FCC Releases Notice of Proposed Rulemaking, Notice of Inquiry on Comprehensive Universal Service Reform

On April 21, 2010, the FCC released a Notice of Inquiry (“NOI”) and Notice of Proposed Rulemaking (“NPRM”) requesting comment on measures designed to phase out the nation’s federal high cost support for voice services and introducing a new fund to support the provision of universal broadband communications, as recommended in the National Broadband Plan.  The NPRM seeks comment on a set of proposed reforms that will effectively end the current high-cost support fund and shift the captured funding to a new fund designed to support broadband deployment.  The NOI seeks comment on the means by which the repurposed funds will be distributed to broadband service providers, which presumably will form the basis of a subsequent NPRM requesting comment on the new distribution mechanism.  Comments are due 60 days following publication of the NOI & NPRM in the Federal Register, and Reply Comments are due 30 days thereafter.

NPRM:  Eliminating The Current High Cost Support Mechanisms

In the NPRM, the FCC proposes additional caps to curb growth in the high cost support funds and certain cost-cutting measures intended to free funds to support broadband services without increasing the overall size of the fund.   The FCC seeks comment on a proposed cap on incumbent ETC support that would complement the cap currently in place for competitive ETCs.  With respect to capping incumbent ETCs, the FCC asks whether it should:

• Cap high cost support for incumbent ETCs at 2010 levels,
• Freeze per-line support for each incumbent ETCs at the 2010 level, or
• Freeze the support incumbent ETCs receive in particular study areas.

After freezing the amount of available funding, the FCC also proposes to phase out high cost support through a series of program cuts, including:

• Converting rate-of-return carriers to incentive regulation
• Freezing ICLS per line support
• Eliminating Interstate Access Support
• Eliminate competitive ETC high cost support over a five year period

The FCC seeks comment on whether these proposals would impact the existing customers of competitive ETCs, recognizing that cutting funding could impact providers’ ability to continue to provide voice service and thereby inhibit future broadband deployment strategies.

NOI:  Replacing the Existing High Cost Support Mechanisms

In the NOI, the FCC seeks to develop a record that will facilitate the creation of a new ​“Connect America Fund” (“CAF”) to support broadband infrastructure that will eventually replace all the existing high cost support mechanisms for voice-only services in accordance with the recommendations of the National Broadband Plan.  In particular, the NOI seeks comment on three approaches to developing a cost model that would be used to determine universal broadband support levels in unserved areas:

• Updating the decade-old High Cost Proxy Model (“HPCM”) or developing a new model based on updated technology.  The HPCM model was developed to determine the costs of a narrowband, circuit-switched voice-only network, and no longer reflects the costs associated with newer technology.
• Utilizing a forward-looking model that estimates the total cost of broadband networks or considering only the incremental costs of upgrading or extending existing networks.  The National Broadband Plan assumes that existing networks will be available on an ongoing basis, even after current support is removed.  As such, the FCC seeks comment on whether the costs of maintaining existing networks should be incorporated in addition to expanding deployment.
• Using a model that considers revenues, as well as cost, in determining support or continuing to use a model that only take cost into account.  The FCC is considering taking into account the revenues earned from all services provided over broadband in calculating the appropriate level of support.
• In constructing the support level model, the FCC wants to know the costs of deploying available technology platforms and the extent to which the Commission should consider any existing plant.
• Finally, comment is sought on whether the $24 billion of expected support is accurate, deriving that projection using a discount rate of 11.25% over a twenty year investment horizon.

The NOI seeks to develop the record on the best way to create an accelerated process to distribute funding to support broadband deployment before the CAF’s final rules are set.

The NOI also revives consideration of reverse auctions as the preferred means by which to distribute CAF funding, asking for comment on:

• Whether a cost model should be used to set reserve prices for single winner reverse auctions.
• Whether a ​“competitive procurement auction,” which is a form of reverse auction, should be used to determine subsidies for the extension of broadband networks.
• The Commission also asks parties to recommend alternative means for distributing support for broadband services.

Although the NOI and NPRM reflect widespread agreement among the Commissioners that reform is necessary, the separate statements of the Commissioners reflect disagreement about whether the reverse auctions recommended in the National Broadband Plan are the best means for distributing support as suggested in the NOI.  Disagreement about the replacement distribution mechanism could stall current reform efforts just as it has stalled past reform efforts.

Interested parties wishing to participate in the proceeding should contact Kelley Drye for further discussion. Please do not hesitate to contact any of the attorneys in the Communications Practice Group, if you have any questions or concerns.