Replacement of the Legacy High-Cost Universal Support Fund with a Connect America Fund. Key Economic and Legal Considerations

On April 21, 2010, the Federal Communications Commission (FCC) released a Notice of Inquiry (NOI) and a Notice of Proposed Rulemaking (NPRM) that seek the public’s input on the FCC’s effort to replace the legacy high-cost universal service fund (USF) with a broadband “Connect America” fund (CAF). In effect, the FCC seeks to implement cost-cutting measures for existing voice support (USF) and create a new fund (CAF) to support the provision of broadband communications in areas that would be unserved without such support or that depend on USF support for the maintenance of existing broadband service. An initial review of the NOI/NPRM raises a number of key economic and legal considerations. In the following, we identify some of the considerations, questions, and challenges raised by the FCC’s USF reform attempt, which is likely to have far-reaching consequences not only for operators that currently rely on USF subsidies or broadband providers in high-cost regions but for the entire communications industry.The purpose of this note is not to provide an all-inclusive list of, or responses to, the critical questions raised by the NOI/NPRM, but rather to illustrate the complexities of this proceeding and the impact the proposed reforms may have on industry performance. As the CAF is necessary for the success of the FCC’s National Broadband Plan (NBP), the policy directions taken by the FCC in establishing it are critically important. USF reform is also essential to the performance and competitiveness of the U.S. communications industry and policy missteps could have serious economic and legal consequences.