Concerns from Competitors, Rural Customers Raised Over Broadband Pricing in Alaska

Allegations that telecom provider GCI holds a monopoly over the state’s broadband internet services.

by Naomi Klouda, Alaska Journal of Commerce, Anchorage / August 11, 2017
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(TNS) -- Old grievances between Alaska’s telecoms have resurfaced with allegations that GCI holds a monopoly over the state’s broadband internet services, and after benefiting from the public pot with $50 million to help build the system, it is now charging rural Alaska schools, hospitals and other companies uncompetitive prices to access the network.

Fellow Anchorage-based telecoms Alaska Communications and Quintillion filed formal objections with the Federal Communications Commission to recommend the agency deny the sale of GCI to Colorado-based Liberty Interactive for $1.12 billion.

During their Aug. 3 conference call with investors to discuss second quarter earnings, GCI officials said they expect the FCC to approve the transaction at the end of the year. The company was granted early termination of the waiting period on June 7 by the FCC and the Department of Justice.

Now complaints brought by the competitors and Alaska rural leaders are before the FCC in a forum that GCI argues isn’t the appropriate place.

GCI has said in its filing that the transaction is in the public interest because it “will result in GCI becoming more stable and will not result in any countervailing harms.”

The applicants claim that the transaction will serve the public interest by providing GCI’s operating businesses with more stable access to financial markets and greater capacity to execute GCI’s current business plan, the FCC summarized in its invitation for public comment.

Alaska Communications and Quintillion, in separate letters to the FCC, wrote that to the contrary, the proposal poses substantial harm to the public interest.

Quintillion has been laying subsea fiber optic cable for high-speed internet infrastructure in the Arctic over the past two summers and will complete Phase 1 this December.

When completed, the subsea cable system will be accessible to Japan in the west and London in the east. In partnership with Alaska Communications, Quintillion began offering broadband services to rural Northwest Alaska schools and clinics this spring.

In an objection written by attorney Karen Brinkman June 19, Alaska Communications asked the FCC to impose several conditions on a combined GCI-Liberty. Alaska Communications asked that first GCI-L must be required to use federal Universal Service Fund, or USF, support to expand the “middle mile” infrastructure linking remote facilities to existing networks.

GCI recently completed its six-year TERRA project that involved multiple phases, starting in 2011 when 400 miles of fiber optic cable and 13 new microwave towers began providing network connection for 65 communities in Southwest Alaska.

The TERRA Southwest and Northwest phases serve 84 communities totaling nearly 45,000 residents, and another 12 communities will be connected by the end of 2017, according to GCI. The TERRA route covers 3,000 miles.

Secondly, Alaska Communications wrote, the new infrastructure that relies on federal money should be available to all carriers on “commercially reasonable and non-discriminatory rates, terms and conditions.”

Alaska has about 20 telecoms ranging from smaller Adak Telephone Utility, Bristol Bay Coop, Mukluk Telephone and Nushagak Electric &Telephone to larger entities such as GCI, Matanuska Telephone Association and Alaska Communications.

Each is able to hook into GCI’s TERRA infrastructure where that is possible but the complaint from Alaska Communications alleges wholesale costs charged by GCI makes it prohibitive.

Thirdly, Alaska Communications asked the FCC to require emergency service restoration agreements with other carriers on reasonable commercial terms. This means in case of a natural disaster or downed systems for any reason, telecoms commit to come to one another’s aid.

Alaska Communications sees needs in additional middle mile build-out as necessary to meet future broadband demand in rural Alaska. This is where the smaller telecoms could build out broadband, but Alaska Communications makes the argument that the FCC needs to force GCI to do so because the current “monopoly pricing” elbows out their ability to do it.

Alaska Communications also points out that though TERRA was built in part with federal funding, it is now part of a publically traded entity that is “ultimately owned by the shareholders.”

GCI holds 16 percent of the voting interest and 23 percent of the total equity, while shareholders hold 84 percent of the voting interest and 77 percent of total equity. If the sale is approved by the FCC, an Outside entity, Liberty, will have a majority ownership in GCI.

“Though the two companies are competitors, Alaska Communications heavily relies on GCI for long-haul transport or ‘middle mile’ telecommunications between Alaska Communications facilities in Anchorage, Fairbanks and Juneau, on the one end, and many of its customers in rural and remote communities,” the filing states.

Because GCI has effectively been unregulated on those routes, GCI enjoys market power “indeed a monopoly,” and has priced Alaska Communications out of the market due to “excessively high middle-mile transport prices charged by GCI over facilities funded directly or indirectly by the federal government,” the company alleges.

Rural objections

Alaska rural leaders overseeing large organizations along GCI’s new TERRA route also urged the FCC to look deeper at the monopoly argument in light of the fact that federal funding was used to help pay for fiber-optic miles GCI now owns outright.

Vivian Korthuis, the chief executive of the Association of Village Council Presidents, which oversees services for 56 tribes in the Yukon-Kuskokwim Delta, also submitted testimony to the FCC on the proposed GCI-Liberty transaction.

She said broadband costs need to be “accessible and affordable” to individuals and tribes. She questioned high costs that continue to be charged AVCP even though the TERRA Southwest, which hooks into Bethel where AVCP is centered, was supposed to bring costs down.

GCI was given $44 million in a federal stimulus grant under the Obama administration for TERRA Southwest and another $6 million in from the Regulatory Commission of Alaska for TERRA Northwest.

TERRA Southwest was partly funded with a $44 million, low-interest federal loan and GCI also borrowed about $50 million with low interest loan through the New Market Tax Credit program for TERRA Northwest.

NMTCs are used to attract investments that otherwise wouldn’t be economic into low-income communities with the goal of revitalizing local economies. The federal program allows the investor, in this case US Bancorp, to use 39 percent of the investment as a credit against its tax liability. This in turn allowed US Bancorp to loan GCI funds at a rate of about 1 percent, according to the company’s Securities and Exchange Commission filings.

Out of all funding streams, GCI calculates it has spent $300 million in total for the TERRA project. Out of the $44 million initial grant, GCI spent $42 million and returned the rest, said GCI spokeswoman Heather Handyside.

“We’ve been able to pay back the loan and built the rest of the TERRA with our own $200 million capital,” she said.

However, the amount of aid GCI received in various forms is a recurring theme among those protesting the GCI-Liberty transaction.

Former Alaska Rep. Harry Crawford, in his letter to the FCC, noted the government “substantially subsidized GCI’s TERRA system in Southwest Alaska, yet the rates to consumers in that part of Alaska have not materially been reduced.

“This appears to be the result of a lack of competition to supply services in these regions serviced solely by GCI. GCI’s monopoly position in its ownership of the infrastructure is yielding the predictable result – namely non-competitive high prices.”

Crawford cited the Nome School District as an example. The district has five schools, and 700 students, and paid $305,000 per month to GCI for its internet service.

According to Crawford’s letter, the district was able to reduce its bill to $95,000 a month once Quintillion connected to the shore from its subsea fiber optic cable.

Handyside noted that each Request for Proposal submitted by schools to gain internet contracts can vary greatly, even from year-to-year for the same district. According to the bid specifications, Quintillion’s package “wasn’t an apples-to-apples comparison” with the previous contract.

Rep. Zach Fansler, representing the Yukon-Kuskokwim Delta region in District 38, also wrote a lengthy letter to give his concerns about the proposed merger. He, too, brought up the Nome School District example of what happens when new competition emerges but focused on subsidies GCI used to help build the TERRA project.

“The Alaska Plan, and grants made possible through the FCC’s E-Rates programs are a lifeline for Alaska communities. The FCC has committed billions of dollars to build the infrastructure to provide broadband internet access. In particular the FCC subsidies in Southwest Alaska have funded the infrastructure that makes up GCI’s TERRA project, yet costs have not gone down,” he wrote.

Schools in the region are paying “hundreds of thousands of dollars a month” for state-mandated broadband internet access, Fansler wrote. The FCC is directly subsidizing GCI, and without competition, the company still charges whatever it wants with little oversight, he wrote.

The Alaska legislator red-lined what he called “an inefficient use of public money” to the FCC.

But GCI counters that it doesn’t have a monopoly because it competes in a bid process against other telecoms.

“One place we do distinguish ourselves is in rural Alaska where it’s risky to cover telecommunications and there is the need to connect vast distances,” Handyside said. “GCI understood it was a financial risk. We worked hard to develop a business model that would be viable.”

The Alaska Plan, to be fair, involves most all the telecoms in Alaska, explains Alaska Telephone Association Executive Director Christine O’Connor, who has worked for the Nushagak Electric &Telephone and MTA.

“They each have tasks they are obligated to complete in order to receive the money. If they don’t, they must pay it back,” she said.

The Alaska Plan secures $152 million per year for the next 10 years from an annual $4.5 billion national fund. The funding is supposed to result in expanded fixed and mobile broadband service to Alaskans across close to 100 rural communities by building out both wireline and wireless services to 4G LTE or better for 85 percent of the population.

Complex costs

The way costs breakdown for broadband in rural Alaska is complicated, said O’Connor, who leads the ATA consortium made up of Alaska’s 20 telecoms, including GCI, ACS and Quintillion.

Schools are charged the same prices as those in urban centers though it costs more to deliver broadband to places such as Naknek or Quinhagak. In a calculation like the school lunch federal subsidy, schools receive USF E-Rate help for up to 90 percent of their costs.

“All of the telecoms in Alaska are heavily subsidized through the various flavors of USF funding,” O’Connor said.

Revenue from managed broadband, the category in GCI financial reports that list rural data services to schools and hospitals, showed a steady increase from 2011 to 2015.

Figures from 2010, the last pre-TERRA year, show GCI revenue of $50 million from managed broadband. Each year the amount climbed as more of the TERRA route communities went live.

In 2011, GCI reported revenue of $63 million for managed broadband; in 2012, $86.5 million; 2013, $95.6 million; in 2014, $105 million and in 2015, $127.4 million.

The total for the five years of TERRA Southwest Service came to $477.5 million.

Again, GCI responds that it took on all the risks of the TERRA infrastructure, which is a hybrid terrestrial fiber-optic and microwave network that removes the latency limitations of satellite. Recouping costs of its projects is part of its business model, Handyside said.

“TERRA not only cost $250 million of our capital to invest, there also is a significant cost to upgrade and maintain this network that is over 3,000 miles long,” she said. “A team of technicians is always on standby in Bethel and other hubs. Equipment is staged so we can deploy it at a moment’s notice if something goes wrong.

“We have specialized equipment and helicopters to refuel TERRA sites where they are not on a power grid. So we have to have 5,000 gallon diesel tanks and we fly out and refuel them — just some examples of the high cost of the project.”

After 2015, GCI changed how it reported managed broadband. The 2016 report released in March of this year did not have managed broadband as a separate category. Handyside said broadband for hospitals and schools is now listed under business revenue along with the other 2,000 businesses.

“In the past, managed broadband was an independent department responsible for construction, deployment, sales and customer service. Late last year, the Managed Broadband department was combined with the Business and Enterprise departments to form GCI Business,” she wrote in an email.

The FCC Universal Services Administrative Co., or USAC, shows that GCI is the largest recipient of federal subsidies for all four categories of Rural High Cost support: Lifeline (for low-income consumers), Rural Health Care, and school and library E-rates.

According to the FCC’s Deputy Director of Media Relations Mark Wigfield, GCI brought in $220 million in 2016 from the four areas of USF funds. The majority, $78.6 million, came from Rural Health Care telecom subsidy funds.

Because GCI is the largest Alaska telecom, this isn’t surprising. But the primary complaints voiced to the FCC by Alaska leaders and GCI’s competitors centers on questioning high costs given the funding help.

Total costs for a school’s broadband, for example, vary around the state. In the Bering Straits School District, 90 percent of the costs for school internet are paid by USF E-Rate directly to the telecom that won the RFP, in this case GCI.

They were charged $171 per student per month, which tallies to $316,008 per month for 8,000 students, according to Connect Alaska’s survey of school districts across the state in 2015.

In Cordova School District, E-Rate funding is $21 per student or $7,329 per month for its 349 students with service provided by AT&T. They receive an 80 percent E-Rate subsidy.

The Lower Kuskokwim School District served by GCI is $110 per student per month, or $471,350 for 4,285 students. Some 80 percent of costs there are covered by USF subsidy.

“These funds put the telecoms on equal footing with what those costs would be in an urban setting to level the playing field,” O’Connor said. “Otherwise, they would be prohibitively expensive.”

And costs for broadband have been reduced since GCI built the TERRA middle-mile routes, say the providers of major medical services via GCI.

Rural Health Care subsidies, like E-Rates for schools and libraries, are critical to one of the largest health providers in Alaska. At the Yukon-Kuskokwim Health Corp., President Dan Winkelman said with the subsidy YKHC spends the same as hospitals and clinics in Anchorage pay, yet they have the ability to reach thousands of miles.

“It saves us millions of dollars a year,” he said. In addition to saving money, it can save lives along with travel and air-ambulance costs.

Telemedicine made life-saving changes possible on an amazing scale, he said.

“The ability to treat a patient in remote Alaska from centers of specialty, behavioral health counseling, electronic health records, voice-over-internet contact with professionals throughout 56 villages — all is now possible for 42 village clinics and five sub-regional health centers,” he said.

TERRA wasn’t about speed; it was about reliability, Winkelman added.

“Satellite connections would go down. It helped on the reliability side,” he said.

GCI also is building “redundant” lines so that if one system fails on the TERRA route, there’s backup, he said.

Regulatory jurisdiction

The Regulatory Commission of Alaska analyzes price increase proposals on behalf of consumers for water, electrical, telephone and gas companies, then approves or denies the changes. But who approves rates for broadband before they imposed?

“That’s a big question right now,” said O’Connor. “The FCC has struggled to set benchmarks, an Alaska-specific price benchmark because rural Alaska presents real challenges on pricing.”

The RCA does not have jurisdiction over broadband rates as it is superseded by the FCC.

In April, the FCC announced benchmarks for Alaska Plan Carriers, a first attempt to rein in free-market pricing. But the new FCC Chairman under the President Trump administration, Ajit Pai, has said high-speed internet service should no longer be treated like a public utility. He has spoken in favor of leaving the industry to police itself, according to national news accounts on changing net neutrality rules.

In using the GCI-Liberty transaction, however, as the basis for complaining about GCI’s prices and alleged monopoly, GCI lawyers argue Alaska Communications and Quintillion are utilizing an incorrect forum.

“(Their) attempt (is) to use the Commission’s review of this transaction to rehash old grievances about GCI’s extensive and ongoing efforts to invest in terrestrial middle-mile facilities to connect remote Alaska with city centers and the rest of the world,” wrote Liberty attorney Richard Baer.

“The Commission should recognize these efforts for what they are: attempts to resuscitate pre-existing, shop-worn complaints unrelated to the pending transaction to seek unwarranted conditions on GCI.”

GCI also counter-claims that ACS hasn’t taken on the financial burden of building large infrastructure but wants to “piggyback” off GCI’s investments and gain a discount to do so.

The FCC could refuse to address the complaints in its GCI-Liberty ruling later this year, as it had in earlier complaints by the competitors.

Quintillion, Alaska’s newest entity changing the landscape of future broadband, still hopes the FCC will “realize this as an opportunity to protect the public and taxpayers’ interests in balance with the desire to reduce regulatory barriers to industry,” wrote Vice President of External Relations Kristina Woolston in an email.

“For much of the public the telecom industry is a confusing puzzle and they rely on the FCC to enforce rules and regulations that assure public funds are benefiting the public as intended.”

Competition on the horizon

Competition and collaboration between telecom companies promises to bring the costs down for Alaska in the coming years as Quintillion, Alaska Communications and AT&T launch projects building out wireless and fiber optic networks.

Besides Quintillion’s high speed fiber optic, changes are coming to internet broadband in Alaska over the next two years due to new low earth orbit, or LEO, satellite technology.

Alaska Communications developed a non-exclusive memorandum of understanding to become the first reseller of OneWeb enabled broadband access in Alaska starting in 2019. That puts rural Alaska a step closer to more affordable broadband access, said CEO Anand Vadapalli.

The LEOs will be deployed by OneWeb in late 2018 or early 2019, Vadapalli said in a June 9 interview with the Journal.

O’Connor notes that since this is a non-exclusive agreement, any telecom, even the smaller village-based entities, could hook into OneWeb for bringing down their broadband costs.

“A satellite dish the size of a pizza box will be able to move 500 megabits at a 30 nanosecond speed,” O’Connor said, noting those speeds are fast enough for live gaming. “OneWeb is looking for partners in Alaska, which is seen as the great telecom challenge. If they can make it work in Alaska, they can make it work anywhere in the world.”

O’Connor said the increasing internet options coming online over the next few years could render moot the current angst over rates and market share.

©2017 the Alaska Journal of Commerce (Anchorage, Alaska) Distributed by Tribune Content Agency, LLC.