In 2011 the North Carolina Utilities Commission nearly completed the process of access charge and universal service reform which began in late 2009. As part of this ongoing docket the Commission formed the Access Charge Working Group (ACWG), made up of members representing all stakeholders. The purpose of the ACWG was to develop a compromise plan acceptable to consumer interests as well as traditional investor owned telephone companies, independent telephone companies, TMCs, wireless, cable providers and Competing Local Providers (CLPs). Unfortunately, the ACWG was unable to develop a consensus plan. However, out of the ACWG, a compromise emerged between the ILEC carriers which would replace traditional universal service support currently found in intrastate access charges with explicit support in the form of a North Carolina Universal Fund. While no member of the ILEC coalition was completely satisfied by the compromise, the work of small and large companies alike coming together for the benefit of North Carolinians and affordable access to robust communication services is commendable.

The ILEC plan faced opposition from wireless carriers, the cable industry, and CLPs as each of these industries would have been required to contribute to the fund in exchange for their use of the Public Switched Telephone Network(PSTN). Some of these companies still support access charge reductions but without any state universal fund. In the view of the ILEC coalition, a reduction in access charges, which as the Commission has concluded helps support universally affordable local telephone service could, without a transitional funding mechanism, result in a risk to universal service in North Carolina. This was a particular concern for companies for rural ILECs, which operate in rural, high cost, and sparsely populated areas.

Following an order declaring the Commission possessed the authority to require contributions from VOIP and wireless providers, the Commission conducted an evidentiary hearing which took more than four days. Witnesses included economists and policy analysts from all companies. Eric Cramer, CEO of Wilkes Telephone, testified on behalf of the TMCs concerning the necessity of universal service support in some form to continue to provide high quality service in rural North Carolina.

While the evidentiary phase of the case is complete, the November 18, 2011, FCC order on the Connect America Fund (more on this below) addressed many of the same issues and may preempt state authority on some issues. Currently, all parties are preparing comments on how the FCC Order aaffects the North Carolina proceeding.

On November 18, 2011 the FCC released its long awaited order on Access Charge Reform and the Connect America Fund. At an astounding 759 pages, stakeholders across the country are working to determine the complete effect of the order. However, everyone agrees, this is a broad and massive reformation of access charges and universal service. As expected, the FCC began the process of transitioning universal service from voice service support to broadband support. The FCC stated, “the universal service challenge of our time is to ensure that all Americans are served by networks that support high-speed Internet access-in addition to basic voice service-where they live work and travel.” While the changes involved in the FCC Order present some challenges for small companies, unlike previous FCC orders, the Commission, at least in this decision, appears to recognize some inherent difference between large and small carriers, and constructed rules which could ease the transition for smaller companies.

Under the access charge reform portion of the Order, the FCC establishes a long pathway to an eventual bill and keep model. The FCC has asserted jurisdiction over intrastate switched access charges (at least at the terminating end of a call) as well, although this jurisdiction may be challenged by some state regulators. The starting point for revenue recovery from lost access revenue for small carriers will be the carrier’s 2011 interstate and intrastate access revenues. That lost revenue will be recovered from explicit federal subsidies, remaining access charges, and from end user customers through a rate increase (referred to as an ARC) limited to $.50 per year. This increase will be available to companies whose rates are below $30. Each company’s eligible recovery will be reduced by 5% from the previous year until the transition to bill and keep is complete. Additionally. the FCC also established a $10 price floor, which means that companies with rates below $10 are ineligible for explicit subsidy recovery. Under this model, VOIP providers are finally brought under the access charge regime. The FCC also adopts rules designed to eliminate arbitrage schemes such as “phantom traffic”.

The transition to broadband support recognizes differences between large and small carriers. While large carriers will face competitive bidding with some form of first refusal for LECs, small carriers will receive support based on an incentive based model for efficient operations. These changes include a limitation on reimbursement for capital and operating expenses for HCLS support, although the model for that limitation will be adopted in a future order following a comment period. According to the FCC, the $10 price floor and a limit of support to $250 per line, as well as elimination for any support for a study area which is completely overlapped by an unsubsidized competitor, will lower the cost of the funds and provide incentives for efficient operations.

While the FCC order was sweeping and detailed, many important pieces of the proposed reforms were left undecided. Along with the Order, the FCC released a Notice of Proposed Rule Making, which will hopefully determine many of the undecided issues. This Order was a monumental step from the FCC, amazingly coming 15 years after the passage of the Telecommunications Act of 1996. Rural carriers must continue to be involved in determining further reforms, and adapting to the changes that are coming.

In December 2010, the FCC issued its long awaited decision on “net neutrality”. The concept of net neutrality states that internet service providers (ISPs), traditionally cable, telecommunications, and wireless providers, should not discriminate between content providers and must allow their customers equal access to all web content. However, this creates difficulties for ISPs in terms of bandwidth management, service levels and costs, among other issues. The issue was pushed to a head in 2010 when Netflix began streaming movies (some estimate Netflix movie streaming now uses 20% of the country’s bandwidth) and the decision of Comcast Cable to “choke” Bit Torrent, a popular file sharing site. The results of the Comcast/Bit Torrent dispute led many to question the FCC’s power over ISPs, as the DC Court Appeals overturned the FCC’s Order forcing Comcast to allow Bit Torrent equal access to its network. The Court did not reach the issue of net neutrality specifically but instead ruled the FCC did not have the authority to regulate the Internet in this way without broader authority from Congress.

While the authority of the FCC is not clear following the Comcast decision, the FCC moved ahead with a vote on its net neutrality plan. In a 3-2 vote, along party lines, the Democratic majority voted to approve the plan. The plan tends to favor Internet content providers over ISPs, as providers are prevented from “choking” any legal content website. However, ISPs are given some freedom to charge its subscribers for increased speeds and usage. Even with that freedom, the ruling still places ISPs in the uncomfortable situation of solving bandwidth issues by increasing fees on customers instead of management of certain websites, which dominate bandwidth use, including Google, YouTube, Netflix, and Facebook, among others. Proponents of net neutrality were not fully satisfied with the decision either, as wireless network providers were given significantly more freedom to manage their networks than their landline competitors. This concern focuses mainly on low income Americans as well as rural areas, which may lack wire access to the Internet . Fortunately this problem does not exist in our member’s areas, due to the excellent work of our member companies in expanding their networks to include universally available broadband. Still, a concern remains over a new “digital divide” between those who can only afford wireless, or have no access to a wired connection. The increasing market share and platforms of wireless ISPs also add to this problem.

Even with the decision of FCC, this controversy is likely years away from a final conclusion. Verizon has already filed a challenge in the DC Court of Appeals, which is the same court that overturned the FCC in the Comcast case. In addition, Congressional Republicans are also considering possibly overturning the decision through the Congressional Review Act, which provides an expedited process for overturning administrative agencies. The Act allows for only a simple majority in the Senate, so if the Republicans can convince a few Senate Democrats to vote with them, Congress may overturn the FCC decision.