Federal Universal Service Fund

Speakers at a NARUC panel on use of reverse auctions as a universal service reform tool said their effectiveness will depend heavily on how the auctions are designed. FCC Chmn. Kevin Martin in March supported the concept as a way to contain universal service fund growth. His idea would make the winning bidder the provider of last resort. For reverse auctions to have a chance to work, speakers said, the auction process must recognize the large cost differences that can exist between locations within the same high-cost area. Brian Stahr, Embarq regulatory economist, said costs can vary by over 400% across a market area, such as between a town or other population concentration and the outlying areas. He said the industry has depended on low-cost downtown lines implicitly subsidizing high-cost outlying areas, but competition is causing that subsidy source to disappear. He said explicit subsidies through the USF aren’t working either, because support is based on a statewide average. Support needs to be more “granular,” he said, such as by census block: “Competitive bids must truly reflect costs of the truly high-cost areas.” Dennis Weller, Verizon chief economist, supported the idea of targeting support to the areas where it’s really needed: “The current system isn’t rational nor sustainable.” He said auctions in areas with multiple ETCs could establish rate models for setting support levels in areas not auctions. He said universal service is “essentially a government procurement process, and bidding is how government procures most everything.” Scott Reiter, NTCA industry affairs dir., disputed the wisdom of reverse auctions, calling them “a big blind leap into the unknown.” He said adoption of auctions won’t address how the universal service fund came to be unbalanced in the first place: “Auctions may be worth a look, but they aren’t the fundamental reform that’s needed.”

Reverse auctions might rein in burgeoning universal service costs, but there are pitfalls, panelists warned Thurs. in a program sponsored by the D.C. Bar. It’s an “interesting idea” but shouldn’t be the sole solution, said Eric Einhorn, AT&T exec. dir.-federal regulatory. Done right, it could be a “market-oriented” way to downsize the Universal Service Fund (USF) but “the devil is always in the details,” said CTIA Asst. Vp Paul Garnett. It would have to be implemented in a technologically- and competitively- neutral manner, he said.

The FCC’s query about using reverse auctions (CD Oct 12 p6) for universal service support ended up drawing more than 50 comments, with a variety of views. NECA warned that “reverse auctions would effectively end rate of return regulation for rural ILECs, a result not contemplated” by the Federal-State Joint Board, where the proposal originated. Alltel said reverse auctions could be used to set the level of support, similar to “a forward-looking cost methodology,” but any carrier able to provide that price should be allowed to offer service. In other words, “auctions should not be used to select one or a limited number of eligible telecommunications carriers.” Verizon, joined by Verizon Wireless, said reverse auctions could be the solution to the over-extended Universal Service Fund (USF): “With the right design, a simple system of reverse auctions for high cost support could provide consumers, carriers and regulators with substantial benefits.” State regulators appeared to have mixed feelings about the reverse auction concept. The Ia. Utilities Board said it likes that auctions would reduce the number of USF-supported carriers but it’s concerned about the viability of incumbent rural carriers: “On the one hand, rural exchanges may represent the type of service territory where it makes the most economic sense to support only one network and an auction may incent carriers to seek operational efficiencies… On the other hand, existing incumbent networks have been constructed… in reliance upon continued receipt of universal service support. If that support were to suddenly be redirected to another network based on competitive bids, the existing universal service ‘investment’ in the incumbent network would be lost.”

Some industry groups are using an FCC notice of proposed rulemaking on USF contribution methodology to argue for moving to a number-based method of calculating payments -- a question the FCC never raised, NASUCA claimed. The VON Coalition, CTIA and other groups said tweaks to current methodology will fall far short of needed reform.

The FCC Fri. sent a letter to Verizon asking why it hit customers with a new DSL fee just as a federal fee of about the same amount lapsed. However, the agency decided not to question BellSouth, which said Fri. afternoon it was killing plans for such a fee. FCC Martin reportedly was upset by the companies plans for replacement fees. “We generally prefer regulation be done by the marketplace but we will act to insure consumers’ interests are protected,” an FCC official said.

ASPEN, Colo. -- Verizon won’t seek a federal franchise bill next Congress if the telecom bill (HR-5252) fails to pass this year, Verizon Exec. Vp Tom Tauke said Tues. at the annual Progress & Freedom Foundation conference here: “We aren’t going to be starting out from the same place -- the appeal of video is going to be less.” Verizon’s state-level success with franchise laws significantly weakens demand for federal reform, Tauke said.

Resurrecting an idea first aired several years ago, the Federal-State Joint Board asked for comments on using “reverse auctions” to distribute universal service funds in rural and other high-cost areas. The idea gained currency earlier this year when FCC Chmn. Martin voiced interest in letting phone companies bid to provide universal service in rural areas (CD March 30 p6). The term “reverse auction” sometimes is used to indicate that low bidders, not high bidders, get contracts.

Few changes mark the latest edition of a controversial plan for reforming intercarrier compensation, submitted Mon. to the FCC by AT&T, BellSouth, Cingular and hundreds of small carriers. Now dubbed the “Missoula Plan,” it’s the final version of a proposal by the remaining elements of the NARUC forum (CD March 15 p1). The proposal immediately drew fire in the form of a statement from many industry groups and companies, including NASUCA, CTIA, NCTA and CompTel.

Telecom customers nationwide are getting stuck for a fortune needlessly subsidizing rural telephone companies via the Universal Service Fund (USF), a consumer group charged Wed. The govt. would spend less giving satellite or wireless phones to rural residents otherwise without service than it does “enriching” rural telecoms, said a representative of the Seniors Coalition in a call-in news conference.

VoIP providers are setting up meetings to discuss their options in light of a surprise FCC decision ending their federal preemption protection if they use traffic studies to calculate Universal Service Fund payments, VON Coalition Pres. Staci Pies said. The FCC’s universal service reform order, released June 27, lets VoIP providers pay into the USF based on 65% of revenue, a figure known as a “safe harbor,” or submit traffic studies to show the amount of interstate revenue is lower. But if they use traffic studies the FCC no longer will deem them eligible for federal preemption, subjecting them to state regulation. The order said the FCC in the 2004 Vonage Order opted for federal regulation of VoIP because “it was impossible to determine whether calls by Vonage’s customers stay within or cross state boundaries.” But if a VoIP provider can tally its USF payment based on the actual percent of interstate calls, “the central rationale justifying preemption… no longer would be applicable” to that provider. That is, if they can pinpoint their traffic’s jurisdiction, the problem spurring the Vonage Order no longer exists, according to the new order. “It’s a Catch-22,” said Pies, a PointOne vp. NARUC Gen. Counsel Brad Ramsay said the “state friendly” language was welcome. The preemption decision wasn’t mentioned in the news release on the FCC vote June 21 (CD June 22 p1).