FCC Proposes Major Overhaul of USF High-Cost Fund

A mobility fund also was proposed to extend 3G coverage in areas “lagging beyond the national average,” said senior policy advisor Carol Mattey. The legacy high-cost fund, which the commission projects will spend $4.6 billion in fiscal 2010, has many problems, she said. It was designed to support voice service, and “it supports broadband today indirectly and inefficiently,” she said.

The commission is proposing a three-phase process over 10 years “to make sure that providers who require universal service funding in order to serve their communities can make the migration successfully,” Levin said. The commission would like to undergo phase one from 2010 to 2011. Its plan also includes proposing eliminating intercarrier compensation charges paid on a per minute basis. Mattey noted IP carriers make other compensation arrangements for interconnecting and terminating traffic: “The current system is irrational and inefficient and leads to unfortunate situations with arbitrage.”

During phase two, a methodology to “reduce intrastate charges down to interstate levels,” will be set to improve intercarrier compensation, Mattey said. From 2012 to 2016, the commission also plans to use the second phase to freeze legacy support levels, phase down competitive eligible telecom carrier funding and begin distributing funding from the Connect America Fund.

From 2017 to 2020, the commission expects to carry out the final phase, where any remaining high-cost legacy programs are moved over to the new fund. Voice-only networks will no longer receive USF, and “there will be the eventual migration down to a world in which there are no per-minute charges,” Mattey said. Because intercarrier compensation is a significant revenue stream for some companies, “the plan will set forth a vision for adequate cost recovery for those companies,” she added. The FCC said that contribution is not the main focus and it’s working within the high-cost fund’s existing budget. Instead of adding more costs onto consumers, “we're going to take a hard look at what’s working, what’s important and we'll shift it to a new priority,” Levin said.

Many groups consider the FCC’s proposals to be a significant step. The Independent Telephone & Telecommunications Alliance agrees high-cost support should be changed to target certain areas and that intercarrier compensation mechanisms “should be addressed in a manner that reduces opportunities for arbitrage while ensuring rational mechanisms to offset access revenue reductions,” it said. NCTA and USTelecom said the reforms outlined during the briefing are long-needed. “There is broad consensus that reform is sorely needed in these areas and can make a significant contribution” to the country’s broadband networks, said USTelecom President Walter McCormick.

The commission can count on support from the Bells. Success can be achieved “if we all work together to fashion solutions,” said Senior Vice President Jim Cicconi of AT&T. “To really fix this system, policymakers and all participants in the Internet ecosystem are going to have to roll up their sleeves, put aside differences and distractions.”

The National Association of Regulatory Utility Commissioners was pleased. “Congress expected the FCC to make some hard choices and they did,” President David Coen said. “It appears the FCC is setting out a solid framework for reform. The plan had to, and does, appropriately address universal service and intercarrier compensation reform simultaneously and also takes a long overdue and hard look at reforming the CETC process.”

Reactions to the FCC plan were guarded but mostly favorable among state officials on the USF joint board. Oregon Utility Commissioner Ray Baum, the board’s state chairman, said he hadn’t seen the details but judging from what he knows the FCC is making a “reasonable” start. “One thing is clear,” Baum said in a statement forwarded by the NARUC Telecommunications Committee, which he chairs, “The approach appropriately incorporates key elements the Joint Board adopted in its 2007 recommended decision on the shift to broadband, the creation of a separate wireless mobility fund, and the efforts to limit growth of the overall program. Compromises need to be made. There is momentum to finally fix this now.”

The FCC’s effort seems to be based on “solid reliable data,” said Indiana Commissioner Jerry Landis, the chairman of the Federal-State Joint Board on Advanced Services. “These are very difficult questions. Everyone involved should have expected to shift their positions somewhat. It is significant that there are no flash cuts, but some clear transitions that allow businesses to adjust to the plan.” Landis said he’s “encouraged” to see a technology-neutral approach.

“There has always been something suspect about the CETC [Competitive Eligible Telecommunications Carrier] process,” said John Burke, a member of Vermont’s Public Service Board, the Federal-State Joint Board on Universal Service and the Separations Joint Board. “The current approach of funding multiple carriers to provide service where ostensibly there is no economic business case to support even one has never made much sense.”

Chairman James Cawley of the Pennsylvania Utility Commission, who’s a USF joint board member, said he’s “particularly pleased” with the plan’s emphasis on efficiency and better targeting of areas of need. Cawley said he wants to know more about the proposed “modest” subscriber line charge increases and the mechanism for intercarrier compensation reform, but “benchmarks and trying to keep the overall size of the fund static are definitely good starting points.”