Today, the FCC opened a rulemaking on universal service in high cost areas and intercarrier compensation. In response to changes in the marketplace over the last 15 years, the rulemaking proposes dramatic, if gradual, changes to both the current high cost program and the system for intercarrier compensation. If the FCC succeeds in adopting its proposed reforms, many existing subsidies for voice service will disappear, to be replaced by targeted funding for broadband infrastructure. The press release describing today’s actions and the commissioners’ statements are available at (press release), (Genachowski), (Copps), (McDowell), (Clyburn), (Baker).


Today marks the fifteenth anniversary of the date that President Clinton signed the Telecommunications Act of 1996. Since that time, there have been few issues that have proved as intractable as intercarrier compensation. And in that time the FCC’s high cost program, designed to support telephone service in rural areas, has become equally problematic. While it might seem counterintuitive to attack two of the FCC’s most difficult problems at the same time, they are, as Chairman Genachowski said today, intertwined, and it may not be possible to address one effectively without addressing the other.

The broad outlines of today’s proposals have been known for some time. They were first described in late 2008, and also were included in last year’s National Broadband Plan. Today’s rulemaking builds on the ideas in both proposals without changing their basic thrust: shift funding from voice service to broadband service, and reduce the amounts paid by carriers (and passed through to consumers) for interstate and intrastate access.  

Today’s FCC vote suggests there is a consensus both on the need for action and on many of the specifics of the plan. While the points of emphasis differed, there was very little to suggest any real disagreement on the major issues, including the FCC’s authority to support broadband service. This suggests that there is a real prospect that the FCC could meet the timeline suggested by Commissioner Copps, and act by the end of the year.


The FCC starts its analysis by focusing on what Chairman Genachowski called “four pillars” that would guide the reform effort. They are:

  • Modernizing universal service and intercarrier compensation to support broadband.
  • Controlling the size of the universal service fund during the transition period.
  • Requiring accountability from carriers and the government (in its role as administrator of the fund).
  • Adopting policies that are market-driven and incentive-based.

While, as noted above, there were different levels of emphasis among the commissioners, nearly all of them mentioned several of these principles in their statements. This is not entirely surprising, as several of these principles reflect actions the FCC already has been taking or that the commissioners already have supported. The only principle that does not fit in this category is the use of market-driven and incentive-based policies in universal service. This suggests that the FCC will look to use reverse auctions or similar mechanisms to set universal service support, rather than using the current cost-based analysis.


Remaking the high cost program is likely to be the most important focus of the rulemaking. Today, most of the discussion also centered on these changes. The FCC is proposing a two-stage transition to the new regime, which would support only broadband service and only in a limited number of areas.

The first steps in the FCC’s proposal would focus on making funds available for the new program, the Connect America Fund and on starting that program. The FCC’s intent is to make initial funds available by limiting the availability of support to multiple carriers and by reducing funding to incumbents. In the second phase of the program, all high cost support would be shifted to the Connect America Fund.

Making Funds Available

The specific steps to free up money for the Connect America Fund would include the following:  

  • Eliminating funding for “duplicative phone service by multiple phone companies operating in the same area.” 
  • Imposing limits on reimbursement for the remaining providers that receive funding.
  • Modifying the formulas for funding current high cost programs and phasing out the local switch support program.
  • Reviewing other funding mechanisms to determine if they still are necessary.

The FCC’s short-term goal appears to be to fund no more than one carrier in any given area. To achieve this result, it is considering, among other things, eliminating the “identical support rule,” which provides all carriers that qualify for funding with the same support per customer; and limiting funding to one carrier per area or eliminating funding entirely when at least one carrier can operate without a subsidy. It is likely that the last proposal would be particularly controversial, as there are many rural carriers that face competition from carriers that do not receive subsidies.

There also likely will be controversy over the proposals to limit support for rural carriers. The basis for this proposal is a concern that there are no incentives to reduce costs. The press release, for instance, notes that there are some carriers receiving more than $20,000 in subsidies a year for each voice line they serve, even while there is no current direct support for broadband service.

The FCC’s intent in concentrating on cost savings in the first phase of its proposal is to avoid what Commissioner Baker described as the urge to “layer broadband support on top of today’s fractured system.” Based on the discussion at the meeting, it appears likely that the Connect America Fund will be funded, at least initially, only from savings the FCC achieves in other areas. It is notable, in that regard, that the FCC already has been setting aside money returned to the high cost fund (e.g., as the result of voluntary conditions in wireless transactions) for use in supporting broadband service.

The Connect America Fund

The press release identifies four steps the FCC would take to implement the Connect America Fund. These steps would identify specific areas where support is needed to develop broadband service, choose providers in a cost-effective way and, in the long run, eliminate all current high cost programs in favor of broadband support. The four steps described in the press release are as follows:

  • Identify unserved areas using the broadband map being prepared by the NTIA.
  • Create the fund.
  • Support providers using market-based, technology neutral mechanisms, targeting the areas with the greatest need.
  • “Streamline and consolidate” existing programs into the Connect America Fund.

The FCC’s plan to target funding to unserved areas with the greatest need and to use market-based mechanisms to determine what providers will get the subsidies suggests a specific effort not to provide funding where broadband already is offered and to limit funding to areas where the FCC has concluded that competition is unlikely. One mechanism that was mentioned several times during the meeting was a reverse auction, in which parties seeking support would bid down from a specified support level, which would identify the party that was willing to construct the broadband facilities with the least support.  

A key question in this analysis will be what qualifies as broadband service. Chairman Genachowski addressed that issue directly in his statement, and indicated that he did not intend to create a program that would build the highest-speed network possible unless it could be accomplished at a reasonable cost:

To those who say the Connect America Fund should fund the highest possible speeds and all the bells and whistles: Bring us your specific proposals – but you must show us how much it would cost and who would pay for it, consistent with our commitment to fiscal responsibility and accountability.

This comment also is consistent with the National Broadband Plan, which set a goal of achieving 100 Mbps service in ten years, but which also proposed a definition of “broadband” for rural areas that fell far short of that service level.

Much as creating new caps and other limits on the existing high cost fund will be difficult, the FCC probably will face significant resistance to the proposal to consolidate and streamline existing programs into the Connect America Fund. It is likely, in fact, that rural incumbents will argue that they should be allowed to receive both broadband and voice funding, even after the transition is complete.


The second element of the proposal is reforming the current system of intercarrier compensation. As with high cost support, the FCC is proposing a two-step process. In the first phase, the FCC will address immediate pressing issues, particularly “phantom traffic,” “traffic pumping” and compensation for voice over IP traffic. In the second phase, the FCC intends to eliminate all intercarrier compensation charges over time and provide financial support to carriers that now rely on intercarrier compensation.

Phantom Traffic

Phantom traffic is traffic that has been disguised to look like other traffic, generally traffic that is not subject to access charges. The staff presentation acknowledged that phantom traffic accounts for up to 8 percent of all access traffic. The discussion at the meeting and the press release do not provide much detail on how the FCC intends to address this problem. The staff presentation suggested that the FCC will modify its rules to ensure that carriers receive detailed, accurate information on all traffic, but did not indicate how that requirement would be enforced.

Traffic Pumping

Traffic pumping, also known as access stimulation, generally is understood to cover a range of practices in which carriers work with customers that generate significant amounts of inbound traffic. The carrier charges unusually high access rates, usually because it is a rural carrier, and can split the revenues with its customers.

The notice will propose to require carriers that are engaged in traffic pumping to file new tariffs with lower rates that reflect their actual costs. The rules presumably will set criteria for when modified tariffs must be filed. The FCC believes that any revenues reclaimed by carriers that have been paying traffic pumpers “could be invested in networks or used to reduce prices for consumers.”

Voice over IP Traffic

While voice over IP traffic is not mentioned in the press release, it was discussed in the staff presentation and mentioned in Chairman Genachowski’s statement. The staff presentation mentioned that the notice will decide how voice over IP traffic should be treated for purposes of intercarrier compensation. Chairman Genachowski noted that “carriers are tangled in costly litigation about the treatment of VoIP traffic for purposes of [intercarrier compensation], creating real uncertainty.”

These comments suggest that the notice does not make any specific proposal on how to treat voice over IP traffic. This may reflect indecision within the FCC or an effort to deflect controversy if it intends a specific course. Given previous approaches to issues like traffic being sent to Internet service providers and competitive carrier access charges, the FCC has a range of choices that it could adopt, including treating voice over IP traffic the same as standard telephone traffic or adopting special rules that compensate carriers less for voice over IP traffic.

In that regard, there may be some clues in other comments made during the meeting. For instance, several participants indicated a desire to move to IP-based interconnection, a goal that presumably would be more difficult to achieve if voice over IP traffic were not entitled to the same level of compensation as other traffic. Nevertheless, the failure to describe a specific proposal suggests a significant level of uncertainty about what the FCC ultimately will decide to do.

Long-term Actions

The basic approach to intercarrier compensation reform was set out in both the 2008 proposal and the National Broadband Plan – a gradual transition from current access rates to no charge at all. This approach was described today as a “glide path” to the ultimate goal.

There are two principal issues that affect the FCC’s ability to begin that transition. First, today intercarrier compensation rates are regulated at both the state and federal levels. The staff presentation suggested that the FCC is considering two options. In one option, the FCC would work with the states and create incentives for the states to follow the glide path set by the FCC. The other option would require the FCC to reinterpret the provision of the Communications Act that governs reciprocal compensation and decide that it covers intrastate access. While this approach would be more contentious, if it succeeded it would create certainty that intercarrier compensation rates would be reduced.

The other element of the long-term plan is “a system to offset reductions in intercarrier rates.” This potentially could include some support from the Connect America Fund for rural carriers, but also is likely to include increases in the subscriber line charge or some other new customer charges to replace access revenues. The extent to which customer charges will increase and the size of the fund necessary to support smaller and rural carriers that will be losing access revenues likely will be among the most visible issues in this proceeding. In particular, rural carriers are likely to argue that they cannot accept any reductions in their total revenues and to seek a permanent guarantee that they will recover their lost revenues from the Connect America Fund.


The final area of focus in today’s discussion was an effort to increase accountability for carriers receiving money from universal service programs and for the government administering the fund. The press release describes three proposals:

  • Clear performance goals and metrics for the Connect America Fund
  • Increased financial disclosures from recipients of universal service funding
  • Increased transparency, oversight and accountability

The most significant of these proposals is the requirement for more financial disclosures. While many rural carriers theoretically operate under rate of return regulation that requires them to demonstrate that their rates are justified by cost, in many cases those carriers can avoid providing the FCC with detailed information on their actual costs and revenues. Also, in many cases rural carriers have multiple revenue streams that may not be fully accounted for in calculating subsidies. Thus, additional financial disclosure may demonstrate that current subsidy levels are unjustified.

It also will be interesting to see what kinds of metrics and performance goals the FCC adopts. For instance, the FCC could choose to focus on deployment goals, financial goals or speed goals, and each of those goals could affect how the new program operates. The statements today suggest that financial efficiency is an important goal of at least three commissioners, including Chairman Genachowski, so it may be likely that the FCC will seek to measure how effectively support recipients use the money they receive. However, deployment may be a more important goal, and the relationship between those goals will affect what kinds of metrics the FCC adopts.


Once the order is released, the FCC will set comment deadlines. The comment period likely will be completed this spring.

During the meeting, Commissioner Copps and Chairman Genachowski indicated that the FCC also will be taking other steps to get information and to seek consensus, including a series of workshops on universal service issues. Commissioner Copps, in speaking of the workshops, said

My hope is that participants would come prepared to put on the table their final, best and considered thoughts on the shape of our decisions, cognizant that Commission decisions and votes were imminent and that everyone will have to sacrifice a little so the country can gain a lot.

Chairman Genachowski also said that the FCC will provide “a special opportunity for comment for the state members of the Joint Board [on universal service].”

If the workshops the FCC conducted during the National Broadband Plan process are any indication, the workshops may well be an important part of the process. While no decisions will be made at the workshops, they could help shape the FCC’s general approach and its specific analysis of key issues.


While it is impossible to predict whether or when the FCC will act, today’s meeting suggested a level of consensus and urgency that has not always been apparent in considering universal service and intercarrier compensation issues. Commissioners repeatedly acknowledged that the intercarrier compensation system was broken or jerry-rigged, and expressed the view that the high cost program needed to look forward, not backwards.

It also is unusual to hear any commissioner express an opinion about when the FCC should act in a rulemaking proceeding, as Commissioner Copps did today. This is a further indication that the FCC intends to move forward quickly.

The FCC’s ability to act also may be aided by what appears to be a consensus among the Commissioners. Unlike some recent decisions, where the Republicans dissented or merely concurred, all five commissioners expressed strong support for action and for many of the specific elements of the proposal. As Commissioner McDowell noted, it has been difficult to achieve consensus on these issues in the past, so the current agreement is significant.

Still, the reason that these issues, and particularly the issues relating to intercarrier compensation, have proved intractable is that they are difficult. Moreover, rural carriers are wary of changes in either intercarrier compensation or high cost universal service support because they depend heavily on the revenues from those sources. For the FCC to succeed in this proceeding, it will have to balance rural carrier interests against broader national interests, and this has proved very difficult in the past. Indeed, the FCC could well face Congressional pressure to protect rural carriers from significant shifts in their revenues.

It also is worth noting that this proceeding does not address any issues relating to the current universal service contribution mechanism. While the FCC staff has been working on these issues, it appears that the Chairman has decided to keep them separate from the individual universal service programs. That did not, however, prevent Commissioner Copps and Commissioner McDowell from suggesting that changes to contribution mechanism will be necessary in the near future.

Nevertheless, this proceeding appears to offer the best opportunity for the FCC to move forward to address its rural broadband goals, the growth of the universal service fund and the unstable intercarrier compensation system. For that reason, FCC could make compromises to gain support from rural carriers, which could affect their competitors and even carriers in more urban markets.