Al Weigand
Managing Consultant
Abilita Telecom Consultants
aweigand@abilita.com

On October 27, 2011 the FCC announced a sweeping reform of two key regulatory elements of the telecom industry - the Universal Service Fund (USF) and Intercarrier Compensation (ICC).  While both have an impact on what we pay for voice services, the USF fee is one that is generally passed directly on to the customer and turns up on your bill as a line item charge.   This article focuses strictly on USF reform and the potential impacts on customer bills.

First a little background.  The Universal Service Fund was established by Congress as a mechanism to ensure that all people in the United States could have access to phone service by providing a subsidy to telephone companies to help build out networks in the rural, high-cost areas of the country.  This program was expanded in 1997 to include direct subsidies to assist schools, libraries and rural health care providers in gaining access to affordable voice and broadband services.  USF is funded by a "contribution" from all telecommunications service providers including wireline providers, cellular providers, conference services, long distance carriers, VoIP carriers and others - that is based on a percentage of their interstate and international telecom revenues.  The Universal Service Administrative Company (USAC), an independent, non-profit corporation designated by the FCC as the administrator of the fund, sets the contribution factor on a quarterly basis. The factor varies depending upon the needs of the fund and the projected revenues of the carriers.  Carriers are not required to pass this cost onto users, but they are also not prohibited from billing it either, hence it turns up as a line item on most every customer's bill.

The contribution factor for the fourth quarter of 2011 is 15.3%, which is the second highest rate ever set by the fund administrator.  This rate topped out at 15.5% during the first quarter of 2011, compared with 6.7% in the first quarter of 2001.   Since the contribution factor is based on the projected interstate and international revenues of the carriers, as more carriers offer flat rate long distance plans, as well as reduced per-minute rates, the pool of available revenues shrinks, and the factor rises to compensate.

The table below shows the declining trend in carrier revenues for interstate and international services, as well as the growth in the funding requirement of the program over the last 10 years.  As these numbers move in opposite directions, the contribution factor rises dramatically.

So what impact might the recent reform plan have on the USF fee that turns up on our bills?  Well the first potential impact comes from the FCCs stated goal to hold the line on the largest portion of the program - the high cost fund that provides subsidies to the carriers who build networks in high cost areas.  The FCC is proposing to cap this fund at its current level of $4.5 billion for the next six years.  They are also proposing cost controls and improved accountability processes that are designed to reduce the fat in this program, including a reverse auction process that pits recipients of the fund against each other in a battle to see who can provide services at the lowest cost.  Now after the six year freeze, they may increase or decrease the size of the fund, depending upon "market developments, efficiencies realized, and further evaluation of the effect of these programs in achieving our goals" (from the FCC's October 27, 2011 Executive Summary of the order).

By holding the line on approximately 50% of the total fund, we could see the USF contribution rate come down slightly, or at least stabilize in the 14-15% range.  However, as long distance rates continue to decline along with the introduction of more flat-rate calling plans, the revenue pool will continue to shrink, so the rate may still push up, but the net effect may be nearly flat in terms of real dollar cost.

In their statement of "Principals and Goals" of the reform program, the FCC specifically spells out the goal of minimizing the USF burden on consumers and businesses.   While the proposed plan addresses the high-cost fund, the commissioners have remained silent about the other three elements: Schools and Libraries fund (~25% of the total), Rural Health Care (1%) and the Low Income Subsidy fund (24%).   In these days of austere budgets and sensitivity to tax increases, I suspect that there will be little support for any increases in spending for these programs, so there may be a good chance that we will see a slight reduction in our telecom bills over the next few years.   Hopefully this won't turn out to be wishful thinking....

Al Weigand
Managing Consultant
Abilita Telecom Consultants
aweigand@abilita.com

On March 17, 2010, the Federal Communications Commission (FCC) released its National Broadband Plan that is intended to ensure that all people of the United States have access to broadband capability  and establishes specific benchmarks towards meeting that goal.  The FCC was tasked with this effort as part of the 2009 American Recovery and Investment Act under the assumption that the accelerated deployment of broadband services in un-served, under-served and rural areas, as well as to “strategic institutions ... are likely to create jobs or provide significant public benefits.”

The FCC’s plan is based on the premise that “broadband is the great infrastructure challenge of the early 21st century.”  Washington  sees this as a transformative initiative that will unleash new opportunities and drive new innovation and economic growth.  In order to achieve this lofty vision, the plan establishes six very specific goals for the next ten years.

(1) At least 100 million U.S. homes should have affordable access to actual download speeds of 100 megabits per second and actual upload speeds of at least 50 megabits per second.

The key words here are affordable and actual.  Although the plan does not establish any benchmark definition of “affordable” it is clear that the intention is to create competition and additional subsidies to drive down prices.  When talking about speeds, the plan notes that the actual speeds that users see today are only 40-50% of the advertised “up to” speeds that they are paying for.  Delivering an actual download speed of 100 megabits per second would enable applications such as streaming high-definition video in real-time without interruption.  The plan banks on the idea that huge increases in bandwidth will stimulate new and creative applications.

(2) The U.S. should lead the world in mobile innovation, with the fastest and most extensive wireless networks of any nation.

The plan calls for the reallocation and auctioning of nearly 500 Mhz of spectrum from both federal and commercial bands.  This could raise tens of billions of dollars that the FCC would use to fund other portions of the plan.

(3) Every American should have affordable access to robust broadband service, and the means and skills to subscribe if they so choose.

A reduction in the price barrier is critical in this plan, but so is the reduction in the knowledge barrier.  The plan calls for the development of an education program in digital literacy to equip everyone with the skills necessary to access and utilize broadband networks.

(4) Every American community should have affordable access to at least 1 gigabit per second broadband service to institutions such as schools, hospitals and government buildings.

This goal is based on an expansion of the existing E-Rate program which subsidizes broadband access for schools and libraries.  The new plan would expand the funding and encourage a minimum speed of 1gigabit per second, assuming that the construction of such a high-speed infrastructure would have the effect of reducing the core costs of the targeted 100 megabit per second residential and business service.

(5) Every first responder should have access to a nationwide wireless, interoperable broadband public safety network.

This goal is driven by the 9/11 Commission recommendations to address the lack of interoperable communications systems between emergency response organizations.  Estimated costs run to $16 billion over 10 years.

(6)To ensure that America leads in the clean energy economy, every American should be able to use broadband to track and manage their real-time energy consumption.

The big idea here is that when people have timely feedback on their energy consumption, they will adjust their usage and save energy.  Conservation rather than construction of new power generation plants and more consumption of natural resources. 

In directing the FCC to create this plan, Congress seems to have envisioned the creation of a broadband Swiss Army knife by requiring a “plan for use of broadband infrastructure and services in advancing consumer welfare, civic participation, public safety and homeland security, community development, health care delivery, energy independence and efficiency, education, worker training, private sector investment, entrepreneurial activity, job creation and economic growth and other national purposes.”

Should the plan achieve even a fraction of its goals, it will spur an increase in capital spending across the country and potentially bolster the economy.   Businesses could benefit from lower cost communications services, improved capabilities for teleworkers and access to a new wave of powerful remote software applications. 

However, with 210 specific recommended actions in this plan, there is sure to be significant and loud debate over exactly how this plan is to be implemented and who will pay for it. Ten years may be an aggressive timetable.