Today the Federal Register published the Notice of Proposed Rulemaking (NPRM) adopted by the Federal Communications Commission (FCC) on February 8, 2011, seeking comment on how to reform the universal service fund (USF) and the intercarrier compensation (ICC) system.

Comments on Section XV (Paragraphs 603-677) of the item, which regards “eliminating opportunities and incentives for arbitrage” in intercarrier compensation, are due April 1, 2011, and Reply Comments on Section XV are due April 18, 2011.

Comments on the remaining portions of the item are due April 18, 2011, and Reply Comments are due May 23, 2011.

Comments on the FCC’s proposed collection requirements under the Paperwork Reduction Act are due May 2, 2011.

To view the Federal Register publication, click here.

Universal Service Reform

With respect to USF reform, the NPRM seeks comment on a number of proposed changes designed to modernize the nation’s communications network, reduce inefficiency, and avoid duplicative spending. Among the proposals upon which the FCC seeks comment are:

  • Defining the broadband services, including the minimum upload and download speeds, that would be eligible for USF support;
  • Capping the amount of per-line support available to carriers at $3,000 per year in the continental U.S.;
  • Moving existing universal service support funding into the Connect America Fund (CAF), which would provide support for broadband networks, including voice applications over broadband;
  • Eliminating the identical support rule, so that new competitive carriers that provide service in a rural area would no longer get the same level of USF support that the incumbent carrier receives; and
  • Adopting a competitively neutral reverse-auction mechanism that would award funds to carriers offering broadband services throughout a specified high-cost area for the lowest subsidy rates.

In addition to these issues, the NPRM also seeks comment on the FCC’s plans to eliminate the Interstate Access Support (IAS) mechanism and to move those funds into the CAF. The NPRM also proposes updates to the support mechanisms originally designed for small telephone companies, including the high-cost loop support mechanism and the switching support mechanism. The NPRM also requests comment on adopting performance metrics for evaluating the USF program.

Intercarrier Compensation Reform

With respect to ICC reform, Randy Clarke, Deputy Chief of the Pricing Policy Division of the Wireline Competition Bureau, stated that the NPRM proposes a two-stage framework. In the short term, the FCC would limit its reform efforts to adopting rules on three topics:

  • So-called “access stimulation”;
  • “Phantom traffic”, which is traffic that has been disguised so that it cannot be identified accurately for billing purposes; and
  • Determining the treatment of interconnected Voice-over-Internet-Protocol (VoIP) traffic for ICC purposes.

Although FCC Staff did not provide any detail during the Open Meeting as to how the FCC intends to address the latter two categories, Mr. Clarke stated that the FCC’s proposed rules with respect to “access stimulation” would apply to both incumbent local exchange carriers (LECs) and competitive LECs alike. He further noted that the proposed rules would require LECs that share access revenue with high-volume customers to amend their switched access rates to reflect more closely the volume of traffic they receive.

In the long term, according to Staff’s statements, the FCC intends to reduce the overall amount of ICC payments, stating that the ICC system “is rooted in outdated distinctions between local and long-distance telephone service, and inefficient per-minute charges. ICC also suffers from loopholes that distort markets and derail investment in advanced Internet Protocol (IP) networks.” The FCC is proposing, however, a “glide path” toward reduced ICC payments in order to avoid imposing a dramatic reduction in LEC revenue streams.

According to Chairman Genachowski’s remarks, the current ICC system is “broken” and must be modernized to support broadband deployment. The Chairman stated that it makes little sense for a call to a friend living a few towns over to cost more than a call to someone halfway across the world. He did state, however, that any reduction in ICC payments must be a “sensible but certain transition” with clear milestones. Commissioner Copps noted in his remarks that he considers the current ICC system to be plagued by gamesmanship and self-help, and it will take “shared sacrifice” in order to reform the current ICC regime. Commissioner Attwell Baker concluded her remarks by stating that the FCC and the industry must embrace IP-based infrastructure, but it is imperative to avoid “flash cuts” in existing ICC payments that support voice service.