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Why USF Reform Matters

The battle over Universal Service Fund reform isn't grabbing the kind of headlines that other regulatory squabbles are, but it is a significant issue for the U.S. telecom market for multiple reasons. Here's what you need to know about regulatory reform:

Why you should care: First, the Federal Communications Commission (FCC) 's decision as to how USF will be changed essentially determines who has the best shot at providing broadband in unserved and underserved areas of the U.S. going forward. And by default, that means what the FCC decides will also likely determine whether those areas get broadband service and what the service looks like -– how fast it will be, how symmetrical, and whether it is wireless or wireline.

Second, the impact of the FCC's choices could reverberate into other aspects of telecom, specifically wireless backhaul. Efforts to build ubiquitous 4G coverage could be impacted if the new rules send rural telecom providers into a tailspin, because someone has to build and maintain connections to wireless towers in rural areas.

USF reform is being paired with intercarrier compensation (ICC), the regulatory formula that determines how telecom service providers compensate each other for completing voice calls. The pairing makes sense because ICC has been another means of funding networks in high-cost areas that have become archaic with the introduction of VoIP, among other things. ICC changes will impact any service provider offering voice services, potentially including VoIP companies and cable players.

Some not-so-small companies, such as CenturyLink Inc. (NYSE: CTL) and even AT&T Inc. (NYSE: T), would be financially impacted by changes in the USF rules that hurt incumbents. There's a reason the six largest U.S. incumbents have banded together and gotten some support from rural telecom associations for a plan that affords some protection to existing service providers in rural areas.

And finally, the entire industry will be affected if a prolonged debate or court battle delays any decision on USF, because regulatory uncertainty slows purchasing on all fronts. The FCC had promised USF reform earlier this year but now has slipped on its plan to finish the process this summer and could be months away. Rep. John Dingell (D-Michigan) this week urged the agency to finish by October, saying the process has already gone on too long.

The ABCs: There is general agreement that the current USF process is wasteful and with Washington on the warpath against spending, the program is an easy target. The National Broadband Plan, issued in early 2010, laid out the means to convert USF into a broadband funding mechanism, called Connect America, but the FCC still has to enact rules to make that change happen. (See FCC Plan to Revamp USF, Intercarrier Payments .)

The gang of six telcos -- AT&T, CenturyLink, FairPoint Communications Inc. , Frontier Communications Corp. (NYSE: FTR), Verizon Communications Inc. (NYSE: VZ) and Windstream Communications Inc. (Nasdaq: WIN) -- unveiled their own America's Broadband Connectivity (ABC) plan in late July and garnered the backing of three rural telecom associations for the framework of their plan: the NTCA - The Rural Broadband Association , Organization for the Promotion and Advancement of Small Telecommunications Companies (Opastco) and the Western Telecommunications Alliance (WTA) . The rural telcos also submitted a plan of their own, to apply to the smaller telcos still under rate-of-return regulation. (See Rural Groups Support USF Plan and Carrier Agreement May Speed USF Reform.)

The ABC plan dramatically cuts ICC rates and eliminates the distinction between local and long-distance calls, which many think is artificial in the IP era. The plan would use federal money to target only identified high-cost areas, where one service provider would be funded -- previously multiple providers had gotten USF money for the same service territory, and it limits growth of the fund.

The amount of funding for a given area would be set by a proposed cost model, and an incumbent carrier already serving 35 percent of that territory would have the right of first refusal to accept that level of federal funding and provide broadband or walk away from it, as Telecompetitor explains here.

Because the ABC plan wouldn't force rural telcos to give up rate-of-return regulation, which compensates them by covering the cost of broadband networks, the rural associations were willing to back its framework.

The opposition: Who's not wild about the ABC plan? Just about everyone who isn't a telco: cable companies, state regulators, satellite providers and even some rural telcos. Among the immediate complaints was that the proposed cost model wasn't public -- that's now been rectified, though some say it's coming too late.

The cable industry also opposes the ABC plan, because they say it favors incumbent telcos, as Multichannel News explains.

Some rural carriers aren't thrilled about the big carriers' plan either. The Rural Broadband Alliance and a long list of rural carriers believe the changes in the way ICC is determined favor the larger carriers and that rural, rate-of-return players are getting the shaft in this new plan, as Telecompetitor explains in this article.

Satellite companies including Dish Network LLC (Nasdaq: DISH), opposed the plan, says Connected Planet, because they also believe it gives incumbents too big an advantage over potential new players.

State regulators are upset, according to this report from Politico, because the plan would preempt state control over intrastate rates. This could well be the complaint that lands the FCC in court, as state regulators are threatening to go to sue to defend states' rights.

Blair Levin, author of the National Broadband Plan, also has been critical of the ABC plan for giving incumbents the right of first refusal, as noted in this Broadcasting & Cable report. The NBP's alternative is a reverse auction, which gives the federal funding to the company promising to provide broadband at the lowest cost.

What's next? The expectation is that the FCC will now come up with its own plan, possibly drawing from the ABC plan, the rural carriers' plan or a third plan, proposed by the Federal-State Joint Board. How long that will take is a guess at this point, but chances are it will be challenged, in court or in Congress, regardless of what is decided.

— Carol Wilson, Chief Editor, Events, Light Reading

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