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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DCITDave 12/5/2012 | 4:52:45 PM
re: Why USF Reform Matters

The idea behind the USF was to provide "all people in the United States" with access "to rapid, efficient, nationwide communications service with adequate facilities at reasonable charges."

That sounds like giving them a smartphone with a reasonably priced data plan. Not DSL or FTTH. 

I wonder why the FCC is reading the '34 Act and not thinking through what's more modern, scalable and cost efficient.


paolo.franzoi 12/5/2012 | 4:52:44 PM
re: Why USF Reform Matters



You really think 1 home per cell site is more efficient?  Knowing that you are in Texas, I think you should go visit Valley Telephone in West Texas.  I think seeing a truly rural IOC.  A quote from their website (I added the bolds):

<div style="padding: 10px;">

In 1999, VTCI was the first in the World to deliver DSL Broadband to 100% of our subscribers. Within the past year, VTCI was the first in South Texas to bring Fiber-to-the-Home (FTTH), and the 1st of three in the Nation for IP Prime Video Service Trial.


My take is that if they can use USF to get 100% broadband then anyone can.&nbsp;


DCITDave 12/5/2012 | 4:52:44 PM
re: Why USF Reform Matters

I don't know about 1 home per cell site but I'm sure it's expensive either way.

In the long term, reliable mobile services seem more important for economic development than a few rural homes on FTTH. It's odd that we're not putting more money toward that goal.

paolo.franzoi 12/5/2012 | 4:52:43 PM
re: Why USF Reform Matters


The reason is that those few rural homes have 0 broadband options and Universal is Universal.&nbsp; That means that if you build a house on top of a mountain then the phone company is legally required to bring you a phone line.&nbsp; If that line costs $100M to run, it is still legally required to do it.&nbsp; (Now to satisfy that they might provide a Sattelite Phone and save money).

The idea of USF (which is mostly not working in truly rural RBOC territories) is that EVERYONE gets a basic service offering.&nbsp; Not 90% not 95% but 100% and at about the same price as everyone else (aka price capped).

If you want to debate this, then we should debate all rural services (roads, electricity, mail) as they are all massively subsidized.&nbsp; To do so, will require a change in the law.&nbsp; So, I don't think you can debate how to change USF and not have it do universal service without Congress.&nbsp; I do think you can redirect what it does.&nbsp; However, given the profits of the large wireless service providers I might think we would be better to make wireless broadband a universal service and mandate 100% 3G (or heck why not 4G coverage).



DCITDave 12/5/2012 | 4:52:43 PM
re: Why USF Reform Matters

I agree with what you're saying, sev. Whatever the state of USF, my feeling is that it's clear now that wireless broadband will eclipse wired broadband for most uses most of the time.

Maybe this isn't practical, given the current regulatory structure, but it seems reliable wireless should be the only service deemed as universal these days.&nbsp;


^Eagle^ 12/5/2012 | 4:52:41 PM
re: Why USF Reform Matters


Your points are based on some false assumptions. &nbsp;The wireless carriers have show ZERO interest in building out 3g into the rural areas. &nbsp;Let alone 4G!&nbsp;

If they wanted to do it, it would have happened by now. &nbsp;Wireless companies only want the dense urban and suburban and smaller cities / towns with sufficient density. &nbsp;And the corridors in between for driver traffic.

Likewise the big broadband carriers have show zero interest in really building out the wired broadband network and this includes FIOS, U-Verse, Comcast Xfinity, etc.. and also even includes the RBOCs with DSL. &nbsp;many areas have still not gotten even basic dsl.

The USF is one of the only funding mechanisms for rural subscribers to even have dial tone. And it is essential for many communities to get any "smell" of remotely viable broadband. &nbsp;

Another example similar to Valley Telephone suggested by Seven: Big Bend Telephone based in Alpine Texas. &nbsp;

Sure, 4G mobile phones with smart tablets would be cool in rural areas. &nbsp;But the cost would be far higher than any wired method or any resonable point to point wireless technology (currently used by rural carriers to bring microwave drops to remote areas then fan out to the few users via either wire or radio). &nbsp;And if the wireless guys did build it, the price per sub would be prohibitive in many cases. &nbsp;Then there is backhaul.

So cool, but not sure how practical considering budget considerations.

Wireless plays have no interest in building out the rural environment unless forced to do so by government intervention. &nbsp;so far that has not happened. &nbsp;so to do what you propose would take far more than simply changing the rules around USF. &nbsp;you would have to go to congress and make build outs a requirement to keep the spectrum licenses in the cities. &nbsp;only then, when they are required, will the wireless carriers do it. &nbsp;Not a matter of technology, but of cost and return on investment. &nbsp;

Remember, the wireless carriers are all separate corporations from their wireline partners. &nbsp;This is deliberate so that the wireless carrier part of a company can operate as a "non regulated entitiy" as opposed to regulated like the wireline side is. &nbsp;No wireless carrier wants the respective PUC in each area to have rate setting power over them. &nbsp;and non of the wireless carriers want the Feds to determine (under the regulated side of carriers) the rate of return on capital investments into infrastructure like the wirelline side has.



DCITDave 12/5/2012 | 4:52:40 PM
re: Why USF Reform Matters

Great post and I realize I'm not being at all realistic. And even if the wireless companies aren't regulated, they do need the gov't to approve their licenses to operate cell towers, etc.

But my point is that its a shame that USF is what it is and it's a shame we're builing out broadband via wireline, not because it's best for the economy or the country, but because it's the only industy we can regulate enough. I know we can't change it, I'm just saying it sucks.

Also, wasn't there supposed to be some correlation between getting broadband to the boonies and seeing some economic growth? All of these West Texas counties folks keep citing as USF/broadband successes have 14 percent unemployment (or higher) and median incomes below $28K. &nbsp;

paolo.franzoi 12/5/2012 | 4:52:36 PM
re: Why USF Reform Matters

The one point I would make here is that the only reason that we don't regulate it enough is because that is the way we choose to do it.

"All" that has to happen [Note: I am using Airquotes] is to tell all carriers of all kinds they are now part of Title 2.&nbsp; ISPs, VoIP carriers, Cable Companies, Wireless Guys - EVERYBODY.&nbsp; Now that they are sufficiently cowed by that awesome concept - you then drop universal service on them for what the consumer wants.&nbsp;



fgoldstein 12/5/2012 | 4:52:35 PM
re: Why USF Reform Matters


Valley Telephone can do what it wants because they don't have to pay for it.&nbsp; They have about 6000 lines, total, and get a USF subsidy of around $750k/month.&nbsp; So that's well over $100/month/line, and we're all paying for it out of our USF taxes (about 15% on all interstate telecommunications).

These small companies are all on Rate of Return regulation: They are entitled to eran around 11% on their rate base (undepreciated invested capital).&nbsp;&nbsp; The more they invest, the more they make.&nbsp; There's no risk:&nbsp; A small fraction comes from their subsribers' fees, another fraction from intercarrier compensation, and the rest from USF.&nbsp; None of these rural carriers has asked for a general rate increase in over&nbsp; decade -- retail rates are frozen in time, and USF makes up the difference.&nbsp; If they lose lines to competitors, they still get their money, since their total retuns, not per-line revenues, are covered.&nbsp; Nice work if you can get it.

USF reform matters because it's bleeding the industry dry.&nbsp; There is no incentive to do things economically.&nbsp; Border to Border Telephone (82 customers, 91 loops total) gets $165k/month (about $2000/customer), and was allowed to invest millions to build Fiber to the Ranch to replace an unregulated WISP that they had previously used, which had been able to deliver broadband to their whole territory anyway.

Wireless is often a solution, since it's far cheaper than FttR, but smartphones are no substitute for computers.

paolo.franzoi 12/5/2012 | 4:52:34 PM
re: Why USF Reform Matters


And AT&amp;T/Verizon/Comcast can do it because they make so much money that they can afford it.&nbsp; There is no reason other than their profits that they could not do a widespread buildout in their area.&nbsp; The percentage of lines impacted for them is so small that it would not matter.

I stand by my stance that all services should be Title 2 and that 4G connectivity and FTTH with 100Mb/s guaranteed service should become Universal Services and available to 100% of all homes within 5 years.&nbsp;



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