The Federal Communications Commission (FCC or Commission) has released a draft version of an order it will vote on at its June 7 open meeting which grants a petition requesting the FCC forbear from applying universal service fund (USF) contribution rules to broadband Internet access transmission services provided by rural local exchange carriers (RLECs). [1] NTCA—The Rural Broadband Association and US Telecom filed the joint forbearance petition in June 2017. [2] The forbearance provided in the order eliminates the current disparate treatment of RLEC broadband providers under the FCC’s USF contribution rules.

Why Do Some RLECs Pay USF Contributions On Their Broadband Service?

The history of USF contribution requirements for RLECs that act as Internet service providers (“ISPs”), either directly or through wholly-owned affiliates, is vastly different from other ISPs. When the FCC classified wireline broadband Internet access service as an information service in 2005, RLECs generally provided Digital Subscriber Line (DSL) broadband service using their existing telephone lines. This broadband service offering consisted of a telecommunications transmission component and an information services component, with the former being offered on a common carrier basis. In its classification decision, the FCC concluded that “facilities-based providers of wireline broadband Internet access services must continue to contribute to existing universal service support mechanisms based on the current level of reported revenue for the transmission component of their wireline broadband Internet access services.” [3] Revenues associated with the Internet access portion were exempt from contributions. The FCC cited various policy goals for the move – to preserve existing levels of universal service funding, to prevent a precipitous drop in fund levels, and to ensure that there continue to be specific, predictable, and sufficient mechanisms to preserve and advance universal service. [4] However, the transmission component / information service component dichotomy is what allowed RLECs to use USF support to recover costs related to broadband network investment. As the FCC explains in the Draft Order, RLECs “that choose to offer broadband Internet access transmission service as a common-carriage service in order to participate in the National Exchange Carrier Association, Inc. (NECA) pooling arrangements or other tariffed rate structures that reflect rate-of-return regulations must contribute based on their revenues from these common-carriage offerings. Notably, our federal universal service rules require such treatment for these small, legacy rate-of-return carriers alone—otherwise, expenditures for broadband services would be excluded from support.” [5]

To provide some contrast, RLEC contribution requirements are strikingly different from the obligations of ISPs that began as cable television providers. Cable providers started using their facilities to provide Internet access services in the mid-1990s. Unlike local exchange carriers, cable providers were not regulated as telecommunications carriers and were never forced to “unbundle” the transmission component of their broadband Internet access service and offer it to unaffiliated entities. In 2002, the FCC declared that cable modem broadband service was an information service – a single, integrated service that enables the subscriber to utilize Internet access service through a cable provider’s facilities. Because cable modem ISPs themselves provided information services to end users, not telecommunications, they were never required to contribute to the USF based on end-user revenues from the provision of broadband services. Nor did they have any USF-assessable transmission component revenue. Even when the FCC classified all retail broadband Internet access services as telecommunications services in the 2015 Open Internet Order, cable ISPs were excused from USF contribution obligations because the FCC decided to “forbear in part from the first sentence of section 254(d) and [its] associated rules insofar as they would immediately require new universal service contributions associated with broadband Internet access service.” [6]

The uneven USF contributions playing field was further tilted when some RLECs moved to cost model regulation by opting into the A-CAM. Those RLECs that receive model-based support have integrated their broadband transmission component services into a single broadband Internet access service offering, “rendering them exempt from [USF] contribution requirements.”

NTCA and US Telecom’s Request Meets The Forbearance Requirements

Under the forbearance section of the Communications Act, the FCC must forbear from applying any requirement of the Act or of FCC regulations to a telecommunications carrier or telecommunications service if and only if the FCC determines that: (1) enforcement of the requirement is not necessary to ensure that the charges, practices, classifications, or regulations by, for, or in connection with that telecommunications carrier or telecommunications service are just and reasonable and are not unjustly or unreasonably discriminatory; (2) enforcement of that requirement is not necessary for the protection of consumers; and (3) forbearance from applying that requirement is consistent with the public interest. In the Draft Order, the FCC finds that NTCA and US Telecom’s forbearance request meets the criteria.

First, the FCC concludes that exacting contributions from small, rural carriers for a component of their broadband Internet access service is not necessary to ensure just and reasonable charges and practices. In general, the FCC does not impose USF contribution obligations on broadband service. But, the current rule carves out an exception – certain RLECs that provide broadband Internet access transmission services on a common carriage basis must contribute to the USF on the revenues from those offerings. With respect to the first forbearance element, the FCC concludes imposing a USF contribution on broadband service provided by a limited group of RLECs “is in itself unreasonably discriminatory because it raises the prices of consumers in rural areas served by these small carriers,” which “is exactly the opposite of the statutory command to ensure that rates are not unjustly or unreasonably discriminatory.”

Next, the FCC finds that enforcement of USF contribution rules on the transmission component of RLEC broadband service is not necessary for the protection of consumers. In effect, the rule harms consumers rather than protects them. Enforcing that rule, the FCC concludes, negatively impacts some consumers because it requires them “to bear additional costs” – costs that other broadband subscribers don’t have to swallow.

Finally, the FCC finds that the requested forbearance furthers the public interest and will promote competitive market conditions (a required part of the FCC’s public interest analysis). Determining whether the third forbearance element has been met seems like an easy task. Communications providers that must make USF contributions ultimately pass these costs on to their subscribers, as is allowed under the FCC’s rules. When only a certain subset of broadband providers has to pay USF contributions, you have an uneven playing field. It “distort[s] the competitive landscape and subject[s] certain consumers to higher prices for broadband services.” Forbearance eliminates this disparate treatment and levels the playing field.

Also considered under the public interest element is how the requested forbearance will impact the overall fund. NTCA and US Telecom argued, and the FCC agrees, the amount of USF contributions collected from RLEC-provided broadband Internet access transmission services is de minimis. Specifically, the FCC estimates the revenues associated with RLEC-provided broadband Internet access transmission services to be significantly less than one percent of total USF contributions. [7]

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[1] Petition of NTCA–The Rural Broadband Association and the United States Telecom Association for Forbearance Pursuant to 47 U.S.C. § 160(c) from Application of Contributions Obligations on Broadband Internet Access Transmission Services, WC Docket No. 17-206, FCC-CIRC1806-03, https://transition.fcc.gov/Daily_Releases/Daily_Business/2018/db0517/DOC-350770A1.pdf (Draft Order).

[2] Petition of NTCA–The Rural Broadband Association and the United States Telecom Association for Targeted, Temporary Forbearance Pursuant to 47 U.S.C. § 160(c) from Application of Contributions Obligations on Broadband Internet Access Transmission Services Pending Universal Service Fund Comprehensive Contributions Reform WC Docket No. 06-122 (filed June 14, 2017).

[3] Appropriate Framework for Broadband Access to the Internet Over Wireline Facilities, et al., CC Docket No. 02-33, et al., Report and Order and Notice of Proposed Rulemaking, FCC 05-150, 20 FCC Rcd 14853, ¶113 (2005).

[4] See Id.

[5] Draft Order at ¶ 4.

[6] Protecting and Promoting the Open Internet, GN Docket No. 14-28, Report and Order on Remand, Declaratory Ruling, and Order, FCC 15-24, 30 FCC Rcd 5601, ¶488 (2015) (2015 Open Internet Order).

[7] Draft Order at ¶ 16.