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FCC Posts Record USF Contribution Factor

Carriers must pay 12.9 percent of their long-distance revenue to the Universal Service Fund in the third quarter, 1.6 percentage points more than this quarter. Big phone companies were quick to note that’s the highest figure in the fund’s history. But some small rural carriers disputed that the high factor shows that a thorough revamp of USF is needed.

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The Universal Service Administrative Co. said it would need to collect more than $2.03 billion from carriers in Q3. To set the carrier “contribution factor,” the commission divides the amount needed by projected carrier revenue. Of $1.95 billion in anticipated USF support, about $1.13 billion is projected for the rural high-cost program, $531.8 million for the E-rate program, $225.7 million for low-income support and $54.2 million for the rural health-care program.

The new factor means costs $500 million higher Q3 than Q1 for “those consumers and businesses that ultimately pay for this program,” said AT&T Senior Vice President Robert Quinn. A comprehensive overhaul of the fund is needed because USF “is in a death spiral, driven by growing demands on the fund, the decline of the wireline model and consumer migration to other platforms and services,” he said.

The FCC should immediately overhaul the USF contribution by adopting a system based on phone numbers and connections, Quinn said. The current system is based on interstate revenue. “While that will not address the service, demand and distribution issues that have been so thoroughly documented over the past 12 years, it will stabilize the consumer assessment percentage that has been so volatile and unstable quarter after quarter.”

But some said the 12.9 percent factor isn’t a cause for alarm. The new percentage “is being used as a political red herring,” said Dan Mitchell, the legal vice president of the National Telecommunications Cooperative Association. The increase won’t cost a consumer much in absolute terms, he said. Taking into account the climbing use of cellphones for long distance calls, the federal USF charge on most people’s wireline bills will still be about $1, he said. That’s not bad considering people pay $3 for a gallon of gasoline, he said.

Not all small rural carriers brushed off the increase. The new factor shows “we desperately need” a contribution revamp, said Stuart Polikoff, the government relations director for the Organization for the Promotion & Advancement of Small Telecommunications Carriers. Maintaining a system based on interstate revenue is unsustainable, and it should be replaced with one that counts a carrier’s number of connections. The FCC should require all broadband providers to contribute, regardless of whether they sell voice service, he said.

Wireless carrier sources said on Monday that competitive ETCs can’t be to blame since they fall under an interim cap. “While many wireline interests have historically attempted to place the blame in the growth of the High Cost fund solely on competitive ETCs, the latest jump in the contribution figure makes it clear that this is not a dilemma created by CETCs,” said a small carrier source. “As a result, Congress and the FCC must recognize that USF reform initiatives will only be effective by ensuring that reform measures are competitively neutral and comprehensive -- targeting incumbents and competitive carriers across all technologies.”

“There has been a remarkable lack of understanding about the contribution factor,” said David LaFuria, an attorney for the Rural Cellular Association. “The decision by Congress to move universal service support from carrier rates to the high-cost program was the right thing to do, and it has delivered enormous benefits to consumers in both urban and rural areas, in the form of lower rates and new infrastructure investment.” The cost of wireless service has dropped to 6 cents a minute from 30 this decade, LaFuria said. “Unfortunately, the FCC in recent years has not sufficiently discussed these benefits much, instead focusing only on reducing the contribution factor. It is time for the focus to shift to ensuring that consumer contributions are offset by the benefits of increased competition, the introduction of mobile and broadband services, and lower prices.”

“Today’s increase in the universal service contribution factor is just one more signal that the FCC must complete comprehensive universal service reform,” a CTIA spokesperson said. “With wireless carriers already subject to a cap on their high cost funding, the commission must look to revamp this program to better reflect the needs and preferences of consumers in today’s increasingly mobile marketplace.”