FCC Adopts USF/ICC Order; Jury Still Out on Whether Industry, Consumers Will Accept It

FCC officials were publicly undaunted by those whispers of court challenges on Thursday and hailed their efforts to fix what they called a broken system. “This is a once-in-a-generation overhaul,” Chairman Julius Genachowski said from the dais. The order and further rulemaking notice “puts us on a path to connect every American to broadband by the end of the decade.” The order, which transforms the USF to a broadband-based “Connect America Fund” and moves the intercarrier compensation regime to a bill-and-keep system, had been expected (CD Oct 19 p1).

"A lot of folks bet we couldn’t get here today,” Commissioner Michael Copps said in a lengthy statement. “They said Universal Service was too complicated and Intercarrier Compensation too convoluted ever to permit comprehensive reform. Universal Service was sadly out of step with the times, Intercarrier Comp was broken beyond repair. Yet here we are this morning, making telecommunications history with comprehensive reform of both Universal Service and Intercarrier Compensation."

"Reform means that some stakeholders will be unhappy because they prefer the status quo, but our Nation’s communications infrastructure is too important to delay reform any longer,” said Senate Commerce Committee Chairman Jay Rockefeller, D-W.Va. Rockefeller said he looked forward to learning about the order in more detail. “A lot of people didn’t think this would be politically possible, but today’s reforms are long overdue,” said Senate Communications Subcommittee Chairman John Kerry, D-Mass. “Today’s reforms will get broadband built out in a way that’s fiscally responsible and fair.”

Commissioner Robert McDowell approved in part and concurred in part because he didn’t think the FCC could rely on Section 706 of the Telecom Act to support the order. He said the order was “truly monumental” and that he and his colleagues had taken “a giant leap together.” Nonetheless, McDowell said he hoped momentum won’t be lost on fixing the contribution side of the universal service system. “We must act quickly,” he said. “The contribution factor, a kind of tax paid by consumers, is growing … and the trend is unacceptable. I strongly urge that we work together to complete contribution methodology [reform] in the first half of next year."

Commissioner Mignon Clyburn called the order “a momentous step” and said it attained a careful “balance” between the need to deploy broadband quickly and to protect industry and customers from drastic changes. “A reasonable transition period will help ensure that providers can navigate these reforms successfully,” she said. “But for those providers who require additional time to adjust, we have in place a waiver process that is firm, predictable, yet fair. Another benefit of this waiver process is that it provides this Commission with a safety net so that we can adjust support as needed, in order to avoid inadvertently harming the success we have already achieved through our legacy system."

As we reported, Thursday’s order converts the USF to the broadband account now called the “Connect America Fund.” Under the order, the high-cost fund will be subject to a “budget” of $4.5 billion. Price cap companies will see their legacy USF support frozen, then be given a one-time infusion of $300 million and ordered “to extend robust, scalable broadband” in early 2012, according to an executive summary of the order. Incumbents will be given right of first refusal for broadband funding, but they'll have to take all of the study areas of a given state, or none of it. In states where incumbents don’t exercise their first refusal rights, reverse auctions will be set up. FCC officials said they hope to have the first reverse auctions going by the third quarter of next year.

The order also caps operating and capital expenses for rate-of-return carriers by June, “after an additional opportunity for public comment,” the executive summary said. It also phases out support “over three years” in study areas “that overlap completely” with “unsubsidized facilities-based terrestrial” competitors that offer “voice and fixed broadband service,” the summary said.

The new Connect America Fund will have a two-phase mobility fund. In the first phase, “up to $300 million in one-time support” will be made immediately available to “accelerate deployment of networks for mobile voice and broadband services in unserved areas,” the summary said. Phase two will see up to $500 million per year for ongoing support, including up to $100 million for tribal areas. Another $100 million per year will be set aside “to ensure that Americans living in the most remote areas in the nation” can have broadband, the summary said. Under that set-aside, satellite and “unlicensed wireless services” will be eligible to receive funding.

The order came after furious industry and consumer lobbying ahead of the sunshine period last week, but also after intense discussion on the eighth floor, an FCC official said. Commissioner Robert McDowell was most concerned about keeping the size of the high-cost fund in check; Copps argued successfully for a set-aside for tribal areas; Clyburn argued successfully for a requirement that carriers negotiate in good faith for IP-to-IP interconnection rates while the matter is put out for public comment and for an additional $100 million in the mobility fund, the official said.

Industry and consumer groups had been anxious about the contents of the order. Most voices gave credit to Genachowski and the commission for tackling a decade-plus-old problem, but also said they would have to read the order’s text carefully before they could say whether their fears were assuaged. “No previous commission proceeding has been more complex or challenging,” said Walter McCormick, president of USTelecom. “While we have not yet read the order, and are concerned by what we believe to be significant 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."

CompTel praised the effort but said: “All of this hard work will be meaningless, however, if the Commission does not maintain its focus on achieving a robust, competitive environment for IP-based services, and it will be from this perspective that COMPTEL will evaluate the FCC’s decision.” Public Knowledge said it was “skeptical” about the order and worried that it “will lead to higher prices at a time when the average American is watching every penny. We hope that the mechanisms adopted by the Commission to prevent this prove adequate, and that this and future Commissions will have the political will to address problems that may arise.” The Consumer Federation of America also questioned the recovery charge but said the FCC “should move ahead” as long as it remains “vigilant to ensure that consumers receive the benefits that have been promised to offset the costs."

Telecom experts we talked to have said that there are several areas that are likely to be litigated, including whether the FCC has authority to preempt states at setting rates, its authority to require price cap carriers to accept a $300 million subvention to build broadband, the right-of-first refusal for price cap carriers and allowing competitors to charge incumbent rates for VoIP.

Hill Looks Ahead

Revamping USF contributions “is the next logical step,” said Rep. Cliff Stearns, R-Fla., in a letter Thursday to the FCC. He didn’t comment on the order. The contribution factor “has witnessed unfettered growth,” growing 2.3 times in the past decade, Stearns said. “Therefore, if the Commission is serious about reform, it will now address the contribution factor to the Fund.” Stearns has said before that Congress should tackle the issue (CD Oct 13 p4).

"The FCC’s work is not yet done,” said House Commerce Committee Ranking Member Henry Waxman, D-Calif. “Implementation of these reforms will not be easy and the Commission must work to increase broadband adoption.” But Waxman called Thursday’s order a “critical step towards connecting all Americans with high speed broadband."

Rep. Doris Matsui, D-Calif., still plans to move forward her bill (HR-2163) to overhaul the USF Lifeline program to bring broadband to low-income Americans, her spokeswoman said. Matsui said she was especially pleased with the order’s adoption elements and support for anchor institutions. Communications Subcommittee Ranking Member Anna Eshoo, D-Calif., said the USF order will increase broadband access in rural areas and get rid of duplicative subsidies. Waxman and Eshoo’s GOP counterparts didn’t comment.

Commissioner James Cawley with the Pennsylvania Public Utility Commission is “very apprehensive” about the FCC’s bill-and-keep regime on intercarrier compensation. The approach may amount to unwarranted and unlawful federal preemption of the states, he told us. The approach undermines the intrastate access overhaul efforts at states through “specific evidentiary adjudications”, he said. It’s unclear if the FCC decision would preserve the significant role that state-specific USF funds play, he said. Certain large wireline and wireless operators stand to gain “significant monetary benefits” from the bill-and-keep regime, while consumers would see their bills go up in order to subsidize the access expense reductions, he said. Under the approach, companies would have no obligation whatsoever to pass access expense savings on to consumers, he said.

Cawley disagreed with the FCC rationale that the existing ICC regime has retarded broadband deployment, especially by rural telephone companies. The agency’s decision primarily addressed the lag in broadband deployment in rural exchanges of major carriers, he said. The ICC regime applicable to VoIP traffic “clearly amounts to unwarranted federal preemption” and is contrary to past FCC decisions, he said. But Cawley said he’s pleased that the FCC maintains a state role regarding state carrier of last resort and eligible telecom carrier designation. The “bill-and-keep” regime is an area for potential litigation, Cawley said. The regime is a violation of Section 254(k) of the Telecom Act, he said. The section is clear that “services included in the definition of universal service bear no more than a reasonable share of the joint and common costs of facilities used to provide those services,” he said.

NARUC called the order a mixed bag. With details yet to be seen, the order raised concerns about preemption of state authority, said NARUC President Tony Clark and the group’s telecom committee chair John Burke in a joint statement. There are also “unanswered legal and procedural questions” and consumer issues, they said. But NARUC is pleased with proposals to prevent traffic pumping and eliminate inefficient fund disbursements. It’s also pleased that the FCC recognizes the state role in carrier of last resort obligations and eligible telecommunications carrier designations, they said.

Wireless carrier C Spire said: “While many of the specific details still have not been publicly disclosed, this much is already clear: today’s decision runs counter to the Administration’s goal of promoting broadband deployment. Wireless is the most efficient and timely deployment option to meet that goal, yet the FCC’s inability to untether itself from the wireline monopoly model of the last century deals a tragic blow to our nation’s competiveness at home and abroad.” TDS said the FCC’s failure to adopt the rural consensus framework “is nothing short of a missed opportunity for rural consumers and small and medium-sized businesses operating in sparsely populated areas."

Stifel analyst David Kaut said the vote was “positive” for Verizon and AT&T. It’s “helpful” to some independent wireless carriers such as Sprint Nextel and T-Mobile, “but problematic” for wireless carriers that still rely on USF cash, he said: It’s “a mixed bag for cable,” a “modest opportunity for satellite providers” and “difficult for CLECs.” There will certainly be “court challenges from unhappy stakeholders, including state regulators objecting to federal preemption of intrastate access charges, with the validity of broadband USF support another core issue,” Kaut wrote. “If the FCC were to lose on either, it could stymie or at least disrupt the current reform effort."

Asked about the litigation risk at a news conference after Thursday’s vote, Genachowski said he and his colleagues “had a series of tough choices to make.” The commission had to fix a broken system but “do it in a way that recognized the legitimate needs of the existing players,” he said. “I think we made the right set of choices on a series of difficult questions.”