Joint Board Recommends End to ‘Equal Support Rule’

The board recommended the FCC consider basing competitors’ support on their own costs, rather than the incumbent ILECs’ and asked for comment on that proposal. “The identical support rule seems to be one of the primary causes of the explosive growth in the fund,” the board said. “We recommend that the Commission expressly place competitive ETCs [eligible telecom carriers] on notice that identical support without cost justification may be an outdated approach to USF funding.” Competitive ETCs generally are wireless carriers.

Eliminating the identical support rule could be “a real landmine because it goes straight to the question of how far policymakers are willing to go to innoculate [rural] incumbents from the telecommunications industry’s competitive pressures,” said Alltel Vp Mark Rubin. The identical support rule doesn’t say wireless carriers get the same support as their wireline competitors, Rubin said. It just says they get the same per-line amount and, since rural ILECs usually have more lines, they still get more support, he said.

The joint board recommendation “emphasizes the problems of maintaining the equal support rule,” said FCC Chmn. Martin. “A large and rapidly growing portion of the high cost support program is now devoted to supporting multiple competitors to serve areas in which costs are prohibitively expensive for even one carrier,” he said in a statement. “These additional networks in high cost areas don’t receive support based on their own costs, but rather on the costs of the incumbent provider, even if their cost of providing service is lower.”

Stifel Nicolaus analysts said the order generally is “problematic for wireless carriers seeking more support, particularly smaller ones… Not only could their funding be capped in the near term, but it could come under further pressure if changes are made to the cost basis for their support.” Ore. PUC Comr. Ray Baum, joint board co-chmn., said both wireless and wireline carriers may see changes in how funds are distributed: “Due to the unsustainable growth pressures on the fund, all ETCs should anticipate changes to current USF distribution mechanisms. The identical support rule for CETCs may not survive. Rural ILECs may no longer receive support based on their embedded costs.”

The order drew warnings that its treatment of wireless carriers might raise questions about lack of competitive neutrality, and resulting litigation. If the FCC adopts the board’s recommendations, “wireless carriers could challenge [it] in court,” said Stifel Nicolaus’s report. “Frankly, I worry that an emergency, interim cap inflames discord and disagreement among industry sectors at a time when we should be bringing everyone to the table to develop as much consensus as we can,” said FCC Comr. Copps, a joint board member who cast a dissenting vote. “Others have expressed concerns that this emergency action could lead to extended litigation and to putting into play concerns about the lack of technology neutrality that some see in this proposal,” he said.

The board’s proposed cap on CETCs “violates both the letter and the spirit of the law,” said CompTel Pres. Earl Comstock. It violates federal law requiring that urban and rural consumers have the same access to telecommunications, he said: “By arbitrarily restricting needed high-cost support only for competitive carriers, this recommendation would… deny consumers in rural areas the competitive choices and access to mobile services that consumers in urban areas take for granted.”

The board said it hoped to develop broader reform recommendations on issues such as reverse auctions in 6 months and recommended the FCC quickly act on the temporary cap proposal during the interim. The board’s plan is to get comment on the additional issues by May 31, with replies due July 2. If the board can make that recommendation in 6 months, the FCC’s rules require action on it within a year, meaning reform could be complete in 18 months.

“We believe the FCC is likely this year to adopt the interim cap… but we believe much uncertainty remains about what further reforms the Joint Board will ultimately recommend and the FCC will approve, in light of industry and political complexities that will presumably intensify in 2008,” said Stifel Nicolaus, noting the timetable “would yield an FCC decision on further reforms that could involve some pain shortly before the 2008 elections, which we believe would be an interesting political scenario.”

Not surprisingly, wireline carriers heralded the joint board proposals as a plus for customers. “Spiraling costs must be contained,” said Verizon. The joint board’s plans would “benefit consumers who rely on universal service programs as well as those who ultimately foot the bill,” the carrier said. OPASTCO said the temporary cap is “the first step toward reforming out-of-control costs.” Western Telecom Alliance, made up of rural ILECs, said the joint board “correctly targets the source of the [USF’s] growth, which is the CETCs.”

Rep. Barton (R-Tex.), ranking member of the House Commerce Committee, would prefer “a more comprehensive approach that addresses wireline carriers, as well, rather than one that just caps funds used primarily by wireless carriers,” he said. But the USF sorely needs reform and the Joint Board’s action is “a necessary first step,” he said.

Wireless Carriers to Oppose Cap

Wireless carriers are expected to fight a proposed cap at the FCC and on Capitol Hill. The focus is expected to be Commission members still forming opinions on the Joint Board recommendations and rural lawmakers, who will be encouraged to make phone calls and write letters expressing concerns, sources said.

But wireless carriers are deeply divided. Some, like Alltel, which bought Western Wireless and its many rural service territories, see ETC status for wireless as a key to deploying in areas prohibitively costly without USF support. Other carriers, like Verizon Wireless and AT&T, are likelier to view the cap as positive.

“There’s a different priority level for different companies,” a wireless source said: “The chairman is interested in pushing it in this direction so that makes it difficult. But there is always support for the program in Congress… There’s support for wireless carriers.” Wireless carriers fear the cap could be long-lived, the source said: “There’s a tendency at the FCC for interim solutions to end up becoming permanent. This isn’t, as some of the comments are suggesting, just a temporary thing. It has to be looked at as potentially a very long term discrimination against the wireless industry.”

A source at a wireless carrier seeking ETC status in a number of states said she hopes for a “silver lining” to the proposal, but has doubts. “Maybe we can at least get our applications approved and have a shot at some money,” she said: “If the overall fund is capped then obviously anything we get is going to be at somebody else’s expense.”

“It is extremely disappointing for the Joint Board to recommend limiting universal service support at a time when consumers are demanding access to wireless service for public safety, basic telephone service, and high-speed broadband access,” Alltel said Wed. in a statement: “Wireless carriers receive less than 50 cents of every dollar that wireless consumers contribute to the fund -- a condition driven by the traditional political strength of incumbent providers rather than the growing relevance of wireless to today’s consumers.” Alltel will “work vigorously to ensure that wireless consumers, particularly in rural markets, continue to have access to affordable, high-quality, wireless communications networks,” it said: “We believe we enjoy the support of policymakers, regulators and legislators at the local, state and federal levels to deliver on this important goal.”

John Rooney, CEO of U.S. Cellular, also objected. “Since rural consumers pay into the fund, they deserve to have the same choices in telecommunications services as consumers in urban areas,” he said: “Wireless providers can’t deliver high-quality service unless they have the network to back it up -- and there are areas of the country where it is difficult to make a business case for an investment in such infrastructure. That’s why the USF was created.”

CTIA Pres. Steve Largent blasted the joint board recommendations. “The Joint Board has missed the mark,” he said: “The Joint Board’s bias toward legacy wireline networks will undoubtedly disadvantage rural consumers, the majority of which now view wireless as their primary mode of telecommunication.”

Wireless Across America, which represents rural wireless carriers, noted in a statement that since 1996 $22 billion- plus in USF funds have flowed to wireline carriers, compared with just under $2 billion to wireless. The FCC should “reject this anti-competitive proposal and implement competitively neutral Universal Service funding approaches that will continue to implement the vision of the 1996 Telecommunications Act by fostering the development of competitive rural telecommunications services that are comparable to those provided in urban America,” the group said: “Rural consumers deserve the same choice of telecommunications services as their urban neighbors.”