AT&T agreed to pay $7.75 million to help settle an FCC cramming investigation into whether the company permitted unauthorized wireline phone bill charges, said an Enforcement Bureau release Monday. "AT&T allowed scammers to charge customers approximately $9 per month for a sham directory assistance service. The scam was uncovered by the U.S. Drug Enforcement Administration (DEA) while investigating the scammers for drug-related crimes and money laundering." The bureau said the DEA probe targeted two Cleveland-area companies, Discount Directory and Enhanced Telecommunications Services, which, according to participants, billed AT&T landline customers for directory assistance they never provided. “Today’s settlement ensures that AT&T customers who were charged for this sham service will get their money back and that all AT&T consumers will enjoy greater protections against unauthorized charges,” said bureau Chief Travis LeBlanc. AT&T will fully refund all current and former consumers affected by the cramming since January 2012 (expected to total $6.8 million), will pay the U.S. Treasury a $950,000 fine and institute further consumer protections, said the release. "Although it bore ultimate responsibility for the charges placed on its customers’ bills, AT&T never required proof from the Companies that they obtained customer authorizations to be billed for their service and the record shows that the Companies never obtained any such customer authorizations," said a bureau order and consent decree, which faulted AT&T for ignoring "a number of red flags that the charges were unauthorized." An AT&T spokesperson emailed a statement: “Consistent with industry practices, AT&T wireline telephone customers have been able to purchase certain telecommunications services from third parties and have charges for those services billed on their telephone bill. We have implemented strict requirements on third parties submitting charges for AT&T bills to ensure that all charges are authorized by our customers; indeed, those requirements go beyond the requirements of FCC rules and impose safeguards that the FCC proposed but never adopted. Nonetheless, unbeknownst to us, two companies that engaged in a sophisticated fraud scheme were apparently able to circumvent those protections and submit unauthorized third-party charges that were billed by AT&T. Today, we reached a settlement with the FCC to resolve all claims associated with these companies and the related charges. ... We stopped billing for these entities as of June 2015 and will also cease wireline third-party billing for other third parties, with limited exceptions.” Affected AT&T customers will receive refund checks within 90 days, said the spokesperson.

The FCC order to make permanent its National Deaf-Blind Equipment Distribution Program, also called iCanConnect, was released Friday in docket 10-210. The 122-page order was approved by commissioners 5-0 Thursday, with some concerns expressed by Commissioner Mike O'Rielly (see 1608040065). It maintains many of the features of a pilot program, while making some modifications, including by authorizing reimbursement to state programs for "train-the-trainer activities" to address shortages of qualified staff to train deaf-blind people on how to use the equipment. The order said the annual $10 million pilot program actually spent $6.76 million in 2012-2013, $9.36 million in 2013-2014 and $8.34 million in 2014-2015

Incompas and Verizon pushed business data service (BDS) regulation proposals they had made to the FCC. In a meeting with commission officials, "We focused on the need for the three-tiered approach to the competition test and the need for a one-time adjustment to TDM [time-division multiplexing] rates in areas served by price cap ILECs to account for the freeze in rates under the CALLS [Coalition for Affordable Local and Long Distance Service] Order" of 2000, said a joint filing Friday in docket 16-143 on a meeting with FCC General Counsel Howard Symons and other staffers. Incompas and Verizon in June proposed creating three tiers of BDS offerings based on their data speeds, with the lowest tier (below no lower than 50 Mbps) deemed noncompetitive and subject to regulation, the highest tier (above 1 Gbps) deemed competitive and not subject to regulation, and the middle tier subject to commission review by census blocks (see 1606270058). "We also discussed the need for an Ethernet benchmark in relevant markets that are insufficiently competitive, which would involve price regulation on a technology-neutral basis," said the Friday filing. "The FCC would apply the benchmark to constrain prices and ensure that providers could not abuse their market positions by imposing rates, terms or conditions that are unjust or unreasonable. The benchmark would be adjusted each year to ensure that rates are reduced over time." Separately, Free State Foundation President Randolph May said BDS regulation would deter network investment that he said already had been undermined by the net neutrality and broadband reclassification order. "The reason is simple -- and widely-acknowledged by regulatory economists: Rate regulation mandating that incumbent telephone company providers give competitors access to their facilities at below-market rates discourages investment in facilities by both incumbent providers and new entrants," he said in a Friday blog post. "This depressive investment effect is the likely result of any Commission action in the BDS proceeding that forces the telephone companies to reduce the rates for network inputs sought by competitors." He cited recent "dismal figures" for U.S. business investment, a report by economist Hal Singer on broadband investment, and an opinion by Supreme Court Justice Stephen Breyer in a 1999 AT&T v. Iowa Utilities Board ruling as supportive of his broader arguments.

Windstream is making good progress toward stabilizing and increasing operational cash flow over time, CEO Tony Thomas said in a Q2 earnings release Thursday. Sales fell to $1.36 billion from $1.42 billion in Q2 2015; operating income was $155 million compared with $79 million, and net income was $1.5 million compared with a loss of $111 million. A Windstream presentation said the company is focused on "mid-market" business customers and driving enterprise margins to 20 percent. On a conference call, Thomas said Windstream can lower the $1 billion a year it spends leasing wholesale access on other networks by building its own facilities and through other steps. He said the FCC could help by reining in "excessive" Bell/ILEC rates for business data services, particularly for lower-capacity circuits that competitors cannot replicate economically, but he said "it's too early to speculate" on the outcome. Windstream is on both sides as a CLEC and ILEC, but "on balance, we think reforming the system to address this market power will be positive for our customers." Wells Fargo analysts called Windstream's Q2 results "mixed" as revenue was "light of our estimates" but adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) excluding sale-related changes were "a nice beat." Cogent Communications said Q2 gross service revenue increased 11 percent to $110 million, and adjusted EBITDA increased 26 percent to $39.4 million from a year ago, said a company release Thursday. Lumos Networks reported Q2 total revenue grew 3 percent to $52.4 million, operating income grew 5 percent to $9.7 million, adjusted EBITDA grew almost 5 percent to $23.8 million, though net income was down to $1.2 million, said a company release Wednesday. Wells Fargo analysts said the Cogent revenue was "a touch light of expectations" but adjusted EBITDA margins "were quite strong." They hailed the "strong" Lumos results and said the company was "over the hump" as its "hard work pays off." At market close Thursday, Cogent stock was down 13 percent to $37.30 a share and Lumos' was up 10 percent to $12.94.

CenturyLink Q2 financial results were "solid" and revenue was "in line" with guidance, though consumer subscriber metrics "were softer than anticipated," said CEO Glen Post in an earnings release Wednesday. Operating revenue was $4.4 billion, compared with $4.42 billion in Q2 2015, and net income rose to $196 million from $143 million. Wells Fargo analysts said CenturyLink "reported light" Q2 results "as both financials and customer metrics missed our estimates," losing 66,000 net broadband subscribers. "The company did report better than expected" free cash flow of $617 million (compared to a $512 million estimate), but that "was due to lower capex and cash tax deferral to 2H2016," they said in an investor note. "We have some reservation that CTL can achieve the low end of its 2016 guide given all the moving parts, and reiterate our Market Perform rating." Among other ILECs reporting, FairPoint Communications posted its second consecutive quarterly increase in broadband subscribers and lost residential phone lines "at their lowest rate in many years," said CEO Paul Sunu in a release Wednesday. Consolidated Communications reported Q2 revenue dropped to $186.9 million from $201 million a year ago, though excluding a $10 million decline from certain sales, revenue fell only $4.1 million, said a company release Thursday. The Wells Fargo analysts said "market perform" FairPoint's results were "mixed" and "light" compared with their estimates, and they noted management reiterated expectations "to participate in the consolidating industry." While Consolidated had a "top-line revenue miss" the impact on cash flow "is negligible," said the analysts, who have an "outperform" rating on the company.

The Phoenix Center urged the FCC to disregard a "flawed" WIK-Consult report on business data services as the commission considers BDS regulation. Incompas had submitted the report in a docket 16-143 filing and said it showed BDS price reductions would have "spill-over effects that multiply the benefits" and promote a "virtuous cycle" (see 1607280060). But the report contains various errors, including "a focus on irrelevant factors, inaccurate computations, self-contradictory claims, and improper benchmarks," said a Phoenix Center release highlighting a longer study of the report. "The BDS proceeding is a dumping ground for inexpert economic analysis, including the WIK-Consult Report," said Phoenix Center Chief Economist and study author George Ford in the release. "Such dross is a direct consequence of the FCC's demonstrable disregard for serious economic analysis." Incompas emailed a response from CEO Chip Pickering: "The Phoenix Center will do and say anything to protect pro monopoly policy. The Phoenix Center believes competition is a dirty word, but fortunately we have two decades of innovation and investment success stories to disprove and debunk their ongoing attempts to raise monopoly policy from the ashes of the past." Incompas emailed a response from CEO Chip Pickering: "The Phoenix Center will do and say anything to protect pro monopoly policy. The Phoenix Center believes competition is a dirty word, but fortunately we have two decades of innovation and investment success stories to disprove and debunk their ongoing attempts to raise monopoly policy from the ashes of the past."

FCC staff finalized a rural carrier cost model and announced model-based offers of broadband-oriented Connect America Fund support for rate-of-return carriers that opt into the mechanism. Rate-of-return telcos have until Nov. 1 to decide, on a state-by-state basis, whether they want to receive subsidy support based on the final version of the Alternative Connect America Cost Model or a revised legacy mechanism, said a Wireline Bureau public notice Wednesday in docket 10-90. Both the model-based and revised-legacy mechanisms were approved in an order released March 30 that capped the rate-of-return high-cost fund at $2 billion per year, though model-based support can be supplemented by up to $150 million annually from USF reserves (see 1603300065 and 1603310039). Recipients of model-based support must meet broadband and voice service requirements, including varying levels of broadband deployment (25/3 Mbps, 10/1 Mbps and 4/1 Mbps) that were specified in one of several reports that the PN noted and linked to.

FCC staff approved the planned sale of Inmate Calling Solutions to TKC Holdings, which is controlled by H.I.G. Capital, a private equity investment firm. The transaction was approved in a Wireline Bureau order in docket 16-188. The bureau declined to impose a condition requiring TKC to stop the payment of site commissions to correctional authorities, which had been proposed by Securus, another inmate calling service provider (see 1607050055). "The issues Securus raises concerning ICS rates and practices with regard to the payment of site commissions are based on allegations of conduct by ICSolutions that do not directly arise from the transaction," said the order, which noted the applicants said ICSolutions' rates, terms and conditions would stay the same post-transaction. "The Commission has been clear that transactions should not be denied or conditioned based on non-merger specific issues. In addition, we agree with Applicants that ICS rate setting issues and practices are best addressed in the Commission’s pending industry-wide rulemaking proceeding on this subject."

It's unclear how potential FCC special access actions will affect Frontier Communications, CEO Daniel McCarthy said on an earnings call Monday. FCC Chairman Tom Wheeler "desires to have something done on his watch" and "he'll push to do that," McCarthy said, responding to an analyst question. "It’s a little too early to tell. We haven’t baked any impact in until we get a better feel for if and when there might be some productivity factor changes that get implemented, and we should have a better feel for that as we get into reporting our next quarter." ILEC competitors and critics want the FCC to use a productivity "X-Factor" to drive down incumbent business data service rates under price-cap regulation in areas deemed uncompetitive. McCarthy said Frontier is "essentially done" with cutting over customers from wireline systems in California, Florida and Texas that it acquired from Verizon. While there are some "lingering" small issues, he said, there's nothing like the "noise" of the early days of the transition when customers complained about service problems (see 1605060058 and 1607080045). In its first quarterly report consolidating the Frontier and Verizon system performance, Frontier said it achieved initial annualized cost synergies of $1 billion from the acquisition, and now expects to increase annual synergies to $1.25 billion by year three, up from an original $700 million projection. "Revenues fell light of our estimates but many of the headwinds it saw in Q2 should get better in Q3 and beyond (less integration expenses, less promotional credits and a more focused marketing effort), and dividend coverage (with a payout of 49%) remains the best of the RLEC group," said a Wells Fargo analysts' note giving Frontier an "outperform" rating. "Nothing in this quarter we saw as a 'cliffing' moment for the company, as we knew the first quarter out of the box would be messy." Macquarie Securities analysts said they "remain cautious on what could be an extended rocky integration period," with "choppy" execution on the former Verizon Fios systems. "Although a [dividend] yield of ~8.3% is certainly appealing and secured, it's not enough, given the lingering impact of integration," said their note, which rates the company "underperform." The company's stock closed down 4.5 percent at $4.85 Tuesday.

FCC staff granted ACS of Anchorage (Alaska Communications) a waiver of Section 51.332 of its rules in order to retire some copper loop plant before 180 days pass after a public notice was issued. "This waiver enables Alaska Communications to implement network changes prompted by two major road projects scheduled by the Alaska Department of Transportation & Public Facilities (AK-DOT), on or after July 31, 2016," said the Wireline Bureau order in docket 16-176 listed in Monday's Daily Digest. "Our grant of the waiver request is premised on Alaska Communications’ assertion that it has worked closely with the only customer directly affected by the planned changes, [General Communication Inc.], to ensure a smooth transition with no loss of service to GCI or any of its customers, and on the absence of any comments in the record in opposition.”