In striving to bring broadband access to all unserved Americans within existing funding constraints, the FCC must stretch scarce Universal Service Fund (USF) dollars as far as possible. Distributing funding through a reverse auction is an incredibly effective mechanism in this respect and one I have long-championed: competition, on both an intra- and inter-area basis, helps drive down the funding amount needed to entice the private sector to build out broadband to areas that wouldn’t be served in the absence of government subsidies. In implementing our reverse auctions, we should always aim to maximize participation and, in turn, competition, rather than arbitrarily limit the number of auction competitors. One way to do this is to eliminate the condition that auction winners be designated eligible telecommunications carriers (ETCs).
Over the years, it has become clear to me that certain providers have been discouraged from competing for USF support to serve high cost areas due to the ETC requirement. By way of background, the ETC designation was created by the 1996 Telecommunications Act when voice service was the telecom industry’s primary consumer offering and state commissions maintained a hefty role in regulating telephone networks. The designation, which is a prerequisite for a provider to receive funding in accordance with section 254 of the Act, requires a company to provide basic voice service within a particular geographic area pursuant to requirements in section 214(e) and makes it subject to applicable state telecom regulations. Procedurally, high cost funding recipients, including winners of Connect America Fund Phase II (CAF II) or Rural Digital Opportunity Fund (RDOF) subsidies, must obtain such a designation from the applicable state commission prior to being authorized to receive funding.
While requiring ETC status doesn’t bar participation by certain providers on its face, it serves as a major obstacle for many companies in practice. Getting the designation itself can be a time-consuming and resource-intensive process, especially depending on the state jurisdiction in question. However, that pales in comparison to the added regulatory burdens and litigation risks that come with being subject to state telecom regulation. Individual states have specific requirements for incumbent and competitive local exchange carriers, including ETCs, covering everything from billing to service level reporting, installation, late fees, accounting standards, and customer complaint processes, which add complexity for companies that operate in multiple states or nationwide and may even conflict with providers’ existing local regulatory requirements for other services in multi-product bundles. And, the designation often introduces new burdens: take, for example, state-specific Lifeline requirements and certain states’ disconnection rules that require ETCs to continue providing basic voice service to a customer despite a lengthy period of non-payment. In other words, a nationwide provider with streamlined practices would potentially become subject to a patchwork of regulations—in certain cases, upwards of 40 different regulatory regimes—even though many of the rules entirely pre-date the modern broadband networks that our auctions are trying to subsidize, often, by several decades.
Even more significant in driving potential bidders away, becoming an ETC can involve tremendous uncertainty and unforeseen burdens. Certain state commissions have been overzealous in expanding their regulatory reach, for example, by proposing onerous, unreasonable rules requiring carriers to report on network outages far in excess of the FCC’s existing reporting system and in a manner likely to undermine confidential consumer data. Elsewhere, there have been attempts to mandate specific backup power requirements that would be technologically, logistically, and economically infeasible to comply with, create serious fire and safety risks, and wouldn’t even help maintain service for the vast majority of consumers. Further, several state PUCs have improperly attempted to regulate interstate VoIP services outside of their jurisdiction, which some providers—and the FCC itself—have successfully fought. It would be completely backwards for these companies to turn around and seek ETC status from those very same commissions and voluntarily submit to having their VoIP service regulated as a common carrier. And, subjecting themselves to legacy telecom regulation by becoming an ETC likely would end up prejudicing them in future legal situations involving these rogue state commissions.
Compared to the burden and risk of becoming an ETC, certain providers have determined in the past and likely will again that the reward simply isn’t worth it. The requirement is especially an obstacle for companies that might be interested in leveraging FCC subsidies to edge out to areas that are just outside their service territories but wouldn’t be seeking USF support to massively expand their footprint. While this calculation may indeed prove to be prudent from a business perspective, it creates unfortunate consequences. In addition to eliminating some of the most stable and qualified potential bidders from eligible census block groups, it also means fewer bidders in the Commission’s reverse auctions, thus reducing both intra- and inter-area competition. The result is a less efficient and robust auction, giving ratepayers less bang for their buck, and the potential for certain areas to get neglected when they would have otherwise received bids.
Some have argued that the FCC has authority to forbear from the ETC designation requirement on its own accord. While that claim may have some merit, taking such action would likely be litigated by those state commissions that retain some role over telecom issues. Rather, this is the type of issue that might be better settled by Congress. Fortunately, the cause has garnered attention from Congress and legislation on point was introduced just last week in the House of Representatives by Congressman Butterfield (D-NC).
The new bill’s plan to eliminate the outdated and burdensome ETC requirement to participate in USF auctions makes total sense. As I have already explained, funding for the deployment of broadband—an interstate information service—should not function as a backdoor way to expose providers to burdensome and unpredictable intrastate regulations. In addition, I cannot think of any ongoing policy reason to maintain the requirement: the Commission already imposes its own legal, technical, and financial requirements on auction winners, not to mention extensive rules for interconnected VoIP providers outside of the auction context on everything from rural call completion to 9-1-1 obligations, and ETC status doesn’t seem to confer any additional necessary protections. Moreover, as we know from CAF II, ETC status certainly isn’t a guarantee of providers’ ability to meet service milestones. Finally, most ironically, many states have run their own efficient and effective broadband funding programs without requiring recipients to become ETCs, increasing participation without any problematic consequences.
Those seeking to preserve the status quo (mostly state public utility commissions intent on preserving any authority they have left) would likely paint a frightening picture of what such a change would mean, and point to their role as cops on the beat to police bad behavior. But such alarmism seems farfetched, especially when unregulated VoIP providers have been operating outside of state telecom jurisdiction for close to two decades, without creating problems. Further, while it might be true, for example, that select state commissions may have played some role in fighting waste, fraud, and abuse in the Lifeline program, these entities have no role whatsoever when it comes to broadband, as it is an interstate service completely outside their expertise and bailiwick. In the absence of authority to regulate broadband, their role is relegated to informing the Commission of any funding recipients’ violations of FCC rules. That’s not a cop, but a shopping mall security guard. Additionally, having been burned in the past with respect to broadband buildout and execution failures, this Commission is paying extra attention and care to ensure USF broadband subsidy recipients meet their commitments and requirements. Ultimately, this means that any additional entry and exit burdens imposed by a state commission are either superfluous or illegitimate.
On a more fundamental level, to the extent that Congress would entertain the worthwhile idea of getting rid of new ETC requirements, perhaps this should also provoke a broader discussion around eliminating the designation entirely, including for those that already have it. While existing ETCs are somewhat differently situated in that they affirmatively sought out and agreed to the designation, its continued application creates regulatory asymmetry in an industry that has undergone a fundamental competitive realignment.
If complete elimination of the ETC designation is not in the cards, perhaps there are some other fixes to our current framework that should be adopted. For instance, instead of the current process whereby providers must seek ETC designations from each state where they have won the obligation to serve, there should be a single, uniform application accepted in all states and a time limit for approving applications, also applicable to the FCC when designating federal ETCs. If our country can do this for the college application process, it can be done here too. Further, state commissions must be prohibited from imposing extraneous conditions or requirements in exchange for ETC designation over and above applicable FCC rules. It’s one thing to allow state commissions to enforce federal standards and quite another to allow these bodies to add new obligations at their whim. And, finally, the process for obtaining FCC broadband subsidies should make clear that a company designated an ETC by virtue of being a USF auction winner is not therefore a Title II telecom carrier, which confers a host of burdens and obligations far outside the scope of this blog. Otherwise, the classification of broadband as a Title I Information Service could essentially be nullified by regulatory sleight of hand.
* * *
In the end, my priority is ensuring that the Commission brings broadband access to as many unserved Americans as quickly as possible, and that means eliminating regulatory asymmetries, technology bias, and inefficiencies. Getting rid of the mandatory, anachronistic ETC designation is certainly consistent with these objectives
 See, e.g. 16 NYCRR § 606.4.