Almost every domestic telecommunications carrier (Wireline and Wireless) are actively engaged in an FCC proceeding reassessing the Universal Service Fund (“USF”) program and the current intercarrier compensation (“ICC”) framework (“the NPRM”).  The breadth of issues and range of opinions approximate those being expressed in the contentious debate in Washington on the Federal debt.

In the NPRM, the FCC proposes to shift USF payments from certain recipients and current USF programs to fund the initial phase of the Connect America Fund (“CAF”) that would support broadband service, as opposed to voice services, as initially proposed in the National Broadband Plan.  Under the interim CAF program, the reallocated USF funds would be targeted for broadband deployment in unserved areas.  Long-term, CAF would become the principal, if not exclusive, USF program.

USF Reform.  The FCC has proposed a series of changes in existing USF programs for the purpose of shifting some monies historically paid to the RBOCs, major Wireless carriers, other mid-size incumbent local exchange carriers such as Frontier, and small, privately-owned or cooperatively-owned rural local exchange carriers (“RLECs”).  Some proposals such as those intended to limit “traffic pumping” and “phantom traffic” and certain investments by RLECs have received broad support.  Another proposal to limit subsidies paid to “competitive eligible telecommunications carriers,” principally wireless carriers serving rural areas, is also widely supported.

The “saved” monies would then be made available through a “reverse auction” under which entities would “bid” for CAF payments to construct qualified broadband networks in unserved areas. The low bidder would receive the CAF payment.  The definition of “unserved areas” and the nature of qualifying broadband networks, i.e., minimum uplink and downlink speeds, are also being debated.

Other proposals that would impact the RLECs are more challenging or draconian, depending on one’s perspective, such as a national cap on per line support.  Coming out of “left field,” House Republicans suggested this past week that USF funds could be used for deficit reduction.

ICC Reform.  Intercarrier compensation reflects rates paid by one service provider to another to access or interconnect with the other’s network.  The principal types of regulated intercarrier compensation are interstate access charges, intrastate access charges, and reciprocal compensation.  The FCC regulates rates for interstate access and states regulate rates for intrastate access.  Reciprocal compensation refers to the payments made for terminating local traffic on competitor’s networks [between the incumbent carriers and CLECs].  These rates are either negotiated by carriers or set by states using the FCC’s pricing methodology.  The termination of Wireless traffic and VoIP traffic are also major drivers in ICC reform.

Intrastate access rates are generally higher than interstate rates, and both are typically higher than reciprocal compensation rates, although large variations exist within each category.  The FCC proposed an immediate measure (assuming state regulators go along) of reducing intrastate access charges in all states to the lower interstate switched access rates as already implemented in several states.

Among the more aggressive proposals is one advanced by Verizon and Verizon Wireless (Verizon) calling for a maximum per minute rate of $0.0007 to be paid by any carrier terminating any traffic (Wireless, VoIP or switched interexchange) on the PSTN, regardless of whether the incumbent local exchange carrier is AT&T or a rural cooperative in Montana.   Verizon argues that the distinctions between interstate and intrastate service and local and interexchange traffic are now irreversibly blurred due to the growth in VoIP and all-distance pricing schemes.  In reality, having disposed of its network and customers in Maine, Vermont and New Hampshire and sold the less desirable exchanges acquired in its merger with GTE, Verizon is now hawking the lowest price possible for terminating its wireless and interexchange voice services.

More constrained, but substantial proposed changes in ICC and on USF reform are offered by several RLEC trade associations.  These parties focus on the services provided by RLECs to rural communities, the disruptive effects of some proposals to RLECs’ continued ability to provide service (and secure financing for infrastructure investment), and the RLECs’deployment of broadband IP infrastructure.

Implications. Without doubt, the RLECs face the most uncertainty and risk as reduced ICC payments—principally interstate and intrastate (switched) access charges–and USF reform could disproportionately affect (i.e., substantially lower) company-wide revenues of these carriers.  The reverse auction for distributing CAF monies has theoretical appeal, but simply distributing $1 Billion or more to low bidders to build broadband networks in rural areas is fraught with risks for “waste, fraud and abuse.”

Another real risk is that any ICC reductions (particularly for switched access rates) could end up solely as cost savings for the major Wireline interexchange and Wireless carriers as opposed to lower rates for customers (major businesses, residential users and state governments, alike).

Timing.  The FCC appears intent on adopting a decision this Fall.  Commissioner Michael Copps has a keen interest in adopting some form of meaningful “reform” of USF and ICC prior to the end of his tenure at the FCC which likely will conclude in December.