Weighing in at 228 pages (not including an extra 61 pages of appendices and separate Commissioners’ statements), the NPRM illustrates the complexity of the problems facing the Commission.

A journey of a thousand miles begins with a single step. As reported here, last month the FCC began its own long, long march to the Promised Land of USF/ICC reform by issuing a massive 289-page tome that promises to revisit, reassess, restructure and revitalize virtually every aspect of universal service support and intercarrier compensation as we know it.

The task is a daunting one. Perhaps for that reason, the Commission has been putting it off for more than a decade, tweaking this or that and putting out small brushfires as they’ve arisen, but never tackling the fundamental reform that virtually everyone agrees is desperately needed.   Complicating the task is the fact that USF reform and ICC reform are inextricably related – you can’t reform one without reforming the other.   So the FCC has correctly chosen to attack the two behemoths – each of which has proven remarkably impervious to reform – in a single charge.   This multiplies the complexity and size of the proceeding exponentially, but is the intellectually honest way to approach the matter.

In truth, just reading the Notice of Proposed Rulemaking (whose formal, if somewhat redundant, title is “Notice of Proposed Rulemaking and Further Notice of Proposed Rulemaking”) (NPRM) was a major undertaking. The document inquires into literally scores of existing policy issues, from questions as fundamental as the FCC’s jurisdiction to regulate VoIP to details as granular as benchmark rate levels. So far-reaching is the inquiry that we estimate that more than a thousand distinct questions or issues were posed for industry input.  Recognizing the logistical problem of arranging the myriad number of meetings necessary to garner the expected input from all parties, the Commission has taken the unusual step of establishing formal procedures for scheduling meetings with the staff.

On the other hand, the Commission has somewhat unrealistically allocated only 45 days for initial comments on the majority of the NPRM and 35 days thereafter for replies.  (Note: a separate abbreviated comment period was established for the part of the NPRM addressing pressing abuses of the existing system such as traffic pumping and phantom traffic.)  As we have previously reported, preliminary comment deadlines have already been established: April 18 for comments on all but Section XV; May 23 for reply comments.  Given the breadth of the inquiry and the years it took to bring this NPRM to term, the comment period strikes us as a bit stingy.   The FCC supposedly has this on a fast track, but there are simply too many moving parts in this vast proceeding for everyone to get their two cents worth in in this timeframe. Expect these dates to be extended

In approaching the reform effort, the Commission will be guided by four prinicples: (i) modernization of the USF and ICC for broadband, (ii) fiscal responsibility, (iii) accountability, and (iv) market-driven policies.   Turning these noble principles into concrete regulations is the hard part. As we’ve indicated, the scope of the proceeding is too all-encompassing to permit detailed treatment of every aspect of it here, but the highlights are outlined below.

Short Term/Long Term Solutions: Recognizing that billions of dollars have been invested in, and depend on, the existing regulatory regime, the FCC proposes to adopt remedial measures for the most obvious abuses and inefficiencies in the short term, while putting in place long term permanent reforms that come into play gradually over a period of years. While it is understandable that the Commission might not want to upset settled investment expectations (particularly of ILECs), the Commission demonstrated precious little solicitude to CLECs in 2008 when it abruptly capped their access to USF funds in a single stroke, leaving them well short of the support presumptively necessary to meet their ETC obligations. Be that as it may, the FCC contemplates comfortable “glidepaths” and phased transitions to ease the pain of companies accustomed to feeding at the USF and ICC troughs.

Short Term Universal Service Solutions.  In the short term, the FCC proposes to:

  • circumscribe or eliminate several high-cost support programs which may have outlived or outspent their usefulness, including high-cost loop support, local switching support, interstate common line support, and interstate access support. The FCC asserts that these programs as currently structured reward inefficiency and actually discourage movement to more advanced technologies.
  • not only develop benchmarks for capital and operating expenses fundable under the high-cost programs, but also cap the amount of support per line that can be received by any one carrier at $250. (There are horror stories of carriers receiving as much as $2,000 per month per line in support!)
  • change its procedures to encourage rational consolidation of service areas eligible for support in order to reflect operational efficiencies rather than USF gaming.
  • eliminate the identical support rule. This rule, which somewhat nonsensically ascribes the same high-cost reimbursement to a CLEC as to the ILEC in the same market, has been long due for change.
  • stimulate broadband build-out by a one-time disbursement (between $500 million and one billion dollars) based on a reverse auction. The funds recipient in each area would be the carrier willing to build broadband facilities in unserved parts of the country at the lowest cost. Broadband service under this proposal could be provided by either wireline or wireless technology or even by satellite (on an ancillary basis) if that proved most efficient for remote areas. This program is apparently a complement to the Mobility Fund proposed last year to disburse $500 million via a reverse auction to construct mobile broadband facilities in needy areas.

Long Term Universal Service Solutions. The Commission’s long term vision for USF involves phasing out all of the existing support mechanisms entirely and replacing them with the Connect America Fund (CAF), a mechanism for supporting broadband in areas of the country where broadband is not economically sustainable without such support. Voice service would simply be a component of the larger broadband service. Support under the CAF regime would be determined in one of two ways.

Under Plan A, there would be a reverse auction in which any carrier using any technology (wireline, wireless or satellite) could bid on the right to provide broadband (or voice only) service in given regions. A single low bidder would receive the funding and have the obligation to provide supported basic services. The Commission envisions satellite service as being a part of the mix since some areas are so remote as to be most economically servable only by satellite, while other areas are more conducive to terrestrial coverage. The most efficient plan would incorporate both technologies to reach everyone at the lowest overall price. The reverse bidding process should ensure that the level of support provided is directly related to the actual costs associated with providing service without the need for bureaucratic review of cost components to determine if the costs are justified or reasonable. This plan has immediate appeal since on its face it ensures that the basic telecom service needed by people in high-cost areas is delivered at the lowest price without redundancy.

No doubt to mollify ILECs concerned about the possible loss of support through such a process, the Commission also floated Plan B. Under this option, current carriers of last resort would have a right of first refusal to take on the obligation of providing broadband/voice service throughout their area.   While this would ensure that such carriers (invariably ILECs) continue to receive not just some but all of the subsidies available for their areas, it would also require the Commission to establish and administer a detailed cost recovery model and continuing oversight to preclude padding of expenses. In a highly competitive carrier environment, such cost recovery models seem antiquated. Moreover, this option seems like a step backward to what was essentially the monopoly subsidization system that existed prior to the introduction of competition into the USF scheme. So it’s hard to see this as a meaningful reform in any sense.

Finally, the Commission mentions a third option for rate of return carriers only: maintaining the current system but capping elements such as ICLS in order to incentivize the carriers to reduce costs. It is unclear why this is even part of the long term reform vision since a reform like this could be imposed on rate of return carriers in the near term to good effect.

Short Term ICC Reform.  The FCC’s immediate reform of the Intercarrier Compensation regime would deal with what are recurring abuses of the system. The current regulatory scheme creates opportunities for arbitrage that have resulted in unnatural schemes of a different nature – phantom traffic, access stimulation, traffic pumping. When millions of dollars are to be had by simply structuring a phone call in one way rather than another, the human capacity for innovation and ingenuity is marvelous indeed.  The Commission proposes to forestall the access stimulation device by requiring rate of return carriers who enter into “revenue sharing” arrangements such as chat lines to modify their tariffs to account for the new traffic.  Competitive carriers would have to benchmark their rates to the largest ILEC in the state, thus ensuring a more normal rate. The problem of phantom traffic (traffic which is passed on to a connecting carrier without sufficient information to identify the party to be billed) would be addressed by requiring all calls, including VoIP calls, to carry the necessary identifying info.

Long Term ICC Reform. The deeper problem of how to handle VoIP traffic (which now sometimes goes unbilled) is part of the FCC’s long-term solution. Clearly all traffic will eventually be IP and the current regulatory distinction between IP traffic and circuit-switched traffic will have to be erased. For more than a decade, the FCC has danced around the issue of whether VoIP should constitute a telecom service or an information service – a distinction that has enormous consequences for the regulatory treatment which it gets. The FCC has so far handled the problem by using its non-Title II authority (i.e., sources of jurisdiction not based on telecommunications carrier status) to make VoIP carriers comply with many of the same obligations as regular carriers.  This evasion of the issue continues, with the Commission concocting new ways of regulating broadband or IP traffic without actually denominating such traffic as telecommunications.

Ultimately, this dance will have to come to an end. In the context of this overall reform effort, the Commission should certainly have teed up the issue for resolution. Its failure to do so (the Commission devotes a single paragraph out of 703 paragraphs to this fundamental question) unfortunately casts a shadow on all of its other more specific proposals to rationalize the treatment of VoIP traffic by treating such traffic the same as circuit-switched traffic.  Until the Commission bites the bullet and reclassifies VoIP, VoIP can’t be treated exactly the same as other traffic since it falls into a different regulatory peg hole.

Long term ICC reform also presents other fundamental jurisdictional problems, the foremost being the historical division of regulatory authority between interstate and intrastate traffic.   Those distinctions (which made sense back in 1934) make no sense at all today.   Without a single nationwide regulatory framework, possibilities for arbitrage and discriminatory intrastate rates continue. The FCC struggles with this problem by proposing different hooks on which it can hang a pre-emptive hat (such as its plenary authority over CMRS rates), but it also suggests ways in which it can induce states to toe the federal line by moving up subsidies or other means. Ultimately, this division of regulatory authority is an obstacle to a consistent nationwide regulatory framework that requires a fundamental change in the Act; in the meantime, the Commission can only do what its limited authority allows.

If it can find the jurisdictional ground to stand on, the FCC proposes to reduce access charges across the board by getting away from per minute charges. It could do so by simply mandating a bill-and-keep approach (where neither connecting carrier charges the other) or flat-rate connection not based on volume. It could also, either on an interim basis or permanently, establish rate benchmarks which would keep the size of access charges within reasonable bounds while also permitting carriers’ costs to be recovered. Shortfalls arising in high-cost areas would be dealt with through explicit subsidies from the CAF rather than through invisible overcharges for access.

Given the combination of jurisdictional hurdles and billions of dollars that will move from one company’s pocket to another’s as a result of ICC reform, the likelihood of paralysis on this issue is high. Yet it is here that reform is most needed because the current market for telecommunications traffic is artificially distorted by the feudal system that still prevails.

We expect to be providing more targeted thoughts on some of the Commission’s specific proposals in the weeks ahead. In the meantime, interested parties are encouraged to weigh in at the Commission to make it aware of particular problems and abuses and to suggest possible alternatives.