CommLawBlog : Broadcast & Communications Lawyers & Attorneys : Fletcher Heald & Hildreth Law Firm : Telecommunications, FCC Regulation, Communications Act

The experiments will test various factors in encouraging broadband adoption: primarily what discount dollar amount would be most effective, whether it should be a single discount or monthly (and if monthly, how long it should last), and how speed, usage limits, and consumer outreach might affect adoption.

Applications to participate in the Pilot Program are due on or before July 2, 2012. Would-be participants who are not already ETCs must be designated before the application deadline. Participants will likely be selected during the third quarter of 2012. The Pilot Program is anticipated to last about 18 months: three months of provider back office implementation, 12 months of subsidized service, and three months of finalizing and reporting data. For more information, there is a Pilot Program webinar available on the FCC’s website.

Here’s how the program is supposed to work:

Experiment design.  Did you enjoy participating in your high school science fair? Then this program will be right up your alley. ETCs seeking to participate in the Pilot Program must design and submit a project along the lines of a scientific field experiment, including a detailed description of the experimental design and the variables to be tested. As mentioned above, the focus is on learning which discount plans are most effective in promoting broadband adoption and retention, but speeds, usage limits, and the effect of consumer outreach are also of interest. The experimental design should randomize variations on broadband service offerings (e.g., geographic randomization).

Individual applicants are not required to incorporate an extensive number of potential variations of broadband service into their projects; rather, the FCC will create a “portfolio” of projects by selecting multiple projects to test a range of variations in diverse geographic areas (e.g. rural, urban, Tribal). The Bureau encourages ETCs to partner with field experiment experts and third-party organizations working to increase broadband adoption, such as academic researchers, social research organizations, contract-research firms, or non-profit organizations. ETCs are also encouraged to work collaboratively with each other, sharing administrative costs where possible.

Preference. Preference will be given to:

• Projects that include partnerships with non-ETCs that already have existing adoption programs in place to provide digital literacy (such projects may also include a control group that does not receive digital literacy training).
• ŸProjects that also test, with appropriate control groups, whether access to equipment can influence adoption.
• ŸProjects that indicate that their proposed projects promote entrepreneurship and small business, including those businesses that may be socially and economically disadvantaged.
• ŸProjects that demonstrate ability to execute the proposal (in terms of funding and expert and third-party qualifications).
• ŸProjects that demonstrate the value of the data to be collected in credibly addressing questions of interest.

The Bureau will also take into account the aggregate funding amount requested for each pilot project. In addition, it will select at least one pilot project directed at providing support on Tribal lands.

Costs and obligations. Participants in the Pilot Program will have the following minimum obligations during the program period (in addition to conducting the project):

• ŸParticipants must use the funds they receive from USAC to subsidize the discounted services they provide to low-income consumers under the Pilot Program. In other words, if a carrier knocks $10 off a customer’s phone bill, it will be reimbursed $10. Other project-related expenses, however, such as the costs of developing the project design, will not be reimbursed.
• ŸWhat program would be complete without reporting? In this case, participants must submit two types of forms. First, they must submit monthly reimbursement forms to USAC (similar to Lifeline reimbursement) for (1) any monthly discount of broadband service, (2) any applicable discount amount for voice telephony service if the broadband subscriber is also getting Lifeline support, and (3) any non-recurring fees for broadband provided to subscribers under the pilot project.  Second, participants must submit subscriber data on a “Low Income Broadband Pilot Program Reporting Form” to be collected directly by the ETC and submitted to USAC. Alternatively, at the participant’s request on its application, USAC will solicit this information directly from subscribers using an online survey. In either case, ETCs must obtain consent from their subscribers to provide this information before enrolling them in the program. This information will be collected at least twice: once when the subscriber first initiates service and again near the end of the project. The “anonymized” form will call for disclosure of income, age, ethnicity, family size, and details regarding subscriber usage.
• ŸSubscribers should all be enrolled within nine months of the start of the trial period, unless applicants make an upfront case as to why their project should have different timelines.
• ŸParticipants are “strongly encouraged” to file a final report sharing additional information with the Commission about lessons learned from the project, including cost on a per-subscriber basis of converting consumers to broadband. A representative may be asked to present such information at a Commission event.

 The Public Notice lists a number of specific items of information that must be submitted with each application that are not itemized here. Feel free to contact us with any questions.

One per household.  The R&O/FNPRM codifies the policy that each household gets support for only one phone line, mobile or fixed. (The agency already clarified, back in June 2010, that an individual gets only one Lifeline-supported service.) A “household” is assumed to consist of everyone who lives as a single address (not a P.O. Box), unless the residents self-certify that they are financially independent from each other (for example, unrelated adult roommates). Commenters (including Commissioner Clyburn) have pointed out that this is increasingly out of sync with the way modern families use phones, but the Commission has rejected the extra cost of providing phones to multiple individuals within a single household. For customers who want to show that they are financially independent of their housemates, the FCC has directed the fund administrator, the Universal Service Administrative Company (USAC), to come up with a certification form within 30 days of the publication of the new rules in the Federal Register.

National eligibility standards.  Right now, eligibility for Lifeline varies by state, although the FCC has developed certain “federal default” criteria applicable to the handful of states that have not claimed jurisdiction over Lifeline eligibility.  Based on those federal default criteria, the R&O/FNPRM establishes as uniform national eligibility criteria: (1) household income at or below 135 percent of the Federal Poverty Guidelines; or (2) participation in one of a number of federal assistance programs, such as Medicaid or Food Stamps. The idea is to give uniform opportunities to low income consumers nationwide, make compliance easier for carriers, and make auditing easier for USAC. States must recognize consumer eligibility under the federal rules, but can add other qualifying criteria, such as participation in a state program. 

Clear marketing.  When advertising Lifeline services, ETCs (carriers) must explain in clear, easily-understood language: that the offering is a Lifeline-supported service; that only eligible consumers can enroll; what documentation is necessary; and that the program is limited to one benefit (either wireline or wireless) per household. ETCs must also explain that Lifeline is a government benefit program, and false statements to obtain it may be punishable by fine, imprisonment, or being barred from the program.

Consumer certification.  When enrolling a new Lifeline customer, carriers must obtain a signed (including electronically or by interactive voice response) certification form from the customer. The required certifications include, but are not limited to, confirmation that the customer: understands how the Lifeline program works; is the only person in their household getting service; is eligible for Lifeline; and will let their carrier know if anything changes (within 30 days). Other distinct certifications not itemized here must be included on this form, so carriers should review the requirements carefully.

Annual recertification.  In addition to the initial certification, carriers must recertify the continued eligibility of all of its customers by contacting them for confirmation. This is to be done by checking with an eligibility database, when available. If no such database is available (or if the database does not confirm eligibility), the carrier must contact the customer – in person, in writing, by phone, by text message, by email, or otherwise through the Internet – to confirm his/her continued eligibility. Previously, sampling could be used for this reconfirmation; that is no longer the case. No documentation is required at recertification. Again, there are a number of specific requirements regarding recertification in the order that carriers should review carefully (no, texting “BTW R U still eligible for Lifeline?” is not enough).

Duplicates database.  The R&O/FNPRM establishes a new, nationwide duplicates database that carriers must query before signing up a new Lifeline customer. If that query indicates that the prospective customer is already getting support, the carrier can’t enroll the customer until the customer de-enrolls from the other service. The database will facilitate the transfer of Lifeline benefits from one ETC to another and will keep track of when a query was made and what information was submitted in the query. It will also verify the subscriber’s identification (without which the ETC will not receive reimbursement).

Two sidenotes on the duplicates database: (1) States can opt out of the national duplicates database if they can show that they have established their own state duplicates process at least as robust as the national; and (2) USAC will conduct a “scrubbing” of duplicates once the database has been populated. USAC will notify subscribers if they are receiving duplicate support and help them select a single provider.

Eligibility database.  Lifeline consumers will no longer be able to simply self-certify their eligibility. Instead, the FCC will establish an eligibility database. The database will confirm – at least initially – enrollment in the three most common programs through which consumers qualify for Lifeline (i.e., Medicaid, food stamps, and SSI). Until the database is established (ideally by the end of 2013), ETCs will be required to review documentation from the consumer to verify eligibility. The Commission is still seeking comment on the eligibility database at a fairly high level, including:

• How to encourage state eligibility databases to provide state-specific eligibility data, including potentially conditioning receipt of federal Lifeline funds on the implementation of a state eligibility database;
• Whether to help pay for state eligibility databases;
• What privacy issues are implicated;
• Whether to implement a national eligibility database instead of or in addition to state databases; and
• Whether the eligibility database should be integrated with the duplicates database.

Reporting subscriber data.  Carriers must populate the duplicates database by obtaining and reporting the following information about customers:

• name;
• address;
• phone number;
• date of birth;
• last four digits of the social security number;
• initial and de-enrollment dates;
• the means through which the subscriber qualified for support (e.g., Medicare, income); and
• the amount of Lifeline support received per month for each subscriber.

ETCs will have to provide an initial data dump of subscriber information within 60 days of notice that the database is capable of accepting data. Because many carriers may not be currently collecting all the information required by the database, they must collect such information from both new and existing subscribers (which can be done as part of the annual re-certification described below).

The carrier that gets customer data into the database first is entitled to reimbursement for that customer, regardless of which ETC the consumer signed up with first.

Disenrollment.  If a customer fails to respond to the annual recertification request, or if a carrier otherwise discovers duplicative support or lack of eligibility, the carrier must, after sending notification of impending service termination, disenroll the customer from Lifeline service. Likewise, prepaid ETCs cannot receive Lifeline support for customers who do not activate their service, or who do not use their phones for a consecutive 60-day period.

Carrier certification.  Carriers must certify, annually, that they are in compliance with the Commission’s Lifeline rules when submitting FCC Forms 497 to USAC for reimbursement. As part of this certification, an officer must certify that the carrier has procedures in place to review consumers’ documentation of income- and program-based eligibility and that it has obtained valid certifications forms from each consumer.

Audits.  New Lifeline carriers will be audited within their first year of providing service. Carriers receiving more than $5 million in annual support will be audited biennially.

Enforcement.  Violators of the rules will be notified of the failure to comply and given 30 days to come into compliance. Penalties for violations include: suspension of payments; monetary forfeitures (up to $150,000 per violation or per day of a continuing violation); revocation of authorization to operate as a carrier; and/or revocation of ETC designation.  Also, funds obtained in violation of the rules are subject to recapture by the government.

The measures described above are addressed to fraud, waste and abuse. Beyond those, the Commission took measures to update and simplify the Lifeline system:

Reimbursement.  The R&O/FNPRM replaces the tiered reimbursement system, which was based on incumbent subscriber line charges, with an interim flat rate of $9.25 (except on Tribal lands). Comment is sought on what would be an appropriate permanent flat rate. Reimbursement will also be based on actual subscriber counts, rather than projected subscriber counts. Starting July 1, 2012, to be paid by the end of the month, carriers will have to submit Form 497 by the eighth day of that month. Carriers may also file on a quarterly basis, with a single quarterly payment (rather than separate monthly payments).  Any new or revised Form 497s that may be necessary to reconcile records may be filed within a year of the original due date of the Form 497. 

Phasing out toll limitation support.  Back in the day, a frequent cause of phone service termination was customers’ inability to pay their long distance phone bills. To prevent this, the Commission required ETCs to provide a service that would automatically limit, or block, the amount of long distance charges a customer could receive in one month. Carriers were permitted to claim reimbursement from the FCC for the “incremental costs” of providing the blocking service. Nowadays, however, many service plans don’t distinguish between local and long distance calls, instead charging a set monthly fee for a certain number of minutes. This effectively creates a “toll limitation” service. And the recovery of “incremental costs” has apparently been subject to creative interpretation: carriers were claiming reimbursement for anywhere between $0 and $36 per Lifeline subscriber per month, and were not required to substantiate their claims. So, the R&O/FNPRM requires toll limitation in the future only for old-fashioned service plans that charge separately for long distance calls – capping reimbursement for “incremental costs” at $3/month in 2012, $2/month in 2013, and no reimbursement at all starting in 2014.

Eliminating Link Up.  Another payout historically subject to abuse is the Link Up program, which reimburses carriers for half of their “customary charge” of initiating service, up to $30. (It does not cover the cost of providing a mobile handset). Over time, many carriers’ “customary” service initiation charge migrated to $60, the number that would maximize the Link Up payout. In addition, many carriers were not charging the remaining $30 to their customers. Also, some carriers imposed the initiation charge only on Lifeline customers and not on “regular” customers.  In essence, carriers were simply collecting $30 each time they signed up a Lifeline customer. In response, the Commission is eliminating Link Up altogether, except for Tribal areas. Although the offending practices have been largely associated with wireless competitive carriers, the Link Up phase-out applies to wireline carriers as well.

Support for VoIP.  The R&O/FNPRM incorporates the Connect America Fund order’s “voice telephony” definition of supported service into the Lifeline rules, making IP-enabled VoIP an expressly supported service. Of course, VoIP is increasingly the norm as carriers move from circuit-switched to IP networks.

Support for bundled service plans.  The R&O/FNPRM provides support for voice telephony service even if it’s bundled with broadband, contains optional calling features, or is part of a family shared calling plan. Historically, the FCC’s rules have been silent on this issue, and not all states permit reimbursement for such bundled plans. The new rules do not require carriers to apply Lifeline to any bundled service, although the Commission seeks comment on such a requirement.

The R&O/FNPRM also establishes a Broadband Adoption Pilot Program to assess how Lifeline can best be used to increase broadband adoption among Lifeline-eligible consumers. The Wireline Competition Bureau will solicit applications from ETCs to participate in the Pilot Program. The Bureau will then test various amounts and durations of subsidies, geographic areas, and types of networks/technologies through a number of diverse projects. Carriers who are interested in participating but are not yet designated as ETCs should get their ETC designation applications in ASAP.

The R&O/FNPRM also cleans up some aspects of the ETC designation process for Lifeline-only carriers by:

• formalizing the Commission’s practice of forbearing, for Lifeline-only wireless resellers, from requiring that an ETC have its own facilities. (That practice dates back to the 2005 TracFone order.) This forbearance is subject to certain conditions. The Commission did not address the status of Lifeline-only facilities-based carriers, who may need forbearance from the requirement that their service area completely overlap rural phone company service areas. (Wireless services are generally authorized by county boundaries, while rural phone company service areas are drawn by blindfolded three-year-olds, so they hardly ever match up).
• confirming that carriers can’t get around the TracFone conditions by providing a component service – such as operator, directory, or toll limitation service – over their own switch and then claiming to be “facilities-based.” This is because the new definition of “supported service” is “voice telephony service” as a whole – not its individual components.
• eliminating the requirement that Lifeline-only applicants submit a five-year network improvement plan.
• adding a requirement that Lifeline-only ETCs demonstrate technical and financial capacity to provide the supported service, among other showings.

Lastly, the NPRM portion of the R&O/FNPRM seeks comment on additional issues, including:

• whether universal service support should be used for digital literacy training;
• whether Lifeline support should be limited to ETCs that provide Lifeline service directly to subscribers (rather than wholesale), precluding the flow-through of Lifeline support to resellers;
• whether the Women, Infants, and Children (WIC) program and homeless veterans should be added to the Lifeline eligibility criteria;
• whether the record-keeping requirement for consumer eligibility should be extended to ten years to cover litigation under the False Claims Act.

Comments in response to the NPRM will be due 30 days after publication in the Federal Register; reply comments within 60 days. Check back here for updates.

Instead, in response to a petition by Corr Wireless (full disclosure: Fletcher Heald represented Corr) complaining that the funds were not being correctly distributed, the FCC decided to just keep the money itself as a rainy day broadband fund. Presumably recognizing the legal infirmity of expropriating these funds in contravention of its own rules, the FCC quickly initiated a rulemaking proceeding which would authorize it to lawfully re-purpose such relinquished funds in the future.   The rulemaking was pushed through hastily, and on December 30, 2010, to no one’s surprise, the Commission adopted the Order. 

The Order included an odd proviso. Typically, FCC rulemaking decisions (like the vast majority of federal administrative actions) become effective 30 days after the new rule is published in the Federal Register. New rules can in rare cases be made effective earlier, but the agency must justify this extraordinary timing by showing that there is good cause for it. Here the FCC simply noted that Sprint had filed notices of its intent to relinquish its ETC designations in several states effective December 31, 2010, and unless the FCC got this new rule into place before December 31, those monies would have gone back into the pool for re-distribution.

Huh? When the earlier Verizon and Sprint monies were relinquished, the FCC had no qualms about stuffing the money into its own pocket, so why couldn’t it have done the same thing with the newly available Sprint money? Perhaps the FCC was candidly acknowledging that its earlier action was legally shaky. 

Unfortunately, the new action simply confuses things further.

First, the FCC's “good cause” showing for accelerating the effective date – that it wanted to prevent CETCs from getting funds that would otherwise be due to them under the rules – would hardly seem to qualify as a basis for deviating from the requirements of the Administrative Procedures Act. Second, although the Order released on December 30 expressly states that it is effective upon release, when the order was published in the Federal Register on January 27, the effective date was given as . . . January 27.   So if the Commission was trying to get things into effect before December 31, 2010, it seems to have stepped on its own foot. 

Finally, although Sprint had requested its relinquishment of ETC status to be effective as of December 31, 2010, the Wireline Competition Bureau waited until January 14, 2011 to approve that request, effective on that same day. If the Bureau could simply delay the effective date of relinquishment by delaying approval of Sprint's request, why did the Commission need to act hastily on December 30? And as long as it was delaying Sprint’s request anyway, why didn’t it just wait to approve relinquishment until 30 days after the December 30 Order had appeared in the Federal Register? That would have removed at least a couple of the legal challenges that are otherwise certain to be filed to this unusual legerdemain involving several hundred million dollars.

So is the Sprint money available for re-distribution to CETCs or not?   You make the call.

The new rule confirms that whenever a carrier relinquishes its ETC status and so gives up its USF financial support, the cap in that state will be reduced by the same amount the relinquishing ETCs used to receive, meaning that there will be no additional dollars to distribute to remaining ETCs.

What is not clear is how the new rule will provide funding for a broadband mobility fund, because slush money is available only if the public has to keep contributing at the old rate.  If the state ETC caps are reduced, it seems that the amount to be charged to the public should also go down.  That is obviously not what the FCC has in mind.  Rather, the Commission wants to keep collecting the money from consumers and repurposing it for mobile broadband studies.

Just a couple of weeks ago, the FCC announced that the consumer contribution factor for the first quarter of 2011 will be a whopping – and record-busting –15.5%.  We anticipate a fair amount of grousing from the public over a figure that will raise total taxes and fees on nearly all telephone bills to the 20-25% range.  That pushback may get the FCC to think twice about how far it can boost telephone taxes before the public brings down the building walls.

• Only Eligible Telecommunications Entities (ETC’s) or entities which have applied to be ETC’s could participate in the auction. Because this is a “mobility” project, participants would have to demonstrate that they have access to broadband spectrum (either owned or leased) in the areas where they propose to receive support. Before being awarded the grant, the proposed recipient would have to demonstrate its financial ability to construct the build-out necessary to deliver the 3G service.
• Bidders would bid on a per unit basis and be compared against anybody else bidding for the same census tracts. For example, one bidder could bid to provide service with a subsidy of $50 per person over the underserved areas in the whole state of Nevada, while another bidder might propose to offer service to underserved areas of Washoe County for $55 per person. Someone else might propose service to underserved areas in all of the mountain states for $48 per person. The last bidder would get the nod in both the county and the state since he was the low bidder in census tracts where there was overlap with other bidders. This process nicely avoids the problem of trying to compare bids on differing geographic areas. The award would then be the winning bid ($48) times the number of people in the underserved census tracts covered by the bid.
• Winning bidders will likely be required to demonstrate that they will provide the 3G service to a set percentage of the population by a set date (possibly two years), but the FCC seeks input on that. For this purpose, 3G-level service is deemed to be 200 kbps up and 768 kbps down while travelling at 70 MPH over 90% of the designated coverage area. The FCC considers these relatively slow rates to be comparable to HSPA and EV-DO. Both voice and data must be supported.
• Interestingly, towers constructed with support money must be made available to competitors, and data roaming must be permitted at reasonable and non-discriminatory rates. These measures are designed to ensure that other carriers are not frozen out of the supported markets.
• The actual money will be doled out in thirds – once right after your grant, once when you are 50% complete, and once when you are finished. Note that these funds are intended to be used for construction of infrastructure – not long-term support – so the award is a one-time thing.
• As always, the FCC will require annual status reports and awardees will be subject to audits.

None of this is set in stone, since the FCC is just beginning the process and seems genuinely interested in getting input as to how to make this process work efficiently and effectively. Earlier efforts to use reverse auctions to award USF funds have always fallen flat, but because this effort leaves wireline LECs unaffected, it may stand a greater chance of success. We notice that in many ways the process mirrors last year’s stimulus money program which was designed to shovel out $7 billion to fund broadband in unserved and underserved areas. Surely the stimulus awards and the resulting build-outs should be taken into account in awarding these new funds. 

Despite the many uncertainties that still surround this Fund (and which may ultimately make it evaporate), this rulemaking merits the careful attention of low cost carriers who cannot otherwise make a business case for serving marginal areas.

Comments will be due 45 days after publication of the Notice of Proposed Rulemaking in the Federal Register; reply comments will be due 75 days after publication. Check back here for updates.

The USF subsidizes affordable telecommunications services in certain circumstances. Each quarter the Universal Service Administrative Company (USAC), which oversees the USF, issues a projection of the support requirements for the various USF programs. USAC also collects quarterly revenue information from carriers and calculates anticipated revenues projections. From these data, the FCC derives a quarterly “contribution factor,” in the form of a percentage, from which carriers then determine how much they will owe to USF. The carriers then dutifully pass that burden along to their customers in a line item on their monthly bills.

The result is a $15 billion pool (more or less), collected from consumers by carriers and remitted to the USAC for distribution back out to carriers in furtherance of various USF programs.

One of those programs is the “high cost” program which ensures that consumers in all parts of the country have access to telecom services – and pay rates for those services – that are reasonably comparable to the services and rates available in urban areas. Subsidies are also available for low income consumers in both rural and urban areas,; the subsidies cover both hook-up and monthly charges. Estimated 2009 level of USF “high cost” support: $4.3 billion. Eligible Telecommunications Carriers ("ETCs") that can get USF distributions include incumbent local exchange carriers (referred to by the FCC as “ILECs”) and carriers who compete with them in offering local service, both wired and wireless (dubbed “competitive ETCs” or “CETCs”).

The FCC has two problems with the current system: (1) the support requirements (i.e., carriers and services entitled to USF funding) have ballooned in size, turning the line item surcharge on telephone bills into the equivalent of a rather nasty tax on consumers; and (2) USF subsidies tend to support 20th Century voice services, which the FCC thinks are old-and-in-the-way, as opposed to today’s-hot-and-happening 21st Century services like texting, tweeting, and on-the-go web browsing.

To address the nasty tax issue, the FCC put a lid on the total amount of support given to CETCs on a state-by-state basis in 2008. As a result, CETCs are limited in two ways. First, they can’t get more pay-out from the USF “high cost” program than the ILEC gets in the same service area. Second, as a group, they can’t collect more than the cap for their state – so that if more CETCs jump into the pool, the amount distributed to each CETC in the state is reduced to avoid exceeding the cap.

But what if a couple of CETCs were to get out of the pool? That’s when things get interesting.

In 2008, Verizon Wireless and Sprint-Nextel – both providing CETC wireless services even though their parent entities may also be wireline ILECs – needed FCC approval for big mergers. To help things along, both agreed to “surrender” their universal service support, giving it up in 20% increments over a five-year period ending in 2013. That is, they would gradually walk away from their share of the USF pool. And they were in the deep end of that pool: the FCC estimated their 2008 share to amount to about $530 million.

In 2009, it seemed to some carriers that they were being shorted by USAC in the funding they had expected to receive as high cost support. They asked, and sure enough, USAC acknowledged that it wasn’t actually redistributing the money that Verizon and Sprint had left on the table. 

Corr Wireless (an FHH client) promptly cried foul. It asked that the USF funds relinquished by Verizon and Sprint be redistributed to Corr and other CETCs, as the interim cap order required.   Corr pointed out that, in imposing the 2008 support cap, the Commission had indicated that the amount of the cap would remain unchanged regardless of the number of carriers making claims. With the departure of Verizon Wireless and Sprint from the pool, the money that otherwise would have gone to them should have been available to be divvied up among the remaining claimants. The basic premise of the cap was that the amount of funds remains constant but the percentage available to participants would go up or down as the number of participants increased or decreased. Once Corr got the ball rolling, a host of other wireless carriers joined in.

The FCC said no, that’s not going to happen. Even though the FCC acknowledged that the interim fund cap is a regulation that cannot be changed without a formal rulemaking proceeding, the Commission nevertheless held that USF payments will continue to be calculated as if Verizon and Sprint were still in the pool. The result, of course, is that as the universe of CTECs grows, the amounts available under the cap for each of them will continue to shrink. And, under the Commission’s proposal, any time in the future that a carrier exits the pool, we’ll just go ahead and pretend that they’re still there. Consumers will thus still have to pay the nasty tax as if the departing carriers were receiving support, but since those carriers are gone, they won’t really be receiving that support. Result:  the USF will have a bunch of money left over that it doesn’t have to dole out. 

Now here’s a surprise: The Commission has decided that that extra money should – and likely will – be placed in reserve for future broadband use.

The FCC is now proposing a permanent rule change that would allow excess USF funds to be reserved for all kinds of Good Things, like: enhancing broadband opportunities for children, teachers, schools, libraries; improving  rural health care by advancing telemedicine services in rural areas; supporting a Mobility Fund to improve 3G wireless broadband in states with the worst coverage; and “in the long term, directly support[ing] broadband Internet services for all Americans”. (By the way, the FCC says, we plan to propose this new Mobility Fund in a formal proceeding during the fourth quarter of 2010, so stay tuned.)

But a rulemaking proceeding is a prospective exercise. That is, whatever the results of the rulemaking may be, they would not ordinarily reach backward. What, then, to do about the excess funds that will pile up between now and then, funds which USAC would otherwise have to account for? No problem, says the Commission. We’ll waive the requirement that the USAC account for differences between its projections and its actual revenues. And we’ll also instruct the USAC to ignore any effect from the Verizon Wireless or Sprint-Nextel mergers in doing its calculations.

The FCC suggests the possibility that avoiding increasing support to ETCs remaining in the pool could facilitate a reduction in the nasty support tax; but with so many broadband ideas out there clamoring for support, it remains to be seen which will emerge as the ultimate victor: frugality, or watching-movies-on-the-bus-while-tweeting.

The deadlines for comments and replies won’t be set until the NPRM is published in the Federal Register. Check back here for updates.

The existing patchwork of USF “high cost” programs is in many ways irrational, overly complex, and inefficient. For example, eligibility for certain types of support is based on company size or regulatory classification rather than on the costs of serving the area. Furthermore, the USF now supports carriers generally on the basis of their actual costs of providing service, whether or not they or someone else could have done it for less. 

Although many aspects of USF are ripe for reform, its most egregious shortcoming, in the eyes of many, is clearly its failure keep up with technology – i.e., to fund broadband. (The current “high cost” program supports only voice service.) Significantly, in this post-Comcast regulatory environment, the Boucher-Terry bill would address that conundrum by giving the FCC express authority to direct USF funds to broadband services.

Would consumers have to pay more for the proposed changes? The bill mandates that any reforms will not “unreasonably” increase the contribution burden on consumers (i.e., the line item charge for USF that appears on your phone bill). To make this mandate mathematically possible, the bill would reduce support to certain carriers, expand the contribution base, and perform other feats of legislative legerdemain designed to balance the fund with the greatest of ease. Nonetheless, consumers may not feel entirely reassured by the guarantee that rate hikes will not be “unreasonable.”

The following is a recap of some of the bill’s key provisions.

Broadband service funding.  High-speed broadband service would be deemed a “supported service”. The catch here is that, in areas lacking high-speed broadband service, recipients of support from the “high cost” USF program would have tomake broadband service available within five years (either through their own facilities or through resale, including satellite resale). The bill would also allow the FCC to expand the universe of “supported services” down the line, so it won’t get stuck again as technology develops. 

Reduced funding for incumbent carriers in competitive areas. The FCC would be required to develop a mechanism for reducing support to incumbent local exchange carriers in areas where at least 75% of households are able to get voice and broadband service from an unsupported competitor.

Competitive bidding for mobile wireless carriers. In an area with three or more qualified mobile wireless carriers, the FCC would have to pick no more than two applicants, using a competitive bidding process similar to that for a government contract. Primary factors would be the amount of the bid and the proposed minimum broadband speeds, but the Commission could consider other things, like existing service area and proposed speed of build-out. Winning bidders would receive a flat-rate subsidy for up to 10 years. In areas with fewer than three mobile wireless carriers, support would continue at the per-line level in effect before enactment. Furthermore, overall high-cost support to mobile wireless providers would be capped at the pre-enactment level.

Wider contribution base. Any provider that “offers a network connection to the public”, including Internet service providers, VoIP providers, and cable companies, would have to ante up. The FCC would be required to devise a new contribution calculation methodology, which could be based on (a) revenues, (b) telephone numbers and IP addresses, or (c) a combination of the two. To broaden the base even further, intrastate revenues (which are excluded under the current system) would be included in the contribution base, along with international and interstate revenues.

A new “high cost” model. The FCC would have to develop a new model for distributing “high cost” support that would factor in the costs of providing both voice and broadband service. The new model would determine these costs on a study area and wire center basis. Current rate-of-return carriers, however, would continue to receive rate-of-return support. 

Intercarrier compensation. Intercarrier compensation reform (ICC) would be left to the FCC, which would have a year to complete an initial proceeding. To facilitate the FCC’s chore, the bill would extend the Commission’s ICC authority to intrastate traffic. 

Miscellaneous. In addition to the foregoing high profile item, the bill would also: strengthen auditing; prohibit “phantom traffic” and traffic pumping; address rural health care support; and eliminate the “parent trap” affecting support after the sale of an exchange; carve out an exemption from the Anti-Deficiency Act; prohibit the FCC both from adopting a primary line restriction and from reducing high-cost support to tribal lands unless in the public interest. 

Note for carriers interested in Lifeline-only designation. With respect to the “Lifeline” USF program – which focuses on service to low-income consumers, not “high cost” areas – the bill would codify the Commission’s TracFone line of forbearance cases by formally exempting Lifeline-only carriers (i.e., resellers) from the “own facilities” requirement of 47 U.S.C. §214(e)(1)(A). Boucher has also indicated a willingness to include Lifeline funding for broadband, which already been proposed by at least one other Representative.

Possible additions to the bill. Of course, we are at the very beginning of the legislative process which can drag on for a while, with plenty of opportunity (and incentive) for amendments along the way. For example, Boucher is apparently willing to work with Rep. Ed Markey (D-MA) on including his E-Rate proposals, such as broadband vouchers for students and supported access for community colleges and head start programs.  More amendments can be expected.

Meanwhile, the FCC is also trying to overhaul the USF on its own. Chairman Genachowski has reiterated the Commission’s commitment to do so. In connection with the National Broadband Plan unveiled with considerable fanfare earlier this year, the FCC adopted a Notice of Inquiry and Notice of Proposed Rulemaking (NPRM) aimed at jumpstarting that overhaul process at the Commission level. While the FCC’s authority, under the current Communications Act, to achieve its ambitious goal is far from clear, the Commission has at least one important cheerleader on Capitol Hill. In a recent letter to Genachowski, Sen. Jay Rockefeller (D-WV) – who happens to be the Chairman of the Senate Committee on Commerce, Science and Transportation – has urged the FCC to focus more on unserved areas than on “the size and regulatory classification of the carrier.” Rockefeller’s letter was in response to a mining disaster in West Virginia and makes no mention of the Boucher-Terry bill (which would retain rate-of-return regulation for current RoR carriers).

Will the bill pass? Boucher and Terry have been working on enacting USF reform for many years, but Boucher is optimistic about this bill’s chances of passing, perhaps even this year. His optimism is based at least in part on the fact that a wide cross-section of the communications industry – including AT&T and Verizon, ISPs, cable, satellite, and rural telcos – has expressed support for the bill. Many mobile wireless providers, however, have stopped short of fully endorsing the bill because of concerns about its proposed bidding procedure. 

Still, many players share Commissioner McDowell’s overall assessment of the current regime as “antiquated, arcane, inefficient, and just downright broken” and agree that the bill is a desirable first step toward comprehensive change. It proposes some long-overdue changes and attempts to balance various carriers’ interests, but leaves many contentious details to the FCC. We’ll keep you posted as the USF reform saga continues.