On October 27, 2011, the Federal Communications Commission (“FCC”) adopted new rules reforming universal service funding (“USF”) and intercarrier compensation (“ICC”). The FCC cast its new rules as the most significant policy step ever taken to connect all Americans to high-speed Internet, wherever they live. Although the text of the order and new rules have not yet been released, based on an executive summary issued by the FCC, notable elements of the FCC’s new rules include the following:

USF Reforms:

  • The creation of a Connect America Fund (“CAF”) designed to ultimately replace all existing high-cost support mechanisms and capped at $4.5 billion over the next six years, with an automatic review trigger if the budget is threatened to be exceeded.
    • For price cap LECs, all existing legacy high-cost support amounts will be frozen and an additional $300 million in CAF support made available subject to an obligation to build and operate broadband-capable networks in areas unserved by an unsubsidized provider.
    • Price cap LECs carriers that elect to receive additional CAF support must provide broadband with actual speeds of at least 4 Mbps downstream and 1 Mbps upstream, with latency suitable for real-time applications and services such as VoIP, and with monthly usage capacity reasonably comparable to that of residential terrestrial fixed broadband offerings in urban areas.
    • The FCC’s Wireline Competition Bureau will undertake a public process to establish cost models to establish efficient support amounts, with price cap LECs asked to undertake a “state-level commitment” to provide affordable broadband in high-cost areas throughout its service area within each state. Price cap LECs thatexercise this “right of first refusal” will be required to meet vigorous broadband service requirements with full network build-out accomplished in phases over a five year period. In areas where a price cap LEC does not accept the commitment, a competitive bidding process will be developed to award CAF funding.
    • Any rate of return LECs receiving legacy universal service support or CAF support to offset lost ICC revenues must offer broadband service meeting initial CAF requirements, with actual speeds of at least 4 Mbps downstream and 1 Mbps upstream, upon their customers’ reasonable request.
  • The creation of a Mobility Fund dedicated to ensuring availability of mobile broadband networks in areas where a private-sector business case is lacking. Mobile broadband carriers will receive significant legacy support during the transition to the Mobility Fund, and will have opportunities for new Mobility Fund dollars.
    • In Phase I, the Mobility Fund will provide up to $300 million in one-time support to immediately accelerate deployment of networks for mobile voice and broadband services in unserved areas. Mobility Fund Phase I support will be awarded through a nationwide reverse auction, which we expect to occur in third quarter 2012. Eligible areas will include census blocks unserved today by mobile broadband services, and carriers may not receive support for areas they have previously stated they plan to cover.
    • In Phase II, the Mobility Fund will provide up to $500 million per year in ongoing support, subject to a proposed (although not yet established) structure and operational details for the ongoing Mobility Fund, including the proper distribution methodology, eligible geographic areas and providers, and public interest obligations. The FCC expects to adopt the distribution mechanism for Phase II in 2012 with implementation in 2013.
  • As a safeguard to protect consumers, an explicit waiver mechanism is established under which a carrier can seek relief from some or all of these reforms if the carrier can demonstrate that the reduction in existing high-cost support would put consumers at risk of losing voice service, with no alternative terrestrial providers available to provide voice telephony.

ICC Reforms:

  • Adoption of a uniform national bill-and-keep framework as the ultimate end state for all telecommunications traffic exchanged with a LEC. Under bill-and-keep, carriers look first to their subscribers to cover the costs of the network, then to explicit universal service support where necessary.
  • For terminating switched access rates, as well as certain transport rates, there will be a gradual, measured transition to bill-and-keep within six years for price cap carriers and nine years for rate-of-return carriers.
  • Adoption of a transitional recovery mechanism to mitigate the effect of reduced intercarrier revenues on carriers, permitting incumbent telephone companies to charge a limited monthly Access Recovery Charge (ARC) on wireline telephone service, with a maximum annual increase of $0.50 for consumers and small businesses, and $1.00 per line for multi-line businesses and a strict ceiling that prevents carriers from assessing any ARC for any consumer whose total monthly rate for local telephone service, inclusive of various rate-related fees, is at or above $30.
  • Default access charges for “toll” VoIP-PSTN traffic will be equal to interstate rates applicable to non-VoIP traffic, and default access charges for other VoIP-PSTN traffic will be the applicable reciprocal compensation rates.
  • Adoption of bill-and keep as the default methodology for all non-access CMRS-LEC traffic. To provide rate-of-return LECs time to adjust to bill-and-keep, adoption of an interim transport rule for rate-of-return carriers to specify LEC transport obligations under the default bill-and-keep framework for non-access traffic exchanged between these carriers.
  • Further comment requested regarding the policy framework for IP-to-IP interconnection.

According to the FCC, its new order will provide broadband infrastructure to millions of Americans that currently do no have access to broadband through the creation of a new Connect America Fund. In addition, the FCC estimates that, by expanding high-speed internet access, approximately 500,000 new jobs will be created.

The FCC estimates that the Connect America Fund will expand broadband into rural areas currently not served providing access to over 7 million residents. The FCC believes that this expansion will result in lower cost to consumers.