Modernizing Universal Service

Description

On February 8, 2011, the Federal Communications Commission proposed to modernize and streamline its universal service and intercarrier compensation policies to bring affordable wired and wireless broadband – and the jobs and investment they spur – to all Americans while combating waste and inefficiency.

The NPRM proposes four key principles to guide reform:

• Modernizing USF and ICC To Support Broadband Networks. Modernize and refocus USF and ICC to make affordable broadband available to all Americans and accelerate the transition from circuit-switched to IP networks, with voice ultimately one of many applications running over fixed and mobile broadband networks.
• Ensuring Fiscal Responsibility. Control the size of USF as it transitions to support broadband by combating waste and inefficiency. The Commission recognizes that American consumers and businesses ultimately pay for USF.
• Demanding Accountability. Require accountability from companies receiving support, to ensure that public investments are used wisely to deliver intended results. Government must also be accountable for the administration of USF, including through clear goals and performance metrics for the program.
• Enacting Market-Driven and Incentive-Based Policies. Transition to market-driven and incentive-based policies that encourage companies to maximize the impact of scarce program resources and the benefits to all consumers.

Specific proposals in the NPRM include:

Eliminate waste and inefficiency throughout the current program.

• Transition funding for duplicative phone service by multiple phone companies operating in the same area to provide support where it's most needed.
• Impose reasonable limits and guidelines for reimbursement to providers that have little incentive under our current subsidy system to operate efficiently.
• Review continued need for funding mechanisms that have not been reevaluated in many years.

Use savings to spur investment in high-speed Internet in unserved areas.

• Identify unserved areas using the forthcoming National Telecommunications and Information Administration (NTIA) national broadband map.
• Create the Connect America Fund to quickly and efficiently deliver support to unserved areas.
• Use market-based policies to support providers in a technology-neutral manner, targeting areas where broadband funding will have the biggest impact.
• Ultimately, streamline and consolidate the five separate Universal Service Fund programs that support rural phone networks into the Connect America Fund. This will constrain spending and bring fixed and mobile broadband to unserved areas while preserving voice service for all, creating jobs and fueling economic growth.

Stimulate investment in broadband by reforming the Intercarrier Compensation system.

• Eliminate wasteful billing disputes by closing loopholes and tightening rules to prevent "phantom traffic," which is traffic that has been disguised so it can't be identified for billing purposes.
• Amend rules to reduce "traffic pumping," a practice that drains revenues from the system by exploiting existing rules to earn more intercarrier compensation. Reclaimed revenues could be invested in networks or used to reduce prices for consumers.
• Gradually reduce per-minute Intercarrier Compensation charges. These charges create incentives for carriers to maintain legacy networks that maximize intercarrier revenues rather than investing in advanced, efficient IP-based infrastructure.
• Develop a system to offset reductions in intercarrier rates, including, where necessary, support from the Connect America Fund.

Increase accountability for recipients and for government, and more effectively measure program performance.

• Adopt clear performance goals and metrics for the Connect America Fund.
• Require increased disclosures about the operating performance and financial condition of companies that receive universal service support.
• Increase transparency, oversight, and accountability.

During the process, the FCC will hold a series of public workshops on key issues in its reform proposals. These workshops, in addition to submissions of written comment, will provide ample opportunity for public input to improve and refine the proposals in the NPRM as the FCC moves toward an Order on these issues.

Issues

The Notice of Proposed Rulemaking (NPRM) and Further Notice of Proposed Rulemaking

Here's the FCC's Executive Summary:

We believe the USF and ICC regimes will benefit from simplification and unification: The Connect America Fund (CAF) we propose to create would ultimately replace all other explicit support provided by the current high-cost fund as well as implicit subsidies from the ICC system. To be clear, we are not proposing to eliminate universal service support for communications services in high-cost areas of the country; rather, we are proposing to improve the efficiency and effectiveness of that support.

Our reforms must balance a number of other important and possibly competing priorities. These priorities include advancing broadband service to all Americans; sustaining high-quality, reliable voice service for all Americans; sustaining and expanding mobile voice and mobile broadband coverage throughout the country; increasing adoption of advanced communications services; and minimizing the burden on consumers and businesses, who pay for universal service. We seek comment on the relative importance of these objectives and look forward to developing a full record on the appropriate balance among them.

Reform will require all major stakeholders in the USF and ICC system to grapple with the practical consequences of change. We do not propose any “flash cuts,” but rather suggest transitions and glide paths that we believe will facilitate adaptation to reforms. Change to USF and ICC policies need not and should not be sudden or overly disruptive, but change must begin so that our country can reach its broadband goals in an efficient and accountable way.

A. Universal Service Fund

Building on the recommendations of the National Broadband Plan and the record from the USF Reform NOI/NPRM, we propose to transform the existing high-cost program—the component of USF directed toward high-cost, rural, and insular areas (which we often refer to as “USF” in this document)—into a new, more efficient, broadband-focused Connect America Fund. As shown in Figure 1 below, we propose to undertake this comprehensive reform in two stages: a set of immediate reforms including, among other near-term goals, the establishment of the CAF, followed by the final selection of the long-term CAF funding mechanism, based on monitoring and evaluation of experiences with the near-term reforms.

1. Immediate Reforms

In October 2010, we issued the Mobility Fund NPRM, which proposed a Mobility Fund intended to spur build out of advanced mobile wireless networks in areas not served by current-generation mobile networks. We now continue our reform efforts in this proceeding by proposing steps to spur broadband build out, whether fixed or mobile, in unserved areas, which exist in every state as well as the territories. We propose to do this by transitioning funds from less efficient uses to more efficient uses, include through the creation of the CAF. We also seek comment on other measures to reduce inefficiencies, extend broadband, and increase the accountability of companies receiving support.

In 2010, the high-cost fund disbursed $4.3 billion through five separate mechanisms designed to support different kinds of costs and different types of carriers, as shown in Figure 2, below:

In this proceeding, we propose the following reforms to be implemented beginning in 2012:

• Three components of the high-cost program primarily support smaller carriers regulated under “rate-of-return” rules: high-cost loop support (HCLS), which provided $1 billion for incumbents in 2010; local switching support (LSS), which provided $276 million for incumbents in 2010; and interstate common line support (ICLS), which provided $1.1 billion for incumbents in 2010. As currently structured, these funding mechanisms provide poor incentives for rate-of-return carriers to operate and invest efficiently. While individual carriers may act in the best interests of their own customers and communities, excessive spending by any one community limits opportunities for consumers in other communities and may not be in the best interests of the nation as a whole. HCLS, for example, creates incentives for companies to outspend their peers in order to receive more funding under the current capped formula. For all three programs, there are few, if any, benchmarks for determining whether network investment is justified or appropriate, allowing a company to spend millions of dollars to build a state-of-the art network that may serve only a few customers. LSS was originally created to help small telephone companies that lack economies of scale to afford large switches, but since then the industry has moved to software-based routers and switches which can be more easily scaled to a company’s size and even shared among companies. LSS now provides perverse incentives for companies not to realize efficiencies by combining service areas. We seek comment on a suite of reforms to these components, which will increase accountability and start rate-of-return carriers on the path towards market-driven, incentive-based regulation. Specifically, we seek comment on:
• Reducing the reimbursement rates for the current high-cost loop program, in order to distribute funding—which has been capped since the 1990s—in a more equitable manner among rural carriers. Today, high-cost loop support largely goes to companies that have accelerated network upgrades throughout their territory, leaving nothing available for other smaller companies that choose to upgrade their networks more incrementally.
• Phasing out Local Switching Support or, alternatively, combining LSS and HCLS into a single, more efficient mechanism to support network costs. Larger holding companies are able to exploit the current LSS rules to gain additional support for switching costs, increasing the burden on American consumers who support the Fund.
• Setting reasonable guidelines for reimbursements for capital and operating expenses based on benchmarks developed from investments made by comparable companies. Today, there are few controls on such reimbursements, leaving companies with broad discretion to control how much public money they get and how they use it.
• Limiting the total support per line any one carrier in the continental United States can receive, absent exceptional circumstances. While we recognize that USF provides support to the hardest-to-serve areas, which may be very costly to serve, it is not clear that all of the amounts provided today are necessary to provide reliable service. We propose a process in which companies operating in the continental United States receiving in excess of $250 per month per line would have to justify higher amounts of support.
• Streamlining the study area waiver process to eliminate barriers to consolidation and rationalization of service territories.
• Modifying rules that limit support when acquiring lines from another provider in situations where the acquired lines are substantially unserved by broadband (the “parent trap rule”), in order to provide greater incentives to upgrade those facilities.
• We propose to phase out Interstate Access Support (IAS) over a period of a few years. In 2010, IAS totaled $545 million. Originally created in 2000 as an interim part of a five-year transitional reform plan, IAS has long outlived its intended lifespan. The comments received in response to the USF Reform NOI/NPRM suggest that this fund is not critical to ensuring rural voice service, and we believe the funds could be more productively used to support the deployment of broadband to unserved areas.
• In addition, we propose to eliminate the “identical support” rule and to rationalize funding for competitive Eligible Telecommunications Carriers (ETCs) over a several-year period. In 2010, non-IAS competitive ETC funding totaled $1.1 billion. Under the Commission’s identical support rule, competitive ETCs (mostly wireless carriers) receive this support, subject to an interim cap, regardless of actual costs or needs, as a per-line, dollar-for-dollar match with the incumbent wireline carrier support per line in the same area. As a result, the funding is poorly targeted—in some areas, as many as four or more providers are receiving redundant ETC funding, while other areas lack even a single provider of broadband or mobile voice. Two of the largest ETCs have voluntarily agreed to relinquish their ETC support in the context of transactions, and the USF Reform NOI/NPRM record supports the conclusion that current levels of competitive ETC support are unnecessary to ensure fixed or mobile voice service in many areas of the country that receive support today.

At the same time, we recognize the importance of mobile voice and mobile broadband coverage in all areas of the country and seek comment on how to balance the desire for universal mobile coverage with other USF priorities. Our proposal in the Mobility Fund proceeding was intended to provide a one-time infusion to expand mobile coverage. We seek comment here on how best to factor the need for mobility into the reforms proposed in this proceeding to achieve our universal service objectives.

Taken together, the proposed changes to the high-cost program will enable significant funds to be used to support fixed and mobile broadband, as discussed below, and potentially a recovery mechanism associated with ICC reform, where necessary, as summarized below.

We seek comment on the appropriate size of these programs. We propose that, together with remaining high-cost support, total disbursements remain no greater than the high-cost program would be under current rules. We seek comment, however, on whether total disbursements should be lower in the future to minimize the burden on consumers. In light of the high costs that would be required to ensure ubiquitous mobile coverage and very-high-speed broadband for every American and the length of the transition to the proposed Connect America Fund, we also seek comment on whether additional investments in universal service may be needed to accelerate network deployment.

To spur immediate new broadband investment through the CAF, we propose to conduct a competitive bidding process (also known as a reverse auction or a procurement auction) in which providers seeking a one-time infusion of support to build out and operate broadband networks in unserved areas across the country compete against one another by bidding for the lowest amount of support they would require to provide service to unserved housing units. Specifically, using the forthcoming National Broadband Map to identify areas that currently lack broadband, we propose to award a significant amount of funding, such as $500 million to more than $1 billion, through a technology-neutral reverse auction in 2012, with additional auctions potentially to follow. Recipients – which could be either fixed (wireline or wireless) or mobile wireless providers – will be subject to enforceable requirements to deploy broadband to the unserved areas (defined as census blocks or aggregations of census blocks) identified in their bid within a specified time period, such as three years, and provide service for a defined period of years after deployment is complete. They will be permitted to subcontract with other providers, including satellite broadband providers, to fulfill their service obligations in particularly difficult to reach portions of their proposed service areas. We seek comment on whether the broadband service obligation should be defined as a minimum of 4 megabits per second (Mbps) downstream and 1 Mbps upstream, or whether we should use other metrics.

If the auction winner is not the existing incumbent recipient of USF in the area during this interim transition period, that incumbent carrier of last resort would continue to receive its existing support, subject to the other reforms proposed in this Notice. If the auction winner is the existing provider, the new funding would supplement its existing support, subject to the other reforms proposed in this Notice. This use of a market-driven process to award support will spur high-impact broadband deployment and give the Commission and the private sector experience with a mechanism for providing consumers access to high-quality network infrastructure in an efficient manner.

To further promote deployment of broadband, we also seek comment on what broadband service obligations, based on section 254 of the Act, should apply to recipients of CAF support under the competitive bidding process described above, as well as whether any such obligations should apply to recipients of the reformed high-cost fund. We seek comment on how to ensure that service in rural areas is available at rates that are reasonably comparable to rates in urban areas. In addition, we propose to clarify that voice service can be provided by any technology, including VoIP, so that USF can be used directly to support modern IP-based networks.

Finally, we propose a variety of measures to increase accountability and better track performance of the Fund as a whole. Specifically:

• We propose to adopt performance goals and measures for the Fund as a tool to monitor how it is advancing the statutory goals set forth in section 254.
• We propose to adjust reporting requirements for Fund recipients, including requiring submission of certain financial information regarding operations, to enable the Commission to ensure that funds are being used efficiently and effectively. We seek comment on obtaining pricing data to ensure that services in rural areas are available at rates that are affordable and reasonably comparable to urban areas.
• We propose to revise our certification and audit processes to reflect updated public interest obligations for all Fund recipients, such as the requirement to deploy broadband networks.

In addition to substantially increasing Americans’ access to broadband and eliminating wasteful or inefficient spending, our proposed reforms will move USF and the companies that rely on it along the road to the future state of reform. They will also provide the Commission and industry valuable experience with market-based mechanisms for allocating support, while improving the Commission’s data on the functioning of USF. Finally, these reforms will introduce elements of incentive-based regulation to rate-of-return carriers.

To reduce uncertainty and help companies reliant on USF and ICC plan and invest for the future, we also propose several options for long-term CAF funding mechanisms, as described below. We seek comment on these options and may select the path for long-term reform at the same time we adopt the immediate reforms just described. But we propose to monitor the outcomes that result from these immediate reforms on an ongoing basis and evaluate them comprehensively beginning no later than three years after adoption of an order implementing initial reforms, to determine what course corrections may be needed at that time along the path to long-term reform.

2. Long-Term Vision

In the second stage of our comprehensive universal service reform, we propose to transition all remaining high-cost programs to the CAF. The CAF would provide ongoing support to maintain and advance broadband across the country in areas that are uneconomic to serve absent such support, with voice service ultimately provided as an application over broadband networks.

We seek comment on longer-term options for providing sufficient, but not excessive support for service to be provided in rural areas at rates that are affordable and reasonably comparable to rates in urban areas. Under one option, the Commission would award all ongoing support through a competitive, technology-neutral bidding mechanism (including using technology-neutral geographic areas). Under a second option, in each part of the country requiring ongoing universal service support, the Commission would offer the current voice carrier of last resort (likely an incumbent telephone company) a right of first refusal to serve the area as the broadband provider of last resort for an ongoing amount of annual support based on a cost model. If the provider refuses this offer, the Commission would hold a competitive, technology-neutral process to select a provider to serve the area and take on all service obligations, a process in which the current voice carrier of last resort could participate. Under either approach, we propose that all ongoing support for carriers operating in high-cost areas would come from the CAF. This funding would replace all other explicit support as well as all implicit subsidies from ICC, as described in the next section.

In the alternative, we seek comment on limiting right-of-first refusal or auction-based support to a subset of geographic areas, such as those served by price cap companies, while continuing to provide ongoing support based on reasonable actual investment to smaller, rate-of-return companies. Should we take this approach to the CAF, we seek comment on possible changes to the current rate-of-return system beyond those discussed in the previous section, including capping and shifting interstate common line support to an incentive regulation framework that would establish support amounts periodically (such as every five years) to generate an appropriate forward-looking return for an efficient carrier for the investments at issue, implementing a more rigorous process to examine whether investment is used and useful, and re-examining the current 11.25 percent interstate rate of return.

Building on the interim reforms laid out in the previous section, we believe each of these proposals for long-term reform provides a possible path to complete the transformation of the existing high-cost fund into an accountable, fiscally responsible, market-driven and incentive-based system focused on the nation’s broadband challenge.

B. Intercarrier Compensation

We propose to take action in the near term to reduce inefficiency and waste in the intercarrier compensation system while providing a framework for long-term reform. This long-term reform would gradually phase out the current per-minute ICC system and implement a recovery mechanism (based on costs and/or revenues), which could enable some carriers to receive additional explicit support from the CAF. Figure 3 below illustrates the proposed transition.

1. Immediate Reforms

In the near term, we propose several reforms to reduce wasteful arbitrage and increase certainty in ICC payments during the transition away from the per-minute system. The record indicates that arbitrage schemes cost hundreds of millions of dollars each year and that regulatory uncertainty about whether or what ICC payments are required for VoIP traffic is hindering investment in IP-based products and services.

We propose to amend our interstate access rules to address access stimulation—arrangements in which carriers, often competitive carriers, profit from revenue-sharing agreements by operating in an area where the incumbent carrier has a relatively high per-minute interstate access rate. Under our existing rules, the competitive carrier benchmarks its rate to that of the incumbent rural carrier, but the revenue-sharing arrangement results in a volume of traffic that is more consistent with a larger carrier. A competitive carrier could, for example, generate millions of dollars in revenues each month from other carriers simply by entering into a revenue sharing arrangement with a company that operates a chat line. A rate-of-return carrier can likewise use our rules to take advantage of revenue sharing by setting a rate based, for example, on historical demand and then entering into an arrangement that inflates demand without adjusting its tariff to reflect a rate appropriate for such demand. We propose that carriers that have entered a revenue-sharing arrangement be required to refile their interstate switched access tariffs to reflect a low rate consistent with their volume of traffic. For rate-of-return incumbent local exchange carriers (LECs), the rate would be adjusted to account for new demand. For competitive carriers, that rate would be benchmarked to that of a large incumbent local exchange carrier (LEC) in the state , rather than to that of the local rate-of-return carrier. We also seek comment on alternative approaches.

We propose to amend our call signaling rules to address “phantom traffic” by ensuring that calls received by the terminating provider include sufficient signaling information for that provider to identify and bill the appropriate provider. Phantom traffic today causes carriers to devote substantial resources to resolving billing disputes that could be used to invest or innovate. One provider, for example, estimates that 5-8 percent of all traffic terminating on its network is “phantom” or disguised traffic. Rules requiring the inclusion of appropriate signaling information would apply to all voice traffic, including interconnected VoIP, but the rules would be flexible enough to adapt to a variety of technical standards and accommodate their evolution. We also make clear that applying the signaling rules to interconnected VoIP does not prejudge the determination of any intercarrier payment obligation for interconnected VoIP calls.

We propose to determine the obligations for interconnected VoIP traffic under the ICC framework, and we seek comment on the appropriate intercarrier compensation regime. We seek comment on payment obligations for VoIP ranging from adopting a bill-and-keep methodology for VoIP, to applying a VoIP-specific ICC rate, to requiring VoIP calls to pay all existing ICC charges. We also seek comment on the implications for existing commercial arrangements that may address compensation for VoIP traffic.

By reducing inefficient use of resources and expenditures on disputes and litigation, we believe these proposals will allow companies to begin directing increased capital resources toward investment and innovation that ultimately benefits consumers.

2. Comprehensive Reform

At the same time, we propose to adopt a sustainable long-term framework to gradually reduce all per-minute charges. Per-minute charges are inconsistent with peering and transport arrangements for IP networks, where traffic is not measured in minutes. The record suggests that the current ICC system is impeding the transition to all-IP networks and distorting carriers’ incentives to invest in new, efficient IP equipment. Moreover, although the short-term measures we propose will address the most common forms of arbitrage today, wasteful attempts to game the system will likely persist as long as ICC rates remain disparate and well above carriers’ incremental costs of terminating a call.

Because the ICC system has not been reformed to reflect fundamental shifts in technology and competition in the last two decades, the current system results in considerable instability for carriers as revenues are declining at often unpredictable rates. Declining minutes for incumbent carriers have led to a concurrent decline in revenues, particularly for price cap carriers. By providing a more certain glide path for the transition to an all-IP future, intercarrier compensation reform will bring much needed predictability to the industry and investors, which will ultimately benefit consumers.

We seek comment on several aspects of our proposed reduction of ICC rates. In particular:

• Federal/State Role: We seek comment on two possible overall approaches for working with states to reform intercarrier compensation. The first approach relies on the Commission and states to act within their existing roles in regulating intercarrier compensation, such that states would remain responsible for reforming intrastate access charges. Under a possible variation, states would remain responsible for reforming wireline intrastate charges, but we also seek comment on whether we should set a glide path to reform wireless termination charges, possibly including intrastate access charges paid by or to wireless providers. The second approach relies on the Commission using the tools provided by sections 251 and 252 in the 1996 Act to unify all intercarrier rates, including those for intrastate calls, under the reciprocal compensation framework. Under this framework, the Commission would establish a methodology, which states would then work with the Commission to implement.
• Sequencing: We seek comment on the sequencing of ICC rate reductions and how the sequencing options relate to the roles of the states and the Commission. Interstate and intrastate access charges could change concurrently, particularly if the Commission and the states each act within their existing roles; alternatively, reforms could proceed sequentially, for example beginning with reductions in intrastate access charges to interstate levels, followed by a reduction of all ICC rates. We seek comment on these possibilities as well as the timing to reduce reciprocal compensation rates and wireless termination charges.
• Timing: We also seek comment on the appropriate timing of the overall transition and propose to complete the transition away from per-minute rates consistent with the implementation of long-term CAF support, so that all subsidies necessary to serve an area are explicit as part of whichever long-term CAF funding mechanism is adopted. We seek comment on the glide path to this end point.

As ICC rates decrease, we propose to adopt a mechanism for recovery, where necessary, which may include explicit universal service support and reasonable end-user charges. In so doing, we recognize that ICC revenues today remain an implicit subsidy for certain carriers, and we seek comment on how to structure the recovery mechanism to provide certainty and predictability during the transition. We also seek comment on how to structure this mechanism consistent with limiting burdens on consumers and constraining the size of the CAF.

By modernizing our policies for a broadband world and reducing the underlying incentives for wasteful arbitrage, we believe these reforms will promote investment in IP facilities and free up valuable resources, provide certainty and ultimately encourage new broadband investment and innovation.

Comment due date: 04/18/2011

Comment reply due date: 05/23/2011