Commissioners Hope to Sort Out ‘Mind-Boggling’ USF in 2011

The FCC plans to launch “several related” rulemakings in the fourth quarter this year, and “enact meaningful reform next year at some point,” said Baker. “It is widely recognized that our current system of explicit and implicit subsidies is inefficient, outdated and poorly suited to a world increasingly dependent on broadband connections to the Internet,” she said. But the FCC must tread carefully, she said: Transition of the fund to broadband must occur “in a way that avoids shock to consumers or providers that could endanger” broadband and traditional voice services.

The current fund is “mind boggling” in its complexities, and victimized by fraud and abuse, said Copps. “Getting this right is really make or break for the success of the National Broadband Plan.” He said it’s “consumer equity” that must “drive the train” in the overhaul. The USF “has not worked well for all rural areas” and is in “dire need of repair,” agreed Clyburn. It will take “enormous personal and political will” to accomplish reform, but revamping USF is critical, she said.

USF modernization should include a revamp of intercarrier compensation rules, said Copps. “Each of us has ideas,” including unifying rates and fighting arbitrage, he said.

USF must support broadband to bridge the digital divide between rural and urban areas, said Sen. Byron Dorgan, D-N.D., who chaired the hearing as substitute for the absent Chairman Jay Rockefeller, D-W.Va. Public policy must play a role in spreading broadband, as it did with electricity and other major national infrastructures, he said. The U.S. can’t rely on the market alone to build out broadband, agreed Copps. Without public policy, universal broadband is “just not going to happen,” he said.

Changes are needed for USF, agreed Senate Communications Subcommittee Ranking Member John Ensign, R-Nev. A revamp should include limiting USF support to one provider in each area, he said. But Ensign also urged alternative ways to spur broadband growth in rural areas, including use of tax incentives.

FCC commissioners disagreed whether they had to reclassify broadband transport under Title II of the Communications Act before moving ahead with a USF revamp. Baker said the Comcast ruling was narrowly written, and the FCC still has all the authority it needs under Title I. But Commissioners Michael Copps and Mignon Clyburn said it was critical to reclassify.

Sen. Mike Johanns, R-Neb., said he disagreed with all three commissioners. The Comcast ruling was a “striking blow” to the FCC, but the FCC should defer to Congress to respond, he said. “There’s a simple solution,” he said. “Come to Congress."

Baker and Clyburn agreed congressional action would be ideal in the long run. “The best path forward would be for Congress to act,” said Baker. “Title I, Title II… it’s all going to be litigated.” Clyburn would welcome congressional action, she said. “The Act needs updating.” But there are important issues that the FCC must address in the meantime, she said.

It’s “ironic” that Genachowski wants to stimulate broadband growth with a proposal that industry and market analysts say will stifle investment, said Ensign. But Copps said he didn’t “buy into” claims that reclassification would hurt the broadband industry. Broadband is “the investment opportunity of our time,” he said. “I can’t see any company saying, well, we're not going to be a part of that.” Sticking with a Title I approach will likely lead to many separate lawsuits, while moving to Title II would result in just one, he added.

Reclassification is “essential” because USF is for telecom services and broadband is currently considered an information service, said Dorgan. Congressional action may not come as soon as people would like, said Sen. Mark Begich, D-Alaska. “The phrase ‘move quickly’ does not really connect with the U.S. Senate,” he said.

Neither Rockefeller nor Communications Subcommittee Chairman John Kerry, D-Mass., attended the hearing. But both issued written statements urging a USF overhaul. “This subject is not simple, and updating the universal service system is not easy,” said Rockefeller. “But it is enormously important, and it is the right thing to do.” Kerry agreed. Revamping USF “should be a top priority for the agency and for this committee,” he said.

"The three commissioners appear fully committed to completing USF/ICC reform in the relatively near term,” and likely before 2012, said Concept Capital analyst Paul Gallant in a note. Gallant expects rules proposed by the FCC in the fourth quarter “to be detailed and to reflect much of what the FCC final rules will include several months later.”