Sunday, February 13, 2011

FCC Plans to Modernize USF

FCC Chairman Julius Genachowski speaking at the Information Technology and Innovation Foundation event in Washington D.C. on February 7th announced plans to modernize and streamline the Universal Service Fund (USF) plus bring the related Intercarrier Compensation (ICC) system into the 21st century.

The USF provides communities with affordable telecommunication services. The USF’s Rural Health Care program supports reduced rates to rural healthcare providers for telecommunications and internet services

The Chairman agrees that the USF has become wasteful and inefficient in some situations by paying over $20,000 a year—nearly $2,000 a month in support per line for some households while providing little or no support in other communities that lack broadband.

He explained that the ICC system consists of a complex system of payments that phone companies make to each other when they connect calls. It has long served as an implicit subsidy for rural carriers with intercarrier rates set well above costs resulting in long distance service subsidizing local networks. As a result, it can cost 10 times more to call a friend a few towns over than to call someone on the other side of the world.

The Chairman continued, “The ICC system is not only flawed, it is unstable. Overall, interccarrier revenues are in rapid and unpredictable decline, as more and more people drop landline phone service. Also, there is considerable uncertainty and ongoing litigation about how the ICC should work in a modern era with VoIP services. This means that some companies are in fear of losing millions of dollars if they upgrade traditional telephone equipment to IP equipment to enable more efficient IP interconnections.

Therefore, the FCC is now addressing some key reforms. First of all, rules are now being proposed for the ICC to stop waste when companies exploit loopholes in FCC rules and the ICC specifically needs to address the proper treatment of VoIP traffic.

The FCC also proposes to start a multi-year transition path, in partnership with the states, to phase down intercarrier payments and shift any necessary recovery to the USF. Doing so will provide much needed predictability for the industry and investors, while also reducing the inefficiencies and perverse incentives created by the current system.

As for dealing with the USF funding issues, the FCC would take existing funding used inefficiently and transition this funding to the Connect America Fund to provide ongoing support to rural consumers. This would provide a single smart and efficient fund to use for both high speed internet networks.

The Chairman explained how broadband could be funded for unserved areas out of savings from existing programs, while constraining the size of the USF. This would move the FCC towards a fairer distribution of the USF and would allow more carriers an opportunity to expand their services through public-private partnerships that would include wireline, fixed wireless, mobile, and satellite providers.

Chairman Genachowski announced that to build on the work of the National Broadband Plan, the USF and ICC reform agenda rests on addressing specific issues. Therefore a Notice of Proposed Rulemaking (NPRM) and Further Notice of Proposed Rulemaking issued on February 8th adopted by the FCC, outlines how programs should be transformed.

Four key principles to guide USF reform are included. The first proposal would be to eliminate waste and inefficiency that is apparent throughout the current program. This can be accomplished by transitioning funding for duplicative phone service being provided by multiple phone companies operating in the same area. Impose reasonable limits and guidelines for reimbursement to providers that have little incentive under our current subsidy system to operate efficiently. Review the continued need for funding mechanisms that have not been re-evaluated in many years.

Secondly, use savings to spur investment in high-speed internet in unserved areas by identifying unserved areas according to the forthcoming NTIA national broadband map. Plus, use market-based polices to support providers in areas where broadband funding will have the biggest impact. Create the Connect America Fund that would contain and consolidate the five separate USF programs supporting rural phone networks.

The next proposal would be to stimulate investment in broadband by reforming the ICC system. This can be done by eliminating wasteful billing disputes by closing loopholes and tightening rules. This would prevent “phantom traffic” where carriers disguise the source of calls to reduce or avoid payments to other carriers. It would also reduce “traffic pumping” where local phone companies enter into arrangements with chat lines or conference calling providers to inflate the volume of incoming calls.

The last proposal would increase accountability for recipients and for government to effectively measure program performance. This means that clear performance goals and metrics would need to be adopted for the Connect America Fund. It also would require increased disclosures about the operating performance and financial conditions for companies that receive universal service support.

The FCC plans to hold a series of public workshops on the key issues proposed in the NPRM. These workshops in addition to the submission of written comments will provide an opportunity for the public to provide input to help refine the proposals in the NPRM.