Broadband has gone from being a luxury to a necessity for full participation in our economy and society,” said FCC Chairman Julius Genachowski in October 2011, when he announced plans for long-awaited changes to the Universal Service Fund (USF) and Intercarrier Compensation (ICC) systems.

Many have argued that the USF, which has supported affordable telephone services in high-cost areas since the mid-1990s, should be updated to drive the expansion of broadband and mobile communications. Furthermore, the ICC system, the mechanism that compensates carriers when they use one another’s networks, has been called inefficient in today’s market. Why? Because it was developed for a competitive landscape that was based on traditional telephony, presenting greater incentive for providers to offer voice service in rural and insulated communities than mobile and broadband.

While most agree that the old system needed to change, consensus on how to approach the changes has been elusive. At least 15 entities challenged the FCC’s order in court. Industry and community leaders are still studying the changes and watching the issue closely as plans continue to be laid for the program’s long-term structure.

The report and order, released by the FCC in November, represents a massive overhaul of the USF’s High Cost support system, one of four programs of the USF that support communications in underserved communities. The High Cost portion of the USF traditionally has subsidized telecom providers that serve areas where market forces alone wouldn’t drive the provision of services at reasonable rates. Under the new order, the High Cost program ultimately will be replaced with the Connect America Fund (CAF), which requires providers that receive subsidies to offer both voice and broadband service. Carriers that fall under “price cap” regulation, which tend to be larger providers, will be required to build out into certain areas in order to receive funding. “Rate-of-return” carriers, which tend to be smaller, will be required to offer broadband service if reasonably requested.

A CAF Mobility Fund also was created, which provides $300 million in the first year for mobile broadband build-out, and $500 million annually for mobile providers thereafter. Long-term plans for both the CAF Broadband and Mobility funds will be finalized in a further rule-making process.

In addition, the order phases out the ICC system and its complex process for paying telecom carriers to connect and terminate calls. Providers will be expected to move to a “bill-and-keep” system, connecting and terminating calls without charging one another.

The old compensation system has been called ineffective for many reasons — one being that it only applies to traffic carried over telephone networks, giving traditional telecoms an advantage over other technology providers and reducing incentive to invest in new service offerings.

Following the breakup of the AT&T monopoly in the 1980s, the ICC system made sense, said Harold Feld, legal director of Public Knowledge, an organization that advocates for technology and communications access. It ensured that rural telecom providers, which tend to handle smaller call volumes and receive lower ROI, were compensated at higher rates than providers serving more populated areas.

“The theory behind that is it costs more to operate the rural system, which is true; it’s also a subsidy,” he said. Now, Feld said, the FCC is shifting from the implicit subsidies of the old ICC system, and toward a more explicit system, like the High Cost subsidies of the past, but aimed at expanding new technologies in these hard-to-reach areas.

Some, however, are concerned that eliminating the ICC will severely impact smaller, rural providers. Absent ICC income, small providers will struggle to remain viable, critics say. The order allows for limited access recovery charges to make up for lost intercarrier compensation, but smaller providers can’t spread out the charges across a large subscriber base.

Mike Skrivan, vice president of regulatory for FairPoint Communications, a telecommunications company with both price-cap and rate-of-return operations across 18 states, said carriers that can’t recover what they need through the recovery charge would be eligible to recover some funds through the USF. Eventually, however, the loss of income will erode their revenue.

“So the question for them,” Skrivan said, “is can they get that through increased sale of broadband services? Can they operate more efficiently, etc.? And that’s true for price cap carriers as well.”

Several states, including Pennsylvania, have filed lawsuits challenging the order. While the FCC has always had authority over interstate compensation rates, intrastate calling has been the purview of state utility commissions, and some state regulators are uncertain about their ability to address consumers’ needs going forward.

Robert Powelson, chairman of the Pennsylvania Public Utility Commission (PUC), said his state has achieved 96 percent broadband coverage under the old policies and worries that the new policies could result in less USF money for the state, higher rates for consumers and, ultimately, more complaints coming in to the PUC.

Powelson, who also serves on the Board of Directors for the National Association of Regulatory Utility Commissioners, fears that state regulators’ hands will be tied by federal regulations and they’ll be unable to respond to consumers’ issues, especially if rates increase for consumers.

“A lot of state regulators are concerned about losing our ability to investigate and resolve consumer complaints,” said Powelson, adding that if the FCC is going to pre-empt part of the state’s authority to regulate, it should also be responsible for resolving issues that arise. “My view is, if you want it, take it all,” he said.

An FCC spokesman said that the ICC reforms are intended to improve networks for consumers and will eliminate billions of dollars in hidden fees. The FCC is confident that the legal authority it asserts in the order will hold up in court. In addition, the spokesman said, the order preserves the states’ role as partner in regulation. States will continue to oversee fund recipients, arbitrate interconnection disputes, enforce carrier-of-last-resort obligations, and oversee intrastate rate reductions during the ICC phase-down, among other things.

The FCC adds that ICC reforms actually will benefit telecom providers by giving them more predictable revenue. And while the order does allow limited cost increases for consumers, the commission estimates that the cost benefits of eliminating intercarrier compensation will outweigh the costs for consumers by 3 to 1.

Pennsylvania may reconsider its lawsuit, Powelson said, when and if the repercussions of the changes become clearer. For the time being, however, he says it’s prudent for the state to reserve its right to appeal.

Skrivan said there may be an opportunity for states to take over where the FCC’s order leaves off by working with providers, possibly by offering incentives, to serve high-cost areas in their states. Because the order caps funding at the current level of $4.5 billion, he said, there will continue to be areas in need.

Edyael Casaperalta, program and research associate for the Center for Rural Strategies, said the Rural Broadband Policy Group, which she coordinates, wanted to see more support for smaller providers in the order. The order gives incentives to large providers that already receive subsidies to build out into rural and hard-to-reach areas, she said, instead of helping small providers, including nonprofits and community broadband networks, already in those communities.

Casaperalta says giving incentives to large corporations rather than supporting smaller providers that are already committed to serving high-cost communities is a flawed approach — one that overlooks the consumers that the program is meant to serve.

“If your main motive is profit,” she said, “I can see how providing service in a remote area for 100 families is not a priority and will never be a priority.” Casaperalta added that policymakers need to recognize alternatives for communities that lie outside the market incentive.

“If we continue creating structures that are focused on markets and creating profits for corporations, then we’re by default going to leave out and continue to leave out these communities,” she said.

According to the FCC spokesman, the statute requires that the money go to telecom carriers — but he contends that the new CAF does “expand the universe of providers” who are eligible for support. He added that the program also must adhere to its current budget, and often, the most economical way to expand coverage is to build on existing networks.

FairPoint’s Skrivan said a focus on larger providers was necessary to ensure broadband access to the largest number of consumers. The High Cost system, he said, gave more funding per capita to rural providers than nonrural providers — a distinction that has been abandoned under the new order. According to Skrivan, the majority of rural customers are served by nonrural providers, which resulted in a rural-rural divide.

“Rural customers served by large companies aren’t getting broadband services nearly as quickly as rural customers served by rural companies, because of the difference in the funding mechanism,” he said.

Since funding is capped at $4.5 billion, Skrivan said, any additional support to nonrural companies means there is less to go around for rural providers. Nevertheless, rate-of-return carriers will under the new program, get approximately the same amount of money that they currently receive.

Obviously local leaders have a keen interest in the outcome of Universal Service reform, even if they don’t play a direct role in regulating. Andy Huckaba, a city councilman from Lenexa, Kan., and chairman of the National League of Cities’ Information Technology and Communications Policy Group, said the league has pushed for a world-class national broadband infrastructure. Although Huckaba sees the FCC’s order as a step in the right direction, he hopes it’s only a first step. Broadband speeds specified in the order — 4 Mbps downstream and 1 Mbps upstream initially and scalable to 6 Mbps and 1.5 Mbps respectively — aren’t exactly top speed when compared to other countries. To remain globally competitive, he said, communities will want to keep pushing for better infrastructure.

The trend toward mobility also is an important one for policymakers to consider, said Huckaba. “More and more people are out there using their smartphones and mobile devices to access the Internet,” he said. Huckaba said he was happy to see that mobility was included in the order and its importance recognized, but it’s just a start. “There probably needs to be a lot more work there to make it stronger and to recognize the trends.”

Scott Bergmann, assistant vice president of regulatory affairs for CTIA-The Wireless Association, said that mobility funding in the order could have been larger, but it’s a significant step that the mobility fund was created. He said state regulators will have an important role in ensuring their communities have mobile services.

Under the new order, states will continue to determine which carriers are eligible for funding. Mobile providers that previously received funding as competitive providers under the legacy High Cost program will again need to be deemed eligible by state authorities under the new funding structure. The impact for wireless carriers, Bergmann said, will vary by provider and by area.

“It’s important for policymakers in a given state or locality to reach out to those companies there to see what the impact will be and what their plans are for either continued buildout or maintenance of service,” Bergmann said, “so they make sure that they continue to enjoy the benefits of mobile services in those high-cost areas.”

Communities should keep an eye on the issue as the changes roll out, Huckaba said, including the effect of ICC changes on smaller, rural providers, appropriateness of broadband speeds and the availability of mobile services.

“I’m just hopeful that we can keep moving in a really strong and positive direction,” he said, “and increase our competitiveness.”

Emily Montandon  |  Editor