Federal Universal Service Fund

Phased-in competitive bidding could slow the growth of the Universal Service Fund (USF) while easing concerns of incumbent rural telcos about shortfalls, Verizon and Verizon Wireless told the Federal-State Joint Board on Universal Service in a proposal filed late Fri. The Joint Board is expected to consider Verizon’s proposal at a Feb. 20 meeting during the NARUC winter meeting in D.C. The Joint Board plans to look at competitive bidding and other ideas for easing demands on the USF during that en banc meeting. The board includes FCC Chmn. Martin, Comrs. Tate and Copps and several state commissioners.

Numbers-based collection of federal Universal Service Fund (USF) contributions would be simpler to administer and easier for consumers to understand, said an industry study released Tues. The Numbers Coalition, made up of wireless, cable and telecom associations, said the per-number fee would be about $1.20 per month, about what residential wireline consumers now pay. Low-income Lifeline customers could be exempted, with adjustments to ensure against unreasonable assessment against low-volume and low-cost services, the study said. “The numbers-based USF fee does not discourage telephone usage and thus increases consumer welfare as a whole,” the study said: “Consumers would be able to make more long-distance calls for their collar than they do today.”

Lawmakers introduced several telecom measures Thurs. on the opening day of Congress -- some of which didn’t make it last Congress. Senate Commerce Committee Ranking Member Stevens (R-Alaska) introduced 5 measures, including a bill that would reform the Universal Service Fund (USF) program that Senate Minority Whip Lott (R-Miss.) is co-sponsoring. Stevens also is introducing a measure that would address FCC and FTC roles in policing pretexting -- impersonating someone else’s identity to illegally gain access to private phone records. A Judiciary bill was enacted last Congress.

FCC Comr. Tate is “energized” at the thought of reverse auctions to set rural universal service subsidies, she said Wed. at a Phoenix Center conference. Tate wants to hear “positives and negatives” about use of auctions,” she said. “Something needs to be done” about Universal Service Fund growth, Tate, who is Universal Service Joint Board chmn., said: “I think we are at the tipping point.” One thing to keep in mind, Tate said: USF programs must continue to assure adequate infrastructure for homeland security and interoperability needs. Tate moderated a panel on rural broadband that included Dennis Weller, Verizon’s chief economist, who said an outdated USF must change. “Competitive bidding may be the solution” because it “imposes market discipline,” he said. If the USF model is “restructured,” said Brian Adkins, Embarq’s federal legislative dir., rural wireline carriers must shed their carrier-of-last-resort requirements, or all USF recipients must face those mandates. Net neutrality probably will be the top communications issue, above universal service reform, in the Democratic-led Congress, said Daniel Sepulveda, aide to Sen. Obama (D-Ill.). But universal service offers “opportunities for bipartisan cooperation,” he said.

The FCC should deny a Cingular request for Universal Service Fund (USF) subsidies in Va., wireline companies said, arguing the big wireless company doesn’t need USF subsidies. Letting Cingular draw on the USF could sap the subsidy program, Verizon said in an opposition filed late Mon. USF subsidies should be used where telecom service otherwise isn’t financially feasible, Embarq said. “It should not be wasted on uneconomic arbitrage,” said the company, a spinoff of Sprint’s wireline operations.

Speakers at a NARUC panel on use of reverse auctions as a universal service reform tool said their effectiveness will depend heavily on how the auctions are designed. FCC Chmn. Kevin Martin in March supported the concept as a way to contain universal service fund growth. His idea would make the winning bidder the provider of last resort. For reverse auctions to have a chance to work, speakers said, the auction process must recognize the large cost differences that can exist between locations within the same high-cost area. Brian Stahr, Embarq regulatory economist, said costs can vary by over 400% across a market area, such as between a town or other population concentration and the outlying areas. He said the industry has depended on low-cost downtown lines implicitly subsidizing high-cost outlying areas, but competition is causing that subsidy source to disappear. He said explicit subsidies through the USF aren’t working either, because support is based on a statewide average. Support needs to be more “granular,” he said, such as by census block: “Competitive bids must truly reflect costs of the truly high-cost areas.” Dennis Weller, Verizon chief economist, supported the idea of targeting support to the areas where it’s really needed: “The current system isn’t rational nor sustainable.” He said auctions in areas with multiple ETCs could establish rate models for setting support levels in areas not auctions. He said universal service is “essentially a government procurement process, and bidding is how government procures most everything.” Scott Reiter, NTCA industry affairs dir., disputed the wisdom of reverse auctions, calling them “a big blind leap into the unknown.” He said adoption of auctions won’t address how the universal service fund came to be unbalanced in the first place: “Auctions may be worth a look, but they aren’t the fundamental reform that’s needed.”

Reverse auctions might rein in burgeoning universal service costs, but there are pitfalls, panelists warned Thurs. in a program sponsored by the D.C. Bar. It’s an “interesting idea” but shouldn’t be the sole solution, said Eric Einhorn, AT&T exec. dir.-federal regulatory. Done right, it could be a “market-oriented” way to downsize the Universal Service Fund (USF) but “the devil is always in the details,” said CTIA Asst. Vp Paul Garnett. It would have to be implemented in a technologically- and competitively- neutral manner, he said.

The FCC’s query about using reverse auctions (CD Oct 12 p6) for universal service support ended up drawing more than 50 comments, with a variety of views. NECA warned that “reverse auctions would effectively end rate of return regulation for rural ILECs, a result not contemplated” by the Federal-State Joint Board, where the proposal originated. Alltel said reverse auctions could be used to set the level of support, similar to “a forward-looking cost methodology,” but any carrier able to provide that price should be allowed to offer service. In other words, “auctions should not be used to select one or a limited number of eligible telecommunications carriers.” Verizon, joined by Verizon Wireless, said reverse auctions could be the solution to the over-extended Universal Service Fund (USF): “With the right design, a simple system of reverse auctions for high cost support could provide consumers, carriers and regulators with substantial benefits.” State regulators appeared to have mixed feelings about the reverse auction concept. The Ia. Utilities Board said it likes that auctions would reduce the number of USF-supported carriers but it’s concerned about the viability of incumbent rural carriers: “On the one hand, rural exchanges may represent the type of service territory where it makes the most economic sense to support only one network and an auction may incent carriers to seek operational efficiencies… On the other hand, existing incumbent networks have been constructed… in reliance upon continued receipt of universal service support. If that support were to suddenly be redirected to another network based on competitive bids, the existing universal service ‘investment’ in the incumbent network would be lost.”

Some industry groups are using an FCC notice of proposed rulemaking on USF contribution methodology to argue for moving to a number-based method of calculating payments -- a question the FCC never raised, NASUCA claimed. The VON Coalition, CTIA and other groups said tweaks to current methodology will fall far short of needed reform.

The FCC Fri. sent a letter to Verizon asking why it hit customers with a new DSL fee just as a federal fee of about the same amount lapsed. However, the agency decided not to question BellSouth, which said Fri. afternoon it was killing plans for such a fee. FCC Martin reportedly was upset by the companies plans for replacement fees. “We generally prefer regulation be done by the marketplace but we will act to insure consumers’ interests are protected,” an FCC official said.