Like It or Not, Here It Comes 

On February 9^th, the FCC released a Notice of Proposed Rulemaking calling for comprehensive reform of the Universal Service Fund as well as Intercarrier Compensation reform.  The 300-page tome goes into exhaustive detail, but for those who actually have work to do, USTelecom hosted a one-hour webinar yesterday in which two senior policy advisors from the FCC, Rebekah Goodheart and Carol Mattey, gave an overview of the contents and proposals in the NPRM.

In my mind, the most striking takeaway after listening to the ladies’ comments was that, while it will take some time to work out the details of HOW to do it, the FCC WILL reform the system, probably this year.  And while both Ms. Goodheart and Ms. Mattey assured there will be no “flash cuts”, make no mistake, for some of you, existing support levels may be at risk.  The following is an overview of the comments made by Mattey on USF reform.

She began by saying that “Universal service has been at the core of the FCC’s mission since its inception, to make vital communications services available to all Americans…In the 21^st century, high speed internet, not telephone, is becoming our essential communications platform…We’re in the process of reforming USF and ICC to transition to a Connect America Fund (CAF) to ensure that networks capable of offering voice and broadband are deployed in all areas of the country.”

Mattey noted that the National Broadband Plan which was released last year provided a blueprint for USF and ICC reform and the NPRM released in February begins that process.  She outlined four “Pillars of Reform” that the FCC Commissioners unanimously agreed to when they adopted the NPRM:

1. Reform USF and ICC to focus on modern networks:  Explicitly support universal availability of broadband and voice service, target the funds to areas that are otherwise uneconomic to serve, and accelerate transition to IP networks;
2. Fiscal responsibility:  Eliminate waste, inefficiency and redundancy, create incentives for efficient operations and prudent investment, and constrain the size of the fund;
3. Demand accountability:  Require improved performance metrics and obligations
4. Market-driven and incentive-based policies: Facilitate deployment of technologies and services providing maximum value to consumers at the lowest possible cost.

She added that the Commissioners are committed to providing predictable transition mechanisms, i.e.  no flash cuts, but that they are also committed to a fast time frame for reform. 

As support for the need to reform the existing system, Mattey cited the FCC’s latest report on Internet Access Services, which found that 28% of voice communication lines are now VoIP and that there has been a 27% increase in mobile broadband subscribers in the past six months, bringing the total to 71m.  “These trends are putting pressure on traditional services and the existing USF.”

“The intent of the NPRM is to take immediate, specific steps to identify inefficient spending under current rules and use the savings realized to fund a new Connect America Fund as well as ICC recovery and a Mobility Fund.”  The total amount of funding would remain the same, but over time, all funds would be transitioned to the CAF. 

Mattey noted that today, while some rural consumers have access to good broadband services (defined as 768 Mbps download speeds), others have no broadband at all.  She also said that under the current system there are widely disparate amounts of funding going to areas which have similar population density and geographies. “You can have one company with little or no support, one next door getting $50-$100 per line, and a company on the other side may be getting $300 per line.”  She suggested that the current system doesn’t create the right incentives for broadband deployment in all areas, and said that the “NPRM takes a hard look at existing rules that aren’t working as intended and proposes to eliminate support that is going to areas that already have unsubsidized broadband service.”

Mattey said the FCC plans to use the national broadband map and FCC data to determine areas that have no broadband service, and she acknowledged that the broadband map has flaws at this time, but said that another update will be done in six months, which will ideally improve the map’s accuracy.

The plan is to conduct a reverse auction for carriers that wish to receive funding in order to construct broadband networks in unserved areas.  The bidding will be done on a technology neutral basis.  “We are looking to see where there is broadband today and where we can edge out broadband through the auction.”  She emphasized that the auction would result in additional support overlaid on top of existing support , “We’re not suggesting we’ll eliminate current funding.”

She also summarized numerous near-term reforms planned to improve efficiencies of the USF system:

1. Establish specific benchmarks for capex and opex for companies that today receive support based on their own costs..."For some companies there appears to be little relationship between how costly the carrier's area is to serve and how much support it gets…the current rules provide no limit on total funding and no benchmarks for reasonable expenditures. As a result, some rural areas have state-of-the-art broadband while other rural areas are being left behind.”
2. Adjust the current formula for high cost loop support while maintaining the current cap. This would redistribute funds within the pool of companies who are eligible for HCLS.  She said that under the current system a company has to spend more than the national average in order to receive funds. “We’re looking to redistribute funds within that pool and figure out ways to target it more efficiently.”
3. Eliminate recovery for corporate operations expense.  Mattey acknowledged that many companies have already said that they need funding for corporate costs in order to run their companies, but she suggested that caps need to be imposed. “Today there are no limits to how much overhead can be claimed...we need to take a hard look at this and make sure that funding is used for infrastructure deployment.”
4. Eliminate local switching support. She pointed out that $275m in local switching support went to ILECs last year, including some of the largest companies nationwide, because the system currently is based on the number of lines in a study area. “It was never intended to support large companies; particularly with the migration to IP/soft switches, it doesn’t make sense.”  Mattey suggested that one solution might be to look at switching and high cost loop expenses on a combined basis to determine who really needs the support.
5. Eliminate Safety net additive support.  The way the system is set up today, companies may become eligible for safety net funding  if they’re losing lines.  “That wasn’t the intent, it was meant  to reward investment.”
6. Establish a cap of $3,000 in total support per line for companies in the lower 48 states. For anything higher, Mattey said that the FCC would need detailed financial and broadband deployment reports from the company. She noted there aren't many companies whose support exceeds $3,000.
7. Eliminate interstate access support for large, price cap companies.  Mattey said that IAS was originally a five year transition plan, established in 2000, but that no action was taken by the FCC in 2005 and “It has outlived its use.”
8. Phase down and rationalize support for CETCs.  CETCs, mostly wireless companies, received  $1.3b last year, Mattey said, and less than $100m (7%) went to areas where there is a small wireless provider serving an area alone. She added that in some areas, support goes to four or more companies.  The plan is to use the reclaimed funds to target the availability of fixed and mobile broadband.

Finally, Mattey discussed accountability for recipient firms, which she characterized as a “key component of our reform proposals.”  “We’re looking to establish clear, enforceable public interest obligations for all recipients of support. We are mindful that these obligations should not be overly burdensome, but at the same time we recognize that accepting government funding comes with responsibilities.”  She added that the Commission is seeking comments on requirements that companies report both financial data as well as broadband deployment milestones to the FCC as a condition of receiving Universal Service Funds.

The Public Comment Period for USF/ICC Transformation NPRM (FCC 11-13) are as follows, with the final rules to follow:

• ICC arbitrage issues (4/1 initial, 4/18 replies)
• General comment period (4/18 initial, 5/23 replies)
• State Members of USF Joint Board (5/2)

The Commission also has planned three workshops on USF/ICC issues: 

• Intercarrier Compensation, 4/6 at the FCC 
• Connect America Fund, later in April at the FCC 
• Connect America Fund/Intercarrier compensation, in May outside of DC

For a copy of the entire NPRM on USF/ICC reform, click here.