USF Reform on Capitol Hill: Inevitable—and Unlikely Soon

The program has a shrinking revenue base, an antiquated mechanism and -- to some -- an obsolete outlook aggravated by advances in communications technology and technique.

But across Capitol Hill, sentiment for reform is offset by a sense that USF reform hasn’t ripened. Besides, the Hill is juggling higher priorities than universal service, such as the DTV transition, which could free huge chunks of spectrum. Until DTV is done, Capitol Hill can’t get to any discussion of USF reform, officials told us.

Still, eventual action on USF will be shaped by that discussion. Besides Sens. Stevens and Inouye, it will involve colleagues Dorgan (D-N.D.), Smith (R-Ore.), Burns (R-Mont.) and McCain (R-Ariz.) and House members Barton, Upton (R-Mich.), Terry (R-Neb.), Cubin (R-Wyo.), Dingle (D-Mich.), Markey (D-Mass.), Pickering (R-Miss.), Boucher (D-Va.), Gutknecht (R-Minn.) and Stupak (D-Mich.) -- USF reform advocates all.

Three tools have emerged for increasing USF revenue - - assessments (1) of intrastate long distance calls along with interstate and international calls, (2) based on phone number assignments, or (3) based on connections. Each has promise but each has problems, officials said. Aiming to spread the pain, some reformers favor blending some or all the approaches.

AT&T, SBC and Intercarrier Compensation Forum allies back a blend of number and connection assessments, with a uniform rate. Theoretically the FCC could impose this, but many in industry see the agency as reluctant to move on its own for fear of another judicial rap on the knuckles. Court setbacks like those on schools and libraries, UNE-P and broadcast flag have the FCC hoping to get congressional backing for change as fundamental as USF reform, sources told us, though they believe the FCC still should step up.

“The extent to which Congress and the FCC undertake so sweeping a program depends on how much they're willing to bite off,” a telecom industry source said. “It is vital that they take up intercarrier compensation and federal USF contribution methodology reform now. If there ever was an interstate service that Congress could deal with, phone service is one.”

Congress could spur the FCC to take the initiative by standing still on a matter of urgency: The USF’s one-year exemption from Anti-Deficiency Act proscriptions, granted late in 2004 by a lame-duck Congress. “If Congress does not pass an ADA extension or permanent exemption, that may be the point at which FCC decides it has to act,” the telecom source said.

Without an extension, the ADA exemption will die in Dec., reviving a mandate that the $6.5 billion USF have enough funds in hand to satisfy an ADA’s ban on unfunded advance appropriations. That prospect would be avoided by passing House (H-2533) and Senate (S-241) bills that would write the ADA exemption in stone. House and Senate staffers said Congress is sanguine about temporarily extending the moratorium to advance USF reform, as well.

Trying to control erosion from VoIP and other information service technologies that aren’t subject to the USF, rural carriers like NTCA’s and OPASTCO’s members want big-tent approaches to the fund. Besides promoting assessment of intrastate long distance calls, they want all 2-way communications services to pay in.

The FCC or Congress could widen the class of contributors. “The law now says interstate telecom ’services’ must contribute to USF, but when it comes to other providers of telecom, the FCC has the authority but is not required to wield it,” said a rural telecom lobbyist. “They can assess broadband, such as cable modem, which are not classified as telecom carriers.”

But FCC Chmn. Martin has expressed reluctance to impose anything on Internet providers that looks like a tax. “Without a mandate from Congress, he’s not going to broaden the base to broadband providers,” the lobbyist said. “If we really want to secure universal service over the long term, we need to change the language that drives who contributes so that all providers of telecommunications, even if they're not now considered telecommunications carriers, must be assessed.”

Rural players don’t favor a strictly numbers-based or connections-based contribution system. “That would let too many players off the hook,” said an association chief.

And using numbers or connections could spark a legal battle, perhaps with as unsettling an outcome as the broadcast flag case. Rural carriers see a spur for Congress in the existing USF contribution factor. “It’s 11.5%, and when a number like that is more than 10% it makes legislators antsy. They want to get that down,” a rural telecom association executive told us. “This is one area where an interjection by Congress would be useful.”

But legislative action will have to wait. “DTV is taking up a lot of time,” said the telecom executive. “The agenda is filling up more rapidly that some on the Hill expected. Chairman Barton and Rep. Upton still want to have an IP [Internet provider] bill out, and are hoping to get it through the committee by the August break. USF reform could be an amendment to an IP bill, but it could be easier to go with a separate bill. There’s talk of rewriting the ‘96 Act as one big bill. We doubt that will happen.”

Woven into broader bills, USF reform will rub up against elements its advocates may not advocate. “We want stand-alone bills moving sooner rather than later,” said a rural telecom executive. “USF could be attached to an appropriations bill, or moved with other bills.”

USF reform’s complexity makes consensus elusive, but some say it should be even more complicated. An essential element of USF reform, according to many, is intercarrier compensation reform to eradicate subsidies built into the system to encourage its development and maintenance, but now sapping its vitality. “The vision of the ‘96 act was to make implicit universal service subsidies explicit,” a telecom lobbyist said. “The FCC has eliminated a lot of the implicit subsidies, but some still remain. These implicit subsidies in the intercarrier compensation area ripple through the system. They warp the way universal service works. People are paying for this without understanding how it works.” Tackling USF and intercarrier compensation in tandem would leave the system in better shape than USF reform alone, advocates said.

With the Senate focused on DTV, the House likely will incubate USF reform -- but not before autumn and then with the assumption that debate will extend into the next session, even if that means another last-minute ADA exemption. One House staffer spoke of the Hill’s communications environment as a “perfect storm” -- a convergence of legal, legislative and regulatory elements in which USF reform is but one piece. If the House is the font of USF reform legislation, it will be under close scrutiny by Sens. Stevens and Inouye.

Senate Commerce Committee staffers said they expect a legislative solution. “The new FCC chairman is looking to Congress. He doesn’t want to step into the fray on a hot-button issue like USF and have the Hill come down on him,” a staffer told us. “We look to see interplay between the Hill and the agency, which has the specific expertise on regulation that complements Congress, with its broader brush strokes. Nobody wants a Band-Aid fix. We want to do best we can with the resources we have on a holistic approach.”

And the schedule must be reasonable. “You can’t have a ‘do-or-die-by-December’ perspective on such large and complex issues,” the Commerce staffer said. “It’s worth setting a deadline, but dates can slip. You can’t just jam something through.” USF reform may languish yet a while, but it will occur. “The first bill to change the ‘34 act was proposed in 1976 and passed in 1996,” said a rural telecom executive. “It’s not going to take 20 years again.”