FCC’s New USF Plan: Something for Everyone

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Washington — The Federal Communications Commission
last week approved a long-awaited and hotly debated
reform proposal for its Universal Service Fund and intercarrier-
compensation regime, with billions of dollars up
for grabs, though much of it likely staying with incumbent
telcos in the short-term.

Cable operators didn’t get all they
wanted, but neither did the incumbent
wireline phone companies and wireless
carriers who have been pitching the FCC
on various versions of Universal Service
Fund reform and revisions to intercarrier
compensation.

The USF is the fund that voice-service
providers pay into to subsidize communications
services to rural and hard-toreach
areas that aren’t economically
viable. Intercarrier compensation means
payments made for originating, transporting
and terminating phone calls
between various carriers, within a framework
of state and federal regulations.

FIRST REFUSAL IS CONDITIONED

In a plus for cable, the incumbent providers’
right of first refusal has been scaled
down from what the telcos had sought.
The FCC is focusing money on areas
where there is not an unsubsidized competitor,
and it has signaled that cable’s
handling of voice-over-Internet protocol
traffic and incumbent phone companies’
exchange and termination of traditional
circuit-switched telephony traffic should
be treated in the same manner.

The commission confi rmed that VoIP
is subject to intercarrier compensation
and that, as of July 2013, VoIP traffic will
have the same status as traditional phone
traffic. “Overall this is a major benefit for
cable companies,” said a senior FCC official, speaking on
background. Long-distance companies will not be able
to deny payments to competitive local-exchange carriers
(CLECs) affiliated with cable companies that terminate
phone calls. “Cable companies can get intercarrier [compensation]
for that, which was one of the biggest things a
number of cable companies felt should be done.”

The FCC will give incumbent phone companies the right
of first refusal on $1.8 billion in subsidies being migrated
from phone service to broadband, but under terms and
conditions that the senior agency official said that will
likely give cable operators and other competitors a crack
at some of that money.

The National Cable & Telecommunications Association
and American Cable Association, the cable industry’s
main trade associations, had both opposed the right
of fi rst refusal, pointing out that their cable constituents
might well be able to deliver better and faster high-speed
Internet service than the incumbent telcos. But the FCC
chose instead to provide a shorter window before transitioning
to competitive bidding.

In their so-called ABC (“America’s Broadband Choice”)
plan, the incumbent telcos asked for a 10-year right, but
the FCC only gave them five, and included buildout conditions,
speed requirements and an all-or nothing service
requirement that could open up some of those territories
to competitive carriers, the senior agency official said.

The USF subsidies are passed along to consumers, so
the FCC also billed the reform plan as a consumer-focused
way to give those consumers the most bang for their buck
— in this case broadband — and as a means to reduce the
potential that those consumers would wind up paying for
waste and fraud.

Th e approximately 500-page proposal includes creating
a Connect America Fund for wired broadband subsidies
“budgeted” at $4.5 billion, though that appears to be
short of the hard cap cable operators and
others had sought. There is also a mobility
fund of almost $1 billion. That’s more
than had originally been proposed in the
FCC’s first draft, but less than the $1.2 billion
wireless carriers currently receive.
The FCC is phasing out support to multiple
wireless carriers.

BUILDOUT TERMS

Various public-interest requirements will
be tied to the broadband subsidies, including
buildout schedules and speed
requirements of at least 4 Megabits per
second downstream and 1 Mbps upstream,
with a mandatory scale-up to
6 Mbps downstream and 1.5 Mbps upstream
— and hopes or expectations for
even faster speeds in some areas.

“Our focus is moving the fund to competitive
bidding,” said the senior FCC
official, “so that telephone companies
and cable companies and satellite companies
and wireless companies can all
compete.” Cable operators want that,
too.

The FCC is still giving incumbents a
leg up in areas in which they already
provide subsidized phone services,
the idea being to deploy broadband as
quickly as possible. But FCC official
points out a “state-level” commitment
to service that opens the possibility
those telco service areas will be opened
to competition before the phase-in of competitive bidding
after five years.

Speed, serving anchor institutions and providing service
at reasonable rates are all part of that equation, the
official said, but the speed requirement is especially important.
The FCC will set a price after it comes up with a
model, he said.

Plus, incumbents that take the right of first refusal must
serve all the subsidized areas in the state and cannot simply “take the cherries and leave the pits,” the FCC official
said.

Telcos had sought 10 years of support at $2.2 billion a
year. They will get five years at $1.8 billion. And instead
of the more-granular approach sought by telcos, the FCC
has instead said companies will get the money only if they
agree to serve all the subsidized portions of their service
areas in each state.

“We think that in some areas, the carriers will turn
down the state-level commitment,”
the FCC official
said, so the net effect would
be “substantial” and there
would be immediate competition
for USF money “in
many areas of the country.”

For the first time, the FCC
is making wireless mobility
a universal service goal, providing
a one-time $350 million
payment to wireless,
then almost $900 million
annually (combining a $500
million mobility fund and
legacy payments over a transition
period) for the next
four years. That is less than
the $1.1 billion currently going
to wireless, but that’s because
the FCC is cutting out
duplicative funding. Wireless
carriers will also be able
to bid for $100 million in a
fund to subsidize the most
remote areas, and for competitive
bids in the Connect
America Fund. Th e mobility
subsidies will also take into
account remote areas along roadways.

“These are areas of frustration and economic stagnation
for so many people,” FCC chairman Julius Genachowski
said, “ Where mobile connections are needed but
unavailable, where small businesses lose out on customers
and productivity, and where people in traffic accidents
can’t reach 911.”

FCC commissioners called it a historic day — the agency
has been trying to reform the USF for years. Republican
commissioner Robert McDowell, however, made the point
that the job of reform is only half-done since the reforms
dealt only with subsidies, not contributions, and only with
the high-cost fund. Subsidy-side reforms are on the agenda,
Genachowski said, though he provided no timetable,
adding that reform of the Lifeline and Linkup fund programs
are teed up for this
year.

Cable’s industry groups
viewed the FCC proposal as
a mixed bag. “While we are
disappointed in the commission’s
apparent decision
to ignore its longstanding
principle of competitive
neutrality and provide incumbent
telephone companies
an unwarranted
advantage for broadband
support,” National Cable &
Telecommunications Association
president Michael
Powell said, “we remain
hopeful that the order otherwise
reflects the pro-consumer
principles of fiscal
discipline and technological
neutrality that will bring
needed accountability and
greater efficiency to the existing
subsidy system.”

American Cable Association
president Matt
Polka, whose group represents
smaller, independent
MSOs, gave the FCC props for setting a $4.5 billion
budget, but was disappointed in the right of first refusal.
“More than 500 smaller cable operators who are ACA
members and were interested in having the same opportunity
to participate in the Connect America Fund program
know that consumers would have received better broadband
services, such as higher speeds, if the FCC had opted
for competitive bidding instead of the right of first refusal.”
There will be competitive bidding at the outset for the
new mobility fund, and after five years for the Connect
America Fund.

TELCOS ARE CONCERNED

“While we have not yet read the order, and are concerned
by what we believe to be signifi cant departures from the
carefully balanced reform framework recommended by
the companies that have long been dedicated to serving
rural America, we are pleased that the commission’s USF
reforms appear to remain appropriately focused on the
priority objectives of accelerating broadband deployment
to consumers in unserved areas of the nation, stimulating
investment, and creating jobs,” said Walter McCormick,
president of US Telecom, which represents the incumbent
telcos that had pitched the ABC plan.

“The Federal Communications Commission deserves
kudos for keeping the public interest in mind in tackling
the complex problem of intercarrier compensation and the
high-cost fund,” Consumer Federation of America (CFA)
research director Mark Cooper said in a statement. “It rejected
the totally self-service industry proposal (the ABC
Plan) and handled four of the five major challenges it confronted
well.”

Cooper praised the fact that companies who get subsidies
for broadband build-out must meet “clear publicinterest
obligations” to provide “adequate facilities at
reasonable charges” for all people of the United States. He
says the five-year transition away from the current system
to a bidding model was a “demanding but fair” adjustment
period.

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