Large Telecom Companies Unveil USF, ICC Proposal, Find Consensus With Rural Carriers

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In a significant move aimed at hastening the deployment of broadband in rural America, six of the largest telecommunications carriers in the country have produced a proposal that would fundamentally reform both the Universal Service Fund and intercarrier compensation systems.

Ending weeks of speculation, the six carriers—AT&T, Verizon Communications, CenturyLink, Frontier Communications, Windstream Communications, and FairPoint Communications—formally filed the proposal with the Federal Communications Commission, along with a joint letter also signed by three major associations representing the rural telecom industry—the National Telecommunications Cooperative Association, the Organization for the Promotion and Advancement of Small Telecommunications Companies, and the Western Telecommunications Alliance.

The rural carriers did not officially sign on to the plan developed by the six carriers, but expressed support for its central elements.

Largest Consensus Proposal.

“This is the largest consensus proposal that has ever emerged to deal with these issues,” Hank Hultquist, vice president of federal regulatory for AT&T, said during a conference call with reporters July 29 announcing the release of the proposal.

The so-called “America's Broadband Connectivity Plan,” which has been in the works for five months, sets out plans for updating the Universal Service subsidy plan and the system for revenue-sharing among carriers who handle parts of connecting calls—two systems that, if modernized, could speed the deployment of high-speed internet services nationwide, a key goal of the FCC's National Broadband Plan.

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 badly in need of reform. But both systems have remained, for some time, intractable.

Proposal Driven by Price-Cap Carriers.

Negotiated under the auspices of USTelecom, the largest telecommunications industry trade group, the plan proposes two new universal service programs—a “Connect America Fund” and an “Advanced Mobility/Satellite Fund”—to subsidize broadband in “high-cost” areas—areas where, absent such support, broadband would not be available, such as rural and sparsely populated regions of the country.

The Connect America Fund would disburse $2.2 billion per year to subsidize the cost of providing broadband in high-cost areas served by price-cap-regulated incumbent phone companies as early as July 1, 2012. Carriers drawing from the new fund would have to provide a broadband service with a minimum downstream bandwidth of 4 megabits per second and a minimum upstream bandwidth of 768 kilobits per second—slightly lower than the 1 Mb/s downstream rate initially recommended by the FCC.

Support would only be available in high-cost areas where there is no private-sector business case to offer broadband to consumers, and the assessment of whether such an area is “high cost” would be made on a census block-by-census block basis. Support also would not be available in any census block in which at least one “unsupported competitor” is already offering broadband as of January 1, 2012—meaning that funding would not go toward subsidizing a carrier to compete with another carrier that is serving an area without the benefit of federal or state universal service support.

Overall, the ABC proposal recommends allocating $300 million for a new mobility fund and $2 billion for rate-of-return carriers, in addition to the $2.2 billion for broadband in high-cost areas.

USF support would be awarded based on a cost model, affording incumbent carriers the right of first refusal to offer a broadband internet service with that level of support. If the incumbent refuses, another carrier could then step in to offer service at the proposed support level. If more than one carrier bids to offer service at that level of support, the FCC would conduct a reverse auction and award funding to the carrier requesting the lowest support level.

The high-cost fund would be limited to a $4.5 billion per year budget.

Largest, Smallest Carriers Find Some Consensus.

In their joint letter, the six carriers and the three associations representing the rural telecom industry laid out in detail the areas where the two sides have been able to reach consensus.

The ABC plan, for one, urges the commission to establish an annual funding target for areas served by rate-of-return carriers beginning at $2 billion and, to the extent necessary to help ensure sufficient funding, increase by $50 million per year to enable access restructuring, promote further broadband build-out, and provide a “reasonable opportunity” to recover costs associated with existing investments in broadband-capable plant. This incremental funding would only be available to rate-of-return carriers.

The framework also proposes to reduce certain terminating switched-access and reciprocal compensation rates to $0.0007 per minute. These reductions would be phased in over six years for areas served by price-cap carriers and over eight years for areas served by rate-of-return companies. Rate-of-return carriers would still be able to charge and be paid by all carriers’ rates that are equal to current interstate levels, without any further automatic reductions, for terminating transport and tandem switching for all interstate and intrastate access traffic, in addition to the reformed per-minute rates applicable to terminating local switching.

AT&T's Hultquist described the current intercarrier compensation as “hopelessly complicated” and “plagued with inefficiencies,” a system based on distinctions between “local” and “long distance” that consumers no longer recognize or care about.

Collectively, the six-carrier group and the rural associations urged the FCC to make a determination that the traffic exchanged over the public-switched telephone network that originates and terminates “in internet protocol format” will be subject to access charges at interstate rates.

Rural Groups Agree on Some Issues.

While the rural associations did not explicitly “endorse” or “support” or “sign on” to the ABC plan, their agreement on several key issues will weigh heavily in the FCC's consideration of a final order.

Urban and rural interests differ sharply on universal service and intercarrier compensation reform, and until now the FCC has been unable to forge consensus between the nation's largest telecommunications companies and the smallest over how to repurpose billions of dollars a year in federal spending to support the deployment of broadband infrastructure in rural America.

The rural telecom providers have staunchly opposed two FCC proposals to hold reverse auctions and eliminate rate-of-return regulation altogether.

Like the ABC plan, the FCC's reverse auction proposal would limit funding to a single company to provide service to an entire service area. The company that could provide service with the lowest level of funding would win. But as part of the FCC proposal, the agency would replace rate-of-return regulation with price-cap regulation for USF beneficiaries, which would allow companies to set prices freely within a certain range and keep any profits that may result from cost reductions, including any cuts in investment.

A spokeswoman for OPASTCO said the rural associations will continue to push a proposal they filed with the FCC in April, which she says better protects the interests of rural telecommunications companies. The spokeswoman described the joint letter as a “complementary effort.”

Plan Will Be Issued for Comment.

The FCC, which called for industry input in the form of proposals, will now issue the ABC plan for public comment.

According to industry sources surveyed by BNA, many of the elements in the proposal probably will survive a final agency order, since the nation's largest and smallest carriers were able to come to an agreement on the thornier issues, and since the plan's top architects had kept the FCC Chairman Julius Genachowski's office abreast of developments throughout the process.

However, there were many “significant constituencies” that were not involved in the talks, noted one source. State regulators, competitive local exchange carriers, some mid-sized telecom carriers, smaller price-cap-regulated carriers, and the cable and wireless industries will now need to fully vet the proposal.

Industry Reaction Mixed.

The plan drew mixed reaction from stakeholders as they began to analyze its many working parts.

“With today's industry proposal, the FCC's job to pursue the public interest now gets a bit more difficult,” Tony Clark, the president of the National Association of Regulatory Utility Commissioners, and John Burke, the group's Telecommunications Committee Chair, said in a joint statement. “It is always tempting to favor a plan that is unlikely to be opposed in court by major industry players. Although we applaud the industry for its efforts, albeit through closed-door discussions, it is the FCC's job is to ensure that all interests, most importantly consumers, are well served by any effort to reform universal service and intercarrier compensation.”

Clark and Burke said the proposal should be weighed against other proposals, including one crafted by the state members of the Federal-State Joint Board on Universal Service.

Michael Powell, president and CEO of the National Cable and Telecommunications Association, commended USTelcom for its work, but noted that industry still has questions about how the principles would be “fairly applied” during the transition period.

“We believe these issues deserve to be aired and considered, but more than anything, we hope that our collective interest in change will serve as a springboard to reform that will establish meaningful controls on the size of the high-cost fund, expand broadband to those without access today, and create a new mechanism more attuned to the realities of modern technology and fair competition,” Powell said in a statement. “We look forward to working as a full partner with the Commission and all interested parties to achieve meaningful and lasting reform.”

Michael Rhoda, senior vice president of government affairs for Windstream, said there was the underlying concern about there being “too many issues on the table.”

Commenting broadly on the group's effort, Kathleen Abernathy, chief legal officer and executive vice president of regulatory and government affairs for Frontier, said as many as four million households would have access to broadband for the first time, under the ABC plan.

“Technology means we need to respond now. Technology changes,” she said. “At the center of all this debate is what it means for increased broadband to high-cost rural America, and that will result from the adoption of this plan.”

COMPTEL Blasts ‘One-Sided, Unlawful' Features.

COMPTEL, which represents competitive carriers, said that while it does not agree with the proposal in full, it supports a recommendation to bring all transport and termination traffic under Section 251(b)(5) of the Communications Act, so a single regulatory regime, interconnection agreement, and set of rates can apply.

COMPTEL CEO Jerry James said other features of the proposal, however, are “one-sided and unlawful.” The proposal does not treat termination and transport of traffic consistently as required by the act, James said. In addition, the proposed $0.0007 rate violates the statute's mandate that state commissions determine a cost-based rate by applying the FCC's methodology, he added, and the proposal is inconsistent with the Act in its treatment of IP-to-IP interconnection, which falls under Sections 251 and 252 of the act.

Agency Does Not Consider Contributions.

The most pressing question that was not addressed in the ABC plan is who will contribute to the new broadband-subsidy fund. The Universal Service Fund is sustained through surcharges tacked onto most consumers' land-line telephone bills and distributed among phone companies to subsidize the cost of providing service to rural areas. The FCC has decided not to take up the issue of contributions at this time, as has the six-carrier working group.

By Paul Barbagallo