FCC Eliminates Mandatory Local Voice Rate Floor

April 18, 2019 | by Andrew Regitsky

FCC Eliminates Mandatory Local Voice Rate Floor

The FCC is on a non-partisan roll! All five commissioners just approved a Report and Order in Docket 10-90 to eliminate a rule that was well past any usefulness it may have once had and is now having the perverse effect of raising local telephone rates. We are speaking about the so-called mandatory “rate floor.”

In the 2011 “Transformation Order”, which established the Connect America Fund and began the transition of switched access rates to bill-and-keep, the Commission adopted a rule that limited the universal service support rural ILECs could obtain if their local rates were set below a minimum rate level. This rate was called the mandatory rate floor.

If a rural ILEC charged customers less than the rate floor amount for voice service, the difference between the amount charged and the rate floor was deducted from the amount of support that carrier received through the Universal Service Fund. According to the Commission, it has backfired:

The practical effect of this rule is to increase the telephone rates of rural subscribers, who are often older Americans on fixed incomes, Americans, and individuals living on Tribal lands. These Americans are some of those least able to afford the needless rate increases caused by the rate floor. In 2017, after several years of experience with it, we froze increases in the rate floor for two years to give us an opportunity to “revisit it to ensure our policies continue to further our statutory obligation to ensure ‘[q]uality services . . . available at just, reasonable, and affordable rates. (Docket 10-90, Draft Report and Order, at para. 1.

The rate floor was set each year as the national average of local rates plus state regulated fees. To implement it, the Commission adopted a phased-in approach, gradually increasing the rate at which carriers lost their universal service support. In 2017, the agency froze the mandatory rate floor at $18 for two years, until July 1, 2019. Last December, the Commission announced that the mandatory rate floor would increase to $26.98 unless the Commission acts before this July 1.

In other words, rural ILECs subject to the mandatory rate floor would have to increase their monthly voice rates to $26.98—nearly a $9 or 49.9% increase—or lose universal service support. This makes no sense, especially in an era of declining costs.

In addition to minimizing the cost of universal service, the Commission originally implemented the rate floor to equalize the amounts rural and urban customers paid for local phone service and ensure their service quality was comparable, as required by section 254 of the Telecommunications Act. Frankly, however, it never made any sense, and the FCC is making the correct call now to eliminate it.

Here are its reasons:

  • The rate floor creates a perverse incentive for carriers to raise local rates, harming consumers in rural areas and making telephone service less affordable.
  • It places unnecessary regulatory burdens on state commissions and rural telephone companies that must notify customers of impending rate increases and seek permission from their state commission for such increases. It also requires burdensome proceedings for rural ILECs, and state commissions related to the rate increases.
  • The rate floor is an ineffective way to conserve scarce federal funds. It neither targets spending in an efficient manner nor creates incentives for ILECs to control costs. Incredibly, it rewards ILECs that artificially inflate prices, regardless of whether they invest efficiently or control their costs.
  • To the extent the mandatory rate floor tried to solve the problem of “artificially low” local rates, it has outlived its usefulness. Voice rates, instead, are higher than the Commission expected in 2011.
  • Finally, the changes the Commission made since 2011 to the Universal Service Fund have eliminated any potential impact local rates have on it. The Commission notes that it imposed concrete broadband build-out obligations on all legacy ILECs, eliminated the support disparity between voice-only and broadband-only lines, and created incentives for legacy carriers to move from rate-of-return regulation to incentive regulation.

That is why the Commission voted 5-0 to eliminate the mandatory rate floor at its April 12, 2019 meeting. It will effectively be wiped off the books 30 days after this Report and Order appears in the Federal Register, sometime this summer.