After one of the most hotly and intensely lobbied proceedings in its history, the FCC has adopted a framework by which to (a) reform and re-purpose the distribution of billions of dollars in Universal Service Fund (USF) money and (b) revise the financial arrangements governing the exchange of traffic between all categories of carriers. The stakes in this game are huge, because the FCC’s action upsets, albeit gradually, a generation of expectations about who receives and who pays for hundreds of billions of dollars in telecommunications services — and how they pay for it. The sweep of the FCC’s action is so broad that there is something almost every industry player will love and something they will hate just as much.

At this writing, the FCC has not yet issued its magnum opus, a tome likely to reach Moby Dick-like proportions. The FCC’s action included both a Report and Order (R&O) adopting many new rules that will go into effect after publication in the Federal Register, and a Further Notice of Proposed Rulemaking (FNPRM) seeking comment on some important loose ends left hanging by the Report and Order.   A myriad of the details of the plan will be known only when the full text of the R&O is released; in the meantime, however, the FCC has released a brief Executive Summary outlining the most important provisions of the new regime. These include:

  • Redistribution of USF funds.   Acting more like Congress than an administrative agency, the FCC is re-purposing what we have known as the USF. Till now, the USF was a vehicle used to subsidize voice service in high cost areas and to low income consumers which was funded by contributions from customers. The FCC has re-dubbed this $4.5 billion pool of cash as the Connect America Fund, with the mission of assuring universal reasonably priced services that include both voice and broadband, with broadband now at least as important as voice, if not more so.   The Commission attacks the problem of excessive growth in the Fund by capping it at 2011 levels for six years. Although Christmas and Hannukah are still months away, the FCC plans to dole out: $300 million in one-time grants to price cap carriers to subsidize broadband build-out in areas unserved by any unsubsidized carrier; $300 million in one-time grants to wireless carriers to provide mobile broadband in unserved areas; and $50 million in funding for mobile service to tribal lands. All of these build-outs, we are earnestly told, are going to be subject to strict deadlines and quality control. The Mobility Fund will in addition get $500 million per year in on-going support, including $100 million for tribal areas. Another $100 million will go for annual support for the most remote, high cost areas. A hundred million here, a hundred million there. . . .
  • Price cap carrier reform. Price cap carriers will have their current high cost support frozen; support levels will be reduced where price cap companies charge artificially low rates; a forward-looking cost model will be generated to establish reasonable levels of high cost support going forward; and price cap carriers will be encouraged to make a state-wide commitment to provide affordable broadband service in most of their high cost service areas in a state.
  • Rate of return carrier reform. The FCC will require rate of return carriers, like price cap carriers, to deliver broadband at actual speeds of 4 Mbps down and 1 Mbps up if they expect to continue receiving subsidies. The FCC will gradually eliminate numerous programs of existing high cost support that allegedly have encouraged inefficiency, gold-plating and redundant services.   The FCC will look at reducing the current 11.25% rate of return which these carriers enjoy, while observing that they will take a second hit through reduced current intercarrier compensation revenues.
  • Identical support rule.   As expected, the FCC is eliminating the identical support rule via a gradual five-year phase-out.
  • Snuffing traffic pumping and phantom traffic.   The FCC blocks these two abuses by requiring: (a) LECs to lower their access tariffs in circumstances where it is clear that traffic pumping is going on (presumed if inbound traffic is three times or more the outbound traffic, or there is revenue sharing with a customer); and (b) all carriers and interconnected VoIP providers to include calling party number info in the signaling stream.
  • Fundamental Intercarrier Compensation reform. Here the FCC acted very boldly by adopting a bill-and-keep framework for exchange of all traffic with LECs. This dramatic step will significantly simplify intercarrier relations, though some will raise questions because costs differ among carriers. Since this new policy can be imposed only on interstate traffic, it will be up to the states to follow the FCC’s lead on this for intrastate traffic – or not. The FCC will effect a multi-year transition by first capping ICC rates, then bringing interstate and intrastate terminating end office rates into parity, then going to bill-and-keep after six years (for price cap carriers) and nine years (for rate of return carriers). These generous transition periods should ease the blow considerably for the carriers involved.
  • New recovery mechanism. Having eliminated some forms of subsidy to carriers, the FCC now establishes a new one. It will permit carriers to charge an ARC (Access Recovery Charge) not to exceed $1.20 -$1.80 for consumers (not including revenue recovered by existing SLC charges) and $12.20 for multi-line businesses (including the existing SLC). These charges are to be phased out over time and not applied to Lifeline customers.
  • VoIP and CMRS traffic. Toll VoIP to PSTN traffic will be treated like non-VoIP traffic, and non-toll traffic will be handled on a reciprocal compensation basis, ending claims by some VoIP carriers that they are not obligated to pay carriers who deliver their traffic to end users.   CMRS-LEC traffic will be handled on a bill-and-keep basis.

We have been critical over the years of the Genachowski Commission’s failings, but in this instance we have to credit it with finally taking on a many-headed monster that had defied regulatory reform for years, even though everyone agreed reform was needed.   There will still be plenty of argument and a spate of appeals before any of this is finally settled, but the FCC has at last set a firm course for USF and ICC reform and gotten the ship underway.