Universal Service Fund mini update

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This month, the FCC is expected to make some decisions on the USF/ICC (Universal Service Funds/Intercarrier Compensation. (For a quick primer on the topic you can check out a video we did with Brent Christensen at the Minnesota Telecom Alliance last Feb – or check out USFBroadband, a great site that uses visuals to help explain the impact of USF.) On October 6, FCC Chair Julius Genachowski outlined the proposed changes in a speech – Connecting America: A Plan To Reform and Modernize the Universal: Service Fund and Intercarrier Compensation System.

While I think the $7.2 billion in ARRA stimulus funding captured more attention and the imagination of the public – decisions made about the USF/ICC will have a greater long-term financial impact on broadband – especially in rural areas with less densely populated areas. It makes sense to pay attention to what’s happening – but it does come down to intricate details that relate to bringing legacy funding strategies and legacy technology into the future. We’ve all done it for work or home and we know, it gets painful.

In my spare time, I’ve been trying to sift through Genachowski’s speech and various responses to the speech. It’s taken a while.

Genachowski explains the transition from USF to Connect American Fund – and its two goals:

  1. ensuring universal availability of robust, scalable, and affordable broadband to homes, businesses, and anchor institutions in unserved areas.
  2. ensuring universal availability of mobile broadband through a new Mobility Fund.

For mobile there will be an one-time boost of funding to spur 4G networks:

We will extend deployment of state-of-the-art mobile broadband to more than one hundred thousand road-miles, where millions of Americans live, work, and travel. This will begin with a one-time shot-in-the arm to accelerate deployment of 4G networks. Thereafter, the Mobility Fund will provide significant ongoing support for rural mobile broadband. This will include dedicated support for Tribal areas, where broadband and mobile service remains far behind the national average.

For wired/wireless service there will be a greater focus on prudent spending:

For all elements of the Connect America Fund, we will ensure that support isn’t used to supplant private investment. Funding will be targeted exclusively at areas without an unsubsidized competitor, and where support is needed to extend or sustain broadband networks*, eliminating wasteful spending and promoting healthy competition. And funding will be conditioned upon complying with rigorous obligations to serve the
public and meet the goals of universal service.

*”Sustain broadband networks” seem to be an addition from previous version and one that I think should make incumbent providers happy – especially if they are prudently building/sustaining broadband

There is also a push to transition away from the current model to something that is more competitive but recognizing the potential impact on communities that are served, the plan has always emphasized the need to phase in this transition slowly.

In pursuing these goals, we will introduce competitive processes among providers for obtaining support and transition over time toward a fully competitive system for distributing Connect America Fund dollars. We will do this in a way that recognizes the strong benefits of competitive processes, and also that we are not writing on a blank slate, and that a flash-cut to competitive bidding in some parts of the decades-old program risks consumer disruption, build-out delays, and other unintended consequences.

The plan builds competitive bidding into the first phase of the new Mobility Fund in 2012.

Genachowski outlines how the changes will have an impact on various providers:

  • Price cap carriers are companies subject to USF and ICC rules that, as currently structured, reward them for operating efficiently, but not for investing in broadband. For areas currently served by these carriers, ongoing legacy obligations, including state carrier of last resort requirements, complicate the transition to competitive bidding.
  • For rate of return carriers, current USF and ICC rules encourage network buildout by reimbursing actual costs incurred, but also enable inefficiencies, like expensive overbuilding of unsubsidized competitors. For these carriers, we will begin by reforming the rate-of-return framework, ensuring providers have appropriate incentives to invest efficiently and receive predictable support. That includes improving accountability, using benchmarks to ensure reimbursable expenditures are reasonable, and extending commonsense limits on reimbursements for corporate operations expenses.

The result: Companies that invest in and manage their businesses prudently will have the support they need to continue extending broadband, and will be on the path to a more incentive-based framework in the future.

Genachowski also addressed Intercarrier Compensation. The goal is…

  • to reduce the hidden subsidies paid by consumers across the country, shut down harmful arbitrage schemes and eliminate competitive distortions, remove a significant obstacle to the deployment of modern IP networks, and substantially increase certainty for all stakeholders.
The plan is to
  • loopholes like phantom traffic and traffic pumping, and other arbitrage schemes
  • bringing intrastate access rates in line with interstate rates – starting with terminating charges
The transition plan is to allow time for providers to rebalance their business plans and look at support from the Connect America Fund.

And here’s a very quick annotated bibliography on what folks have to say about the USF changes…

  • According to the National Journal the FCC is down playing telco influence on the USF proposals
  • According to Broadcast & Cable, a team of Democrat legislators are asking the FCC to consider ways to require broadband providers that receive USF support to build-out broadband networks in rural areas to deploy high-capacity broadband to anchor institutions
  • According to the Center for Media Justice, the proposed changes will mean and increase in phone bills and feels that the plan reads like a play-book written by the phone companies.
  • According to The Hill, Senator Byron Dorgan is worried that proposed caps on the total size of the fund as well as the amount individual carriers can recoup could dissuade telecom firms from investing in rural areas.
  • Stop the Gaps thinks that at the core the proposal is to slash the per-minute rates rural phone companies can charge big city phone companies like AT&T and Verizon to connect calls to rural areas – they think that many phone companies will make up the difference by jacking up your phone bill’s USF surcharge to as much as $11 a month per line to make up the difference.
  • Connected Planet publishes a spreadsheet presented by Philip B. Jones, a commissioner for the Washington Utilities and Transportation Commission, shows the total amount of money that carriers in each state currently contribute to support each of the four different Universal Service Fund programs — the low-income program, the schools and libraries program, the rural health care program and the high-cost program — as well as what carriers in each state extract from the program.