One of the least known features of the federal universal service fund (USF) is the national “rate floor” requirement. The FCC adopted it in 2011 to ensure that consumers across the country are not subsidizing the cost of voice telephone service to rural customers whose monthly rates are below a set minimum rate. If a rural rate-of-return ILEC chooses to charge its customers less than the authorized rate floor amount for plain old telephone service (POTS), the difference between the amount charged and the rate floor is deducted from the amount of support that carrier receives through the USF. The current monthly national rate floor is $18, and it was scheduled to increase to $20 on July 1, 2017 and $22 on July 1, 2018.

However, the rate floor issue has recently become controversial and in a Notice of Proposed Rulemaking (NPRM) and Order in Docket 10-90 released on May, 19, 2017, the FCC has ordered the monthly national rate floor to remain at $18 for the next two years while evaluating whether its methodology should change or it should continue to exist at all.

The national rate floor is calculated through an annual survey of voice service rate in urban areas conducted by the FCC’s Wireline Competition Bureau (WBC). The first voice rate survey result was released in 2014, and found that the average local end-user rate plus state regulated fees was $20.46/month. To protect rural customers, the Commission adopted a phased-in increase to the rate floor of $2/month each year until the rate reached the figure calculated by the survey. Thus, although the most recent survey found the monthly rate to be $22.49, the minimum rate ILECs are currently required to charge for local telephone services to avoid losing universal service support is $18.

Many in the industry have issues with the national rate floor, because while it may ensure that customers across the country are not overly subsidizing rural areas, it has had the perverse effect of causing POTS rates to increase in those areas. As the Commission noted:

[S]takeholders ranging from the AARP to the National Tribal Telecommunications Association, from the National Consumer Law Center to small, medium, and large rural telephone companies, have raised concerns that the rate floor is inconsistent with the direction of section 254(b) of the Communications Act to advance universal service in rural, insular, and high cost areas of the country while ensuring that rates are just, reasonable, and affordable. These parties have argued that the rule makes basic voice service in rural areas less affordable, does not make voice service available at reasonably comparable rates to urban areas, and does not further the Commission’s objective to “minimize the universal service contribution burden on consumers and businesses.” In that same vein, no one disputes that the rate floor has increased rates for voice service in rural areas, despite the Commission’s goal to “preserve and advance universal availability of voice service.” Some parties have also asserted that price increases negatively affect rural consumers and “could lead to some customers losing affordable access to basic service entirely.” Others have noted that the increases caused by the rate floor rule could have a particularly deleterious effect on older Americans on fixed incomes and customers in Tribal areas. (Docket 10-90, NPRM and Order, released May 19, 2017, at para. 8).

Concerns have also been raised about whether a single national rate floor is appropriate. Some parties assert that because income levels are usually lower in rural areas, a national rate floor incorrectly “assumes that what’s affordable in our country’s largest cities must be affordable in our small towns.” Thus, in the NPRM the Commission requests comments on whether more localized voice rate data would better serve the goal of ensuring reasonably comparable service at reasonably comparable rates.

With all the disagreements at the Commission these days, one would think that a relatively simple item like a review of the national rate floor requirement would have unanimous support. One would be wrong. Democratic Commissioner Clyburn dissented from the NPRM and Order because she believes the national rate floor should be evaluated only as part of a global review of the waste and abuse in the entire high cost program.

Republican Commissioner O’Rielly signed on to the NPRM and Order only because it looks at fixes to the current program. His true belief is that a national rate floor is inappropriate because it subsidizes every individual in a rural area even though many people in those areas earn more than their urban counterparts so they need no subsidy. Moreover, per O’Rielly, the national rate floor does not consider that certain costs such as housing, gas, etc.) are lower in rural areas so a rate based on an urban survey overstates the costs rural customers face.

Industry comments with suggestions on how to improve or whether to keep the national rate floor requirement are due 30 days after the NPRM and Order is published in the Federal Register. It will be interesting to see if this fractured FCC can agree on an issue that ought to be a non-partisan or whether the Commission is truly broken.

By Andy Regitsky, CCMI