FCC to Vote on Reform Proposal For USF, ICC at October Meeting

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By Paul Barbagallo  

The Federal Communications Commission will vote on a proposal for reforming the Universal Service Fund and intercarrier compensation systems at the agency's next monthly meeting, slated for Oct. 27, FCC Chairman Julius Genachowski formally announced Oct. 6.

For weeks now, lawmakers and members of the telecommunications industry have been clamoring for Genachowski to finalize an order for consideration by his three Democratic colleagues among the FCC commissioners at the agency's October meeting.

After some speculation about timing, Genachowski officially began circulating a proposed order among Democratic Commissioners Michael Copps and Mignon Clyburn and Republican Commissioner Robert McDowell early on Oct. 6—the chairman's informal "white copy" deadline. Customary procedure calls for Genachowski to deliver proposals he intends to bring up for vote at a meeting exactly three weeks prior to the actual meeting date.

“My fellow commissioners and I have been working hard to modernize the Universal Service and intercarrier compensation systems," Genachowski said in a speech at the FCC offices. "These programs are interrelated. They are complex. And they are broken. There is unanimous agreement on this at the FCC. And many members of Congress from both parties have expressed the same sentiment: The system isn't working."

Influence of National Broadband Plan.

While not divulging many details, the chairman asserted that the underlying goal of his USF and ICC reform proposal is to hasten the deployment of high-speed internet services nationwide, much like what was outlined in the agency's National Broadband Plan.

He also assured his critics that the agency will not simply "rubber-stamp" or "adopt wholesale" the proposals of any industry stakeholder.

"The core elements of our plan were presented in the National Broadband Plan, and included in our notice of proposed rulemaking back in February," he said. "We benefited from a number of fully developed proposals, including joint proposals from the state members of the Federal-State Joint Board on Universal Service, the rate-of-return carrier associations, and the [America's Broadband Connectivity] plan."

It has been widely believed that the agency would use the latter plan—the ABC plan, which was filed with the agency in August by six of the largest incumbent telephone companies in the country—as a "baseline" for a final order. But Genachowski confirmed in his speech that his proposal will feature only "elements" of stakeholder-proposed plans, while rejecting other "suggested policies."

His proposal will not eliminate states' carrier-of-last-resort obligations, for instance. It will also not preempt state jurisdiction to designate eligible telecommunications carriers—those entities that can receive universal service support.

Over the last several months, state regulators have gone so far as to threaten legal action if the FCC were to adopt the ABC plan developed by AT&T, Verizon Communications, CenturyLink, Frontier Communications, FairPoint Communications, and Windstream Communications. Their main concern with the ABC plan is being stripped of their authority to continue overseeing intrastate telecom services.

But tailoring his remarks to state regulators, Genachowski said that under his proposal, states will have a “vital and meaningful role in ensuring accountability for broadband build-out obligations, continuing their crucial responsibilities for protecting consumers.”

The National Association of Regulatory Utility Commissioners did not commenton Genachowski's remarks.

Plan Targets High Cost Fund.

As part of Genachowski's plan, the agency would eliminate the Universal Service Fund's so-called "high-cost fund"—the largest part of the universal service program with a budget of $4.3 billion for 2010—in several phases over the next 10 years. The money would be shifted to a new "Connect America" fund to subsidize the cost of providing broadband internet service—instead of telephone service—in areas where, absent such support, broadband would not be available.

Historically, most telephone and cable companies have not built out broadband infrastructure in rural areas because of the high costs involved. According to one telephone company that serves rural Virginia, the cost of providing basic high-speed internet service can amount to as much as $10,000 per home—and that is just to extend telephone lines to a consumer's home.

Under Genachowski's plan, the new Connect America fund would rely on competitive bidding, or a reverse auction, to award subsidies to companies for "wired" broadband infrastructure deployment in these areas where there are currently no “unsubsidized competitors”—in other words, where there is no broadband service available from any company, be it a cable operator, telecom company, or wireless carrier.

Genachowski said that the FCC would transition over time toward a "fully competitive system" for distributing Connect America fund dollars. How the agency will implement that transition is still unclear, however.

For example, some price-cap areas will be subject to competitive bidding “quickly,” while others will shift to competitive bidding in later years, under his plan.

But until the FCC begins a competitive bidding process, the commission will base support on a “rigorous model” that prevents carriers from receiving more subsidies than necessary to build out infrastructure, he said.

For rate-of-return-regulated carriers, the FCC would start using benchmarks to ensure that all reimbursable expenditures are "reasonable." The agency would also impose "commonsense limits" on reimbursements for corporate operations expenses. The chairman declined to elaborate further on what those limits might entail.

He did admit that while the current system for rate-of-return-regulated companies encourages network build-out by reimbursing the actual costs incurred, it also enables "inefficiencies," such as costly "over-building" of unsubsidized competitors.

In some cases, the Universal Service Fund allocates nearly $2,000 per month for some households to simply maintain telephone service. What is more, in many parts of the country, the existing subsidy system funds four or more companies to serve the same rural area.

For wireless carriers, meanwhile, the plan would create a new Mobility fund within the Connect America fund to provide a one-time infusion for private-sector providers to deploy 4G (fourth-generation) wireless networks in these areas, but would not increase the overall size of the fund.

ICC Second Prong of Reform.

Genachowski's plan seeks to overhaul the Universal Service Fund and intercarrier compensation regimes at the same time. Both systems are linked in the overall revenue stream that telecommunications carriers receive for their services. Both systems are considered broken by nearly all observers and in need of reform. Both systems remain, for the time being, intractable.

But intercarrier compensation, the exchange of payments among carriers for originating and terminating traffic, may be the most complex. Through the years, the system has developed into a messy patchwork of payment amounts, depending on the type of traffic and carrier.

As part of the Genachowski's proposal, the agency will target two controversial practices. The first is "traffic pumping," a scheme by which a small, rural carrier with high intercarrier access fees partners with a service provider, often a “free” pornographic chat-line operator or a free teleconferencing service, to drive voice traffic to their networks. The second is "phantom traffic," traffic intentionally disguised to avoid being identified for billing purposes.

The FCC will try to carry out major changes in its regulations to prevent both practices, while gradually reducing per-minute intercarrier compensation charges.

Genachowski said the plan will phase down access rates over a "measured but certain multi-year transition path," starting by bringing intrastate access rates in line with interstate rates. Again, Genachowski did not divulge any specifics about the transition. This issue in particular has raised concern with state regulators, which historically have had jurisdiction over intrastate access rates.

He did note, however, that the proposal includes a "tightly controlled" recovery mechanism under which some companies can receive transitional support from the Connect America fund.

Under the plan, the agency would also provide companies with limited flexibility to "modestly rebalance" rates in areas where some consumers are paying lower rates than many other consumers as a result of subsidies from wireless and long-distance consumers.

"By eliminating billions of dollars in hidden subsidies that are currently built in to wireless and long-distance bills, consumers can expect reduced costs, better value for their money, or both," Genachowski said. "And by reducing inefficient regulations and removing marketplace distortions and obstacles to deploying IP [internet protocol] networks, ICC reform will promote competition and innovative new services, driving further consumer benefits."

Could Be Big Win for Genachowski.

Securing the votes necessary to adopt the proposal would be a substantial victory for Genachowski. His predecessor, Kevin Martin, a Republican, failed to bring about meaningful reform of both the Universal Service Fund and intercarrier compensation systems during his tenure.

Since its inception, the Universal Service Fund has drawn from a surcharge that consumers pay on all interstate telephone calls. For the most part, these consumers bear the burden of the subsidy, and the decline in revenue from traditional long-distance calling is shrinking the base for contributions to the fund. (Most consumers pay a "Universal Service" line item surcharge on their monthly bills. Though not required, a telephone company can recover the required USF contributions directly from a customer through such a line-item charge.)

The FCC announced in September that the proposed universal service contribution "factor"—the monthly contribution surcharge on long-distance calls—for the fourth quarter of 2011 will rise to 15.3 percent, the second highest all-time level. The current rate stands at 14.4 percent. An all-time high rate was set during the first quarter this year, at 15.5 percent.

While the Universal Service system is badly out of date, so is the current intercarrier compensation system.

According to the agency, per-minute, intercarrier compensation charges actually create incentives for phone companies to maintain legacy networks, instead of investing in next-generation, all internet protocol-based infrastructure.

If modernized, both systems would encourage the spread of high-speed internet access to all corners of the country, a key goal of the Obama administration.

Concerns About Timeline.

Many within the industry greeted the announcement by the agency with measured praise, recognizing that many of the details are still unknown.

Several industry sources told BNA that they have concerns about what the specific timeline for implementation of reforms will be, what exactly the transition to incentive-based regulation will entail, and how that transition would impact existing investment.

Kathleen Abernathy, Frontier Communications' executive vice president and chief legal officer, said in a brief statement that the America's Broadband Connectivity Plan, which Frontier helped to develop, provided the FCC with a comprehensive framework to update both systems for the 21st century.

"We look forward to continued dialogue with the Commission as it finalizes the critical details of this momentous order which will accelerate broadband deployment throughout the country," she said.

Matthew Polka, president and CEO of the American Cable Association, said Genachowski's plan would "lock in a sole-source contract worth billions of dollars" to a handful of incumbent large phone companies to deploy broadband internet service at maximum speeds that are below average.

Competition, Mobility Fund.

"It favors one small group of providers over others to the disadvantage of consumers," Polka said in a statement. "By excluding thousands of broadband providers willing, able, and eager to compete to provide service to consumers living in rural areas where government support is provided, it will deprive these consumers of receiving the best possible service at the lowest possible price."

Weighing in for the wireless industry, Steve Largent, president and CEO of CTIA-The Wireless Association, said that while carriers agree that reform is necessary, the Mobility Fund, as proposed, is too small.

"CTIA has shown that initial investment costs for deploying ubiquitous mobile broadband services may range from $8-$21 billion, so adopting a sufficiently-sized Mobility Fund will be necessary to advance the Commission's goals for wireless service and to maintain the United States' mobile broadband leadership," Largent said in a statement.

Shirley Bloomfield, CEO of the National Telecommunications Cooperative Association, said her members will continue to press for "commonsense reforms" that recognize the unique challenges faced by small carriers and the consumers they serve in rural areas across the country.

Bob Quinn, AT&T's senior vice president of federal regulatory and chief privacy officer, echoed the sentiments of many industry stakeholders and committed to working with the FCC to finalize the order.

"For far too long, the FCC has wrestled with updating the universal service and intercarrier compensation rules for the broadband era. Absent reform, these rules will simply loiter on to foster more litigation and arbitrage, and ultimately stifle innovation and the benefits of broadband for consumers," Quinn said in a statement. "Clearly, now is the time to finally bring these reforms to fruition. FCC Chairman Genachowski deserves credit for bringing this important issue to this point."

One of the more pressing issues, which will not be addressed in Genachowski's order, is who will contribute to the new broadband-subsidy fund. That may be taken up early next year but no sooner.