FCC Approves USF Reform Proposal

The FCC Thursday (Oct. 27) approved a long-awaited and hotly debated reform proposal for its Universal Service Fund and intercarrier compensation regime. The vote was unanimous, though with Commissioner Robert McDowell concurring in part.

Its primary goal was to migrate phone subsidies to broadband. In the process, it appears to have maintained a variation on the right of first refusal for incumbent phone companies that cable operators had opposed. But it makes it clear that cable operators should get just as much money for exchanging and terminating VoIP traffic as phone companies do for handing traditional switched phone service, something the phone companies had opposed.

USF is the fund carriers pay into to subsidize communications services to rural and hard-to-reach areas for which there is no business case. Intercarrier comp are the payments among carriers to originate, transport, and terminate telecommunications traffic, within a framework of state and federal regs.

The USF subsidies are passed along to consumers, so the FCC also billed it as a consumer-focused way of giving those consumers the most bang -- in this case broadband -- for their buck, and to reduce the potential for waste and fraud that those consumers wind up paying for.

The proposal is some 500 pages long, and includes creating both a Connect America Fund for wired broadband subsidies, "budgeted" at $4.5 billion, though that appears to be short of the hard cap cable operators and others had sought. There is also a mobility fund of almost a billion dollars including one time and ongoing payments, more than had originally been proposed in the FCC's first draft.

There will be a five-year transition period from traditional support mechanisms to a new competitive process that will include auctions, although the mobility fund payments, a first for mobile broadband, will go immediately to reverse auctions. The FCC is also phasing out support to multiple mobile carriers.

There will be various public interest requirements tied to the broadband subsidies, including buildout schedules and speed requirements--at least 4 megabits downstream and 1 up, incentives forf 6 down and 1.5 up, and hopes/expectations for even faster in some areas.

The FCC commissioners to a person called it a historic day -- the FCC has been trying to reform USF for years -- though Commissioner Robert McDowell made the point that the job was only half done since the reforms only dealt with the subsidy side, rather than the contributions that provide them, and only the high-cost fund. The chairman said the subsidy side was on the agenda and that Lifeline fund reform was teed up for this year.

"While we are disappointed in the Commission's apparent decision to ignore its longstanding principle of competitive neutrality and provide incumbent telephone companies an unwarranted advantage for broadband support," said National Cable & Telecommunications Association President Michael Powell, "we remain hopeful that the order otherwise reflects the pro-consumer principles of fiscal discipline and technological neutrality that will bring needed accountability and greater efficiency to the existing subsidy system.  We are particularly heartened by the Commission's efforts to ensure that carriers are fairly compensated for completing VoIP calls."

"While we have not yet read the order, and are concerned by what we believe to be significant departures from the carefully balanced reform framework recommended by the companies that have long been dedicated to serving rural America, we are pleased that the commission's USF reforms appear to remain appropriately focused on the priority objectives of accelerating broadband deployment to consumers in unserved areas of the nation, stimulating investment, and creating jobs," said Walter McCormick, president of US Telecom.

The "carefully balanced" reference was to the incumbent telcos so-called ABC reform plan, which had sought, among other things, a 10-year transition period.

"The Federal Communications Commission deserves kudos for keeping the public interest in mind in tackling the complex problem of intercarrier compensation and the high cost fund," said Consumer Federation of America (CFA) Research Director Mark Cooper in a statement. "It rejected the totally self-service industry proposal (the ABC Plan) and handled four of the five major challenges it confronted well."

Cooper praised the fact that companies who get subsidies for broadband build-out must meet "clear public interest obligations"  to provide "adequate facilities at reasonable charges" for all people of the United States. He says the five-year transition away from the current system to a bidding model -- incumbent telcos had wanted 10 years--was a "demanding but fair" adjustment period.

"For the first time, public funds are being used to ensure that broadband is available at affordable rates," said Cooper, something CFA has been pushing for.

He said the FCC's one failure was not to reduce subscriber line charges as part of its reform of intercarrier compensation. He pointed to the FCC's unwillingness to reduce the charges to cost, and said CFA would challenge that part of the order, either through a motion for reconsideration or a court challenge. "[T]he Commission cannot close the book on rate reform and the best way to protect consumers is to eliminate the excessive costs recovered through the SLC," he said.

Jerry Ellig, a senior research fellow at the Mercatus Center said Thursday the key would be for the FCC to monitor the subsidies to make sure they were accomplishing their goal, including "clear measures of outcomes." Another goal for the reforms is to better protect against waste fraud and abuse.

John Eggerton

Contributing editor John Eggerton has been an editor and/or writer on media regulation, legislation and policy for over four decades, including covering the FCC, FTC, Congress, the major media trade associations, and the federal courts. In addition to Multichannel News and Broadcasting + Cable, his work has appeared in Radio World, TV Technology, TV Fax, This Week in Consumer Electronics, Variety and the Encyclopedia Britannica.