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Universal Service Reform: An Overview of Changes

For almost as long as the Universal Service Fund has been in place (since the Telecommunications Act of 1996 created it), there has been talk of its reform--both from those who contribute to the fund and the recipients of that funding. Particularly within the past five years, as voice services looked less like traditional analog voice and more like data, the calls for reform have morphed into downright bellows.

While the FCC had other critical policy topics to address before USF and reciprocal compensation reform (among others, the National Broadband Plan), in late October, the commission was finally able to address both theoretical and practical USF issues in a substantive way.

On the contribution side, no concrete changes to the USF contribution methodology are anticipated--at least at this time. As of Q4 2011, the contribution factor is 15.3% of interstate and international usage charges, as well as other usage costs, including, among others, MPLS. This contribution factor will continue to be adjusted quarterly, based on anticipated needs.

On the recipient side, those entities and services that are eligible to receive USF funding will change in a significant way.

The drama surrounding the FCC's October action has been focused on changes in eligibility for receipt of USF funding. Specifically, beginning in 2012, funding support will be directed toward the deployment of broadband and not strictly to voice services, as has been the case up to this time. In its initial document, the FCC has redefined support-eligible voice services to include VoIP. In a significant--but not unexpected--change in policy, carriers providing services over either the PSTN or IP-based networks are eligible to receive USF funds, so long as such providers are offering both traditional voice telephony and Lifeline services.

Under the FCC’s new definition of "voice telephony services," an eligible provider must offer service that meets four distinct criteria:

1) voice grade access to the public switched network or its functional equivalent;
2) minutes of use for local service must be provided at no additional charge to end users;
3) toll limitation to qualifying low income customers (Lifeline),;
4) access to 911 and enhanced 911 services to the extent that the local government in an eligible telecom carrier's service area has implemented 911 or enhanced 911 capabilities.

Under the recent revisions, the FCC will create two funds: the Connect America Fund, which will provide support to traditional landline broadband services; and the Mobility Fund.

The Connect America Fund (CAF) will support deployment and operation of broadband services in high cost areas, although only to companies that agree to provide service that meets minimal FCC requirements for broadband speeds at 4 Mbps downstream and 1 Mbps upstream. During Phase I of CAF implementation, effective January 1, 2012, existing USF support will be frozen at 2011 levels for both price-cap and rate-of-return carriers. Phase II of CAF provides $1.8 billion, to be distributed based upon competitive bidding and a newly developed forward-looking cost model.

Initially, Connect America funding will be for traditional voice carriers, although carriers accepting funds will be required to implement broadband service and serve "community anchor" institutions with more than just dialtone. Such institutions include schools, libraries, colleges and universities. Carriers that seek funding to provide services to these institutions will be designated "eligible" by state regulatory commissions, thus keeping state utility commissions integrally involved in telecommunications policy and practice.

The Mobility Fund for wireless broadband, in its initial phase, will provide one-time support, in contrast to the CAF, where funding will be ongoing. In the Mobility Fund's Phase I, one-time funding, with a total not to exceed $300 million, will be provided to entities that agree to deploy 4G (4th Generation wireless) within 3 years or 3G wireless within two years. During Phase II, $500 million will be available annually, and on an ongoing basis, to cover deployment and operation of wireless broadband.

As part of Phase II Mobility Funding, a separate Tribal Mobility Fund has been set aside to address the special issues of wireless deployment on Tribal lands (including as much as $100 million annually). Communications and Internet literacy on Native lands have been disproportionately underfunded, and it is hoped that with this significant investment, the digital divide, a phrase not often heard any more, will be mitigated.

Although the initial release of information represents a significant step forward in the evolution of both the Universal Service Fund and Intercarrier Compensation, many details and specifics have yet to be determined.

The full text of the FCC’s order (all 751 pages of it) is available at