McDowell Pressing for Quick FCC Decision on USF Contribution Reform

A USF contribution revamp was expected to be the next big item on the USF reform agenda. But FCC Chairman Julius Genachowski in a Feb. 16 appearance before the House Communications Subcommittee raised questions about timing (CD Feb 17 p3). Asked pointedly about the timing of a contribution order by Chairman Greg Walden, R-Ore., Genachowski would commit only to starting the process within six months. Walden noted that the contribution factor was now at 17.9 percent and is expected to remain above 17 percent.

"I see no reason why the commission cannot initiate a rulemaking and issue an order on FCC contribution reform by the end of summer,” McDowell told us. “It was my hope, as well as my understanding, that the commission would initiate a rulemaking this spring and conclude it in the summer. To date I have not been informed that those plans have been changed.” In a January interview, McDowell said consensus seemed to be growing in favor of moving to a numbers-based methodology for assessing USF fees (CD Jan 9 p1).

Genachowski “can do better” than propose new contribution rules by August, Walden said Friday. Instead, the FCC should release a notice of proposed rulemaking by May 1, Walden said. “The Commission previously said it would propose contribution reforms by the end of 2010,” he said. “The Commission’s had more than a year to review its proposals. Now it’s time for the public to speak, and for the Commission to act."

The FCC has already developed an extensive record on a numbers-based proposal for contribution reform, as an alternative to basing USF on interstate revenue. But the record was largely developed under former Chairman Kevin Martin, before the USF was refocused on broadband.

Verizon and AT&T were strong supporters of a number-based methodology, in an earlier comment cycle. CompTel was sharply opposed. Internet voice providers offered mixed comments. The Alarm Industry Communications Committee said if the FCC makes their members pay into the USF the effect would be “devastating” for the alarm industry.

"There'll be comments and the whole cycle,” said a wireline official. “The consensus that I've heard is you don’t take up contribution reform before the election. If you do contribution reform and you assess some people less and you assess some people more, it’s like a tax increase and it could become part of the campaign."

Contribution reform is “the elephant in the room,” as the FCC moves forward on USF, said Jeff Silva, analyst at Medley Global Advisors. “My sense is the FCC appreciates the import of USF contribution reform and assume it will eventually address it,” Silva said. “Right now, I imagine the commission is juggling several balls and perhaps even a few machetes insofar as USF/ICC reform implementation and follow-up rulemakings. This is hard, complicated stuff that is difficult to tackle in one fell swoop. At the same time, any meaningful USF/ICC reform must address a reexamination of the contribution factor. It is without doubt the elephant in the room at this point.”

"It’s optimistic, but I think it’s realistic,” Mike Romano, senior vice president-policy at the National Telecommunications Cooperative Association, said of McDowell’s end-of-summer projection. “We're hopeful that the commission moves forward and achieves the art of the possible,” he said. NTCA supports a revenue-based contribution mechanism. The current mechanism is already revenue-based, and “just broadening that base is the simplest and most straightforward way to get from here to there,” Romano said, saying he hasn’t seen a groundswell of support for a numbers-based system, which wouldn’t make much sense given the industry’s IP-based future. “Legacy telephone services will become less relevant over time,” he said. “Numbers just seem like a backward-looking mechanism, as compared to applying it on revenues, that are derived from all sorts of communications services whether they use numbers or not."

Genny Morelli, president of the Independent Telephone and Telecommunications Alliance, said she isn’t surprised that McDowell is seeking a quick resolution of the reform process because he has been “pretty vocal” about it. “It’s certainly a very ambitious schedule, particularly in light of the fact that it’s effectively March and the commission hasn’t issued an NPRM yet, but we'll go as quickly as the commission’s willing to go,” she said. “So if they present an ambitious schedule, we'll live up to that because we want to see it happen soon."

ITTA has long wanted the commission to tackle contribution reform and would have preferred to see it worked on before taking on distribution, Morelli said. The USF/ICC order put in place a new distribution mechanism, which is “a little like putting the cart before the horse,” she said. “Before you decide how to distribute money, you should know the future of how much money you're going to have and where it’s coming from.” But she questions McDowell’s belief that there’s an industry consensus around a numbers-based solution, or even any solution. “That’s part of the reason why contribution side reform has bedeviled the commission to this point,” she said. “A consensus position that is broader than just one segment of the industry hasn’t developed to this point.” ITTA’s own position is “in flux,” Morelli said, and she expects that other carriers may be similarly uncertain right now. “Particularly in light of the distribution side reform and, more importantly, the ICC reforms that the commission adopted at the end of last year, that’s affecting carriers’ previously developed positions on contribution side reform,” she said. “So most folks are taking another look on where they come out, and what type of mechanism would best serve their business interests."

In 2008, CompTel preferred a revenue-based contribution mechanism; a numbers-based system seemed to disproportionately impact certain entities, said in-house counsel Mary Albert. Now, it’s “difficult to say” what the group’s ultimate position will be, and it will depend on the new proposals the FCC puts out for comment, she said.

"Until the FCC tackles contribution reform, the USF reform glass remains half-empty,” said Free State Foundation President Randolph May. “There is pretty widespread agreement that the current revenues-based approach is economically inefficient and the FCC needs to adopt some variation of a connections or number-based approach. Contribution reform has been on the table for years, and Chairman Genachowski just needs to bite the bullet and get it done. I gave him credit for accomplishing some modest reform on the distribution side, but right now the FCC is stuck in a halfway house and it needs to get out."

Free Press Policy Director Matt Wood said he was surprised to learn that contribution reform may be pushed further down the road than expected. “While the commission understandably has a lot to do in further proceedings on Connect America and Lifeline, contribution reform is an essential piece of the puzzle in any real overhaul of USF,” Wood said. “The long-term goals here must be maintaining basic phone service and promoting broadband adoption -- not maintaining the size of the fund for its own sake, or preserving existing business models. Whenever it takes up the issue of contributions, the FCC has to make sure that it doesn’t cause a net decrease in adoption by raising consumer prices just to keep inefficient and unnecessary subsidies flowing to legacy providers."

Not everyone is as optimistic as McDowell on the summer timeline. “I'd be shocked if they were able to do that,” an attorney representing several competitive LECs said Friday. “This is a very sensitive and contentious issue, and while I think that everyone in the industry wants contribution reform, how to get there is a little bit more difficult.” The contribution side should be less contentious than distribution was, she said, because the carriers don’t have the same financial stake because ultimately reforms will be absorbed by end users. But she still cited several possible sticking points, the biggest of which could be whether broadband services should have to contribute. Because USF is used to fund broadband projects and network buildouts, “they should have to contribute as well because it’s very unfair having voice services pick up the tab for everything,” she said.

"It seems tough to get it done by summer,” another CLEC official said, noting that Congress “pressed” Genachowski into saying contribution work would start within the next six months. “It’s going to be a pretty contentious proceeding so if they're not starting for several months I don’t see it being a quick process to get done by the end of summer -- but stranger things have happened.”