FCC's Pai Calls for Standalone Broadband Subsidy Support for Small, Rural Carriers

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By Lydia Beyoud

June 29 — Small companies providing broadband in rural areas should be able to offer stand-alone Internet services without jeopardizing federal subsidies they currently receive, Federal Communications Commissioner Ajit Pai said.

Pai announced a proposal June 29 for uncoupling Universal Service Fund subsidies for the rural carriers from the obligation to offer telephone service, and redirecting support to broadband services without increasing the USF's $8.7 billion total budget, at a roundtable at the University of Nebraska at Omaha. The FCC is currently weighing how to expand the USF to foster broadband expansion among low-income households.

Linking broadband subsidies to wireline telephone service “effectively penalizes any rural company that offers customers broadband as a stand-alone service,” Pai said in a joint Omaha World-Herald  op-ed with Sen. Deb Fischer (R-Neb.). “We need to fix the Universal Service Fund and give rural consumers the same options for broadband as every other American,” the pair wrote.

The USF program helps subsidize the cost of bringing high-speed Internet and other telecommunications services to rural and low-income consumers, schools, libraries and tribal areas.

In separately released remarks, Pai proposed “targeted changes” to existing universal service rules to redirect funding to support stand-alone broadband facilities. “They would include stand-alone broadband costs when calculating high cost loop support and interstate common line support,” he said. His proposed changes would also determine how much of that support should be attributed to stand-alone broadband and would then direct USF support to be used to offset the cost of service.

Such changes to the existing rules “would give rural consumers the real option of choosing whether they want to purchase broadband and telephone service from the same company, and they would give carriers more assurance that arbitrary loopholes won’t prevent them from meeting consumer demand,” Pai said.

Connect America Fund Changes Proposed

The second component of Pai's proposal is to open up the Connect America Fund by the end of the year to voluntary participation by rate-of-return carriers. The FCC has been working on creating an alternative cost model for rate-of-return areas, but that model wasn't intended for small, rural companies, Pai said.

“The path to permitting voluntary participation by the end of this year shouldn’t be hard,” he said, as an industry consensus has emerged around key points of a private-sector proposal: voluntary participation, a 10-year program, support targeted to unserved locations that meet the CAF's 10 megabits per second (Mbps) up/1 Mbps down broadband benchmark, and a streamlined registration process.

Pai suggested adding to the industry proposal to allow for a five-year transition period if a carrier's support decreases under the proposed model, with no limit on participation for such carriers. Areas with the lowest level of broadband build out would be prioritized for CAF subsidies, he said.

Rate-of-return carriers are typically small, rural telephone companies that serve a limited number of lines and frequently have higher operating and equipment costs than larger price cap carriers, such as Verizon Communications Inc. or Windstream Holdings Inc., due to lower subscriber density, limited economies of scale and other factors.

ROR carriers serve about 5 percent of the nation's phone lines, and number between approximately 900 to 1,000 companies, according to an FCC spokesman.

Congressional Push

House and Senate lawmakers have been calling on the FCC to support stand-alone broadband. Pai said he agreed with a bipartisan group of 61 senators who wrote to the agency in May to urge it to overhaul the USF fee structure . “The FCC’s USF rules have not kept pace with changing technology and shifting consumer preference. Instead, out-of-date rules tie high-cost USF cost recovery for small rural carriers to a consumer’s actual purchase of voice service, even if the consumer no longer wants that service and only wants broadband service,” the letter said.

FCC Chairman Tom Wheeler said May 12 he was committed to revising the USF rules to accomplish that by the end of the year.

Industry Reactions

Rural broadband providers welcomed Pai's announcement. NTCA—The Rural Broadband Association, said it supported a targeted set of updates to existing high-cost programs to make sure consumers can access high speed and affordable broadband.

“We have also been working for months with other stakeholders and the FCC to identify an optional path for those carriers that want to voluntarily elect a cost model for universal service support,” NTCA CEO Shirley Bloomfield said in an e-mailed statement. “We continue to believe such a two-part approach can provide a more sustainable platform for universal service in areas served by smaller carriers,” she said.

However, carriers outside the traditional ROR or price cap carrier regimes could also benefit from modification of the commission's rules. Pai's proposal would benefit ROR carriers explicitly, but broadband providers such as those with the Wireless Internet Service Providers Association (WISPA) could also benefit from expanding the universe of providers that would be eligible for USF funding, Stephen E. Coran, a member of Lerman Senter PLLC in Washington and counsel to WISPA, told Bloomberg BNA.

To contact the reporter on this story: Lydia Beyoud in Washington at lbeyoud@bna.com

To contact the editor responsible for this story: Heather Rothman at hrothman@bna.com

Text of Pai's proposal is at http://transition.fcc.gov/Daily_Releases/Daily_Business/2015/db0629/DOC-334153A1.pdf.