FCC Rules on Submarine Cable Cost Issue

The U.S. Federal Communications Commission (FCC) has ruled on a dispute regarding the recovery of lease costs on a domestic submarine cable system.

In a recently released order, the FCC considered whether certain cable lease costs incurred by Sandwich Isles Communications, Inc., may be recovered through the National Exchange Carrier Association (NECA) pooling process, which is an averaging mechanism to smooth out rates for small carriers over a larger base of costs and revenues. Balancing the unique facts and circumstances at issue here, the FCC determined that some — but not all — of those lease costs are properly recoverable consistent with Commission rules and precedent.

Sandwich Isles provides telephone service to a study area consisting of most of the Hawaiian Home Lands. Sandwich Isles began operations in 1997, and was licensed by the Department of Hawaiian Homelands to construct and operate a modern telecommunications network serving the HHL.

Sandwich Isles functions as an incumbent local exchange carrier for access charge and universal service purposes 5 and has approximately 2,000 access lines. On February 3, 1998, the FCC’s Common Carrier Bureau granted Sandwich Isles a waiver of section 36.611 of the Commission’s rules to the extent necessary to permit it to receive high-cost loop support for a period of time based on projected costs.

In addition, the Bureau waived the incumbent LEC requirements of Part 36 and 69 of the Commission’s rules to permit Sandwich Isles to receive high-cost support based on its costs and to become a member of NECA. The Bureau recognized Sandwich Isles’ service territory in Hawaii as a study area.

In mid 2007, Sandwich Isles indicated to NECA that it was considering a finance lease arrangement with another entity, Paniolo, LLC, which would obtain financing to build an inter-island network that would be leased to Sandwich Isles. Additionally, Sandwich Isles advised NECA at this time of its intention to include the new cable lease costs in its NECA cost submissions. NECA and Sandwich Isles subsequently discussed a number of factors bearing on the extent to which the lease payments could be included in NECA’s cost study.18 Sandwich Isles ultimately entered the lease agreement, and its base lease costs currently are $15 million annually.

In early 2008, Sandwich Isles submitted its cost forecast for the 2008 NECA tariff and included six months of the Paniolo cable lease cost. In April 2008, NECA sent a letter to Sandwich Isles expressing “serious concerns about the amount of the proposed costs and requesting specific details of the proposed cable system.” On May 5, 2009, NECA notified Sandwich Isles that the costs for the undersea cable transaction “do not appear to meet the standards of the ‘used and useful’ doctrine” and that NECA might not accept Sandwich Isles’ proposed costs in the upcoming tariff filing or for pool reporting.

Based on its analysis, the FCC is requiring NECA to recognize 50 percent of Sandwich Isles’ Paniolo submarine cable network lease expenses subject to dispute in its revenue requirement for ratemaking purposes. Moreover, in light of its analysis and the timing of filing of the Sandwich Isles petition, the FCC found it appropriate to apply its decision retroactively to the 2009 annual access tariff filing. The Commission said that it has previously allowed for a mid-course correction. The FCC also recognizes that for accounting purposes, NECA’s contract with its members allows for a 24-month period in which the member may revise its costs and noted that both of these processes are at the parties’ disposal.

International Carriers

Interoute Opens Office in Russia

Interoute, owner and operator of Europe’s largest next-generation network, has announced that it has extended its presence into Russia in response to increasing demand for next generation connectivity and telecommunication services in the region. The opening of a new office in Russia and the appointment of a Russia and CIS Country Manager, Elena Chernykh, will enable Interoute to meet the demand of both international companies looking for connectivity in the region and carriers looking for a high speed connection between the East and West.

The Russian market has experienced the fastest internet population growth in Europe, with Internet users in Moscow more than doubling from 27 percent to 60 percent between 2002 and 2009.  At the same time, growing consumption in China and the Middle East has pushed internet traffic through Russia as it provides the lowest latency terrestrial route between Asia and Europe. The culmination of the two has resulted in an increasing demand for Interoute’s next generation network services, following its network extension into Moscow in 2009.

“Since we extended our network into Russia we’ve experienced a huge demand for our services from both domestic and international companies looking for next generation services and a flexible pricing policy,” said Elena Chernykh, Russia and CIS Country Manager, Interoute.  “We are excited to be at the heart of this fast growing market“.

Interoute’s Moscow PoP is fully integrated into Interoute’s pan-European network, providing businesses and service providers with fast, cost effective access to the rest of Europe and resilient, high quality voice and data services to support their operations, the company said in a statement.

Market Snapshot

Broadband Growth for Central Europe

Broadband is growing so rapidly in Central and Eastern Europe (CEE) that one analyst believes that networks will soon be overloaded.

Analysys Mason says that in the first three years after the launch of mobile broadband in the region, a number of markets in CEE are expected to achieve triple-digit annual growth in subscriptions, putting significant strain on network bandwidth.  Because the majority of mobile browsing takes place in buildings, the company says that operators should focus on expanding their Wi-Fi offerings, instead of accelerating their 3G network capex to cope with the demand for bandwidth.

The statistics on broadband growth in many CEE countries mirrors the strong growth being witnessed around the world.  In Poland, for example, incumbent Telekomunikacja Polska (TP) expects its broadband subscriptions to increase about 33% from 2.261 million to 3 million in 2012.

Meanwhile, Ukrainian national operator Ukrtelecom announced that its broadband subscriber base has increased by during 45% in the past year, from 681,000 to over 1 million.

Romanian telecom regulator ANCOM notes that mobile broadband in Romania is booming.  The number of mobile broadband subscribers jumped by 65% during 2009, reaching 2.53 million by the end of the year (the latest data available).  Fixed broadband growth was more modest, but still increased by a healthy 12% to 2.82 million.