In our last blog (May 28), we discussed the May 23, 2014 Opinion of the Tenth District Court of Appeals in Denver which provided the FCC with a complete victory in its affirmation of the Commission’s landmark November 2011 Transformation Order which Created the Connect America Fund (CAF) to replace the analog-centric high-cost Universal Service Fund (USF) in order to bring broadband Internet access service to rural Americans.  

The Order also reformed the Inter-Carrier Compensation (ICC) system, bringing all telecommunications traffic including interstate and intrastate access under section 251(b)(5) of the 1996 Telecommunications Act. This inclusion allowed the Commission to claim authority over intrastate access charges and require all terminating interstate and intrastate switched access charges and reciprocal compensation to move to zero with the costs of “transporting and terminating” all inter-carrier traffic recovered by each carrier from its end user customers through a system known as “bill-and-keep.”

As we noted, in its Opinion, the Court rejected almost all the arguments made by the 31 petitioners. The arguments that were not rejected were found to be not yet “ripe” for judicial review. Last time, we discussed the Court’s conclusions regarding Inter-Carrier Compensation reform. Today we discuss its major conclusions regarding the Connect America Fund:

The FCC’s Classification of Broadband Internet Access Service as an Information Service is not Fatal to the Requirement that CAF Recipients Provide Broadband Internet Access to consumers – The Court accepts the FCC’s argument that section 254(c)(1) of the 1996 Telecommunications Act which defines universal service as an evolving level of “telecommunications” services, does not limit its authority to require recipients of  USF to expend some of those funds to deploy networks capable of providing voice and broadband services, regardless of whether interconnected VoIP services are telecommunications services or information services under the 1996 Act

Petitioners Argument that the Commission Cannot Lawfully Provide CAF Support to Entities that do not Provide Telecommunications services is not Ripe for Judicial Review- Although the Court appears to concede that petitioners may be right to challenge the Commissions claim  that CAF support can be given to VoIP providers, it would be premature to review the argument. According to the Court, the fact remains that in order to obtain USF funds, a provider must be designated by the FCC or a state commission as an “eligible telecommunications carrier.”  Thus, under the current statutory regime, only eligible telecommunications carriers can receive USF funds that could be used for VoIP support. Consequently, there is no imminent possibility that a broadband-only provider would receive USF support under the FCC’s Order. As a result, the petitioners’ argument is not ripe for judicial review unless and until a state commission (or the FCC) designates an entity that is not a telecommunications carrier as an eligible telecommunications carrier.

The Commission has an Independent Authority to Mandate the CAF Broadband Requirement under Section 706 of the Act – Aside from granting the Commission additional justification for the CAF (in addition to section 254), the Court’s finding that the Commission has authority over broadband services under section 706 (the advanced services portion of the 1996 Act), supports a similar finding made by the DC Circuit Court of Appeals in its recent “Open Internet” Opinion. 

The FCC did not Act Arbitrarily in Simultaneously Imposing the Broadband

Requirement and Reducing USF support for Carriers – The Courtaccepted the Commission’s argument that a sufficient CAF budget for price cap and rate-of-return carriers could be achieved through a combination of maintaining current USF funding levels while reducing or eliminating waste and inefficiencies that existed in the prior USF funding scheme  Carriers  have the authority to determine which requests for broadband service are reasonable and, when necessary, use the waiver process to protect their revenues. Moreover, as further protection for carriers, the Commission will conduct a budgetary review by the end year six of the CAF.

Rural ILECs, which currently recover a large portion of their revenues from the universal service fund and are very worried about decreased revenues from the CAF and shrinking access revenues were understandably disappointed with the Court’s decision. Although clearly unhappy, no party expressed an immediate interest in appealing the Court’s decision to the Supreme Court. 

It is the opinion here, that the Court made a stronger case for accepting the FCC’s CAF arguments than it did in accepting the Commission’s inter-carrier compensation claims. The fact that rural ILECs can file waivers of the CAF rules to protect them from insufficient USF recovery, along with a Commission review within six years makes it difficult to argue that the Commission ‘s actions are arbitrary and capricious.  Nevertheless, because of the importance of universal service funding to rural ILECs, don’t be surprised if the final outcome of the CAF is made by the US Supreme Court.