WASHINGTON, Friday  October 28, 2011.  The Federal Communication Commission unanimously voted to overhaul its outdated the Universal Service Fund and reform its intercarrier compensation fund at yesterday morning’s Open Commission Meeting.

The FCC predicts that an effort to expand high speed internet to rural America over the next six years, will increase economic growth by $50 billion.  The Commission introduced the Connect America Fund.  The CAF replaces the high-cost fund by shifting the focus of the fund to support broadband capable networks, setting performance goals and a capping the fund at $4.5 billion.

The goals stated in the FCC executive summary include:  (1) preserve and advance universal availability of voice service; (2) ensure universal availability of modern networks capable of providing voice and broadband service to homes, businesses, and community anchor institutions; (3) ensure universal availability of modern networks capable of providing advanced mobile voice and broadband service; (4) ensure that rates for broadband services and rates for voice services are reasonably comparable in all regions of the nation; and (5) minimize the universal service contribution burden on consumers and businesses.

Chairman Julius Genachowski remarked, “We are taking a system designed for the Alexander Graham Bell era of rotary telephones and modernizing it for the era of Steve Jobs and the Internet future he imagined.”

Below are a number of quotes from the Commissioners that best highlight the major accomplishments of the proposal.

The Chairman directed his initial comments to praising the accomplishments made in the creation of the Mobility Fund. “Today, we make mobility an independent universal service objective for the first time, providing dedicated support through the world’s first Mobility Fund. Over the next three years, we will provide almost $1 billion in funding per year for universal mobility.”

Genachowski also stressed his approval of the proposal’s consumer protection measures and competitive bidding provisions.

“By constraining the growth of existing programs, today’s reforms will also minimize the burden those programs place on all consumers, keeping hundreds of millions of dollars in consumers’ pockets over the next several years. Our overhaul of the intercarrier compensation system will gradually eliminate the billions of dollars in hidden subsidies currently paid by consumers across the country through their wireless and long distance phone bills. Our staff estimates that the consumer benefits of ICC reform will be more than $2 billion annually. Consumers will get more value for their money and less waste.”

“Also a first, today’s Order brings market-based competitive bidding into universal service support. In a series of ways, including auctions, we have structured distribution of public funds to ensure real efficiency and accountability in the Connect America Fund.”

As noted by many stakeholders throughout the day, the Commissions plan did not adopt wholesale the telecom industry’s America’s Broadband Connectivity Plan, better known as the ABC plan.  Genachowski addressed the various stakeholder proposals by saying, “We did not rubber stamp or adopt wholesale the proposals of any stakeholder or group of stakeholders. Instead, we made our decisions on what’s right for the American people and our economy based on facts and data gathered in one of the most extensive records in FCC history, including hearings and workshops across the country, and more than 2,700 substantive comments totaling tens of thousands of pages.”

Commissioner Copps focused his statements on the details of the Mobility Fund, the benefits the plan brings to Tribal communities, ICC reforms and the role of states.

With respect to the reverse auctions, Copps stated, “While we have considerable experience with spectrum auctions, this is in many ways a new species of auction and we will need to be very careful in how we approach and evaluate it. I hope… it will truly become an efficient way to expend our limited USF dollars to reach unserved areas.”  He added, “Let me also say how much I appreciate the item’s prohibition on nation-wide package bidding in the Mobility Fund. I believe this is an important safeguard against gamesmanship and even further consolidation in the industry.”

“I am also encouraged that we launch a Tribal Mobility Fund specifically to target support for mobile service in Tribal areas…Again, getting this right will take more money than is being proposed in today’s proceedings, but it also hinges on more than money alone. It hinges also on the Commission taking prompt action on other proceedings and spectrum issues pending before us.” Copps said noting the specific efforts to address the unserved tribal areas.

Copps was very clear in expressing why the ICC reform was beneficial for consumers.

“This item puts the brakes on the arbitrage and gamesmanship that have plagued ICC for years and that have diverted private capital away from real investment in real networks. By some estimates, access stimulation costs nearly half a billion dollars a year, and phantom traffic affects nearly one fifth of the traffic on carriers’ networks. Today, we say “no more.” We adopt rules to address these arbitrage schemes head on. And, very importantly, we chart a course toward a bill-and-keep methodology that will ultimately rid the system of these perverse incentives entirely.”

Copps then raised the issue that has been a major concern for many in the public interest community.

“My enthusiasm here is tempered by the fact that end-user charges (under the label of “Access Recovery Charges”) are allowed to increase, albeit incrementally, for residential consumers. My first preference was to prevent any increase. Alternatively, we could require individual carriers to demonstrate their need for additional revenues before imposing the ARC. Perhaps some of the largest and most profitable companies should not be able to charge the ARC.  However, the Commission does adopt some important measures to protect consumers even as it allows additional charges. In particular, consumers already paying local phone rates of $30 or more cannot be charged the ARC.  The use of this ceiling recognizes that some early adopter states have already tackled intrastate access rates, and their citizens may already be footing a reasonable part of the bill. In the end, I am grateful that, at the very least, additional charges to end-users are not as great as they might have been, are spread over a longer period of time, and should be offset (and hopefully more than matched) by savings and efficiencies realized because of the more rational programs we begin to put in place.”

The role of states in the proposed plan has been brought up many times in the months leading up to this proposal.  Copps was very clear about the role of states moving forward.

“Building critical infrastructure—and broadband is our most critical infrastructure challenge right now—has to be a partnership. The states are important and essential partners as we design and implement new USF and ICC programs.”  He continued, “More even than my personal preference, which is deeply-held, this is the mandate of the law. Section 254 of the Act is clear—the states have a critical role in the preservation and advancement of Universal Service. While I understand the need for predictability in an ICC regime, I am pleased that my colleagues have retained a key role for states, including arbitrating interconnection agreements; monitoring intrastate access tariffs during the transition to bill-and-keep; and helping to implement our Universal Service Fund as well as, in many cases, their own state universal service funds. State regulators are by definition closer to the needs of their consumers than federal regulators ever can be, and they retain their role as the likely first venue for consumer complaints.”

Copps ended his statements by noting that while the proposal deal with distribution of funds, reforming contribution to the fund will be another difficult task.

“I would have preferred to see such an item in front of us today. There is inherent inequity in a system that funds the deployment of broadband off of assessments on interstate telephony. Once we ensure that double, triple and quadruple play services that benefit from Universal Service bear their fair share; we will not be subject to the unnecessary financial constraints that our current approach imposes.  We also need spectrum management decisions that avoid putting still more spectrum in too few hands.”

Commissioner McDowell, not surprisingly, used the podium to address the importance of fiscal responsibility and how it was expressed in the proposal.  “In the spirit of being fiscally responsible, however, we are mandating that the high cost program of the Universal Service Fund live under a definitive budget for the first time in history.  Functionally, the budget serves as an annual cap through 2017.  Until then, the Fund may not rise higher than $4.5 billion per year, on average after true-ups, without Commission approval.”

Following the comments of Commissioner Copps McDowell also addressed the need for contribution reform,

“The contribution factor, a type of tax paid by consumers, has risen each year from approximately 5.5 percent in 1998 to an estimated 15.3 percent in the fourth quarter of this year.  This trend is unacceptable.  We must abate this automatic tax increase without further delay.  Accordingly, I strongly urge that we work together to complete a proceeding to reform the contribution methodology in the first half of the year.”

McDowell also applauded the proposal’s focus on competitive bidding including reverse auctions, the elimination of the inefficient identical support rule, the benefit consumers will receive from transparency by the phasing out of hidden subsidies, the waiver process for carriers experiencing hardship, and the proposed means testing in the Further Notice that will identify the qualified recipients in remote areas.

As a champion of consumers and a former state utilities commissioner, Commissioner Clyburn had a lot to say about ICC reform and the role of States in USF reform.

“I carefully considered how much those consumers are being asked to shoulder, when it comes to the costs of Intercarrier Compensation reform, as well as the impact on those consumers who already have service.”  She continued, “It also shouldn’t surprise anyone that it was similarly important to me, that we give service providers and their investors time to adjust to our proposed reforms, because from day one, I made a firm commitment to no flash cuts.  A reasonable transition period will help ensure that providers can navigate these reforms successfully.  But for those providers who require additional time to adjust, we have in place a waiver process that is firm, predictable, yet fair.   Another benefit of this waiver process is that it provides this Commission with a safety net—so that we can adjust support as needed, in order to avoid inadvertently harming the success we have already achieved through our legacy system.”

“We owe a debt of gratitude to our State Members.  They have been a significant resource for this Commission in our reform process…We are requiring USF recipients to meet interim broadband build out milestones, to annually report on their build out and service requirements, and to file those reports jointly at the FCC and the state utility Commissions.  We also are implementing a cap on total per-line support, and other fiscally responsible measures, to eliminate waste and inefficiency in the system.”

Clyburn made a point of also focusing on IP interconnection issues,

“Not only did we hear from the states about how important it is to ensure that IP interconnection occurs, we also received significant comment from competitive voice providers that the lack of IP interconnection is impeding the development of IP networks, including VoIP services.  As such, the Order confirms that the duty to negotiate in good faith, does not depend upon the network technology underlying the interconnection, whether it is TDM, IP, or otherwise, and that we expect good faith negotiations to result in interconnection arrangements between IP networks for the purpose of exchanging voice traffic. “

“However, I think it is only appropriate that our actions today carefully preserve and recognize the reforms that some states already have undertaken.  Most importantly, we have provided for replacement funding as intrastate access rates decline as a result of our reform which relieves the financial burden that would have been on states in their own attempts at reform.  To that end, we also have carefully balanced ICC revenue replacement for providers, with the important goal of not burdening consumers with significant increases in their bills or overburdening the USF which is ultimately paid for by consumers.  As indicated by our staff’s analysis, we believe that the overall benefits that will flow to consumers as a result of this reform will far outweigh the minimal price increases they will experience on their phone bills due to ICC reform.”

“I also want to be quite clear that states will continue to have an important role with respect to the arbitration of interconnection agreements and in the operation of USF.  With respect to USF, states will continue to designate Eligible Telecommunications Carriers for USF purposes and will continue to protect consumers through their carrier of last resort regulations.  As technology evolves, so too must the role of the regulators.”

Clyburn ended her comments by stating how important the states were in cost saving because of their ability to help target the fund to areas that are most underserved.

“One constant that I have seen, however, is that consumers expect that their state regulators will serve and protect them.  Moreover, those of us at the FCC need the states’ expertise and knowledge on the ground, to properly execute and operate our new universal service funding mechanisms.  For instance, we need the state’s assistance in identifying those areas that currently are unserved by broadband.  We want to target our limited resources to those consumers who do not have any broadband provider offering them service.  Likewise, we will need the states’ help assessing that those providers who receive funding meet their public interest obligations to build and serve.”