FCC POISED TO ACT ON UNIVERSAL SERVICE CONTRIBUTIONS

Commission reportedly plans to give Adelstein opportunity to participate in vote if he wishes. Adelstein, who at our deadline still was waiting for his commission to be signed by President Bush, has indicated strong interest in universal service from rural perspective. “We heard the agency held up the order a few weeks out of courtesy to Adelstein and his interest in rural issues,” industry lobbyist said. Order would have been ready sooner “but everyone expected the new commissioner to want to look at it,” agency insider acknowledged.

Proposal has been circulating among commissioners on FCC’s 8th floor for at least 2 weeks. Agency probably will vote on circulation, although there’s still outside chance order will show up on agenda for Dec. 11 open meeting, Commission official said. Agency is expected to deal with immediate problems such as wireless contributions and so- called revenue “lag” problem in interim order and then tee up further notice to look at more long-term changes, such as whether to change basis of system from interstate revenue to something else such as connections or numbers. However, plans to deal with immediate issues still hadn’t been settled completely late last week, particularly since Adelstein hadn’t weighed in yet. “It’s still in the discussion stage,” 8th floor staff member said.

Seemingly routine contributions issue has grown into highly debated proceeding with industry groups divided into several camps. Spicing up discussions has been recent debate on 8th floor over whether interim order also should address whether USF contributions should be collected from broadband providers. Commission hopes to put interim order into place by April 1 because amount of money to fund high-cost universal service program could drop on that date -- causing line item charges on phone bills to rise. Agency has been bolstering high-cost fund with unspent money from E-rate program and will stop doing so April 1, at which point line item fees on customer bills could rise unless new plan was in effect. Commissioners have said they want to act soon so new system could be in place by April 1 to head off “rate shock” for consumers. Line item fees passed on by long distance companies average about 7.5% now but could rise to 10% or higher once E-rate funds became unavailable, experts said. Idea of taking interim step while working out final overhaul of contributions methodology was proposed by several parties including CTIA, Qwest, USTA, Verizon (CD Oct 28 p6).

Wireless contribution has become more significant issue as wireless providers increasingly serve as “substitutes” for wireline service, which is mainstay for USF contributions. Current “safe harbor” sets wireless contribution at 15% unless provider can break out its actual interstate revenue. Safe harbor was set because wireless carriers said it was difficult to separate their interstate and local revenue -- and USF contributions were based only on interstate, or long distance, revenue. Even CTIA has agreed 15% is too low, but debate has centered on how much that figure should be raised. Industry and FCC sources say debate has ranged from 20% up to 30% or higher. WorldCom proposed 40% in ex parte letter (CD Nov 21 p8). CTIA submitted study showing on average about 22% of wireless carriers’ traffic is interstate.

There’s been some talk of requiring wireless carriers to file based on actual revenue. Tracfone, which offers prepaid wireless service by reselling larger companies’ services, has told FCC it’s possible for wireless providers to break out their interstate revenue because they bill prepaid companies such as Tracfone that way. However, 8th floor staffers say it could be complicated procedure. It’s “not a simple matter” to break out wireless interstate revenue, which is why there’s safe harbor, said one, who added that using actual revenue also could require more oversight by Commission. Another called actual revenue “a very regulatory” approach. CTIA Vp Diane Cornell said association would prefer safe harbor but wouldn’t object to actual revenue if “some simplified assumptions” could be used to help measure interstate traffic.

Lag problem, which agency is attempting to correct, occurs because of 6-month gap between time when FCC assesses carrier contribution, based on revenue, and when carriers make payments. If company’s revenue declines between time contributions were calculated and when payment is due, carrier ends up having to pay higher percent of its revenue than envisioned 6 months earlier. AT&T, which faces declining revenue, passes its universal service contributions on to customers and company has warned that lag problem could raise those line-item fees on customer bills to well over current level.

Interim order is expected to change that procedure, possibly basing contributions on projected revenue, which would reflect future declines. AT&T asked for projected revenue approach in April, suggesting true-up could be done if actual revenue were different from projected figure. Other possibility is changing to “collect and remit” system that some carriers have suggested. However, many issues must be worked out, FCC official said: “Like so many things, the devil’s in the details.” Interim order also may include action aimed at better reflecting uncollectibles in USF assessment, possibly by allowing carriers to reduce revenue estimates by small percentage.

Broadband contribution issue seems to have surfaced only in last few weeks, lobbyist said. FCC advisers said it probably wouldn’t be included in interim order, but that wasn’t certain. One lobbyist said privately he wasn’t sure how broadband issue would play out and his company had more meetings scheduled this week to talk about it with commissioners and their staffs. Issue revolves around fact that wireline DSL revenue is assessed for USF contributions but cable modem revenue isn’t. At least 2 FCC commissioners have weighed in publicly on issue, both concerned about lack of “parity” but suggesting different solutions: Comr. Martin has said he doesn’t think USF contributions should be assessed on either type of broadband services, at least for time being. Comr. Copps has indicated he might support opposite approach of assessing USF contributions on both cable modem and DSL because there’s “disparity” now.

“It’s a matter of equity,” BellSouth Vp Whit Jordan said: “If cable is not assessed, DSL should not be assessed.” SBC took similar stand in ex parte filing in mid- Nov., saying that wireline DSL shouldn’t be subject to USF contribution obligation unless cable modem services faced same requirement. SBC said “removal of DSL from the contribution base on an interim basis can be supported” by precedent set in FCC’s “AOL Bulk Services Order.” Richard Whitt, senior counsel for WorldCom and member of Coalition for Sustainable Universal Service (CoSUS), said CoSUS was somewhat “agnostic” about broadband issue and didn’t think this was right proceeding to deal with it.

Commission staff explained on background that broadband contributions issue raised questions of compliance with Telecom Act, which specified that providers of “telecommunications services” must contribute to USF and that wireline DSL providers were considered telecom services. Cable modem providers on other hand aren’t defined that way. Several on Commission reportedly favor delaying broadband issue until it acts on wireline broadband proceeding, which addresses such definitions. “We ought to sort out the classification first,” said one adviser.

Longer term action, which agency plans to tee up in further notice, is where companies break ranks most obviously. Verizon favors retaining revenue-based system and is pushing for improved method of collecting those revenues. CTIA also supports revenue-based system because it would be “more accurate and fairer” for wireless carriers, Cornell said. Using connections-based system proposed by some is “more complicated in a wireless world,” she said. Several carriers support connections-based system, which would determine company’s contribution by number of connections to end users. Two most-prominent connections proposals are one proposed by SBC and BellSouth and one supported by CoSUS members WorldCom, Level 3 and eCommerce & Telecom Users Group. AT&T has indicated support for yet another system based on telephone numbers rather than connections, approach that Comr. Martin has supported.

Action isn’t expected until early 2004 on permanent solution but agency is expected to ask for comment on 3 plans, according to sources in and outside Commission: (1) SBC-BellSouth connection-based plan, which recently was modified to ease concerns by long distance companies about data collection requirements. (2) FCC staff recommendation on connection-based approach that some called modified CoSUS plan. (3) Telephone number-based concept. Comr. Abernathy has indicated support for connections-based methodology in general but hasn’t lent support to any one type, other than to say it should be equitable.

“We're hopeful the Commission eventually could get to a connections-based plan,’ BellSouth’s Jordan said. WorldCom’s Whitt said 3 plans targeted by FCC all were nonrevenue-based, giving his company hope that Commission would “endorse something other than revenues” and that revenue-based interim plan would be “as interim as possible.” On other hand, Verizon consultant Frank Gumper said, “we're comfortable in waiting because we are hoping the interim plan will be permanent.” Interim plan originally was proposed by Verizon as long-term solution.