FCC Takes Steps to Radically Reshape and Shrink the Lifeline Program

by Davis Wright Tremaine LLP

Davis Wright Tremaine LLP

On November 16, 2017, a divided FCC voted 3-2 to adopt a controversial order and new rulemaking proceeding, adopting and proposing many changes that will radically reshape—and significantly shrink—the Lifeline program.

The steps taken in the item signal that the now Republican-controlled FCC seeks to drastically reduce the role of the Lifeline program in the Universal Service Fund (“USF”) ecosystem. Furthermore, the FCC seemingly changes the goal of the Lifeline program from an affordability mechanism, to building broadband-capable networks, which has long been the goal of the high-cost (Connect America Fund) USF program. While some of the FCC’s reforms will only affect areas currently eligible for additional Tribal Lifeline support, many of the FCC’s proposals, if implemented, will effectively shrink the program by eliminating the very providers interested in serving qualified consumers.

From a technical legal perspective, the adopted document incorporates four different “orders,” including a continuation of a rulemaking proceeding launched in 2011, a ruling on a petition for reconsideration, etc., in addition to a notice of a new rulemaking proceeding. The key distinction for industry to understand is that the rules adopted in the orders are slated to become final FCC rules, whereas the rulemaking is merely proposing additional rules that could undergo significant changes during the required public comment period. In this advisory, we first discuss the changes adopted in one of the four orders, and then discuss the rulemaking proposals.

Fourth Report and Order

First, the Fourth Report and Order restricts eligibility for the $25 of enhanced Tribal Lifeline support to Tribal areas that are also “rural,” as that term is defined in the FCC’s E-rate program. Its justification is that although the Lifeline program is a revenue-replacement mechanism to compensate providers for serving low income consumers, the enhanced Tribal support was also aimed at encouraging the deployment of facilities-based networks in remote Tribal areas. Addressing the impact of the proposed restriction on “more densely populated” tribal lands, such as Tulsa, Oklahoma and Reno, Nevada, the FCC asserted that approximately 98 percent of Americans in such areas already have access to high speed fixed broadband (at speeds of 25 Mbps up/3Mbps down), compared to about 63 percent of Americans on rural Tribal lands.

Second, the Fourth Report and Order limits Tribal support to facilities-based providers, eliminating support for non-facilities-based providers such as mobile virtual network operators (“MVNOs”). The FCC argues that Lifeline funds are more efficiently spent when directly supporting voice and broadband-capable networks on Tribal lands. The Order does not address why indirect support (i.e., in the form of support for the wholesale customers of those networks) would be inconsistent with, or ineffective in achieving, the goal of expanding facilities on Tribal lands. As precedent for limiting support to facilities-based providers, the FCC cited its 2012 Lifeline Reform Order, in which it eliminated Link Up support except for facilities-based carriers that received high-cost universal service support on Tribal lands. Link Up reimburses carriers for reduced service activation charges, rather than recurring monthly service charges. The FCC then defines facilities-based for these purposes as an FCC-issued spectrum license or long-term spectrum lease arrangement and associated facilities for mobile wireless providers, which would eliminate MVNOs from being eligible for the additional Tribal support. With respect to fixed wireless providers (e.g., WISPs), the FCC defines facilities-based as “provision[ing] or equip[ing] a broadband wireless channel to the end-user premises” over either licensed or unlicensed spectrum. While these definitions of facilities-based do not yet apply outside the context of Tribal support, they likely foreshadow where the FCC is headed for the program in general in the rulemaking proceeding.

Third, the Fourth Report and Order requires Lifeline providers to independently verify each subscriber’s residency on rural Tribal lands, replacing the current self-certification requirement. Under the new scheme, Lifeline providers would need to use FCC-established mapping and data sources to validate that the residential addresses of subscribers are within the Tribal areas recognized by the FCC. The Order instructs USAC to prepare maps – including shapefiles suitable for use with GIS systems at least 60 days ahead of the effective date of the proposed rule changes concerning enhanced Lifeline support on Tribal lands.

The Fourth Report and Order proposes a transition period for customers of ninety days, following OMB approval of the proposed order, requiring Lifeline providers to notify customers who will no longer be eligible for Lifeline support within 30 days of OMB approval. The notice requirement would include providing information about the provider’s non-enhanced Lifeline offerings, as well as alerting otherwise-eligible customers of non-facilities-based providers about the option of switching to a facilities-based provider to continue receiving enhanced benefits.

The new restrictions on Tribal Lifeline proposed in the Order will likely have a dramatic impact on the industry, in which MVNOs have been at the forefront of marketing and providing Lifeline to customers on Tribal lands.  The restrictions may also have spill-over effects on non-Tribal offerings, by eliminating the ability of non-facilities-based providers to achieve efficiencies in distribution, marketing, and service that were made possible by serving a significant percentage of customers with enhanced Lifeline funding.

Order on Reconsideration

The Order on Reconsideration section of the Order makes additional changes that are likely to significantly diminish the ability of MVNOs to continue to operate in the Lifeline program, by eliminating port freezes for voice and broadband Internet access services, which prevent subscribers from changing Lifeline providers. In the 2016 Lifeline Order, the FCC adopted 12 month port freezes for customers receiving Lifeline-supported broadband Internet access service, and codified a 60 day port freeze rule for Lifeline-supported voice telephony service. The Order eliminates both of those port freezes, arguing that the restrictions on consumer choice created by the port freezes outweigh the advantages that the FCC identified in the 2016 – which included encouraging new entrants to the Lifeline market by “allowing broadband providers the security of a longer term relationship with subscribers.” Eliminating the port freezes could result in increases in customer “churn,” with customers quickly switching from one provider to another, making it difficult for providers to recoup customer-acquisition costs.

Memorandum Opinion and Order

The Memorandum Opinion and Order portion focuses on providing “clarity to ensure that service providers claiming Lifeline support for broadband service actually provide Lifeline customers with the level of broadband service intended in the 2016 Lifeline Order.” In particular, the FCC makes clear that Lifeline may not be used to support services delivered using Wi-Fi technologies. The FCC stated in the Order on Reconsideration that “mobile broadband service eligible for Lifeline reimbursement must be provided on a network using at least 3G (Third Generation) mobile technologies,” and then concluded that that does not include Wi-Fi, citing a lack of evidence in the record that Wi-Fi is either a “mobile technology” or a “generation” of mobile technology. In doing so, the FCC rejected industry arguments that the reference to “3G” in 47 C.F.R. 54.408(b)(2)(i) refers to speed, and not a particular mobile technology. In particular, the Order identified “premium Wi-Fi” services that require Wi-Fi-delivered broadband Internet access service – such as at a Wi-Fi “hotspot,” as ineligible for Lifeline support. The Order on Reconsideration also clarified that fixed broadband service is only eligible for Lifeline support if the customer can access the service at their residential address.

Notice of Proposed Rulemaking

The Notice of Proposed Rulemaking (“NPRM”) portion of the document puts forth multiple proposals, which, if adopted, would have the effect of eliminating any significant role for MVNOs in the Lifeline program, and otherwise radically reduce the number of subscribers served through the Lifeline program.

After recasting the goal of the Lifeline program as “encourag[ing] investment in broadband-capable networks” (instead of the historic goal of affordability), the FCC then seeks comment on a proposal to discontinue Lifeline support for non-facilities-based carriers, or otherwise reversing its 2012 blanket waiver from the statutory requirement that Lifeline providers have their own network facilities. In proposing to limit participation in the Lifeline program to facilities-based providers, the FCC also seeks comments on how to define “facilities based.” For example, the FCC proposes that a carrier is only facilities-based if its facilities are located in its service area and it uses those facilities to provide last-mile service to its supported customers. That definition will prevent providers from relying on network equipment with limited geographic to classify their operations as facilities based. Given the spectrum-based definitions of facilities-based adopted for purposes of Tribal support, these proposals will likely eliminate participation of MVNOs in the Lifeline program.

In another portion of the NPRM that is likely to be of great concern to Lifeline resellers, the FCC signaled a new, narrow conception of how Lifeline support must be used under section 214(e) of the federal Communications Act, asking whether existing resellers have “passed through all Lifeline funding to their underlying carriers to ensure federal funding is appropriately spent.” The suggestion that Lifeline funds are passed through to underlying carriers fundamentally mischaracterizes the nature of the Lifeline program, which is a mechanism to replace foregone end user revenues for services provided—not to pay for specific cost inputs, again conflating the structure of the Lifeline program with that of the High Cost program.

Citing to a recent GAO Report on waste, fraud, and abuse in the Lifeline program, the FCC then proposes a number of reforms aimed at improving program integrity.  Specifically, the FCC proposes to identify which service providers will be subjected to audits based on a risk assessment rather than focusing on the size of the provider.  The FCC also proposes to codify a requirement that Lifeline provider representatives who participate in customer enrollment register with USAC.  Moreover, the FCC also proposes to require USAC staff (as opposed to the provider) to review documents supporting manual overrides in the National Lifeline Accountability Database, including information regarding the agent submitting the documentation. The FCC seeks comment on additional ways to prevent waste, fraud, and abuse in the program such as reforming use of the Independent Economic Household worksheet and increasing transparency in the program.

The FCC also proposes to replace the budget approached adopted in the 2016 Lifeline Modernization Order by adopting a “self-enforcing” budget mechanism with an annual cap on Lifeline disbursements, although the proposal is short on details. For example, the FCC does not propose a specific budget cap or even a period over which to measure and enforce the cap. A hard, annual cap on disbursements in the Lifeline program is notoriously difficult to structure given that the subsidies are distributed on a monthly basis, unlike the other universal service programs whose annual funding mechanisms more naturally lend themselves to an annual funding cap. The FCC proposes to permit Lifeline spending to exceed the cap in a given period with the expectation that Lifeline disbursements would then be reduced in the next period to accommodate the excess spending, without specifying how service to individual subscribers may be affected.  Furthermore, the FCC asks questions about whether Lifeline disbursements should be prioritized towards certain areas, such as Tribal or rural lands, in the event that the Lifeline budget cap is met in a certain period.  Lastly, the FCC asks questions about how the cap should adjust over time and the impact of administrative expenses.

Finally, as expected, the FCC proposes to eliminate the Lifeline Broadband Provider (“LBP”) designation that it introduced in the Lifeline Modernization Order to increase competitive entry into the Lifeline program by broadband providers, bypassing state-by-state designation requirements. The newly Republican-led FCC now agrees with the challenge to the LBP designation lodged by the National Association of Regulatory Utility Commissioners and a coalition of states in the D.C. Circuit. The basis of that challenge is that the federal Communications Act gives primary responsibility to the states to designate providers as eligible to participate in the Lifeline program, which is something that the LBP process sought to preempt.

Notice of Inquiry

Finally, the item adopted by the FCC includes a Notice of Inquiry that seeks comments on further possible changes to the Lifeline program, particularly with respect to a proposal “sharpen the focus” of the Lifeline program to assist low-income Americans who have not adopted broadband service, or who live on rural lands, including rural Tribal lands, further distancing the program’s goal away from its historical focus on affordability. The FCC identified several areas for comment as part of the Notice of Inquiry. Notable among these, the FCC seeks comment on setting a maximum discount level for services, such that a portion of the cost of service would be borne by the customer. The basis for this appears to be the FCC majority’s view that free-to-the-customer plans –which have largely been responsible for increasing the Lifeline program’s reach – have greater potential for waste, fraud or abuse. In addition, the FCC seeks comment on implementing a benefit cap for customers, either by setting a dollar limit to benefits or by limiting the amount of time that a customer may remain on the program. Either of these changes could dramatically alter the business models for Lifeline providers, impose new costs and complexities associated with billing customers, and create significant obstacles in providing Lifeline to low-income Americans.

Comments are due on the rulemaking and notice of inquiry by January 24, and replies are due February 23, 2018.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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