On April 18, 2011, comments were due for the USF Reform Notice of Proposed Rule Making and Further Notice of Proposed Rule Making. Various parties filed 130+ comments. Reply comments were due on May 23, 2011. USF reform comments were filed by ILECs, RLECs, CLECs, state commissions, fiber providers, cable companies, mobile providers, associations, and VoIP providers. The Rural Broadband Alliance, for example, recommended in comments basically leaving the USF subsidy as it is in place and providing a “glide path” to reform. Rural LECs are completely dependent on the USF subsidy, paid for by every telecommunications customer, for their financial survival. RBA suggested creating “Transitional Stability Plan” to insure that the rural LECs dependent on the USF subsidy recover increased operational costs and capital investments for delivering broadband service. RBA is against reducing carrier access charged by LECs to IXCs and proposed a freeze on existing USF subsidies, unless a LEC shows that it expanded service or spent extra on maintenance.

Tom Evslin wrote a good post about the rural USF subsidy issues not as an advocate of a carrier but as citizen and a leader in the rural state of Vermont (pop. 621,000):

It's easy to envision a future — it's almost here — when nobody is using copper landlines for plain old voice services except those rural pockets where both the erecting of poles and the original provision of telephone service was subsidized and where telephone service is still being subsidized today. … it isn't economical to provide cable or cellular or broadband services where the population is thin. … there is also a huge threat to the existing subsidies for rural POTs. These subsidies are collected from other users of POTS; if we country people are the only remaining users of POTS, where's the subsidy going to come from?

Tom is correct that rural America has the most to risk from the loss of USF subsidies. Rural America relies on subsidies for almost all of the rural infrastructure: electric, highways, agricultural, and telephone. 

However, the subsidy payments for telecommunications made to rural America though are anything but simple and transparent. The RBA comment for example refers to NECA “pooling” for the carrier access subsidy – but the pooling methodology is not made public so access fee payers (the interexchange companies and ultimately every end-user customer) do not know which company and their customers receive how much or why.

The other issue is that the “High Cost Fund” (HCF) portion of UFS (about 50% of the total 15.5% USF fee on interstate revenues) paid by consumers to rural America has almost tripled in 10 years from $1.7b to $4.3b. The High Cost Fund is used to pay for the costs of reaching homes in very low density areas to provide telecommunications and information services.

However, over the same 10 year period, the number of traditional access lines (sometimes called POTS) and interconnected VoIP access lines, now renamed by the FCC (News - Alert) as “Service Connections,” have remained nearly stable at around 160 million.

This means that on average $9 per connection was paid to the High Cost Fund in 1999 but that this amount increased to $27 per connection by 2010. One other take away, that could be assumed from these numbers, is the cost of providing service to rural consumers appears to have increased by 300% from 1999 to 2010. More than likely, such a large cost increase did not occur but the large increase in the HCF fee collected from U.S. consumers to support rural American consumers should be questioned.

The new FCC USF Reform goal is to provide broadband service to all American homes and businesses. To achieve this goal, USF will need to be used for capital expenses such as fiber construction which costs between $30k to $65k per mile on poles. One would think that HCF funds have been primarily used for such capital expenditures rather than for operational expenditures. This is not the case and it should be changed by the Commission. Even a recent court decision made the point that USF HCF goes to operational expenses, not capital expenses. In a recent, January 2010 Fifth Circuit Court of Appeals decision determining the taxability of USF payments to recipients as income or capital contributions, AT&T (News - Alert) argued that USF was a capital contribution for capital expenses but the court disagreed. The court explained:

AT&T argues that the legislative and regulatory background for the payments indicates that they were intended to increase AT&T’s investment in capital assets. However, universal service support did not provide money exclusively for the specific purpose of making capital improvements, such as building an airport or locating and constructing a plant. Instead of providing the money only for that type of investment, the governments provided supplemental income so as to provide the telephone companies an enhanced return on their investment.

To ensure that USF HCF funds are properly used for extending fiber broadband connections to end-users and also are taxed as capital contributions rather than income, the FCC could require that HCF USF funds be used for capital expenses only. The FCC could even specify the types of capital the HCF funds should be used for such as outside plant and network equipment, just as the NTIA required with the Recovery Act grants. This capEx only requirement would ensure that the funds are spent building fiber highways rather than merely subsidizing operating expenses of existing telephone networks.

One other suggestion for USF reform is that the largest ILECs collect, pay to the USAC, and then receive back from USAC hundreds of millions of dollars of USF Funds. The FCC could enable “bill and keep” for such companies paying and then receiving funds. Using bill and keep would allow the LECs receiving the funds to use the cash immediately rather than having the cash move through the government (USAC) and then return months later. In other words, put the money to work immediately to build broadband to rural America.

Jonathan Adelstein, USDA RUS

Finally, the smartest decision the FCC could make would be to recommend to Congress that legislation be enacted to transfer the $4.2 billion in USF HCF funds collected annually to the USDA’s RUS for distribution to rural providers. RUS is now led by one of the most experienced former FCC Commissioners, Jonathan Adelstein. Former Commission Adelstein’s RUS has the staff resources and years of experience in working with rural American to properly allocate the billions of dollars USF collections for the capital needed to build broadband in rural America.