NBP envisions overhaul of compensation/distribution schemes to fund $24 billion to close broadband “gap”

One of the problems which has vexed the FCC for more than a decade is how to adapt the Universal Service Fund (USF) and Inter-Carrier Compensation (ICC) regime to the world of the internet.  The USF and ICC were 20th Century constructs which patched up subsidy and traffic exchange problems arising from the AT&T break-up.  The need for reform in these areas has been stymied by the inability of policy-makers to resolve the competing, but more or less legitimate, demands of all the players.  The advent of broadband offers the FCC an opportunity to break the logjam in the context of a migration to all-digital, all-IP networks.

In this cause, The FCC’s ambitious National Broadband Plan (NBP) to facilitate universal access to broadband is inspiring, but as Rod Tidwell and Jerry McGuire (portrayed by Cuba Gooding, Jr. and Tom Cruise, respectively) famously insisted: “Show me the money!” The NBP asserts that it will cost $24 billion to close the “broadband availability gap” and provide the targeted level of affordable broadband service to currently unserved areas.

Where will this money come from?

The FCC proposes to transform and re-purpose the major source of funding currently used to facilitate the provision of telephony in unserved areas, i.e., the USF, into a new Connect America Fund (CAF) to facilitate provision of broadband services. And because, for historical reasons, the USF programs are deeply connected to the way that telecommunications carriers make payments to each other for carrying telephone traffic, the NBP also proposes revisions to the ICC system. With broad proposals to “comprehensively reform” the complex mechanisms through which billions of dollars per year are collected and disbursed, revisions to USF/ICC will be a hotly contested process that will raise some difficult questions.

Currently, three out of the four federal USF programs are not designed to support broadband services directly, though some carriers that receive USF use that funding to construct facilities that can be used for broadband as well as tradition voice services.  In addition, the largest of the USF programs, the High Cost Fund (HCF), supports only certain components of a network, such as wires and switching equipment, but not other components necessary for broadband. Thus, rather than “tweaking” the existing USF programs, the NBP proposes that the FCC pull $15 billion out of the HCF over the next decade and re-purpose that money into the CAF to facilitate (wireline) broadband development. 

In addition, the FCC would create a Mobility Fund to facilitate the development of broadband mobile wireless networks where the market would not otherwise support such development.  Lastly, between 2012 and 2020, the FCC would beginning phasing down and ultimately eliminating the HCF – first by eliminating payments to competing providers in certain areas (primarily cellular companies) and then by phasing out payments incumbent telcos for traditional voice services. After 2020, the only voice services eligible for federal support would be broadband voice services.    

As noted above, the NBP also proposes broad reform of the ICC system. This is because prior to the deconstruction of the Bell System in 1984, universal service was largely funded by a complex set of internal AT&T price and cost cross-subsidies, shifting costs from rural to urban users, from residential to business users, and from local to long distance users. After the break-up of the Bell System, those cross subsidies were replaced with direct payments between phone companies, with rural and smaller phone companies charging ICC rates designed to reduce the cost of providing service to their residential customers.  

When the Telecommunications Act of 1996 was enacted, it mandated that federal subsidies for universal service be funded explicitly, through USF. Nevertheless, the business structures of many telephone companies still rely heavily on the profits received from ICC, and to the extent their ICC declines, those companies would either have to receive more USF, or raise fees on customers. Thus, ICC still plays an important role in making service affordable for customers, a key universal service policy goal. Nevertheless, the NBP recognizes that due to changes in technology (reduced costs of switching and transport of digital data) and increased competition, the existing ICC regulatory structure does not function well and leads to destructive market and behavioral distortions. Indeed, notwithstanding the huge growth of VoIP, many parties claim that the current ICC regulatory regime does not provide for payment of ICC for carriage of VoIP traffic, leading to extensive litigation and under-recovery of ICC by incumbent carriers.

Accordingly, the NBP proposes a staged transition of ICC between 2012 and 2020.

Initially, intrastate per-minute compensation rates would be reduced to the typically lower interstate levels. Then, set per-minute ICC rates for origination or termination of traffic would be completely phased out, leaving companies to negotiate “reciprocal compensation” agreements, where in many cases, no money would be paid between companies in either direction. If enacted, this would radically transform the economics of the telecommunications business.  In a related matter, the NBP also appears to endorse FCC action to ensure “fair and reasonable” (read “reduced”) “special access” charges, which are paid to local exchange carriers by large end users, ISPs, and competing carriers, for dedicated high-capacity transport. 

A number of big questions are raised by the above proposals. Here are some of them:

  1. Section 254(e) of the Communications Act states that USF payments can be made only to “telecommunications” carriers, and other provisions of that Section suggest that funding is primarily for the purpose of facilitating provision of “telecommunications” services, though there is some mention of “information services”. At this time, the FCC has ruled that broadband Internet services are not classified as “telecommunications” services, and it has refused to rule on the regulatory classification of VoIP. Does the FCC need to get Congress to revise the Act in order to defund USF and repurpose that money for provision of “broadband” services through the CAF? A good argument can be made that there is no need for any such legislation, and the NBP does not suggest any such need. But the answer is not 100% certain, and this issue could get caught up in the debate over whether the FCC should reclassify broadband Internet as a “telecommunications” service to facilitate its attempts to promote an “open” Internet. Alternatively, will Congress step in and address the matter? 
  2. Does the FCC need legislation in order to set up the Mobility Fund?
  3. The NBP proposes that the CAF would support only one provider in any particular geographic area, and the use of “market-based” mechanisms (read “reverse” auctions) to determine the one recipient of support. While such approaches have been discussed for some time, they have not been enacted. Would such approaches survive an attack by proponents of funding multiple providers (primarily wireless carriers) and opponents of the auctioning of federal support (primarily wireline carriers)? 
  4. While the current ICC system is clearly dysfunctional, previous attempts by the FCC to enact the changes proposed here ground to a halt after years of FCC proceedings and industry negotiations, though a negotiated solution was apparently undercut by the actions of former FCC Chairman Kevin Martin. In the previous rounds of proceedings and negotiations, it was widely supposed that USF disbursement would increase in order to cover the reduction of ICC income by smaller carriers. Yet in the NBP, the FCC proposes not only to eliminate ICC per-minute payments, but also to reduce (and ultimately eliminate) the HCF at the same time. Is this approach wise or even workable? What can the FCC do at this time that would make this version of ICC reform more palatable to all major industry segments than it has been in the past? In addition, the NBP proposes to reduce the level of intrastate access charges, a matter that state commissions are likely to claim is in their sole jurisdiction. What, other than holding out “incentives” to carriers and state commissions, can the FCC do to address intrastate rates?

It is far too early to know how all of this will play out, but here are some potential winners and losers if USF/ICC reform proceeds as set out in the NBP:


Rural and small/mid-size telephone companies (and their customers) that do not or cannot move to all-broadband networks by 2020. ICC revenues get zeroed-out, as does the HCF. Will CAF provide sufficient funding for these companies to move to all-broadband networks, and to survive after that transition? Will revenues from providing multichannel video services make up the difference?


AT&T and Verizon radically reduce their ICC payments and their contribution to the USF. Furthermore, they may receive more CAF funding than the USF funding that they currently receive.

Winners and/or Losers: 

Cellular Companies (including Verizon and AT&T) will lose some of their current funding if USF only funds one entity per area, and in order to obtain new USF funding, they may have to be the lowest bidder in an auction. But they will be the primary beneficiaries of the proposed Mobility Fund (though it is unclear how much funding this would provide, in what locations, and for how long). More important, they will likely benefit greatly from reduced “special access” payments. 

Internet Content, Application and Service Providers:   If the NBP accomplishes the proposed goals, ubiquitous high-speed broadband will likely greatly enhance the development and profitability of on-line providers. But there is also a possibility that some of these providers could be dragged into making large contributions to the USF and/or CAF funds. 

Wireline competitive local exchange carriers (CLECs) could greatly benefit from suggestions in the NBP regarding the unbundling of incumbent LEC broadband fiber facilities and reduction of special access charges. It is harder to see whether CLECs will win or lose in ICC reform.

Execution of the USF/ICC proposals will generate a large number of extensive and hard-fought battles at the FCC and perhaps in Congress. Put on your helmets.

[Blogmeister note: This is one in a series of posts describing the range of regulatory and societal areas in which the National Broadband Plan could, and likely will, affect us all. Click here to find other posts in this series.]