Rising USF Fees for Telecom Carriers Spur Overhaul Efforts
Less than a decade after Congress passed a landmark law expanding the types of companies supporting the federal Universal Service Fund (USF), the fund faces a new financial crisis. The main problem, though, isn’t that the fund will run out of money any time soon. Due to fees the FCC assesses on local, long distance, wireless, paging, pay phone and international carriers alike, the USF now takes in about $6.5 billion a year. That money subsidizes rural and low-income residential phone service and communications links to rural schools, libraries, hospitals and other vital services. If the fund needs more cash, the fees automatically are adjusted upward.
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Rather, the big problem is that current fund contributors are paying an increasingly hefty portion of their interstate and international service revenue into the USF, while other telecom carriers pay nothing at all. The contribution factor, proposed each quarter by the Universal Service Administrative Co. (USAC) and then set by the FCC, rose in the 2nd quarter to a record 11.1% of interstate end-user revenue. That’s up from 10.7% in the first quarter, 8.9% in the 4th quarter of 2004 and less than 7% just 3 years ago.
“The contribution factor is now in double digits,” said Ed Merlis, USTA senior vp-govt. & regulatory affairs: “Long-term, that’s not sustainable.”
With traditional long-distance industry revenue falling due to ever-growing competition from wireless carriers, cable operators and VoIP providers, that contribution factor is likely to rise even further in the quarters ahead unless the formula is changed. Policy makers, rural phone companies and other USF supporters fear further hikes could jeopardize public backing of the fund and spark a revolt among telecom carriers.
“It may lose support among the general populace if the number goes higher, like to 12% or 13%,” said Rick Cimerman, senior dir.-state telecom policy for NCTA. “They're worried about erosion of general support for the fund.”
As a result, lawmakers, regulators and communications lobbyists all are sparring over how to change the basic USF funding mechanism. They're haggling over whether to slap assessment fees on intrastate revenues as well as interstate and international receipts, require all cable telephony and VoIP providers to pay directly into the fund, and extend charges to broadband service providers. They're also debating whether to switch from a revenue- based formula to one based at least partly on the number of phone numbers or connections.
“There’s a sense that our current methodology isn’t working anymore,” said Kathleen Grillo, Verizon vp-federal regulatory policy. For instance, she noted, “one of the harder questions is what portion of the [telecom] bundle is subject to universal service.”
Although not aimed at doing so, the federal Anti- Deficiency Act (ADA) poses another financial threat to the USF. The act, aimed at keeping federal agencies from spending funds without prior Congressional approval, tripped up the fund last summer and fall. The USAC had to stop making payments to schools, libraries and rural health care providers for several months because it hadn’t collected enough fees to cover its outlays.
Last year’s application of the ADA to the universal fund also forced USAC to move more than $3 billion in govt.-backed money market funds to lower-yield U.S. Treasury securities, resulting in a $4.6 million investment loss. The USF endured a $2.3 million drop in interest income for the 4th quarter.
In April testimony before the Senate Commerce Committee, USAC Chmn. Brian Talbott said a cut in interest income “will increase the funding burden on all Americans.” He and other witnesses urged a permanent USF exemption from the ADA, as a Senate bill introduced by Sens. Snowe (R-Me.) and Rockefeller (D-W.Va.) proposes. In a last-minute action last Dec., Congress granted the fund temporary exemption from the ADA for one year.
“The application of the Anti-Deficiency Act to USAC will lead to overall higher phone bills for all customers and dramatic increases in the phone bills of rural America,” testified Steve Hamlen, COO of United Utilities, an Alaskan telecom carrier. “It threatens affordable service in high-cost areas as well as the viability of the Lifeline and Linkup programs, which provide reduced phone rates for low-income families.”
Another telecom world debate rages over the size of the fund itself. For example, critics of the USF structure ask whether it still needs to pump up to $2.25 billion a year into the federal E-rate program, which has subsidized wiring of schools and libraries for Internet and other telecom services. With most schools and libraries wired for broadband service, they wonder if such subsidies remain necessary.
“The system is just ballooning out of control,” said Patrick Ross, vp-communications & external affairs of the Progress & Freedom Foundation. “We'd prefer to narrow the USF focus to those who really need help.”
Critics also ask whether the USF should subsidize wireless service or multiple providers in the same market. They contend regulators increasingly use the fund to promote competition in local markets, not just support lifeline service by incumbent providers. “In some states, they're using ETCs [eligible telecom carriers] to create competition,” Merlis argued. “It’s being used as a surrogate to create competition rather than to insure a baseline of connectivity.”