This article originally appeared in the March 2011 issue of INTERNET TELEPHONY.

The Federal Communications Commission last month expected to vote on rules to modernize the Universal Service Fund and intercarrier compensation. These important and overdue actions could mark the end of the communications world as we know it.

The reform is clearly aimed at moving the nation more fully into the broadband era, in which voice is just another application, and away from the legacy, circuit-switched network and the existing regulation that continues to prop it up. In fact, I’m told that AT&T and Verizon are pushing for the end of POTS completely.

This excerpt from comments that AT&T submitted to the FCC (News - Alert) in December 2009 seems to support that. “Any such forward-looking policy must enable a shift in investment from the legacy PSTN to newly deployed broadband infrastructure,” AT&T (News - Alert) wrote. “While broadband usage – and the importance of broadband to Americans’ lives – is growing every day, the business model for legacy phone services is in a death spiral. Revenues from POTS are plummeting as customers cut their landlines in favor of the convenience and advanced features of wireless and VoIP services. At the same time, due to the high fixed costs of providing POTS, every customer who abandons this service raises the average cost-per-line to serve the remaining customers. With an outdated product, falling revenues, and rising costs, the POTS business is unsustainable for the long run. Yet a web of federal and state regulations has the cumulative effect of prolonging, unnecessarily, the life of POTS and the PSTN.”

Unplugging POTS would be a good thing for a big carrier like AT&T, which continues to support costly legacy systems while its cableco competitors have newer, potentially more feature-rich and cheaper to maintain VoIP networks. Of course, USF reform and abandoning legacy networks is a scary notion for many telcos in rural areas that get significant funding via the USF.

But whichever side of the debate you’re on, it’s clear that the existing USF regulatory structure has a lot of problems, including – as the FCC notes – inequity of funding between rural areas and service providers; rules that reward companies for losing customers; and others that have produced a rural-rural divide.

The intercarrier compensation scheme also is a “flawed system”, the FCC notes, explaining that it has loopholes that some companies are taking advantage of to benefit from phantom traffic (or disguising the source of calls to reduce or avoid payments to other carriers) and traffic pumping (in which local telcos inflate incoming call volumes to increase compensation).

The Notice of Proposed Rulemaking that the commission was expected to issue Feb. 8 aims to address all that. Proposed changes to intercarrier compensation are meant to close the above-noted loopholes and address how VoIP traffic fits into intercarrier compensation, something that many agree is long overdue considering the number of people who now use VoIP services.

And, as the FCC has been discussing as part of the National Broadband Plan, it aims to transition the USF to the Connect America Fund, which is all about broadband as opposed to POTS.

“At the end of this transition, we would no longer subsidize telephone networks; instead we would support broadband,” according to an FCC press release on the matter.

Richard Shockey of Shockey Consulting, and chairman of board of director of The SIP Forum (News - Alert), says there are of course many questions about how all this will play out. For example, where will the money for the new fund come from given that much of the USF base has evaporated? He also wonders how voice and, specifically, 911 will be funded. The states could handle that, he says, but then many states are struggling financially, to say the least.