Funding the USF Broadband Programs

A number of telecom advocacy groups came together recently to ask the FCC to increase the budget for the high-cost portion of the Universal Service Fund to at least $2.4 billion for the next fiscal year just begun on October 1. The joint filing was by ITTA – The Voice of America’s Broadband Providers, USTelecom – The Broadband Association, NTCA – The Rural Broadband Association and WTA – Advocates for Rural Broadband.

Small telcos are specifically asking that the FCC fully fund the commitments made to them in 2016 for the A-CAM program. This is the fund that is providing money to rural telcos to upgrade their networks to at last 25/3 Mbps – although it seems like most companies are using the money to upgrade to fiber. That program is bringing a permanent broadband solution to numerous rural communities.

The A-CAM and other high-cost support programs are not currently fully funded. This is due to several factors. First, more small telcos accepted A-CAM funding than the FCC anticipated, creating a bigger financial commitment than was expected. But more importantly, the FCC has been tapping the Universal Service Fund for other broadband commitments such as the CAF II program that gave billions to the large telcos to upgrade to only 10 Mbps. This same fund is also used to provide e-rate funding for schools to get affordable broadband, to support libraries, to support rural healthcare and to provide the lifeline program to make telephone and broadband more affordable for low-income households.

It would be a challenge for the FCC to meet the request and I’m not sure there is an easy way for them to do so. The Universal Service Fund is funded by fees assessed against landline telephone service, cellphone service and against broadband connections that are deemed to be interstate in nature – these are generally broadband connections sold by regulated telcos using the soon-to-be-obsolete TDM technology.

This fee is an additive to these services and the rate being charged has climbed over the years as the number of both landline telephones and special access transport circuits has dropped. In the last quarter the assessment topped 20% for the first time and has climbed over the years. I can recall when the assessment was under 5%.

This all creates a dilemma for the FCC. The revenues against which USF can be assessed are shrinking. Landline use continues to plummet; cellphone prices are trending downward and special access is being displaced by other kinds of transport. As much as the FCC might want to fully fund rural broadband, it has numerous other obligations to meet from the same pile of money like the e-rate program and rural healthcare broadband.

There has been talk for years of expanding the USF base. If the USF fee was assessed against home and business broadband the overall percentage would plummet from today’s 20% rate. However, Congress nixed the idea of assessing USF against broadband by sticking to the philosophy that we should not tax the Internet. This was a concept that was introduced when broadband was a fledgling industry, which somehow became a mantra that is outdated. Broadband revenues dwarf the fees for products like landline telephone service.

The FCC’s hands are tied from assessing USF against broadband by Congress. But even if Congress changed their mind, the FCC has now given up regulation of broadband and they might not have the authority to assess a fee on a product they declare they don’t regulate.

It’s to everybody’s benefit that the FCC finds a way to fund commitments they made for rural broadband just a few years ago. The FCC has some latitude and they could probably apply all fund shortfalls against another program like CAF II – but with the lobbying power of the big telcos that’s unlikely.

The FCC also has another huge source of revenue they could tap. The agency has been collecting gigantic fees for the auction of spectrum in recent years and there is no reason that all or part of this money couldn’t be diverted to rural broadband. However, this also would require action by Congress, which directly diverted auction fees to the US treasury earlier this year when they enacted the Ray Baum bill.

The funding shortfalls are mostly the result of the FCC committing more funds than are available in the fund. Since the USF is funded by fees on services, the fund can’t have cost overruns and spend more money than it has – unlike many other government programs. Every time I hear the FCC announce a new initiative out of the Universal Service Fund I always wonder which other parts of the fund will be raided. I think we now know that it’s funding for rural broadband.

Means Testing for FCC Funding – Part II

Yesterday I wrote about the recent blog by FCC Commissioners Michael O’Rielly and Mignon Clyburn that suggests that there ought to be a means test for anybody accepting Universal Service Funds. Yesterday I looked at the idea of using reverse auctions for allocating funds – an idea that I think would only serve to shift broadband funds to slower technologies, most likely rural cellular service for broadband. Today I want to look at two other ideas suggested by the blog.

The blog suggests that rural customers ought to pay more for broadband since it costs more to provide broadband in sparsely populated areas. I think the FCC might want to do a little research and look at the actual prices charged today for broadband where commercial companies have built rural broadband networks. It’s something I look at all of the time and all over the country, and from what I can see the small telcos, cooperatives, WISPs and others that serve rural America today already charge more than what households pay for broadband in urban areas – sometimes considerably more. I am sure there are exceptions to this and perhaps the Commissioners have seen some low rural pricing from some providers. But I’ve looked at the prices of hundreds of rural ISPs and have never seen prices below urban rates.

The small rural ISPs have to make a commercial go of their broadband networks and they’ve realized for years that the only way to do that is to charge more. In most urban areas there is a decent broadband option starting around $40 per month and you rarely see a price close to that in rural America. If you see a low price in rural America it probably offers a very slow speed of perhaps a few Mbps, which certainly doesn’t compare to the 60 Mbps I get from Charter for $44.95 per month.

The issue of rural pricing does raise one policy issue. Historically the Universal Service Fund was used for precisely what this blog seems not to like – to hold telephone rates down in rural America so that everybody in the country could afford to be connected. That policy led to the country having telephone penetration rates for decades north of 98%. I’m not advocating that USF funds ought to be used to directly hold down rural broadband rates, but it’s worth a pause to remember that was the original reason that the Universal Service Fund was started and it worked incredibly well.

The second idea raised by the blog is that Universal Service Funds ought not be used to build broadband to wealthy customers. They suggest that perhaps federal funding ought not to be used to bring broadband to “very rich people who happen to live in the more rural portions of our nation.”  The blog worries that poor urban people will be subsidizing ‘some of the wealthiest communities in America.’  I am sure in making that statement that the Commissioners must have a few real-life communities in mind. But I work all over the country and there are not very many pockets of millionaires in rural America, except perhaps for farmers.

Farmers are an interesting case when it comes to broadband. By definition farmers are rural. But US agriculture is the largest industry in the country and the modern farmer needs broadband to be effective. We are headed soon towards a time when farm yields can increase dramatically by use of IoT sensors, farm robots and other high technology that is going to require broadband. I know that a lot of the rural communities that are clamoring for broadband are farming communities – because those farms are the economic engine that drives numerous counties and regions of the country. I don’t think it’s unreasonable if we are going to rethink policy to talk about bringing broadband to our largest industry.

The FCC blog suggests that perhaps wealthier individuals ought to pay for the cost of getting connected to a broadband network. It’s certainly an interesting idea, and there is precedent. Rural electric companies have always charged the cost of construction to connect customers that live too far from their grid. But with that said we also have to remember that rural electric grids were purposefully built to reach as many people as possible, often with the help of federal funding.

This idea isn’t practical for two reasons. It’s already incredibly hard today to finance a fiber network. I picture the practical problem of somehow trying to get commitments from farmers or other wealthy individuals as part of the process of funding and building a broadband network. As somebody who focuses mostly on financing fiber networks this would largely kill funding new networks. To get the primary borrower and all of the ‘rich’ people coordinated in order to close a major financing is something that would drive most lenders away – it’s too complicated to be practically applied. The FCC might want to consult with a few bankers before pushing this idea too far.

But there is a more fundamental issue and the FCC blog touches upon it. I’m trying to imagine the FCC passing a law that would require people to disclose their income to some commercial company that wants to build a fiber network. I’m not a lawyer, but that sounds like it would bump against all sorts of constitutional issues, let alone practical ones. For example, can you really picture having to report your income to AT&T?  And I then go back to the farmers again. Farmers don’t make a steady income – they have boom years and bust years. Would we put them on or off the hook for contributing towards a fiber network based upon their most recent year of income?

I certainly applaud the Commissioners for thinking outside the box, and that is a good thing when it leads to discussions of ways to improve the funding process. I will be the first to tell you that the current USF distributions are not always sensible and equitable and there is always room for improvement. Some of the ideas suggested by the blog have been discussed in the past and it never hurts to revisit ideas. But what most amazes me about the suggestions made by this blog is that the proposed solutions would require a heavy regulatory hand – and this FCC, or at least its new Chairman has the goal of reducing regulation. To impose a means test or income test would go in the opposite direction and would require a new layer of intrusive regulations.

Means Testing for FCC Funding – Part I

A recent blog by FCC Commissioners Michael O’Rielly and Mignon Clyburn asks if there should be a means test in federal high cost programs. This blog is something every telco, school, library or health care provider that gets any form of Universal Service funding needs to read.

There is already some means testing in the Universal Service Fund. For instance, the Lifeline program brings subsidized voice and broadband only to households that meet certain poverty tests. And the Schools and Libraries program uses a mean test to make certain that subsidies go to schools with the most low-income students. The FCC blog talks about now applying a means test to the Universal Service Funds that are used to promote rural broadband. There are several of these programs, with the biggest dollar ones being the CAF II funding for large telcos and the ACAM program for small telcos to expand rural broadband networks.

The blog brings up the latest buzzword at the FCC, which is reverse auction. The FCC embraces the concept that there should be a competition to get federal money to expand broadband networks, with the funding going to the carrier that is willing to accept the lowest amount of funding to expand broadband into an area. On the surface that sounds like a reasonable suggestion in that it would give money to the company that is the most efficient.

But in real-life practice reverse auctions don’t work, at least for building rural broadband networks. Today these FCC infrastructure programs are aimed at bringing broadband to places that don’t have it. And the reason they don’t have it is because the areas are largely rural and sparsely populated, meaning costly for building broadband infrastructure. In most of these places nobody is willing to build without significant government subsidy because there is no reasonable business plan using commercial financing.

If there was a reverse auction between two companies willing to bring fiber to a given rural area, then in my experience there wouldn’t be much difference between them in terms of the cost to build the network. They have to deploy the same technology over the same roads to reach the same customers. One might be slightly lower in cost, but not enough to justify going through the reverse auction process.

And that is the big gotcha with the preference for reverse auctions. A reverse auction will always favor somebody using a cheaper technology. And in rural broadband, a cheaper technology means an inferior technology. It means using federal funding to expand DSL or cellular wireless as is being done with big telco CAF II money instead of building fiber, as is being done by the small telcos accepting ACAM money.

Whether intentional or not, the FCC’s penchant for favoring reverse auctions would shift money from fiber projects – mostly being done by small telcos – to the wireless carriers. It’s clear that building cellular technology in rural areas is far cheaper than building fiber. But to use federal money to build inferior technology means relegating rural areas to dreadfully inadequate broadband for decades to come.

Forget all of the hype about how 5G cellular is going to bring amazing broadband speeds – and I hope the FCC Commissioners have not bought into cellular company’s press releases. Because in rural areas fast 5G requires bringing fiber very close to customers – and that means constructing nearly the same fiber networks needed to provide fiber into homes. The big cellular companies are not going to invest in rural 5G any more than the big telcos have ever invested in rural fiber. So a reverse auction would divert federal funds to Verizon and AT&T to extend traditional cellular networks, not for super-fast wireless networks.

We already know what it looks like to expand rural cellular broadband. It means building networks that deliver perhaps 20 Mbps to those living close to cell towers and something slower as you move away from the towers. That is exactly what AT&T is building with their CAF II funding today. AT&T is taking $426 million per year for six years, or $2.5 billion in total to expand cellular broadband in rural areas. As I’ve said many times in the past this is perhaps the worse use of federal telecom funding I have ever seen. Customers on these cellular networks are getting broadband on day one that is too slow and that doesn’t even meet the current FCC’s definition of broadband. And in the future these customers and rural communities are going to be light-years behind the rest of the country as household demand for broadband continues to grow at a torrid pace while these customers are stuck with an inadequate technology.

The FCC blog also mentions the concept of possibly re-directing future USF payments, and if I am a small telco that scares me to death. This sounds like the FCC may consider redirecting this already-committed ACAM funding. Numerous small telcos just accepted a 10-year commitment to receive ACAM funding from the USF Fund to expand broadband in rural areas, and many are already borrowing matching funds from banks based upon that commitment. Should that funding be redirected into a reverse auction these small companies will not be able to complete their planned expansion, and if they already borrowed money based upon the promise of that ACAM funding they could find themselves in deep financial trouble.

An Idea for Funding Rural Fiber

eyeballI’ve been working for a long time with rural broadband and it has become clear to me that there is no way on our current path that we can build fiber everywhere in the US. The borrowing capacity of all of the small telcos and coops is not nearly large enough to fund fiber everywhere. It’s often difficult to have a business case for rural fiber that you can get funded at a bank. It certainly doesn’t look like the federal government has any plans to fund fiber, and even if they did they would probably spend too much by imposing unreasonable rules that would drive up construction costs.

But there are other ways that we could fund fiber everywhere. For example, consider the utility model. Utilities are generally able to get funded because they are guaranteed a rate of return of perhaps something like 10% on their investment. It has been the guaranteed returns that have allowed rural telephone to borrow the money needed to operate.

If fiber networks had a guaranteed return there would be many commercial lenders and other investors willing to provide the money to build rural fiber networks. There is a huge amount of money available from pension funds, insurance companies, and other large pots of money that would be attracted to a steady 10% return.

There is no reason the utility model can’t be applied to rural fiber. The primary characteristic of a regulated utility is that it is a monopoly, or nearly a monopoly. In rural America today there is no real broadband competition. Rural areas are served by a combination of dial-up, satellite, cell phone data, very poor DSL or fixed wireless systems. There are many millions of households with no other options other than dial-up or satellite.

There are two keys to making this idea work – how to pay for it and how to monitor and regulate the earnings of these new broadband fiber monopolies. We already have a historical model of how to pay for this. Rural telephone companies for years were regulated in this manner and there was a combination of funding mechanisms used to fund rural telephony. Most obvious was local revenues collected from customers. I know of rural fiber networks today with 70% to 80% broadband penetration rates, so these networks would get a significant number of customers and local revenue.

Telephone companies have also pooled some of their revenues nationally in process called cost separations. Phone companies throw all of their interstate revenues into a pot and divvy up the money according to need. There is no reason that some of the broadband revenues couldn’t be pooled.

Finally, the telcos had direct subsidies from the Universal Service Fund to make up any shortfall. The biggest complaint about the Universal Service Fund is that it isn’t paid to companies on the same basis as other revenues, and thus it enriches some companies unfairly and doesn’t give enough to others. But if USF revenues were put into the same pool as other revenues then it would be allocated each year where the financial need warrants it.

The process of pooling revenues has always been a bit complicated in practice, but simple in concept. Each company in a pool calculates their costs according to a specific formula – in the case of telcos, using rules proscribed by the FCC. Then, some external pooling body examines those calculations and administers the collection and distribution of pooled monies. This whole process of administering a pool adds only a tiny fractional additional cost onto the process – and is necessary to make sure everybody plays fair and that there is no fraud.

The basic concept of pooled revenues and some kind of broadband USF could provide the economic basis for obtaining the funding needed to build rural broadband. I would expect that rural telcos and cooperatives would jump onto this idea immediately and build more rural fiber. And there is no reason that the large telcos wouldn’t at least consider this. But since they are driven by Wall Street earnings they might pass on regulated returns.

We know this process can work because it has been in place for decades for rural telephony. The only alternative to this that I can think of is for the federal government to hand out grants to build rural broadband. But I just don’t see that happening in today’s political environment. So rather than wait for the federal government to finally decide to hand out huge grants we ought to take the model we know and get going with it.

This concept would need a boost from the federal government to get going. It would probably require an act of Congress, but this is something that is probably easier to get enacted than a huge grant program. And it is a lot more attractive politically since it provides a way for private investment to fund rural broadband rather than the government. We have too try something because the rural areas are falling quickly onto the wrong sie of the digital divide, and that is not good for any of us.

A Better Way to Fund USF

USF-logoThe Universal Service Fund (USF) is shifting its focus dramatically and this leads me to ask if there ought to be a more equitable way to fund this effort.

Historically, the USF was established to help pay for providing telephone service in high cost and remote parts of the country. Largely, it worked and telephone networks were expanded to places that certainly never would have gotten service without these funds. Then, over the years, Congress and the FCC expanded the role of the USF and it was also used to provide telecom services to schools and libraries and to bring telecom and data services to rural health care providers. And as each of these new functions was added the size of the fund grew to over $8 billion.

But now there are big shake-ups in all of the traditional functions of the USF. Subsidies for rural telephony are being phased-out and instead these subsidies are going to be used to promote rural broadband. A significant number of billions of dollars are going to be given to companies over the next seven years that are willing to build rural broadband to places that don’t have it today. The money provided for schools and libraries has been refocused on getting gigabit connections to schools and libraries.

And so the fund is becoming very much focused on bringing better broadband to places that need it. But surprisingly, this is still being funded almost entirely by a surcharge on interstate and international telecommunications services. And there are some real problems with using interstate long distance as the base for collecting the fee.

First, the revenues used for long distance have dropped annually since the turn of the century. Long distance has gotten so cheap that it’s not something that is even noticed much by consumers any more, except perhaps in some rural communities that still charge a lot for long distance. Long distance has become such a commodity that it is often built into the base rate for telephone service. About the cheapest charge I’ve seen for this is where Charter is selling telephone lines with unlimited long distance in some of their markets for $15 per month.

The same thing has happened to interstate transport for special access service. It was routine just a decade ago to charge $4,000 – $6,000 per month for a DS3, which is about 45 Mbps of dedicated bandwidth. But today you can buy a gigabit of bandwidth for a fraction of that cost – and buy it from somebody who is not selling it as special access and who does not add a fee for USF to that charge.

As the amount spent on interstate long distance has continued to drop, the USF assessments have climbed as a percentage of the interstate revenues. I have a few clients who now have a USF assessment of over 17% of their interstate billings. Years ago this started as a rather small fee, but it is a noticeable item on customers’ bills, particularly on buyers of special access.

So if the new data-centric USF is going to work, we need to somehow expand the assessment base. Interstate telco revenues are going to continue to drop. There are only a few places that the assessment base can be expanded, but they are major sources of new revenue. First, cell phones get some USF assessment today, but not as large of a share as landlines. There is also the possibility of expanding USF to include intrastate long distance, but that gets into a messy jurisdictional fight.

The biggest way to spread out the USF fee and make it more reasonable and more sustainable is to assess it on broadband services. This is now easier to do since broadband is covered under Title II. But Congress has real heartburn against ‘taxing the Internet’ which I can’t understand. The original push to not tax the Internet came during the late 1990s as the new broadband services were growing. At that time the political wisdom was that you don’t tax a burgeoning industry and give it a chance to get on its feet.

But there is probably not a more mature industry in the country now than broadband. As far as home utilities, it now comes in third in penetration rates behind electricity and water. Adding a 50 cent per month tax on broadband would not cause any great economic burdens and would spread out the funding to the USF fund. Besides, who better to tax to get broadband to rural places and schools than all of the people who already have broadband?

Unfortunately it will take an act of Congress to change the way that the USF is funded. That is likely only to happen as part of a larger new Telecom Act, something that is overdue. But I can’t see any realistic way that this is going to happen with our split government. Republicans are likely to use a new telecom act to try to defund network neutrality and to cut back on the FCC’s powers in general. And as long as there is a democratic president a new act is not going to get signed. So I guess USF funding reform goes on hold with many other telecom issues that we ought to be addressing.

How Should We Fund Universal Service?

USACThe Universal Service Fund today is funded primarily from telephony revenues. That made a lot of sense historically because the fund was used to support programs that were mostly telephony related. Consider the following uses of USF for 2013:

High Cost Fund                      $4.17 B

Lifeline                                    $1.80 B

Rural Healthcare                    $0.16 B

Schools and Libraries            $2.20 B

Total                                         $8.33 B

The High Cost Fund and Lifeline Funds have always been used almost entirely to support telephony. And there has also always been a telephony component of the Schools and Libraries Fund even though in recent years it has been targeted more for data. With the Connect America Fund ruling of a few years ago the FCC is about to embark on a major shift in the way that USF funds are used. The High Cost Fund support, which is about half of the disbursement will be directed over time to support broadband for places that are either unserved or underserved by broadband today. This fund historically went to support rural telephony but now will support rural broadband.

Further, the Schools and Libraries program was recently redirected to use more of it’s funding to support bringing fast internet connection to schools. The goal is to bring very high-speed Internet to 99% of schools within the next five years.

Since a large portion of the USF is now being redirected towards broadband, it raises the natural question if broadband customers in the country should pay to support this fund. Years ago the FCC’s logic was that urban telephone users ought to chip in to support rural telephone users and one must ask if that same logic now makes sense for data. Today the USF is funded through surcharges on landline phones, cellular phones and special access.

The fee on landline phones has grown to as much as 16%. The USF levy on cell phones is currently around 5.8%. The surcharge on special access is also as much as 16% and this is the fee that most makes me ask the question if we are funding this correctly. These circuits are traditional TDM-based telephony and include such things as T1s, DS3s and OC48s that are sold to large customers. Consider a DS3. This is normally used to provide dedicated transport and it is equal to about 45 Mbps of dedicated bandwidth. But if a customer instead purchases a dedicated 50 Mbps Ethernet product they avoid the USF surcharge. It doesn’t make sense that two nearly identical products are treated so differently. The main reason for this difference is that the special access circuit is considered as an Interstate telephony service by the FCC while the Ethernet service is considered as an information service. Even if both are used for the identical purpose.

When DSL and cable modems were new there was a big push by the telcos and the cable companies to keep taxes away from these products. The argument made then was that the FCC should not do anything that might quash the fledgling data industry. The cry at the time was. “Do not tax the Internet”. So in response to the taxation and other issues the FCC declared that Internet connections are information services and are not telco services. This is the same classification that is causing all of the furor in the net neutrality discussion.

There have been various unsuccessful bills introduced into congress since 2006 to change the way that USF is funded. Part of this is due to the intense lobbying from the industry, but a lot of it has to do with this very sticky classification of Internet service. Congress recently asked for input to this question and got the same responses it’s gotten for a decade. Companies that sell Internet connections don’t want Internet access to be taxed and just about everybody else does.

But it makes no sense to charge as much as a 16% surcharge on landline telephones, which continue to slowly die as a product line. And it makes even less sense to penalize a company that buys a high-speed connection from a special access tariff rather than buying an alternate Ethernet product. And it makes no sense to tax the voice portion of cellphones but not the data portion. It’s time to assess the USF fee on everything telco related. In doing so the surcharge rate would be reasonably low on all products. It’s gotten out of hand now that some of the USF surcharges have grown as high as 16%.

But changing the USF formula then gets wrapped up into the whole issue of whether the FCC can regulate the Internet, because levying a surcharge in Internet product will be seen as a form of regulation. All I know is, if there is going to continue to be a Universal Service Fund that it ought to be funded as broadly as possible so as to not discriminate against some telecom products but not others. Otherwise, as landline voice continues to wane as a product the USF allocation will be shifted largely to cellphone voice. There has to be a more sensible solution.

 

Funding Broadband to Schools

Indianola_High_SchoolFCC Chairman Tom Wheeler recently announced that he was going to try to funnel $5 billion over the next five years to upgrade the bandwidth inside schools. He is proposing to do this as part of the E-Rate program by changing the things that fund will pay for. I think this begs the question of how and why the FCC has the funds available to pay for this sort of expenditure. So following is a bit of a primer on the E-Rate program.

The E-Rate program is part of the federal Universal Service Fund (USF). Since the 1960’s there was a universal service fund that was administered by AT&T that provided funds to support the expansion of telephony into rural places. This was funded by a small surcharge on interstate long distance calls.

But when AT&T was broken up the funding for USF got murky and so Congress changed the administrator of this funding as part of the Telecommunications Act of 1996. In the Act the Congress directed the Congress to create the Universal Service Administrative Company (USAC) who collects and disburses funding for universal service. USAC is still funded based upon interstate telecommunications. Most telcos pass these fees along to customers on their bills, although this is not mandatory and companies could fund this out of their fees.

The Universal Service Fund has four major components. The High Cost Fund pays to support providing telephony in rural places where the costs are much higher per customer than average. The Low Income Fund pays for some of the installation fees and also some of the monthly fees for telephone lines for low income subscribers. The Rural Health Care Fund provides subsidies for rural tele-health and tele-medicine. And the Schools and Library Funds provides subsidies for Internet access and telecommunications services and infrastructure for schools and libraries.

The USF is undergoing major change due changes ordered by the FCC in Docket 11-171 in 2011. The fund is being transitioned to be called the Connect America Fund and will divert the High Cost Fund to be used to support rural broadband instead of rural telephony.

The Schools and Libraries Fund is commonly referred to as the E-Rate program. This program was started in 1997 where the FCC determined that, “telecommunications services, Internet access, and internal connections, including installation and maintenance,” for schools and libraries were eligible for discounted rates. The E-Rate program will pay from 20% to 90% of the cost of eligible services based upon the poverty and the urban/rural nature of the population supported by a given school. The Fund pays the neediest schools and works its way through the list of applicants each year until it runs out of funding.

What the FCC is doing as part of Chairman Wheeler’s announcement is to look at the definition of what is eligible for reimbursement from the E-Rate program. These definitions haven’t been upgraded for a long time and the fund pays for things like pagers and telephone lines (although one has to imagine the payments for pagers must be very tiny).

The FCC now wants to divert some of the fund to help pay for the basic infrastructure at schools to deliver broadband to the classrooms. President Obama has announced a policy goal, referred to as ConnectED, of bringing faster broadband to all of the schools in the country. His goal set a near-term goal of bringing 100 Mbps connections with a near-future goal of bringing gigabit speeds to schools

The FCC is responding to those policy goals with this change in the E-Rate funding. In Docket WC 13-184 the FCC had looked at some of these issues and had noted that there was a challenge in getting bandwidth from the wiring closet of schools into the classrooms. The FCC now wants some of the E-Rate funds to be used to rewire schools or to deploy other technologies that can bring bandwidth to where students can use it. It certainly is important for this fund to keep up with the times. It makes a lot more sense to use these funds to improve bandwidth at schools rather than to continue to pay for telephone service and for T1 lines. .

It’s Still a Regulated World

It seems like every few weeks I have a conversation with a carrier and in the course of conversation I find out that they are not in compliance with some regulation or another. It seems like a lot of companies that sell VoIP services, in particular, think that somehow that makes them immune from regulation.

But regulation has not gone away. If you bill an end-user customer for a voice, data or video product then there are regulations that you have to comply with. If you are an ISP for other entities, even if those entities are large, you are subject to some regulation. The only category of carrier that might not be subject to regulation is what I call a carrier’s carrier, and who only serves other carriers as customers. And in some states even they are subject to regulation.

It matters that you follow the rules. It seems like regulators at both the state and the federal level are getting surly about offenders and there some big fines being handed down to carriers who ignore regulation. I think the cost of compliance is cheaper than the cost of getting caught.

Here is a sample of the kinds of federal regulations that we see carriers ignoring. There are other state requirements that are also being ignored:

  • CALEA. There are significant obligations to be read to immediately give access of your customer’s voice and data records to law enforcement. You must have a manual filed that describes the processes.
  • CPNI / Privacy. You must have a manual and processes describing how you will protect your customers’ privacy.
  • Red Flag. You must have a manual and processes in place to demonstrate how you will protect your customers from identity theft.
  • Net Neutrality. There is very specific information about your company, your products, your network and your technology that you must inform customers about.
  • 21st Century Communications Video Accessibility Act. You must file a plan on how you will help disabled customers get access to voice, video and data products.
  • Universal Service Contributions. We find carriers that should be contributing to the USF fund who are not. The fines for getting caught for this can be huge.

I told my readers that I wasn’t going to write too many blog entries that are direct sales pitches for CCG services. I will admit that many of my blogs hint at the services we offer, but the main intentions of these blogs is to discuss issues for carriers that I think they will find to be useful. But in many cases CCG is able to help clients with a lot of the topics discussed in my blog.

CCG has three regulatory products that make it easy for anybody to stay in compliance with the rules. We have many clients who use CCG as their regulatory arm and many have said that it’s far cheaper to use us than to do it themselves. Here are the three products you ought to consider if you want to hand make sure that you are in compliance with the regulatory side of the business.

Regulatory Assessment. We will do a one-time assessment of your business and tell you every regulation that we think applies to you. Why guess if you are in compliance. For a modest fee we will make a list.

Regulatory Compliance Monitoring Service. In this service we develop a calendar for your company and we remind you of every regulatory deadline you must meet during the year.

Regulatory Compliance Filing Service. If you want it, we can create all of the needed paperwork and manuals, fill out the quarterly and annual forms and file everything for you. We think we have some of the best prices in the market for this kind of work.

If you want help to get into regulatory compliance or stay incompliance, give Terri Firestein of CCG a call at (301) 788-6889. We can help you take regulatory worries off your plate.

Regulatory Alert: Cap on USF Fee Charged to End Users

Seal of the United States Federal Communicatio...

Seal of the United States Federal Communications Commission. (Photo credit: Wikipedia)

In a footnote to WC Docket No. 13-76, adopted and released March 26, 2013, In the Matter of July 2, 2013 Annual Access Charge Tariff Filings (establishes procedures for the 2013 filing of annual access charge tariffs and Tariff Review Plans) the FCC reminds carriers of the requirement to apply FCC rule 47 C.F.R. §54.712 where applicable.

The footnote references 47 C.F.R. §54.712 :

Contributor recovery of universal service costs from end users.

(a) Federal universal service contribution costs may be recovered through interstate telecommunications-related charges to end users. If a contributor chooses to recover its federal universal service contribution costs through a line item on a customer’s bill the amount of the federal universal service line-item charge may not exceed the interstate telecommunications portion of that customer’s bill times the relevant contribution factor.

We believe that some contributors to federal USF that want to recover their contribution costs through a line item on a customer’s bill are going to have a problem complying with this Rule. We can think of two circumstances that may place a carrier in violation of this Rule:

  1. If a carrier has tariffed a Subscriber Line Charge (SLC) in their FCC interstate access tariff and bills it to their end users monthly that revenue is considered Interstate revenue. Carriers should ensure that the amount they are charging customers as a USF contribution recovery fee does not exceed the tariffed SLC charge times the current USF contribution factor (17%). The current 17% relevant contribution factor is higher than it was in past years so carriers should look at this again as the contribution factor changes.

For example, if your SLC charge is $4.00, then the most you could charge for a USF fee to end users based upon that amount is $4.00 X 17% = $0.68. So do the math and compare your USF recovery fee to 17% of your SLC charge. If the USF recovery fee exceeds that amount you have a problem, which will be discussed below.

  1. Some CLECs opt to not tariff or bill its end users a SLC charge. Until recently, USAC required that these CLECs to impute a SLC charge for USF 499 reporting purposes and to report the revenue as 100% interstate revenue.

However, recently the FCC informed USAC that they could no longer require CLECs to impute the SLC and report it as interstate revenue. This means that CLECs that do not have a SLC charge in their access tariff, and who do not expressly charge a SLC on the bill do not have any customer revenue that can be explicitly assigned to the interstate jurisdiction absent measuring interstate long distance usage. In such a case, the CLEC can’t bill a USF recovery fee to a customer who doesn’t make any interstate long distance calls. And they can only charge a USF recovery fee up to 17% of whatever a customer does spend for interstate long distance calling.

This creates a dilemma for carriers who find themselves in either of the two circumstances mentioned above. How does one bill the USF fee to customers since every one of them has a different amount of Interstate usage?

One thing that is important to remember is that the FCC does not mandate that a carrier bill its end-user customers a USF contribution recovery fee. It is optional for a carrier to recover its USF contribution from its end users. In other words, a carrier may treat its USF contribution as an expense.

We believe this footnote was included in the March Order for a reason, that the FCC suspects there are carriers who are violating the rule. So you can expect USAC to be auditing contribution recovery fee calculations in the near future.

So, if you are in violation of this rule, what are possible solutions for getting back into compliance?

  1. Decide to not bill the USF surcharge to your customers and pay USAC out of your own pocket (not recommended).
  2. If you tariff and bill a SLC charge today you can increase it to make it large enough to cover the USF contribution (assuming your SLC is not capped).
  3. If you don’t tariff and bill a SLC consider putting one in your access tariff. This would require breaking it out on the end user bill as a separate line item. However, note that by doing this you would be increasing the amount of your USF contribution paid to USAC if you are a contributor. Or, if you are not a contributor today it could make you into one.
  4. Increase your local rates by an amount that would cover the USF contribution. This is probably the best solution, except for possible competitive consequences. However, if you discontinue the USF fee and raise rates by the same amount you will not be increasing the customers’ bills overall.
  5. Pass the USF fee onto only those customers who have enough interstate long distance usage to cover the USF fee. The trouble with this idea is that it is hard to do correctly and it also means you would be charging the largest USF fee to those who make the most long distance. That is probably not a great idea from a competitive perspective.

We recommend you review the USF fee you are billing customers and ensure it passes the FCC “test”. If you need help to do this review please contact Terri Firestein at (301) 788-6889.