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While the text of the FCC’s Report and Order and Further Notice of Proposed Rulemaking on universal service and intercarrier compensation reforms (“USF Order” or “the Further Notice,” as applicable) has not been released, the Executive Summary  of the agency’s decision allows us to project the more prominent “winners” and “losers.”

The Winners

Verizon Wireless, AT&T (Mobility), Sprint and SIP-Based Voice Services Providers.   These carriers will benefit as bill-and-keep replaces the current intercarrier compensation (“ICC”) scheme.  These services providers will realize substantial savings as terminating switched access rates decline progressively during the transition to “bill and keep.”  For the largest price cap incumbent local exchange carriers (“Price Cap ILECs”), the transition period is 6 years; for the rural ILECs subject to rate of return regulation (“Rural ILECs”), the transition is 9 years.  For local CMRS traffic terminating on the local ILEC’s network, bill-and-keep becomes the default pricing rule.

Mobile Wireless Broadband Providers.  Wireless competitive eligible telecommunications carriers (“ETCs”) must now support voice and broadband services.  Initially, the new Mobility Fund will provide mobile wireless broadband providers up to $300M in “one-time support” for deployment of 3G/4G services in census blocks in which wireless broadband service is not available.  This funding will be made available through a reverse auction tentatively set for the 3rd quarter of 2012.  Beginning in 2012, up to $500M will be available for annual support to mobile wireless broadband providers.  

Wireless Satellite Broadband and Unlicensed Wireless Broadband.   Taking a new approach,  the USF Order sets aside up to $100M annually for broadband satellite and unlicensed wireless broadband services to be provided to the most remote areas of the nation.  The rules governing the eligibility and service obligations for these providers will be established in the Further Notice.

The Rural ILECs.   For years, the Rural ILECs were the ‘whipping boys” for USF and ICC reform.   Even though the USF Order adopted numerous reforms relative to these carriers,  the Rural ILECs demonstrated their substantial investment in rural broadband infrastructure and the significant adverse impacts to customers and non-USF funding sources if radical changes to current support levels (particularly on top of ICC reforms) were implemented.  Until 2017, Rural ILECs will receive up to $2B annually in support, approximating current annual USF support.

The Further Notice will review the Rural ILECs’ current 11.25 % authorized rate of return and funding approaches under the Connect America Fund (CAF)—the broadband focused successor to USF.  To mitigate reductions in ICC payments but taking into account ongoing declines in ICC revenues, Rural ILECs will be allowed to recover some lost ICC revenues through a transitional Access Recovery Charge (“ARC”) mechanism, authorizing limited increases in subscriber line charges (“SLCs”) and supplemental funding from the CAF, if justified.

Price Cap ILECs (Principally Verizon, AT&T, CenturyLink, Frontier and Windstream).  The FCC froze USF support at current levels for these carriers, offering them the opportunity to pursue additional one-time funding to deploy broadband infrastructure in unserved areas of their service territories.  As with the Rural ILECs, continued support for these carriers (in rural areas) will reflect historical declines in ICC revenues which may be supplemented through the interim ARC mechanism described above.

Federal Communications Commission.  The FCC made a number of challenging policy decisions to promote broadband development in under- and un-served areas of the nation.  The agency deserves credit for addressing USF and ICC rules and policies in a comprehensive fashion.

The Losers

Voice-Only ETCs.  The USF Order not only expands ETCs’ public interest obligations to offer broadband services, but it eliminates the “identical support” rule under which ETCs obtained USF support based on the (substantially higher) costs of the local ILEC. This support will be phased-out in five years.  The identical support rule triggered annual USF payments of $1.2B to ETCs, exceeding  25 % of the current $4.2B USF program. Mobile wireless broadband carriers will have to qualify for support under the Mobility Fund.

State Regulatory Commissions.   The USF Order encroaches significantly on state commission prerogatives.  The transition to bill-and-keep contemplates substantial reductions in intrastate switched access charges in many states; setting bill-and-keep as the default rate for local CMRS to local ILEC traffic displaces state authority over reciprocal compensation; and implementing the new, per line cap in federal support of $250.00 per year will require increases in local service rates in many states. We believe one or more state commissions or NARUC will seek judicial review of the USF Order.