USF Reform: Big Boost for Broadband

Back in October, we wrote about the Universal Service Fund, and the fact that it was slated for a potentially dramatic overhaul. These changes were designed to focus more on broadband internet service and less on traditional landline telephone service. Since then, the FCC did in fact release its proposed changes and, as expected, they are designed to provide support for ensuring universal access to broadband services. The order, over 750 pages long, takes some reading and it will be a while before its full effect is actually realized since legal challenges are likely and may ultimately blunt some of its force. This post offers a quick look at some of the likely impacts of the order.

So what would the proposed order do, exactly?

The main driver behind change to the Universal Service Fund is the transition of Universal Service funds from traditional voice-based technologies and services to digital technologies focused more broadly on data. Broadband is not, however, the only driver of reform in the order. The FCC also sought to clear up issues related to certain charges that telecommunications companies make to one another, known as “inter-carrier compensation”, or ICC charges. Reform in these areas is designed to reduce fraud, waste and abuse in the current system.

In terms of Broadband the Order creates a new and separate broadband fund called the Connect America Fund. This fund will ultimately replace current funding for what is known as “high-cost” support. Traditionally, high-cost support is money given to encourage phone companies to spend more on infrastructure and service in areas that are more expensive to serve on a per-customer basis because they are remote or because customers there are more disperse. High cost support currently exceeds $4 billion per year.

The FCC Order also offers some customer service standards by defining broadband as data service with a minimum of 4Mb download and 1Mb upload speeds, and looks to provide money for increased build out in areas where these speeds are not currently available. Additionally, most new broadband service will be required to provide service quality that will allow for internet based voice and video communication, ensuring that consumers will be able to reliably use services such as Skype, Vonage, Google Voice, etc.

To accomplish these goals in the short-term, the FCC has frozen all current USF high-cost support and made an additional $300 million available for broadband. Companies that choose to apply for this support must commit to deliver broadband to one unserved location for every $775 in incremental support they receive.

Beyond providing support for traditional hard-wired broadband, the proposal supports the creation of a “Mobility Fund” designed to foster the development of wireless broadband networks in underserved areas. In the first phase of the Mobility Fund, some $300 million will be awarded via an auction process in late 2012 as a one-time support to accelerate development of wireless networks. The hope is that increased use of competitive bidding processes will better reflect actual costs than the models currently used.

As for the inter-carrier charge issues, the FCC Order seeks to end controversy produced by discrepancies in intrastate and interstate charges. The controversy arises from the fact that many calls have different companies handling the beginning and the end of the same phone call and these companies then bill the same call differently. The difference in billing arises because the companies have diverging financial interests which cause them to label and handle calls differently. And Oregon has not been immune to this problem.

FCC guidance on this issue is overdue and the new Order attempts to address the problem in several ways. First, it seeks to reduce “terminating charges” (charges one operator makes to another for calls that end on its network). In the long term, this will reduce the incentive for companies to drop or mislabel calls. Second, in the short term, it redefines various terms to allow companies to better detect and file complaints about problems.

It is also worth noting briefly what the Connect America Fund does not do. Outside of the high-cost and inter-carrier reforms, the plan leaves most other USF programs largely intact, though some of these, such as low-income programs like Lifeline, are themselves the subject of separate efforts at reform.

What does this mean for service providers?

The answer to this question depends a lot on what kind of service provider you are. A substantial portion of the order is dedicated to proposed rules dealing with rate of return for carriers, as well as price caps, but exactly how this will affect them remains a subject of much debate.

Cable companies are concerned that they have not been sufficiently included in the order. Specifically, there has been some frustration that many of the ways in which companies can apply for or bid for support under the new rules apply mainly toward traditional phone companies, thereby putting them at a competitive disadvantage. Notably, VoIP service providers will now have to pay some access charges for this service, though not at the rate ascribed to established carriers of voice service.

The phase-down of certain inter-carrier charges mentioned above will almost certainly mean lost income for many small rural providers of traditional phone service. Many have relied heavily on USF funds and access charges, and these providers have already seen declining revenue in recent years. Since the order makes substantial changes in both of these funding areas, these companies are concerned that they will have to raise rates or close up shop.

Prior to the order, some of the larger existing providers and wireless phone companies proposed a plan of their own known as “America’s Broadband Connectivity”, or the “ABC” plan. The FCC order goes further and will take longer than the plan these companies had submitted, but the process is sufficiently similar that they appear to be more generally content with it as a class.

What does this mean for consumers?

In theory, people who live in rural areas where internet service tends to be less available should benefit from these changes. The order makes a concerted effort to reach underserved areas, not just to increase competition in already served areas. For example, if an area is already served by a company that is not receiving USF subsidies, the assumption is that a good enough market already exists, and another competitor entering the market in that area will likewise need to do business without any subsidies. As noted above, the initial standard in many areas will be 4Mb/1Mb. However, in many areas a higher standard will be used either initially or be phased in over time.

The “mobile fund” should ultimately lead to better access to 3G and 4G mobile networks in rural areas. In the long run, this should mean that more people living outside of the developed networks in major cities should have better access to comparable wireless phone data services.

The reform to the inter-carrier charges is not likely to result in savings for many residential phone customers. In fact, it is likely that some areas will see increased rates for basic phone service. However, for many such carriers the FCC order establishes a rate ceiling of $30. The changes to inter-carrier charges should also result in better accountability for some USF funds. The FCC believes that benefits to customers from the increased efficiencies and new rules about charges will far outweigh any increases for basic phone service in many rural areas.

CUB looks forward to following this issue closely. Inevitably, as the various stakeholders have more time to consider the order in the coming weeks, more details will emerge. For readers looking for a brief synopsis of the proposed changes, an executive summary can be found starting on page 10 (paragraph 17) of the full order.

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