USF Reform: Broadband, Intercarrier Comp Top of Mind

As expected, the FCC will push for Universal Service Fund (USF) reform that supports broadband buildouts and gets rid of intercarrier compensation.

The agency has spent the past couple of months previewing parts of its national broadband plan, which it will present to Congress on March 17, and USF changes are among the most recently unveiled details. FCC Chairman Julius Genachowski wants to put the $4.6 billion that goes to rural voice services to broadband connections instead. The entire USF is valued at a bloated $8.7 billion.

The FCC’s proposed overhaul for the USF come as little surprise. For several years, commissioners have talked about scrapping landline support in favor of broadband. And there’s substantial industry backing for the shift. Verizon Communications Inc. (VZ) is among the carriers so far in favor of the FCC’s recommendations.

“It makes sense to focus limited Universal Service Fund resources on broadband, rather than layering new support on top of existing voice subsidies,” Kathleen Grillo, Verizon’s senior vice president of federal regulatory affairs, said in a prepared statement.

The real pushback could come from the rural LECs that have relied on USF subsidies to operate in high-cost areas. The FCC is very aware of those providers’ concerns and, in an attempt to mitigate them, has constructed a gradual timetable for the changes. That could somewhat reassure mid-size price-capped rural carriers such as CenturyTel (CTL), Windstream Corp. (WIN) and Frontier Communications (FTR), said telecom analysts for investment bank Stifel Nicolaus. But there are of course caveats and uncertainties, adding up to “a long way to go,” wrote Rebecca Arbogast and David Kaut in a client memo last week.

To that point, the FCC aims to phase in USF change over 10 years. The first phase would run from 2010-2011 and include rulemakings and other administrative adjustments. The second, from 2012-2016, would consist of “major initial implementation,” said Kaut and Arbogast, and the third would complete the migration to IP interconnection from 2017-2020.

All of that will impact intercarrier compensation, as well. In fact, the FCC wants to eliminate it altogether, according to reports. As Arbogast and Kaut explained, that “core ICC ramp-down” would be much slower and more gradual than what former FCC Chairman Kevin Martin had proposed, “and provides the midsize RLECs more breathing room to adjust.” Adjustments could include higher local rates and subscriber line charges or even more USF money.

On the whole, the range of planned changes is vast and subject to political headwinds. The FCC is scheduled to release the national broadband plan next Wednesday but could do so a day earlier at its monthly meeting.

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