FEDERAL-STATE UNIVERSAL SERVICE BOARD GETS EARFUL ON REFORMS
DENVER -- Rural telcos couldn’t provide high-quality service to all customers without universal service subsidies, Gene Johnson, speaking for OPASTCO’s constituency of small rural incumbents, said Thurs. at a special en banc hearing here of the Federal-State Joint Board on Universal Service. He said large carriers subsidized their rural service from their urban revenue streams, but small carriers couldn’t do that.
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Johnson said the rapid growth in the universal service fund’s size was being driven by the entry of competitive eligible telecom carriers (CETC) that were just as entitled as the incumbent to receive the same level of support. He said support for CETCs should be based on their own costs, not the incumbent’s costs, preventing a new entrant from gaining a windfall from support. He called it “ludicrous, ridiculous to infer that incumbents will be inefficient” because of universal service subsidies. He said there might be “natural monopoly areas” in rural America where no economic incentives existed for competition.
Leonard Steinberg, gen. counsel for Alaskan incumbent ACS, said unequal funding for competing carriers in a market wasn’t discriminatory if each carrier received support based on its costs. He said the amount of universal service support affected unbundling and competitive entry, and wrong decisions on support could leave incumbents bearing the costs while competitors captured the customers, particularly in very rural markets such as Alaska. He said his company had greatly improved its efficiency but still was suffering financial impairment from subsidized competition, cutting its return to the point where ACS was reluctant to make new investments and was struggling to afford maintenance on the current plant: “Consumers will be the ones who ultimately suffer” unless something is done.
Tina Pidgeon, gen. counsel for ACS’s Alaska competitive rival GCI, disagreed. She said giving each entrant equal per-line support would maintain the carriers’ relative economic strengths. She said a shift to differential support based on each individual carrier’s costs would be unworkable because of difficulties in tracking and verifying each CETC’s costs. Another factor is that new entrants start off with far fewer lines than the incumbent. She also said there was no evidence that equal per-line support threatened incumbents’ survival. She said unequal support wouldn’t provide CETCs with incentives for efficiency since reduced costs simply would reduce support. Pidgeon said that under the current system, incumbents didn’t lose support when a customer left them, while CETCs did. But ACS and GCI agreed on one point: Any carrier receiving an ETC designation should bear the same obligation to serve all comers.
David Cosson, speaking for the Rural Independent Competitive Alliance’s constituency of small rural wireline CETCs, faulted the present system for not having any rational link between the support a CETC needed and the amount being offered. He said support should be based on a carrier’s network costs, not disbursed per line, and should be based on forward-looking costs rather than embedded costs.
Don Wood of the Rural Cellular Assn., said that before the FCC changed the current support system, it needed to consider what that system had wrought. He said it had created investment and jobs in rural areas both directly and through the general economic benefits of multiple carriers. He said wireless CETCs were particularly suited to rural areas because they could offer coverage nearly everywhere. He said nobody was reaping a windfall from the current payments. He acknowledged that equal per-line support could introduce an economic distortion if a low-cost provider decided to use the difference between cost and support to build out network facilities that couldn’t be justified economically without the subsidies. He said that in farflung rural areas, it was an open question whether wireline or wireless were the better service path.
David Bergman of the Ohio Office of Consumer Counsel, speaking for NASUCA, said the growth in the number of wireless CETCs was a factor expanding demand for universal service support. He said curtailing the growth in fund size, and the consequent burden on consumers through phone bill surcharges, required basing each carrier’s support on its actual costs and limiting support to primary lines only. He said the purpose of universal service subsidies was to make affordable quality service available to all, not make competition happen.
A subsequent panel addressed measures to curtail universal service fund growth. Susanne Guyer, Verizon senior vp-federal affairs, said support for a rural incumbent should be capped at the prevailing level when a CETC was authorized in the market. She said only the carrier actually serving a customer in a high-cost area should get support, and when that customer changed carriers, the old carrier would lose support while the new carrier gained, and the support should apply to all lines of that customer. Guyer said subsidizing each carrier that vied for the customer would be economically counterproductive.
Joel Lubin, AT&T federal affairs vp, said support should be limited only to the customer’s primary line or connection. He said if a wireless carrier competed head to head and won that primary line, it should receive the same subsidy as its rival. He opposed supporting wireless service that supplemented the primary line, and said the universal service fund was meant to support access, not mobility.
Brian Staihr, Sprint senior regulatory economist, said there might be other ways to control fund size beside denying support to 2nd lines. He said the primary-line-only idea was inconsistent with competition, would be very difficult to administer and presumed 2nd lines were a frill rather than a necessity.
David LaFuria, an attorney representing the Alliance of Rural CMRS Carriers, said Congress in the universal service provisions of the Telecom Act intended that rural customers have the same competitive telecom service options as their urban counterparts. He said rural competition could be encouraged while keeping the universal service fund at sustainable levels if: (1) Incumbents’ support were capped when the first competitor entered. (2) Subsidies followed the customer and ported over to the new carrier when the customer switched. (3) It based incumbent support on its economic cost and required that the incumbent apply the subsidies only to the actual high-cost exchanges within its service area.
Ken Reif of the Colo. Office of Consumer Counsel, speaking for NASUCA, said customers used to complain about lack of access to basic phone service, but now the main consumer gripe was the ever-escalating surcharges on their phone bills. He said the current system “isn’t economically sustainable,” and advocated support only for the primary line and a cap, either absolute or a target figure, on total fund size.
At a previous session, held during the recent NARUC meeting, the Joint Board heard from industry, regulators and consumer interests offering their ideas on how the FCC should address the opposite side of universal service support -- namely, the fund’s contribution methodology. Panelists agreed there were 4 major alternative ways to assess universal service fund contributions: (1) End-user connections. (2) Assigned phone numbers. (3) A hybrid of end-user and transport connections. (4) Total revenue, adding up interstate, intrastate and international revenue. Panelists also agreed the present system, based entirely on interstate carrier revenue, couldn’t work much longer because of changes in technology and market conditions.
Neb. PSC Chmn. Anne Boyle didn’t advocate a particular change but said that in deciding how to revamp the universal service funding system, the FCC would have to consider some fundamental questions such as whether to support 2nd lines and whether wireless carriers should be compensated the same as wireline carriers. She also said the FCC needed to address “the elephant in the room” of total fund size. She said the fund should be capped while the FCC addressed the tough question of how to stop the hemorrhage that was draining the fund and driving contributions up. Boyle also said adding intrastate revenue to the contribution base could have adverse effects on state universal service funds. She called federal legislation to reform the contribution system the “worst option” because bills rarely passed out of Congress in the same form as they were introduced.
Cheryl Parrino, CEO of the Universal Service Administrative Co. (USAC), said any of the major alternatives could be implemented, but cost and time would vary. If the FCC went with a revenue-based system, implementation would be simple and speedy because the basic systems already were in place. Parrino estimated a reformed revenue-based system could be put in place in a few as 6 months. She said a shift to a number-based system would take about 9 months to implement, while a connection-based system could take a year because new reporting and verification systems would be needed. She said a number-based system would be easier to implement on a continuing basis because numbers would be reported by the neutral N. American Numbering Plan administrator, while a connection-based system would require more verification structures because carriers would be the source of connections data.
AT&T’s Lubin advocated basing contributions on assigned phone numbers. He said the universal service funding mechanism was “broken” and economically unsustainable in the face of new technologies that currently were exempt from contribution. Lubin said a number-based system would cut the consumer’s fee to about 98 cents per number while allowing for about a 4% annual growth in the fund. He said a number- based system would eliminate customer confusion over the varying size of the monthly phone bill charge because it would stay the same month to month. He said revenue-based contribution systems wouldn’t catch customer “leakage” to new exempt landline and wireless technologies for their long distance calling and wouldn’t be competitively neutral.
Scott Saperstein, SBC exec. dir. for regulatory policy, advocated a hybrid approach of connection-based assessments for local exchange carriers and a revenue-based system for interexchange carriers. The SBC plan also would eliminate wireless carriers’ “safe harbor” and require all dial tone providers, whether wireline, wireless or cable-based, to pay into the fund equally. Saperstein said the SBC plan would provide true parity among competing carriers and eliminate differences between residential and business contributions.
Jeffrey Smith, OPASTCO policy analyst, said a revenue- based system would have the fewest competitive distortions if it were based on total revenue and if facilities-based broadband providers were included in the revenue assessments. He said adding intrastate revenue to the current base would address the current universal service funding difficulties, but acknowledged that change would require that Congress amend the Telecom Act so the FCC could assess intrastate revenue. Absent a change in law, Smith said OPASTCO would favor the SBC approach. He said any connection- or number- based approach would violate competitive neutrality requirements because it effectively would shelter interexchange carriers from contributing to the fund.
Peter Sywenki, regulatory policy dir., Sprint Wireless, said number-based assessments would provide a stable fund base while eliminating technological and competitive disparities. He said a number-based plan would reduce customer complaints and confusion over the universal service contributions on their bills.
Billy Jack Gregg, dir. of the W.Va. PSC Consumer Advocate Div., said consumers probably wouldn’t see any reduction in the universal service fees on their phone bills regardless of which contribution system was used.. He said plans that based contributions on connections or phone numbers would shift the bulk of the contribution burden from interexchange carriers to the local exchange carriers. He said the interstate-service revenue base for universal service support was declining while the funding requirement was increasing, and the current 9.5% assessment factor was double what it was 4 years ago and likely to rise further unless something was done.