Reforming the Universal Service Fund

FCC Chairman Julius Genachowski delivered a major address today at ITIF regarding Universal Service Fund (USF) reform. The chairman will circulate a Notice of Proposed Rulemaking (NPRM) at tomorrow’s FCC open meeting setting out goals and directions for converting the USF’s High Cost Fund (HCF) and Inter-Carrier Compensation (ICC) programs from telecom subsidies to ongoing broadband Internet support programs. After a transition period, USF will stop funding telecom altogether and focus exclusively on broadband Internet, with the expectation that VoIP (Internet telephony) and cellular will provide telephone service.

The plan is somewhat light on specifics at the moment, as Chairman Genachowski is (wisely) focusing on ends rather than means; his expectation is that NPRM comments will enable the Commission to fill in the gaps with good idea as the NPRM process advances.

What we know is that USF reform will seek to immediately address the most egregious inefficiencies in the administration of the fund:

• Excessive payments, as high as $2,000/month, for single household phone service in some areas;
• Overlapping payments to multiple providers in the same region;
• Perverse incentives that reward rural carriers for losing customers;
• The Enron-style gaming of the system through “traffic pumping” and “phantom traffic” techniques that inflate rural carrier fees through ICC.

Reforming a system that allowed these abuses to happen in the first place isn’t as straightforward as it might be, of course. The Chairman places a great deal of emphasis on shifting dollars from the HCF to the Connect America fund that brings broadband service to libraries and other community anchor institutions.

To understand how this helps, it’s useful to consider how Internet interconnection works. There is an established system of Internet Exchange Points (IXP) where network operators exchange traffic with each other. Major IXPs are located in “NFL cities,” which interconnect to each other over very high speed lines. Major IXPs are the top of a pyramid that includes smaller IXPs (where fewer networks are present) and simple Points of Presence (POP) maintained by single networks for the convenience of their transit customers. Institutional users – including smaller ISPs – purchase or build backhaul to get from their premises to telephone company Central Offices (CO), and from there to the nearest POP or IXP, where they interconnect with other users by peering or transit. So the interconnection “fabric” in today’s broadband world is a hybrid of traditional telephone facilities and new Internet facilities.

Right off the bat, the difference between telephone networks and the Internet is the number and location of connection points. If we’re going to replace plain old telephone service with broadband Internet, the interconnection fabric needs to develop in such a way that IXPs and POPs “eat” the COs and convert them into POPs and IXPs. This is where Connect America comes into the picture.

If done correctly, Connect America will transform the last leg of the existing interconnection infrastructure into a system where the anchors become mini-IXPs. This isn’t as easy as it looks, however. The (very) general method replaces traditional telephone switches with soft switches at Class 4 switching centers, and then replaces soft switches with IP devices. This process is already taking place, but the perverse structure of the USF makes it take place more slowly than it should, even if the only goal was to reduce the cost and increase the pervasiveness of telephone service.

When the impediments are removed, broadband deployment will accelerate, performance will improve, and costs will come down. One imperative that falls out of this plan is the likely need to convert a fairly large number of single-carrier switching centers into multi-carrier interconnection points. If such a conversion is in fact necessary, it will be one of the more controversial issues as free marketers may grouse about replacing currently private facilities with essentially public resources. Such a move would simply amount to a  recognition of reality since these “private” facilities are creations of government subsidies in any case, and taxpayers should not be required to subsidize multiple, equivalent systems in the same areas after all.

Policy analysts have been calling for wholesale reform of USF and ICC for a very long time now, and the FCC has had the issue on and off the table for years. Technology has not been sufficiently advanced until very recently for the Commission to push forward with a plan that replaces plain old telephone service with broadband and VoIP, but it is now. USF reform is therefore an idea whose time has come, and we applaud Chairman Genachowski’s desire to push forward with this very constructive plan that may well become the centerpiece of his legacy.