Section 706 and Jurisdictional Questions ‘Key’ to Upholding USF/ICC Order, Analysts Say

The FCC’s intercarrier compensation reforms may be tough for carriers to swallow in the short term, but it will ultimately make them stronger and more competitive, said Michael Spead, senior technical specialist at ICF International. “Like the antiquated, pre-formed USF, this is another revenue stream that has gone the way of the dinosaur,” said Spead, former senior manager of the Universal Service Administrative Co. high-cost program. Spead accepts the FCC’s arguments that the transition period of up to nine years is long enough to allow carriers to adjust, and thinks the new models will give carriers flexibility to recover charges from end users, the Access Recovery Charge system and the USF.

"From a legal standpoint, the FCC has always had the power to implement this change,” Spead told us. “The carriers’ argument hinges on the FCC’s choice not to flex a particular muscle in the past, but that doesn’t mean the muscle wasn’t always the FCC’s to flex when they deemed appropriate.” The biggest weakness in the FCC’s case may be a jurisdictional challenge based on state rights to set rates, “but as the FCC was quick to mention, these challenges are at this time unripe, meaning that there is no immediate effect and therefore no action that infringes or inhibits state rights,” he said. “In the end, I think the FCC can beat this one too, but this may be the one that slows them down the most."

David Bergmann, counsel to NASUCA, said he was “perplexed” about the FCC’s claim that states and rate-of-return carriers want to preserve the status quo of an antiquated funding model. NASUCA is one of the petitioners to challenge portions of the USF/ICC order. “NASUCA, among many other parties, has for years and years and years urged the FCC to make changes” to USF and ICC by taking uncontroversial, incremental steps to fix certain problems, Bergmann told us. The FCC is “really setting up a straw man,” he said.

NASUCA disagrees with the FCC’s position that it can provide support for broadband under Section 254 or 706 of the Telecommunications Act, Bergmann said. The FCC has cited both as grants of authority. But Section 706 doesn’t give the commission independent authority to fund broadband, Bergmann said; it only lets the commission “remove barriers” to infrastructure investment. “We think the FCC is constrained by the law, not by what they want to do,” Bergmann said. The court’s interpretation of what “removing barriers” means will be a “key issue” in the case, he said.

"To use 706 as a justification to reform rural USF programs is an example of using selective data to arrive at a predefined conclusion,” said Douglas Meredith, director-economics and policy at telecom consulting firm JSI, which does work on behalf of rural ILECs. Most troubling, Meredith said, is that the FCC’s foundation of 706 authority -- its finding that broadband is not being timely deployed -- is based on a national finding instead of better, more granular data. “The FCC admits in its brief that 83 percent of the unserved broadband areas are in price cap areas. This implies or suggests that broadband in areas served by rural carriers is meeting a 706 policy. Thus, the FCC’s 706 finding is inaccurate for areas served by rural rate-of-return carriers insofar as it has data at a more granular level that disproves the FCC’s general 706 claim."

The pre-reform USF was getting broadband to customers who live in areas served by rural carriers, Meredith said. “The problem is with price cap carriers -- the same carriers who, under price cap, have zero incentive to assist in rural areas.” The FCC’s price cap policy “has resulted in exactly what one would predict,” he said: poor service in rural areas. “As the saying goes, you rob banks because that’s where the money is."

"Not surprisingly, since adoption of the order implementing the changes, some rural telco subsidy recipients have fought tooth and nail to overturn the USF reforms -- and to retain their subsidies without any reduction,” said Randolph May, president of the Free State Foundation, in a blog entry Thursday (http://bit.ly/Wzf0X1). After reading the FCC’s briefs, May said he was “reminded” that Chairman Julius Genachowski “deserves considerable credit for continuing to defend the modest reforms, and for continuing to explain in court and in Congress why it is in the interest of consumers and competition, if not the subsidy recipients, that the reforms be implemented,” May said. “It would be a shame to go backwards now.”