Yesterday, the Federal Communications Commission adopted an order comprehensively overhauling the nation’s existing universal service fund ("USF") and intercarrier compensation ("ICC") regime. The full text of the Order has yet to be released, but an executive summary is available. We will update this alert once the FCC releases the full text of the Order.

Intercarrier Compensation Reform

The FCC announced several long term reforms to modernize the ICC regime, including:

  • Bill-and-Keep: All rates will transition to bill-and-keep over 6 to 9 years, with states overseeing the transition with respect to intrastate rates in accordance with the federal framework.
  • Access Charge Recovery: To offset intercarrier compensation revenue declines, incumbent carriers can collect a limited monthly "access recovery charge" from consumers, with a maximum annual increase of 50 cents per month for consumers and small businesses, and $1.00 per month for multi-line business customers, but only if the customer is not already paying more than $30 per month for local telephone service.
  • Compensation for IP-to-PSTN and PSTN-to-IP Traffic: The FCC declared that IP-to-PSTN and PSTN-to-IP traffic will be subject to the same rates as PSTN-to-PSTN traffic.
  • IP-to-IP Interconnection: The FCC will release an NPRM to establish rules requiring carriers to provide IP-to-IP interconnection.
  • Traffic Stimulation: The FCC will require competitive carries and rate-of-return ILECs to refile their access tariffs if the LEC:
    • has a revenue sharing agreement; and
    • either
      • has a three-to-one ratio of terminating-to-originating traffic in any month or
      • experiences more than a 100 percent increase in traffic volume in any month measured against the same month during the previous year.
  • Phantom Traffic: The FCC adopted rules to require:
    • carriers and VoIP providers to include the calling party’s telephone number in all call signaling; and
    • intermediate carriers to pass this signaling information along, unaltered, to the next provider in the path.

Universal Service Reform

The Order eliminates the existing high-cost funding mechanism in its entirety, replacing it after a transition period with two funds designed to support broadband services: the Connect America Fund ("CAF") and the Mobility Fund.

The CAF for wireline carriers will be implemented in two phases:

  • In Phase I,
    • Support for price cap carriers will be frozen; and
    • An additional $300 million will be made available to wireline carriers that deploy 4 Mbps downstream and 1 Mbps upstream broadband services to "unserved" locations.
  • In Phase II,
    • Support for price cap carriers will be:
      • Distributed using a combination of forward-looking broadband cost model and competitive bidding to support deployment for five years;
      • Subject to making a "state-level commitment" ; and
      • Distributed to other carriers using competitive bidding if the price cap carrier declines to participate
    • Support for rate-of-return carriers will be reformed to encourage efficiency.

The Mobility Fund for wireless carriers will be implemented in two phases with a transition period:

  • Transitioned Phase-Out of Existing Support:
    • Current support per study area will be frozen as of year-end 2011 and phased out over a five-year period beginning on July 1, 2012, which should result In average of $900 million provided annually to mobile ETCs through 2015
    • Phase-down will stop on June 30, 2014 if Mobility Fund Phase II is not operational by that date, which should ensure approximately $600 million per year of legacy support until new mechanism is operational.
    • There will also be a "waiver" process from the phase-out of funding in cases of "extreme hardship"
  • Phase I will provide one-time support for currently unserved areas:
    • of up to $300 million plus $50 million for tribal lands;
    • to carriers that deploy 4G services within 3 years or 3G services within 2 years; and
    • awarded using reverse auctions beginning during the third quarter of 2012.
  • Phase II will provide ongoing, annual support of up to $500 million with $100 million set aside for tribal lands, with the proposed details outlined in a further notice of proposed rulemaking to be issued by the FCC.
    • Support will only be provided to a single carrier in each area supported by the Mobility Fund.
    • A competitive bidding process will be used to determine which carriers receive support.