Federal-State Joint Board on Universal Service
FCC Docket 96-45
High-Cost Universal Service Support Recommendation

Key Plan Details

1. Future USF would employ three-part funding structure composed of a Broadband Fund, Mobility Fund and a Provider of Last Resort (POLR) Fund


2. Joint Board recommends an overall cap on high cost funding at $4.5 billion dollars which is approximately equal to the 2007 level of high-cost funding


3. During the transition period, gradual elimination of the identical support rule will provide a funding source for the Mobility and Broadband funds


4. Broadband Fund
   1. Primary purpose provides support for broadband facility construction in unserved areas with support being expended as grants for new broadband facility construction
   2. Secondary purpose would be to provide new construction grants for broadband service enhancements in areas with substandard service
   3. States would award Broadband Fund support
   4. Support funding would be about $300 million dollars per year
   5. Would perhaps favor large ILECs who haven’t historically received USF support and who also have not invested in broadband network upgrade improvements


5. Mobility Fund
   1. Would be tasked primarily with disseminating wireless voice services in unserved areas
   2. Support would be expended as subsidies for construction of new facilities in unserved areas
   3. States would award Mobility Fund support
   4. Support funding would eventually be about $1 billion dollars per year
   5. 2007 CETC support is about $1.28 billion and is expected to increase to $2 billion in 2008, $2.5 billion in 2009 without additional CETC designations in 2008 and 2009


6. POLR Fund
   1. Support comprised of all existing ILEC support mechanisms (ICLS, LSS, High Cost, Safety Net Additive, Safety Valve)
   2. Programs would be left intact for now, but possible future funding reductions may occur
   3. Current programs provide substantial support for Rural carrier loop costs, generally less so for switching costs and nonexistent for transport costs
   4. Current USF mechanisms do not reflect the increased importance of Non-Regulated revenues generated by telecommunications plant
   5. May adopt future reform that modernizes the rural and non-rural high-cost mechanism so that a coherent system can be applied to all incumbent carriers


7. ILEC Benefits of Joint Board USF Recommendation
   1. CETC Identical Support rule eliminated
   2. Current definition of supported services revised to include broadband Internet service
   3. A carrier does not have to offer all supported services (voice, mobility and broadband) in order to receive any high cost support
   4. Current high cost funding level and structure maintained initially via POLR fund
   5. Participants in the POLR fund would remain subject to the current ETC requirements
   6. CETC funding shifted to new Mobility fund and further CETC impact on legacy support is limited
   7. Continued use of ILECs embedded costs as the basis of support
   8. Possible inclusion of transport facility support for rural carriers
   9. May provide financial stability for ILECs with completed or planned loop plant facility upgrades (high cost support is associated with loop plant facility costs)
   10. Support mechanisms more sensitive to high costs
   11. Targeting support to only one service provider in an area initially
   12. Initial service provider will be the incumbent LEC providing voice service over traditional landline facilities in each of the ILEC study areas


8. ILEC Concerns with Joint Board USF Recommendation
   1. No recommendation to increase the level of high cost support beyond $4.5 billion
   2. Limited benefit from the new Broadband and Mobility support funds since these funds could possibly support CETC and large ILEC companies with unserved areas
   3. Possible changes to the POLR support program which might reduce legacy support such as:
      1. Applying a rates test as a condition or an adjustment to cost-based support (in some areas, the combination of universal service support and funds from intrastate access, interstate access settlements may produce very low consumer rates)
      2. Considering LEC costs on a comprehensive basis as opposed to separate programs for loop and switching costs
      3. Considering unregulated revenues in calculating carriers need for support
      4. Providing more limits on support for operating expenses
   4. Reducing or eliminating, over time, the support to areas with multiple providers
   5. Future support may be based on a modeling approach
   6. Recommends that the FCC consider the most appropriate auction mechanism to determine high cost support (i.e., reverse auctions)
   7. State involvement in the distribution of Broadband and Mobility funds and the determination of unserved areas

ILEC USF Opportunities

1. An Interstate Cost Based settlement ILEC with recently upgraded or existing broadband capable loop plant investment should receive continued USF High Cost fund settlements and extend the loop plant investment cost recovery process for an additional period of years based on the POLR plan.


2. If an Interstate Cost Based settlement ILEC is considering a broadband capable loop plant network investment upgrade, due to customer demand for enhanced broadband services, the POLR and/or the Broadband plan should provide a continued loop plant investment cost recovery process for an additional period of years.


3. ILEC plant investment annual depreciation rates should be studied to determine if increased annual depreciation expense balances should be applied in subsequent operating years and allow the recovery of these increased depreciation expense balances concurrent with a POLR plan utilizing existing USF settlement procedures.


4. Review ILEC plant maintenance activities and determine if planned future maintenance could be completed in an accelerated time frame and optimize the recovery of these increased maintenance expense balances concurrent with a POLR plan utilizing existing USF settlement procedures.

ILEC USF Challenges

1. A future POLR USF settlement plan may apply specific USF compensation test conditions including Local Service rate benchmarks. An ILEC may consider a review of existing monthly Local Service rates and determine if these rates should be increased using the time available before USF compensation test conditions are applied. Local Service rate increases could be coordinated with other no-cost customer benefits provided by the ILEC (free or reduced cost POTS calling features such as speed dialing, call forwarding, call waiting, etc.).


2. Review existing or planned non-regulated ILEC activities to minimize any cross subsidization between the ILEC regulated and non-regulated business units.
   1. Consider joint use company assets, shared staff, materials and supplies as well as operating expenses
   2. If FCC USF compensation test conditions would apply non-regulated revenues received by ILEC non-regulated subsidiary, could the non-regulated business enterprise operate independently?


3. Develop a business strategy which optimizes POLR plan settlement opportunities, but also create an alternate business plan which considers a possible future USF settlement decrease.
   1. Reduced depreciation and maintenance expense rates, increased CLEC revenue activities and possibly slower ILEC capital investment deployment.