FCC proposes to re-direct cash left behind by Verizon Wireless, Sprint-Nextel

If you managed to clear out of the office early for the Labor Day weekend, you may have been lucky enough to miss the release of the latest salvo in the FCC’s effort to reform the Universal Service Fund (USF). The Commission’s Order and Notice of Proposed Rulemaking (NPRM) hit the e-distribution system late on Friday afternoon, just as the local streets were clearing after an early rush hour and beach-bound traffic was slowing to a crawl.

The Commission’s new USF game plan involves the likely dedication of hundreds of millions of dollars to subsidize broadband in furtherance of the National Broadband Plan (NBP). (Many observers believe the NBP has replaced the Communications Act of 1934 as the FCC’s Prime Directive.) The cash would come from the existing USF pool of funds – although precisely how the Commission justifies its proposed approach may raise some eyebrows. Still, it seems that that approach may be a fait accompli: the Commission has allotted a mere 21 days for comments on its proposal (and another 14 days for replies).

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.