Universal Service Fund Distribution Proposals of the National Broadband Plan

In its much anticipated “Connecting America: The National Broadband Plan,” the Federal Communications Commission proposes numerous sweeping changes to the manner in which Universal Service Fund (“USF”) support is distributed, primarily to high cost service areas, but also for eligible healthcare providers and schools and libraries. These changes would be accomplished by shifting support from traditional voice service towards broadband with the creation of two new funds and several changes to cost of service calculations, as well as broad proposals to permit greater sharing of capacity and flexibility among recipients.

1. High Cost Fund Reform

The most significant proposals are for the support currently provided to carriers who provide voice telephone service in so-called “high cost” areas. The Plan proposes to shift $15.5 billion over the next 10 years from support for traditional voice service to broadband. These changes will involve new funding opportunities, but also a reduction in traditional support, and related inquiries into the price of middle mile and other facilities and reform to the intercarrier compensation system. (Please see our separate reports on Wholesale/Special Access and Intercarrier Compensation for details on those topics.) In addition, the Plan recommends that the FCC impose new reporting and service quality standards on those carriers receiving USF support for broadband. Eventually, the provision of broadband service will be a condition to receive USF high cost support, although waivers may be granted.

Stage 1, which will last approximately 18 months, would see the creation of two new funds, a “Connect America Fund” (“CAF”), which would provide direct support for carriers who provide broadband service to unserved areas, and a “Mobility Fund” which will provide one time support to improve 3G networks. The key proposals of these funds are:

• To make the provision of broadband in these areas economically feasible by a single provider. The Plan makes clear that only a single provider in each area will be supported, but that the provider could theoretically be an incumbent or a competitor, wireline or wireless.
• CAF support will be based on the deficit between revenue (defined broadly to include revenue from broadband, voice, video, intercarrier compensation and grants given pursuant to the national recovery legislation) and costs to provide the service. Costs will include both capital expenditures and operating expenses.
• ILECs who receive funding from the CAF should transition from rate-of-return regulation to price cap regulation. To ensure revenue neutrality for recipients in the first year, Interstate Common Line Support payments will be frozen.
• Initial funding for this new support will come from 1) the ending of high-cost support to Verizon Wireless and Sprint pursuant to merger conditions agreed to by those companies; 2) the wind down of all high-cost funding to non-incumbent carriers over five years; and, 3) freezing, and the ultimate elimination of, Interstate Access Support payments.
• The creation of the CAF (and the funding associated with it) will be tied closely to the reforms on intercarrier compensation that will encourage increases in rates to areas with artificially low average pricing (as low as $8-$12 a month in some areas). Similarly, to ensure that the costs of providing service are not overstated, the Commission will review the costs and pricing of necessary facilities, including second mile and middle mile. (See our separate reports on these two issues.)

In Stage 2, roughly a five year period beginning in 2012, carriers will begin to receive money from the CAF and Mobility Fund while the other proposals outlined in Stage 1 will be implemented. The Plan suggests that this funding can be paid for by the elimination of support to non-incumbents and the wind down of IAS support, as well as a broadening of the USF contribution base. (See our separate report on USF contribution issues.) In addition, the Plan notes that given the ambitious nature of these goals, Congress should be asked to authorize “a few billion dollars per year over a two or three period” to help fund these programs. 

In Stage 3, from 2017-2020, the Plan calls for the “elimination of legacy High Cost Programs”. Not much detail is provided on this portion of the Plan. Presumably, this elimination would end such programs as High Cost Loop Support and switching support, although these programs are not addressed specifically. The Plan acknowledges that some rural carriers may be unable to provide broadband at all, or that some additive support may be needed to make carriers whole as part of the intercarrier compensation reform.

The changes outlined in the National Broadband Plan are quite ambitious and seek to harmonize USF reform with other initiatives at the FCC and in the states. Rural carriers could see their USF support decline significantly over the next decade, and rural customers could see their rates for traditional phone service increase. What is unclear is the extent to which the cost-saving mechanisms outlined above, in conjunction with additional audits and other supervision that the Plan recommends, will be sufficient to prevent a substantial growth in the size of the overall High Cost Fund and, more critically, the Contribution Rate.

2. Rural Healthcare and E-Rate Changes

Compared to the High Cost Fund, the changes to Rural Healthcare and Schools and Libraries Programs (“E-rate”) programs are relatively modest, although they are fairly specific. Among the proposals for E-rate:

• Index the E-rate cap to inflation to ensure that the fund maintains its purchasing power over time.
• Adopt the pending proposed rules to allow community members to use the broadband connection during off-hours.
• Conduct a rulemaking on the current barriers to broadband in schools, and then prioritize funding based on minimum service goals, and need. Need could be defined based on income or by cost.
• Increase support for “internal connections” under the program, to provide schools with better infrastructure to maximize the usage of supported broadband connections.
• Conduct a rulemaking on whether funding wireless connectivity for things such as smart phones, tablet PCs, or netbooks could be beneficial to the goals of the program.
• Award support to “competitive programs” that integrate broadband into education. It isn’t entirely clear what the competitive aspect of this support will be.

In the Rural Healthcare Program, the suggestions are slightly more expansive than the E-rate program. They include:

• Allowing for-profit hospitals to receive funds if they serve “vulnerable” areas.
• Converting the current “Internet Access Fund” to a “Healthcare Broadband Access Fund” that will award grants to both rural and urban healthcare providers based on factors such as available pricing, ability to pay, and whether the recipient is a public provider.
• Creating a “Healthcare Broadband Infrastructure Fund”, which draws on the experience of the RHC Pilot Program, and would provide support for construction of new network connections, subject to conditions such as demonstrating that current broadband is too expensive and that construction of new infrastructure is more cost effective than using any existing provider.
• Adopt rules requiring the supported services to be used in a meaningful way, so as to prioritize funds to those entities that will gain the most from the supported services.

Perhaps the most intriguing aspect of the e-Rate and RHC programs is repeated references to the sharing of resources. Noting that middle mile and other infrastructure can become more cost-efficient with more usage, the Plan refers in several contexts to having one recipient utilize the previously supported infrastructure of another recipient in the other program, and encouraging recipients of e-Rate and RHC in the same communities to work collectively to share these resources to encourage a more efficient return on the support provided by the USF. While these sharing ideas are intriguing, some difficulty with allocating cost between the two programs seems likely.

This is one of a series of reports by Bingham’s Telecom, Media, and Technology practice group focusing on specific aspects of the FCC’s National Broadband Plan. If you would like to receive our reports on other topics, or to consult with us about how the Plan and its implementing proceedings may affect your business, please contact:

Andrew D. Lipman, Partner
andrew.lipman@bingham.com, 202.373.6033

Tamar E. Finn, Partner
tamar.finn@bingham.com, 202.373.6117

Douglas D. Orvis II, Partner
douglas.orvis@bingham.com, 202.373.6041

Or any other member of the Telecom, Media, & Technology Practice Group.