USF & ICC Reform Update: Appeals and Challenges and the Search for Clarity

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It seems that every FCC decision of consequence gets appealed to the courts, and the incredibly consequential Universal Service Fund and Intercarrier Compensation reform Order is no exception. In a race to the courthouse, within days of the Order's publication, appeals were filed by over a dozen parties on a wide range of issues.  State regulators want to reverse their loss of jurisdiction over interstate toll rates.  Rural carriers are troubled by cuts in support, as are some wireless carriers.  Competitive providers object to the move to Bill and Keep (a "zero" rate) for terminating access.  Even AT&T challenged the order, seeking to reduce compensation for competitive providers.  Late last week, the Federal Court of Appeals for the 10th Circuit (Denver) was selected to hear the case.

(By the way, even after the initial race to the courthouse, there are many days left for other parties to pile on and toss their issues before the court.)

Will these lawsuits changes the CAF?

So what is the Federal Court of Appeals likely to do?  First of all, we will get some indication of where the court is headed when it deals with expected petitions to stay parts of the Order.  To obtain a stay, a party must show it is likely to prevail on the merits and there would be irreperable harm if the new rule were to become effective.  So, if the court grants a stay, it would be a signal that the FCC faces an uphill fight on prevailing on that issue.

As for the overall appeal, in the face of a lengthy, highly technical, and complex decision -- and potentially very difficult legal issues -- the odds favor the three judge panel deferring to the FCC's judgment wherever it hasn't been overtly arbitrary.  That is, for any issue, if the Commission has made a reasonable case that it has authority to act and has a basis to support its action, it is likely to be upheld.  That does not mean that the court will uphold the entire order, but it will be selective in what it rejects.  Further, given the complexity, it is likely that the court will not act quickly (other than on whether to issue a stay), which means the FCC continues to be the key venue.

How is the CAF evolving?

After a relatively slow start, Chairman Genachowski and his staff are now moving at full speed. In the USF/ICC order, they broke a longtime logjam and have updated, albeit imperfectly, key regulations.  They now aim to continue their work.  Comments are due in a month on important follow-on USF issues and a month later on ICC issues.  In addition, the Chairman has announced that contribution reform will be considered soon, which is heartening given the excessively high fee (almost 18% for the 1st Quarter of 2012) imposed on subscribers.  Often in an election year, the Commission will act more tentatively, especially on tough issues.  But, you should not count on that being the case in 2012.  I believe the odds favor the Commission continuing to move forward and complete work on many USF/ICC issues next year.  The main barrier is the enormity of the tasks they have given themselves.  For instance, the creation of a cost model to determine support is a daunting endeavor.  That said, the Commission is almost certain to adopt a number of follow-on orders within the next 12 months, and these should precede any decision by the court.

Where does that leave local providers? 

First, every incumbent and competitor currently has its hands full trying to implement the new rules.  Despite the Commission's efforts to create clarity, its rules simply do not fit neatly with the particular business plans and operations of each provider. (It is thus not surprising that providers have already been meeting with FCC staff to gain greater clarity on a variety of issues.)  It will take many months to understand the new rules and their implications sufficiently and draft new filings and enter into new business arrangements in response.  This is a big job.

Second, every provider will be back at the FCC on the further proceedings.  The price cap incumbents need to deal with the additional support provided in Phase I of the Connect America Fund and the cost model in Phase II.  The rate of return providers need to address the caps on capital and operation expenses and the long term policy for support.  And, all providers will be affected by the next round of ICC issues.

Finally, in light of the clear long term direction of the Commission, providers need to reexamine their business plans.  With this Order, the Commission has confirmed what every provider has already known:  the telecom world is intensely competitive and highly dynamic.  As a result, the government's role will be far different.  It does not want to get between competitors, and it wants to direct support where it is truly needed.  The old regime is ending rapidly, and, in such an environment, it is essential that providers seek to control their own fate.