Proposed USF reforms could threaten small telcos

FCC officials have called proposed reforms to the Universal Service Fund a “once in a generation” undertaking and if enacted as envisioned, that’s not an overstatement. Those who have the most at stake are the smaller incumbent rate-of-return telcos that rely most heavily on Universal Service today.

The proposed reforms, which are expected to be part of the National Broadband Plan due next week, are a mixed bag for small telcos. On the plus side, the small telcos stand to gain one critical goal that they and others have been asking for—support for broadband network deployment. The FCC plans to transition today’s voice-based high-cost fund to a new fund, dubbed “Connect America” with the goal of bringing broadband to 99% of Americans by 2020 (although exact broadband speeds have not yet been revealed.)

Small wireline telcos also will be pleased to learn that the FCC wants to phase down high-cost USF support for the competitive eligible telecommunications carriers that have caused the high-cost fund to grow in recent years.

As Omnibus Broadband Initiative Senior Policy Advisor Carol Mattey noted in a briefing with reporters on Friday, CETC funding is primarily going to support multiple voice wireless networks. Small telcos (other than small wireless telcos such as those represented by the Rural Cellular Association) have argued that this isn’t an appropriate use of high-cost funds and the FCC seems to have accepted that argument.

But winnowing down the number of carriers receiving USF funding also poses a threat to small incumbent telcos. As anticipated, FCC officials said the new broadband fund will cover only one provider of fixed broadband services, which could be fiber-based or fixed wireless, in a geographic area. And there’s no assurance that the incumbent will be that carrier.

“In some areas, more than one provider may be interested,” said Mattey, who hinted at some type of reverse auction mechanism to address that scenario. She told reporters the FCC was interested in establishing a “market-based mechanism to select providers and the amount of support.”

The FCC also left open the possibility that in some areas that currently receive high-cost support, no carrier at all would be eligible for Connect America funding. Mattey said that in determining the need for Connect America support, the FCC would focus on areas where market conditions do not support a broadband build-out.

USF detractors have argued that the current plan lacks a mechanism for determining whether areas that historically received high-cost funding really need it any more, pointing to the example of previously rural areas that now have become suburbs of major metros. The FCC not only seems to have accepted that argument—it also has taken a first pass at analyzing the situation, and the results may not bode well for rate of return carriers

Mattey told reporters that two-thirds of households that have no access to broadband are served by price cap carriers such as the former regional Bell companies, while only a third are served by the rate of return carriers. Based on that analysis, she said the FCC would recommend freezing support to rate of return carriers under the legacy system by as early as 2012 with the goal of shifting funding toward broadband and price cap carriers.

Many small telcos have realized that Universal Service funding was in jeopardy for some time and have made efforts to develop new revenue streams to replace those funds.
Some industry observers say small telcos that already have invested in broadband will be well positioned moving forward—especially if future funding is based on definitions of broadband speeds that are allowed to increase over time. Small telcos with wireless operations also could have a shot at new funding under the proposed new mobility plan aimed at supporting one-time buildouts of 3G networks—although those funds also would be awarded on a competitive base.

But any small telcos that are not able to shift their focus from delivering subsidized voice services could find they can no longer make a go of it.