USF PRIMARY LINE RESTRICTIONS WORRY RURAL AND WIRELESS CARRIERS

Several senators wrote the Joint Board last month arguing against a primary line restriction for the USF. The letter, signed by Senate Communications Subcommittee Chmn. Burns (R-Mont.), Senate Minority Leader Daschle (D-S.D.) and others, said limiting USF to the primary line would deny rural consumers equal access to telecom service (CD Dec 22 p5). They contended a primary line restriction would force rural customers to pay very high rates for 2nd phone lines or wireless service. They said the Joint Board was studying a primary line restriction, but hadn’t made any formal recommendations. Daniel Mitchell, NTCA senior regulatory counsel, said at a FCBA Wireless Committee lunch the Joint Board was expected to issue its recommendations by Feb.

A primary line restriction would limit only a primary carrier to eligible support, Rubin said, and wireless eligible telecom carriers (ETC), and rural ILECs agreed on not wanting that restriction. ETC status is needed before a carrier can receive universal service funding. “The problem with it, from an implementation point of view, is how do you figure out who is primary?” Rubin asked. “It would require probably too much complex coordination between carriers.” From a legal standpoint, Western Wireless has concerns that such a restriction wouldn’t be competitively neutral, he said. “If a primary line restriction were implemented, it could be very disastrous for us.” Despite the significant increase in wireless service penetration, wireless hasn’t typically been the first phone service in a household, he said. Saying far less drastic alternatives exist, Rubin called it a “meat cleaver approach” that should be avoided.

Mitchell said NTCA’s concern was that wireline, wireless and VoIP carrier’s didn’t build networks based on primary and secondary line distinctions. “If you start limiting to a certain amount of lines, you are going to send a message of clear disincentive to carriers that they better be careful where they choose to build out because even if you qualify for high-cost support, you might not get it,” he said. Mitchell said that in some cases that would discourage carriers from building out their networks to meet the other goal universal service -- promoting advanced services, he said. At some point, NTCA members would like to see the same penetration on lines for high-speed Internet access as for voice service, he said. A primary line restriction “would create a significant disincentive to that,” he said.

Of issues pending in the Joint Board, Mitchell highlighted the surge in competitive ETC designations in high-cost areas. There are 128 competitive ETCs, up from just 17 two years ago, he said. The contribution factor consumers pay to support high-cost funding is about 9% of interstate and international revenue, he said. “Right now it hasn’t reached the level where there’s a call from the public where something has to be done because ‘we're paying too much for universal service,'” he said. The FCC has to concern itself with avoiding steps that would jeopardize the U.S. phone penetration rate of 96% of households, he said.

Mitchell said the 3 critical issues he saw lined up for the pending Joint Board recommendations to the FCC were: (1) What should be the public interest obligations under Sec. 214(e) of the Communications Act? To get ETC status, a carrier must meet certain criteria, including a determination by a state PUC or the FCC that it would be in the public interest to have a competitive ETC in that service territory, he said. Mitchell, acknowledging competitors had disagreed, said it wasn’t always in the public interest to have a 2nd or 4th ETC in a sparsely populated service area. (2) Should support be limited to primary line support. (3) Should the cost basis continue to be based on embedded costs or on some other methodology, such as forward looking economic costs, he said. On that 3rd issue, there appeared to be less agreement among board members than in other areas, he said. That could mean the issue would be put out for further comment by either the Joint Board or the FCC, he said. Mitchell said it was his understanding that the Joint Board had been seeking consensus on new standards for determining a public interest test. He said the board also appeared to have been seeking support for a consensus on limiting support to primary lines.

Separately, in a report to investors Fri., Merrill Lynch said that a USF funding shift to a flat rate per number charge would eliminate the disproportionate burden on long distance users. It would shift the burden to all users, regardless whether they used wireline, wireless or VoIP, the analyst report said. A per-number charge of $1 to $1.50 per month could provide “adequate funding,” it said. “On the disbursement side, one solution would be a voucher system whereby end users get to decide whether to apply the subsidy to their wireline or wireless service,” the firm said. The report said that if USF funding dropped to 75% or 50% of its current level, 2005 earnings per share at CenturyTel would fall 10 or 20% from current estimates, and Alltel earnings projections for 2005 could fall 1.8-3.3%. Some losses could be offset by increased wireless ETC funding, it said.

“If an area as remote and poverty-stricken as Pine Ridge can sustain more than one ETC, to me that is the beauty of all this,” Rubin said, referring to Western Wireless’s provision of service on the Pine Ridge reservation in N.D. “That really dispels the myth that high-cost support for wireless companies is gravy and that we're taking advantage of loopholes.” In other areas, NTCA’s Mitchell said rural ILECs faced caps on the amount of high-cost support for which they are eligible. “Competitive ETCs do not have a cap on their support,” he said. He said more wireless carriers are now seeking ETC status. For example, he said, Nextel and Sprint PCS both have petitions for competitive ETC status pending at the FCC involving different service areas. The funding system would be stressed even further if Verizon Wireless and Cingular were to follow suit, a trend that he said the FCC recognized in looking for solutions.