The Federal Communications Commission (FCC) proposes to replace the high-cost subsidy portion of the Universal Service Fund (USF) with two new funds supporting broadband and mobile broadband in certain unserved areas of the country, while keeping total subsidies close to the current level of funding. Most legacy support would not be phased out until the second stage of a transition from 2012 to 2016, meaning that disbursements for broadband subsidies would not begin until then. The Plan lacks detail on potential reform of the USF contribution system, leaving that critical issue to future proceedings.

Background

The largest single portion of the roughly $9 billion federal USF is a set of “high-cost” subsidy programs that provide approximately $4.6 billion to carriers for providing traditional telephone service in “high-cost” areas (approximately $2 billion to small, rate-regulated incumbent carriers; $1 billion to larger incumbents; and more than $1 billion to “competitive” (mostly wireless) carriers serving the area of a subsidized incumbent). The source of these funds is an assessment on interstate telecommunications and voice over Internet protocol (VoIP) services (essentially a tax) that has recently rocketed to 15.3 percent. With this rate already seen as too high, for the Plan to expand to subsidize construction of broadband facilities in unserved areas, many commenters urged the Commission to make cuts to the existing program.

Analysis

That is exactly what the Plan proposes. Over a 10-year transition period, the Commission proposes the total replacement of its existing high-cost support programs with a ConnectAmerica Fund (CAF) to support broadband in areas that would otherwise be unserved, and a Mobility Fund for the 2 percent of the country that it estimates lacks 3G coverage.

CAF support would be provided only “in geographic areas where there is no private sector business case to provide broadband and high-quality voice-grade service.” This significant change effectively adopts the cable industry proposal that no subsidy should be provided where an unsubsidized competitor provides service, and should greatly reduce the number of areas where subsidies are provided. The Plan also adopts the cable proposal to make such determinations based upon “neutral” census areas, rather than on the existing incumbent telephone company’s “study area.”

Funding would be provided both to construct new broadband facilities in unserved areas and to support existing broadband that was previously constructed based upon universal service support. The FCC will consider making such awards based upon market-based approaches, such as a competitive grant process similar to the broadband stimulus program model, and/or “reverse auctions,” in which existing and potential service providers bid for the lowest subsidy that they would be willing to accept to serve an area (which in many markets could be zero). In all cases, funding would be limited to one wireline and one wireless service provider in each area.

The Plan intends to implement these changes while keeping total spending “close” to the current $4.6 billion (in 2010 dollars) in annual high-cost support. At a macro level, the type of recipients might not change significantly. Just as today, approximately $3.5 billion would be spent on wireline subsidies and $1 billion on wireless, but the funding would be more targeted for a smaller number of areas and likely to a smaller number of recipients.

Most legacy support would not be phased out until the second stage of a transition from 2012 to 2016, meaning that disbursements for broadband subsidies would not begin until then either. The Plan suggests that Congress could provide one-time temporary bridge funding to allow broadband spending sooner than the expected reductions in the spending occurring under existing programs, rather than increasing the size of the fund and further increasing the already high contribution rate. All legacy high-cost programs would be eliminated by 2020.

A significant omission from the Plan is any proposal for reforming the USF contribution system, which is notoriously confusing and which has had to rise precipitously as the USF fund has ballooned during a period of shrinking interstate telecommunications revenue. The Plan calls for a new proceeding to consider proposals to replace the revenues-based contribution with an assessment on telephone numbers and/or connections, which has been supported by most industry groups. However, it also calls for “broaden[ing] the universal service contribution base,” which could mean USF assessments on broadband or other Internet services.