USF Reform: Goodbye Quantile Regression, Hello (Maybe) a 10 Mbps Target Speed

Small rural telecom network operators got several pieces of good news from the FCC today. At today’s monthly meeting, the commission reversed the quantile regression analysis benchmarks that reduced Universal Service Fund support for some of those carriers. The commission also said it would allow the small rate of return carriers to receive USF support for investments made in 2010 and 2011 and that it would consider raising the minimum broadband speeds operators would be required to support for new broadband deployments supported through the USF system.

Less popular will be the FCC’s decision today to implement a new rate floor that will cause local telephone service rates in rural areas to increase.

The moves came amid a broad range of actions taken to continue transitioning today’s voice-focused USF program to a Connect America Fund focused on broadband, including providing additional detail about plans for the CAF program for larger price cap carriers.

The commission also said it will consider proposals for a CAF program for rate of return carriers. Small telco associations previously submitted such a proposal, but apparently the FCC wasn’t satisfied with it. Until then, today’s voice-focused USF program covers some broadband costs when broadband is delivered over networks that also support voice.

Goodbye quantile regression
Quantile regression analysis was put in place with the goal of rewarding small rate of return carriers that were most efficient in building out their networks by reducing the amount of USF funding given to the least efficient carriers and making it available to the most efficient carriers. But the carriers have argued that the system has hindered network investment because it is not possible for a carrier to know in advance where its investment level will place the company on the efficiency continuum.

Today’s action eliminates the quantile regression analysis benchmarking system, essentially leaving the previous system in place, and also seeks comment on alternative methods of achieving the goal of rewarding efficient carriers.

Rate of return carriers also complained that recent USF reforms prevented them from being reimbursed for some costs they already had made prior to the reforms being put in place – and in saying carriers would receive support for 2010 and 2011, the FCC may have addressed those concerns.

Another previous FCC move that has been unpopular with carriers was a decision to set a minimum target speed for the CAF program at 4 Mbps downstream. The carriers argued that the number was too low because it is considerably lower than rates already available in urban areas. That view received support today from Akamai, whose latest State of the Internet report found an average nationwide broadband connection speed of 10 Mbps, with less rural eastern states having even higher average connection speeds. In today’s action, FCC officials said they would “consider” raising the minimum speed for CAF-funded broadband deployments to 10 Mbps downstream.

Rate floor raised
One area where rural carrier complaints did not sway the FCC was in the commission’s decision to raise the rate floor that determines the price of local phone service. Recent research showed that the average monthly local service rate in metro areas had increased since the last time it was measured. Accordingly rate of return carriers receiving USF support will be required to raise prices, using a phase-in process over a period of several years.

At today’s meeting FCC Chairman Tom Wheeler said the commission was required by law to raise the rate floor and that by phasing the floor in gradually the commission was fulfilling its obligation as “humanely” as possible.

The requirement apparently was put in place with the goal of reducing the amount of USF support carriers would need, but carriers argued that this move would cause more customers to cancel local service – a trend the carriers already are seeing and which the carriers said would be exacerbated by a price increase.

Price cap CAF plans
On the price cap side, the FCC said today it would implement Phase 2 of the CAF program this year. For the past two years, the commission has administered Phase 1 of that program, which helped fund broadband to a limited number of unserved or underserved locations in price cap territories. Phase 2 aims to target more locations using a forward-looking cost model that was adopted yesterday.

In today’s action, the FCC provided several details about this plan:

• All areas in price cap carriers where the average cost equals or exceeds a benchmark will be eligible for Phase 2 funding

• Incumbent carriers who decline to bring broadband to qualified locations within a state at the level of support calculated using the cost model will be allowed to participate in the reverse auction that would ensue.

• Other entities participating in the reverse auction will not have to have eligible telecommunications carrier status to participate in the auction but will have to obtain that certification if they win in the auction

• Details about what constitutes a “reasonable request” for broadband are included in forthcoming documents adopted today