Federal Appeals Court Upholds New FCC Rules Revamping Rural Telephone Rate Structures and Directing Expansion of Rural Broadband Access

by Stinson Leonard Street

In a pair of opinions issued late last week, a federal appeals court in Denver affirmed in its entirety a landmark Federal Communications Commission rulemaking that expands the availability of broadband internet access in rural communities and revamps the way telecommunications companies are compensated for the services they provide. Because rural carrier revenues may be significantly reduced as a result of the court’s decisions, the ruling is likely to have a material impact on those carriers and their ability to serve rural consumers.

The FCC rules upheld by the court require rural telephone carriers to use "universal service funds" to provide both telephone service and broadband internet connections. The court also upheld the FCC’s decision to replace intercarrier compensation arrangements with a new "bill and keep" system under which rural carrier’s costs will be recovered solely from their customers, not from other carriers.

The Universal Service Fund Opinion

For years, telephone customers nationwide have paid surcharges on their telephone bills to support a universal service fund (USF) used to help rural carriers cover the high cost of providing telephone service in rural areas. The concern rural telecommunications carriers (supported by state commissions) expressed with the FCC's new USF rules was that they were being asked to do more with less – to use a reduced level of funds not only to provide telephone service, but broadband as well.

They made two main arguments to the court – first, that conditioning receipt of universal service funds on providing broadband connections was illegal because USF funds are limited and earmarked to support telecommunications services, not broadband. They also argued that the agency's decision was arbitrary because the agency was supposed to provide them "sufficient" universal service fund support, but never took the cost of providing broadband connections into account in calculating the size of the fund.

The court rejected the first argument, concluding that the decision to accept universal service funds was voluntary and that the FCC could require recipients to provide broadband services. The court also rejected the carriers' argument that the fund level was insufficient, but they did get the support of dissenting Judge Bacharach, who reasoned that the FCC logically couldn't know whether the fund was sufficient if it didn't know how much it would cost carriers to comply with the broadband access condition.

The "Bill and Keep Opinion"

The court's second opinion upheld the FCC’s decision to adopt a national bill-and-keep framework. Bill-and-keep anticipates that carriers will recover all their costs from their end users rather than from other carriers with whom they exchange traffic. Rural carriers and state public service commissions had argued that the carriers were entitled to compensation for accepting traffic from other carriers and that eliminating the existing reciprocal compensation system based on "calling party pays" and replacing it with bill-and-keep was unlawful and would deny rural carriers the compensation they needed to provide affordable service. As with the other challenges to the FCC rule, the court rejected this one. Because carriers must make up the revenue shortfall that might result from elimination of reciprocal compensation and because rural carriers already face obstacles in keeping rates affordable, adopting to the bill and keep regime may prove to be a challenge for some carriers.

The result of the court's rejection of the rural carriers' challenges to the FCC rule is that they may need to reconsider their current business plans and processes. Will they need to consolidate? Can they look to state and federal legislators for assistance? These are questions they are likely to be asking themselves.


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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