Proposals to reform the Universal Service Fund High-Cost Program have been circulating at the Federal Communications Commission (FCC) for years. Last week, the FCC launched a proceeding to escalate high-cost reform as part of the implementation of the recently released National Broadband Plan. (Our summary of the universal service terms of the Plan is available here.)

This new proceeding, in the form of a Notice of Inquiry and Notice of Proposed Rulemaking (NOI/NPRM) seeks comment on ways to use High-Cost Program funds to expand broadband services and shift funding away from services and areas no longer in need of support. It also seeks comment on ways to limit the growth of the funds, as well as ways to improve broadband deployment.

Although the NOI/NPRM does not make proposals for the creation of the new Connect America Fund (CAF), which is one of the centerpiece proposals of the Broadband Plan, it does offer some insight into the FCC’s thinking of what that future fund should look like.

The NOI/NPRM seeks comment on three main issues:

  1. Whether the FCC should continue to use a form of cost modeling, or move to another mechanism such as reverse auctions, to determine the amount of support to be distributed;
  2. How the FCC might jump-start broadband deployment in unserved areas via a “fast track” procedure while finalizing funding rules; and
  3. Whether it should implement certain funding freezes and caps on the existing High-Cost Program.

With respect to the first issue, the FCC currently uses a cost model to determine the level of support to be distributed to qualifying carriers, with some differences in the model depending on whether the carrier operates in a rural area. There are inherent limitations to using any cost model, and on a more practical level, the FCC also noted that the current model has not been comprehensively updated for more than a decade.

One alternative proposed in the NOI/NPRM was to use reverse auctions where the carrier seeking the lowest subsidy level is chosen to receive funding to serve an area that is otherwise not commercially viable. The subsidy would then be based on the carrier’s bid.

The FCC also sought comment on the possible use of a cost model for such purposes as setting a reserve price (i.e., the highest permissible subsidy level in a reverse auction), or setting the level of support in areas where a market solution is not viable, or otherwise identifying which geographic areas are in need of support.

The FCC states that it intends to create the new CAF sometime in 2010 or 2011, but the Commission has also stated that there will not be a flash cut over to the new fund. Therefore, the FCC is seeking comment on measures it might take to disburse funding on an accelerated basis for the construction of new broadband facilities in unserved areas during the transition period.

Some parties have proposed a program by which the FCC would award funding on a project basis, similar to the broadband stimulus programs. The FCC estimated that one-time deployment or upgrade efforts could potentially bring broadband to nearly half of the estimated seven million unserved homes. The FCC has proposed some form of competitive procurement auction as a possible distribution mechanism, and seeks comment on how it would conduct such an auction.

Finally, the FCC has proposed capping the level of funding at current 2010 levels for incumbent providers, and implies that the current “interim” cap for competitive providers at 2008 levels will remain in place until the funding transition is complete. Other measures proposed for controlling the growth of the fund include phasing out competitive high-cost funding over five years, transitioning rate-of-return carriers to incentive regulation, and eliminating or freezing certain types of high-cost support (e.g., eliminating Interstate Access Support and freezing Interstate Common Line Support).

The NOI and NPRM are available on the FCC website, along with the statements of the FCC Commissioners (Julius Genachowski, Michael Copps, Robert McDowell, Mignon Clyburn and Meredith Baker).