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ACA Urges FCC To Adopt Broadband Support Cost Model That Will Efficiently Allocate CAF Money

Trade Group Says Cost Controls Necessary To Serve Greatest Number of Homes

PITTSBURGH, July 9, 2012 - The American Cable Association is urging the Federal Communications Commission to adopt the most efficient mechanism to allocate $9 billion in new Connect America Fund (CAF) subsidies over the next five years to the price cap phone companies to bring broadband service to the maximum number of homes in rural America.

"The FCC should create a cost model that provides the most efficient level of broadband support to mid-sized and larger price cap phone companies to permit these companies to deploy to eligible homes broadband service that satisfies the performance obligations set forth by the FCC.  Failure to develop an accurate and efficient cost model runs the risk of not funding homes that need support.  It also would result in the provision of support being spent in areas where it is not needed or intended.  This would be especially harmful because it would deter ACA Members and other broadband providers that do not receive CAF money from investing in their networks," ACA President and CEO Matthew M. Polka said.

ACA set forth its positions in comments filed with the FCC on Monday, continuing the trade group's effort of encouraging federal financial support for broadband projects under closely monitored conditions that make the best use of taxpayer dollars in the quest to achieve universal and affordable broadband access as envisioned by the FCC's National Broadband Plan.

ACA's comments focused solely on the cost model as it applies to determining support for price cap phone companies, and do not reflect ACA's position with respect to the provision of support for rate-of-return phone companies.  ACA has long supported continuing previous high-cost funding levels for rate-of-return phone companies during a deliberate transition period.

ACA members -- 850 mid-size and smaller facilities-based providers of voice, broadband, and video service -- have a great understanding of the business case for deploying triple-play networks in less dense areas and have an intense interest in ensuring that CAF support is distributed efficiently. ACA believes that there is a great deal at stake in the development of cost models that will determine the distribution of CAF support in areas served by price cap phone carriers.

ACA is convinced that if the FCC gets it right, support per location will be sufficient to meet the performance objectives set forth in the CAF and will enable broadband to be brought to millions of unserved locations.  On the other hand, if the cost model provides excessive support per location - more than actually needed to meet the FCC's network performance objectives - the FCC will actually set back broadband deployment in several key respects.

ACA said the misallocation of CAF support could led to number of bad outcomes -- including limiting the number of locations where broadband will be made available by CAF funding; funneling support to areas where service is already available from an unsubsidized provider or a private sector case exists for deployment; and stopping ACA Members from deploying broadband service to over 1 million locations. ACA also warned that incorrectly allocated CAF support could be used in ways other than to bring broadband service to unserved locations, such as investments in non-communications projects or dividends to stockholders.

ACA is pleased the FCC has established a transparent process for development of an accurate cost model, which will be pivotal in determining how to distribute $1.8 billion in CAF support annually to bring broadband to 7.8 million homes in territories served by price cap carriers and no one else. To respond to the many key issues raised by the FCC, ACA has retained the services of Boston-based CSMG, a boutique strategy consulting firm with more than 20 years of experience serving the communications, technology and digital media industries.

In its comments, ACA explained the importance for the FCC to establish and follow objective core principles in assessing the value of the cost model. Supplementing some of the FCC's work in this area, ACA said the cost model should maximize the number of homes where broadband will be made available by CAF funding; should target support only to areas that are not commercially viable without a subsidy; and should be based on a realistic, reasonable picture of the costs to meet the FCC's performance requirements (4/1 Mbps broadband to 100% of the locations in five years).

In deciding the level of subsidy required for any given location, the FCC should base it on a realistic portrait of future attainable revenues from broadband deployments, ACA said. By accurately calculating an efficient subsidy, the cost model will provide price cap carriers with the proper incentive to accept CAF funding and sufficient compensation to meet their service obligations.  The support distributed through the CAF should provide recipients with a return that is not less -- but not more -- than what is typical for similar services offered in competitive, unsubsidized areas.

ACA also stressed that the cost model should be based on actual market data to the maximum extent possible, an approach consistent with the FCC's desire to achieve data-driven results.  In developing the cost model, the FCC should be rigorous in ensuring that sufficient data is collected, especially for aspects that are critical to determining the amount of funding per location and the geographic allocation of funding.

ACA's comments endorsed the notion that the design of the cost model should follow the best principles of transparency and flexibility, allowing for the modification of all assumptions.  ACA's position tracked with the FCC's commitment of ensuring that the cost model and "all underlying data, formulae, computations, and software associated with the model must be available to all interested parties for review and comment...and potential modification."

The FCC's rationale for allocating CAF money to price cap incumbents in lieu of competitive bidding was based on the need to leverage existing network investments to allow for the lowest-cost broadband build-out. ACA urged the FCC to keep that commitment by employing a "brownfield" DSL network as the basis for the cost model since it would most accurately reflect the infrastructure price cap LECs would deploy when given the freedom to employ any technology to meet their public interest obligations.

In support of the brownfield approach, ACA cited price cap carriers' models showing that, assuming a $1.8 billion fund, 3.9 million locations would be built-out and maintained in a "greenfield" DSL scenario compared to 6.1 million to 14.1 million in a brownfield DSL scenario - that is, 50% to 250% more locations would be built and maintained.

"Providing funding for a greenfield build would contradict the FCC's previously stated intention to leverage existing network investments to allow for the lowest-cost broadband build-out," Polka said. "ACA is determined to see that the CAF money is distributed to the most locations that do not currently benefit from the advantages of broadband access to the Internet."

About the American Cable Association

Based in Pittsburgh, the American Cable Association is a trade organization representing nearly 850 smaller and medium-sized, independent cable companies who provide broadband services for more than 7.4 million cable subscribers primarily located in rural and smaller suburban markets across America.  Through active participation in the regulatory and legislative process in Washington, D.C., ACA's members work together to advance the interests of their customers and ensure the future competitiveness and viability of their business.  For more information, visit http://www.americancable.org/

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