USF, Intercarrier Comp Changes Given Fighting Chance at FCC

Comments were due Wednesday, after our deadline, on the USTelecom-brokered agreement on USF and intercarrier compensation changes. The FCC already has before it an alternative version, offered last week by Google, Skype, Vonage, the Ad Hoc Telecommunications Users Committee and Sprint Nextel (CD Aug 22 p4).

Small wireless carriers and satellite operators have been sharply critical of the “consensus plan” offered by wireline carriers (CD Aug 2 p4). But two other potential fault lines are causing even more concern among supporters of the plan -- resistance from cable operators, who have emerged as the key alternative to both voice and broadband offered by phone companies, and from the states, whose concerns are generally given considerable weight by the FCC.

Windstream Senior Vice President Mike Rhoda said one of the reasons the FCC has been unable to approve USF/intercarrier comp reform in the past was that doing so is so difficult. “We did expect there to be opposition,” Rhoda said in an interview. “I've frankly been pleased that a lot of the opposition was in the areas where you would expect it. There are many segments of our industry that are extremely advantaged under our current rules. When you go to change those rules, you're going to upset some apple carts. People who have a lot to protect and potentially are not going to be as well advantaged under the reform system, they're not going to sit quietly. I think in some respects that’s what we're seeing."

The FCC “has a strong desire to move forward and be able to point to something that really kind of pushed us into a more broadband-focused era,” Rhoda said. “I think they [at the FCC] have the tough job of weighing all of these different viewpoints.” The FCC has the institutional knowledge “to understand the opposition that’s well founded versus the opposition that’s just opposition for opposition’s sake,” he said. Rhoda said he hopes the FCC will start with the consensus plan as a framework, but conceded “that’s a big assumption.” But Rhoda said the incumbent local exchange carriers that signed onto the plan are the biggest players in serving rural America.

Rhoda said the two biggest wireless carriers, Verizon and AT&T, are part of the ILEC coalition. As for smaller wireless carriers, “I wouldn’t say that their criticisms aren’t legitimate, they know better than I do or we do how legitimate their concerns are,” he said. “We're operating under a $4.5 billion budget. That has to account for all of the objectives that the commission and policymakers have with this funding.” Given limits on the fund, most agree it makes no sense to support multiple networks in any market. Wireless carriers call for a technologically neutral USF program, Rhoda said. “To give two providers the same level of support in a market is only technology neutral if their costs are the same,” he said. “That can’t happen. No two carriers’ costs are going to be the same."

Rhoda said the group that negotiated the consensus plan didn’t spend much time looking at the correct size of a mobility fund or whether $300 million, as proposed in the plan, was the right figure. That’s “a figure that’s been thrown around by a lot of people in the past … so we thought we would start there,” he said. “We think that $300 million is probably a lot closer to the actual need … than what’s currently being spent, over $1 billion a year.”

"If the FCC is serious about promoting competition and innovation in the marketplace and bringing benefits to consumers, it should not adopt the ILEC’s USF proposals,” said Rural Cellular Association President Steve Berry. “Rather, the Commission should undertake genuine USF reform that focuses on the interests of consumers, promotes efficient investment in broadband deployment, and prevents wasteful outlays from the high-cost program. The ILEC’s proposals blatantly favor outdated wireline technologies, which consumers are choosing less and less every day."

One cable industry official said this week the agreement was largely a deal struck between wireline carriers, large and small. “At the end of the day, the telcos did what the telcos did,” the official said. “They need to go further. This largely takes into account the interests of the telcos and doesn’t really encompass a full industry position.” The plan is “sort of a throwback to the way things they were” prior to today’s more competitive world, the official said.

Trying to reach an agreement today is even tougher than in 2008, said a second cable industry official. “The telcos are losing access lines 10 percent a year,” the official said. “The difference between 2008 and today is substantial. They've lost 25 or 30 percent of their lines in that time. That tells you how much competition has grown. The other factor is the growth of broadband. … Cable is leading DSL and telcos in terms of what [cable] can do."

Getting big and small LECs to sign off on the same framework “gives them a lot of momentum and makes it harder for someone to put together a coalition to block,” said a top telecom lawyer, who noted that rural LECs have traditionally led efforts to defeat USF reform. “There’s certainly a lot of vulnerabilities” as well, the official said. “The ILEC plan is really an ILEC plan despite the fact that AT&T and Verizon are obviously big wireless providers as well.”

Many changes will need to be made before the plan submitted by the carriers can be approved, predicted Andrew Schwartzman, senior vice president of the Media Access Project. “Unfortunately, the so-called Consensus Plan does not represent a true consensus of all the relevant parties. I suspect that significant changes will be needed before it can be approved.”

"Opponents of the telcos’ … plan could win some revisions, and last Friday’s alternative proposal by some key players [Google, Sprint and Skype] definitely adds a new dynamic, but right now I think it’s still the telcos’ game to lose,” said MF Global analyst Paul Gallant.

"My sense is that the … plan will form a baseline from which some changes are likely to be made in the direction advocated by cable operators and others to make the reform somewhat less incumbent-centric and more fiscally restrained,” said Free State Foundation President Randolph May. “But in my mind there’s little doubt that the … plan contains core elements around which any changes will be made. Getting meaningful reform adopted, say, with a hard cap for the high-cost fund, will be a real test of Chairman Genachowski’s leadership. But … I am an optimist."

"On the surface, prospects for universal service reform/intercarrier compensation reform appear favorable in light a coalescing consensus among major stakeholders. Momentum for a USF/ICC overhaul appears as strong and sustained as it has ever been,” said Jeff Silva, analyst at Medley Global Advisors. “However, executing such sweeping change inherently remains a highly delicate matter because of the many complex issues involved and the politically-sensitive nature of telecom subsidies at the heart of USF/ICC reform. My sense is the FCC wants to go big on USF/ICC reform, but its ability to do so will likely turn on whether rural telephone companies can support a final package. While other stakeholders may be unhappy with the Consensus Plan, rural telephone companies arguably have the most potent political card to play and therefore have the ability to cause USF/ICC reform to unravel at the 11th hour."

Meanwhile, the six companies behind the consensus plan -- AT&T, Verizon, Windstream, CenturyLink, Frontier and FairPoint -- released the executive summary of their filing at the FCC Wednesday. The framework “presents the Commission with a historic opportunity to put its own National Broadband Plan into action and deliver broadband to all Americans, no matter where they live,” the filing said: “The Commission has been close before (though never this close and with this much support), but it ultimately failed to adopt comprehensive universal service and intercarrier compensation reforms -- and the opportunity could again slip away unless the Commission acts very soon. Further delay is untenable and would leave millions of consumers without access to broadband and the tools they need to be full participants in the information age.”