calls ↓ 40%Many rural independent telcos went bankruptAT&T became dominant force again with 15 million phones in service by 1940

Smith vs. Illinois (1930)Supreme Court decision established the concept of “jurisdictional separations”

Jurisdictional separations is assigning or allocating telephone plant and expenses as state or interstate based on the usage of the associated plant

Origins of settlements paying a portion of local plant costsEstablished the principle that local companies should receive compensation for originating and terminating long distance calls

Communications Act of 1934

Established the goal of universal service as making available “rapid, efficient, nationwide and worldwide wire and radio communications services with adequate facilities at reasonable charges..” to all people of the United States

One result of the 1934 Act was to subsidize lower residential rates by raising the cost of long distance service and business services

Created the Federal Communications Commission (“FCC”) to regulate interstate telephone and other communications services (radio, television, etc.)

Settlement Negotiations(1935 – 1950)

Smith vs. Illinois established the concept of Jurisdictional Separations by function, but accomplishing it was another matterNational Association of Regulatory Utility Commissioners (NARUC) becomes concerned that too much cost is shifted to state jurisdiction causing a disparity in state and interstate access ratesNARUC and FCC negotiate the process of separations over timeSettlements to independents were distributed by the Bell system1948 – Dr. Claude Shannon developed and published a “Mathematical Theory of Communication”

Promoted concept of communicating in binary codesBecame the basis for the digital communications revolution – from cell phones to Internet

Rural Electrification Act (1949)

In 1949, Congress amends REA’s charter to provide loans to telephone companies

In 1949, only 60% of rural homes and 30% of farms had telephone service; by 1985 telephone penetration had reached 94%

Today, REA is known as the Rural Utility Service (RUS) which is an agency within the US Department of Agriculture

Changes in Separations(1950 – 1971)

NARUC held several conventions in the 1950’s, 60’s, and 70’s that resulted in changes to the Separations Manual

The various changes were named after the place where the convention took place

The Charleston Plan in 1951, the Denver Plan in 1965, and the Ozark Plan in 1971 all made changes that shifted “revenue requirement” from the state to the interstate jurisdictions

Shifts from the state jurisdiction result in lower local telephone ratesShifts to the interstate jurisdiction result in higher interstate toll rates

Wireless Debut(1960’s & 1970’s)

In 1964, AT&T developed a second-generation cell phone system called Improved Mobile Telephone Service (IMTS)

In 1968, the FCC opened the so-called "cellular docket," Docket 18262, to address the reallocation of these new airwave frequencies

AT&T wanted a monopoly on the marketMotorola, however, gave the first demonstration of a wireless portable telephoneYet it took until 1981, after more than a decade of legal wrangling, for the FCC to finalize the rules and allocations for cellular spectrum

1977 - AT&T developed the advanced mobile phone system (AMPS), the first regular U.S. cellular phone system using microwave transmissions

AT&T Divestiture (1984)

In 1984, the US District Court ordered the divestiture of the AT&T System separating its long distance business from its local operations (the Bell companies)

Largest corporate reorganization ever undertaken: dividing the Bell System into eight major entitiesSome believe the Bell System was brought down by the U.S. Justice DepartmentThe real cause of AT&T’s demise may have been its long status as a "regulated natural monopoly”

– "One Policy, One System"

“Access” is Born (1980’s >>>)

Before 1984, AT&T was responsible for revenue distribution to the local Bell companies who then paid the independent companiesHowever, 1984 began the origination of generalized “access charges”, or “intercarrier compensation”. This became the standard compensation method between all telecom carriersIn 1983, the FCC created the National Exchange Carrier Association (NECA) to be the administrator of interstate access charges and universal service funding (USF)

Universal Service Funds (1980s >>>)

USF is a “subsidy” program overseen by the FCC that, up until recently, compensated [generally] high cost and rural providers through a variety of funding mechanisms:

High Cost Loop (HCL USF)Interstate Common Line Support (ICLS)Local Switching Support (LSS; no longer available)LifelineSchools & Libraries

More on these later under “Current Issues”

Wireless Debut #2(1980’s & Early 1990’s)

By the 70’s, cell phones and related technology were under wayThese early cell phones were the size and weight of small bricks, required large batteries and often had to be carried in briefcasesDemand soon far outweighed the supply of frequency bands and cell phone numbers as well as their analog systems could not contain the flood of potential wireless customersIn 1990, the digital standard time division multiple access (TDMA) system was established

Tripled Capacity & Improved sound qualityIn 1994, an alternative digital standard, code division multiple access (CDMA) was introduced by Qualcomm. In December of that year, the FCC began to auction off the "PCS" (Personal Communications Service) airwaves, for digital cell phone use

Telecom Act of 1996

Congress reformed telecom laws by opening local telephone service to competition

Created an uneasy balance between the goals of implementing competition while maintaining universal service

Who is responsible for serving every customer?Do competitors get to “cherry pick” high volume customers?

Universal service funds became “portable” Eligible Telecommunications Carrier (ETC) status necessary

Also resulted in substantial decreases in access chargesHistorically, long distance charges of 10, 12, or 15 cents per minute were necessary to pay for access charges of 8, 10, or 14 cents per minute. All of these are now generally below 5 cents per minutePlaces additional pressure on local rates

Wireless Debut #3(Late 1990’s >>>)

In 1990, the IEEE began work on a wireless Ethernet standard, which would come to be known as Wi-FiIn 1994 Ericsson began research on what would become a narrowband wireless personal area network (WPAN) spread spectrum system called Bluetooth In 1999, wireless phones converged with handheld personal computers, combining wireless phone service, Web access and personal digital assistant (PDA) capabilities in a single pocket-sized deviceFurther improvements led in 1999 to the adoption of IEEE 802.11b, allowing speeds of up to 11 mbps4th generation wireless, or 4G, became available in 2009, however did not become widespread until recently. The main difference between 4G and previous standards is a large increase in data transfer speeds

Current Issues

Intercarrier Compensation & USF Transformation Order:

ChallengesAccess Charges/Intercarrier CompensationUniversal serviceTribal Carriers

Current Issues (cont’d)

Challenge of modern day regulators is complicated by emerging technologies: wireless, Internet, video, voice-over-IP

Proper regulatory framework must create/maintain a level playing field for various competing industries (cable vs. DSL; wireless vs. wireline) without sacrificing universal service policyThe benefits of competition must be balanced against the costs of universal service

Competition itself is not the goalPolicies that develop uneconomic incentives should be eliminated and/or avoided

An environment with some stability must be created to encourage the future deployments of advanced services

Intercarrier Compensation

FCC took immediate action to stop regulatory arbitrage

Different types of carriers (wireline; wireless; internet; large; small; satellite; competitive carriers; video/cable) created complication in assessing compensable intercarrier charges

FCC adopted a plan to “bill & keep” accessTerminating access going awayAccess charges will eventually decrease towards zero, with USF “picking up the tab”

FCC generally implemented additional end user charges on non-Lifeline customers

Universal Service

FCC Ordered that there will be explicit support available for broadband-capable networksTotal fund is capped at $4.5B annually ($1.8B for large carriers; $2B for small wireline carriers; $500M for wireless carriers, of which $100M is set aside for Tribal carriers; $100M for remote areas)Minimum standards apply for receiving support

4 Mbps downstream/1 Mbps upstreamVarious per-line caps enforced with new Order

$3,000/line total USF capCorporate expense cap“Quantile Regression” caps/benchmark

Universal Service

Numerous additional accounting & administrative compliance requirements

5 year progress reportDetailed information on outagesUnfulfilled service requestsCustomer complaintsPrice offeringsNetwork performance tests (latency, speed tests, etc)Financial reportingRecord retention

Tribal CarriersThe National Broadband Plan, released in 2010, states that Tribal Carriers need more, and not less, funding

Current mechanisms do not seem to support thisAs a result of the Order, the FCC set aside $100M annually for Tribal carriers from the Mobility FundStanding Rock received a 2 year delay for the beginning of a 5 year transition of competitive ETC supportTribal carriers receive priority review from the FCCETCs serving Tribal lands must have meaningful Tribal engagement with their government/CouncilAll intercarrier compensation and USF reforms apply to Tribes

FCC Decision

Issue

Decision

Congress

Public Interest

State PUC’s

IXC’s

CLECs

Local Rate

Payers Price Cap

ILECs

ROR ILECs

CableWireless

Cxrs

Info/Data Cxrs

Tribal Telecom 2013

Telecom 101:Intro to Technology & Regulation

Doug Kitch, CPAChris Barron

Alexicon

OutlineThe Communications Industry – Technology Platforms

Wireline/CableWirelessSatelliteInternet Protocol

Types of ProvidersILECs, CLECs, Wireless, ISPs

RegulationWhy is regulation necessary?Types of regulationEvolving with technologyToday’s world

What’s Next?

Technologies

WirelineTraditional ILEC technologyPhysical plant connects customers to outside worldHigh fixed cost characteristics

CableSystems owned by video/television providers (i.e., cable TV)Coaxial and fiber/coax hybridEntered two-way communications market after 1996 Telecom Act

TechnologiesWireless

Commercial Mobile Radio Service (CMRS)CellularPCS (personal communication service)Advanced (3G/4G)

SatelliteBroadband for remote areas

Internet Protocol (IP)VoIPOther servicesMainly provided over broadband

Retail Local Telephone Service Connections

2008 2009 2010 2011 -

50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000 500,000

SwitchedVoIPMobile

S: FCC Local Telephone Competition Report (Jan. 2013)

Broadband Connections(Over 200 kbps)

Dec 2008 Dec 2009 Dec 2010 Jun 2011 -

50,000

100,000

150,000

200,000

250,000

Mobile WirelessOther FixedFTTPCableOther WirelineDSL

S: FCC Internet Access Services Report (6/30/2011)

ProvidersIncumbent Local Exchange Carriers (ILEC)

Original telephone service providersIncludes former “Bell Operating Companies” (BOCs), rural local exchange carriers, and mid-size local exchange carriers

Competitive Local Exchange Carriers (CLEC)Started with 1996 Telecom ActGenerally wireline or landline-based providersFacilities-based, unbundled network elements, resale1996 Act allowed CLECs to interconnect with ILECs

ProvidersEligible Telecommunications Carriers (ETCs)

Started with 1996 ActPrior to 1996 Act, only incumbent carriers (ILECs) were allowed to receive USF supportFCC adopted ETC requirements in order to allow competitive carriers (CETCs) to receive USF supportCETCs – wireline (CLECs), wireless, and Lifeline-only (generally wireless)

Internet Service Providers/Internet ProtocolISPs – provide access to Internet services, typically over other carriers’ facilitiesIP – based services (usually require broadband) such as VoIP

Regulation-Brief HistoryWhy is it necessary?

Originally – to limit utility service provision to one company (natural monopoly)Regulation took on the role of competition

Limits prices, ensures service quality and constrains anti-competitive behavior

Regulatory CompactUtility Service Provider – receives exclusive service territory, free of competitionMust operate as carrier of last resort (COLR) – provide service to all in the established service territoryEconomic Regulation is included in the deal

Regulation-Brief HistoryThe telecommunications natural monopoly included end-to-end service (local to long distance)

AT&T break up in 1984 – competition in long distance market

Access charges begin

Telecommunications Act of 1996Competition adopted as national policy

New policies for interconnection, competition, and universal serviceDid not eliminate COLR

USF determined to be “portable”Access charges “inefficient” and improperly subsidized other services

The RegulatorsFederal Communications Commission (FCC)State Regulatory CommissionsTribal AuthoritiesLocal entitiesWho regulates what?

FCC State/Tribe Local None

Access Local RoW Internet Access

Broadband Features Taxes Equipment Sales

Wireless* Access

VoIP* Long Distance

* Limited authority over specific issues

Regulation TodayRate-of-Return Regulation (RoR)

Rates to be charged determined by company’s total regulated cost of serviceCost of service = Net Rate Base x RoR + allowable expenses and taxes

Net Rate Base = Telecommunications plant in service (used for regulated purposes) less accumulated depreciationRoR = allowable return on rate base (e.g., 11.25%) established by state or federal regulatorsAllowable expenses and taxes – those amounts necessary for provision of regulated services

Regulated Non-Regulated Other

Basic Local Internet Access Long Distance*

Calling Features* Equipment Sales Broadband*

Access Wireless*

Special Access*

Regulation TodayRoR regulation – key concepts

Used and UsefulKnown and measurableCost allocationAffiliate transactionsWhy are these concepts important?

FCC’s recent actions – push to end traditional regulation?

Price Cap RegulationDeveloped for large carriers with competitionRates are not set based on cost of serviceInstead, services are grouped into “baskets”

The total price (rates x demand) of the basket cannot exceed a defined capCompanies are free to revise rates up or down, as long as cap is not exceededIncents cost control

Regulation TodayAlternative Forms of Regulation (AFOR)

Combination of different regulatory systemsSome examples

De-Tariffing“Light” regulationService quality / customer complaints

A note on deregulationNever 100% “deregulated”Wireless carriers – still subject to certain FCC rulesSame for CETCs and CLECsInternet Access is close

What’s NextContinuing struggle to keep up with technology

Latest FCC reforms reflect the emphasis on broadbandRecent petitions related to IP regulation

Increasing levels of competitionIP, Wireless

Large company push to eliminate COLR obligations

Problem for high cost rural areas – still need for service, but little or no independent financial business case

Add to this apparent lack of appetite for sufficient USF programs at the federal and state levels

Future – service quality and complaints

Questions?