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The Perennial Universal Service Push
by David Hatch
In telecommunications circles, the federal universal service fund is the proverbial elephant in the room. A perennial focus of policymakers, it is a massive and highly complex program that has become synonymous with fraud and bureaucracy. Yet for rural states, it is considered essential to ensuring that citizens, schools and libraries have access to telephone and high-speed Internet services that many Americans take for granted.
Universal service, which funneled just more than $6.6 billion to phone companies in 2006, was at the heart of major telecom legislation last year. But there is also action on the regulatory side, as the FCC explores changes to the way support is doled out to carriers.
Can Congress clear a bill overhauling the subsidy in 2007? "I would say it's probably not any more than a 50-50 chance, if that much," said John Rose, president of the Organization for the Promotion and Advancement of Small Telecommunications Companies, which is known as OPASTCO. Dissension over how to restructure the fund and the plethora of issues competing for the attention of lawmakers are the reasons for his bearish outlook.
The Debate In Congress
Hawaii Democrat Daniel Inouye, the new chairman of the Senate Commerce Committee, is orchestrating the latest attempt at drafting major USF legislation, but even he acknowledges that reaching consensus is tough. "It will be a challenge, but I can assure you, we will take on that challenge," he said at the conclusion of a March 1 hearing.
Strong USF proponents on the panel include Byron Dorgan, D-N.D.; John (Jay) Rockefeller, D-W.Va.; Olympia Snowe, R-Maine; and Ted Stevens, R-Alaska. So far this year, Stevens, the senior Republican on Senate Commerce, has introduced a USF bill, and Dorgan, Mark Pryor, D-Ark., and Gordon Smith, R-Ore., have jointly offered legislation.
But there are Senate Commerce critics, too. Last year, Republicans Jim DeMint of South Carolina, John Ensign of Nevada, John McCain of Arizona, and John Sununu of New Hampshire explored ways to control the fund's growth.
Stevens opposes an industry-backed idea for shrinking the fund: reverse auctions. Under that approach, telecom carriers agreeing to the lowest subsidy in their areas would receive financial support. By contrast, multiple carriers now serving the same locale all draw from the fund.
But Stevens worries that rural telecom providers would be pushed aside by deep-pocketed national players that could underbid them to secure subsidies. OPASTCO shares his concern. "Reverse auctions would be bad because there wouldn't be any incentive to invest in [a] network," warned Stuart Polikoff, the group's director of government relations.
Alltel, the wireless association CTIA and Verizon Communications think reverse auctions are needed to curb USF growth. They have presented varying plans to an FCC federal-state board that is expected to make universal service recommendations to the full commission this spring.
On the House side, Virginia Democrat Rick Boucher and Nebraska Republican Lee Terry plan to reintroduce comprehensive USF legislation, but the members who set the chamber's telecom agenda have not treated the issue as a priority so far.
"We're going to wait and see later down the line [after] we have some oversight hearings," said Colin Crowell, a top aide to Massachusetts Democrat Edward Markey, chairman of the House Energy and Commerce Telecommunications and the Internet Subcommittee.
Competing Proposals At Play
"I know there's going to be a lot of activity at the FCC and I presume in Congress as well," Democratic FCC regulator Jonathan Adelstein said of USF following a recent speech. FCC action on universal service would "guide" Congress' hand on legislation, he explained.
But David Kaut, a telecom analyst at the investment firm Stifel Nicolaus, said the agency has its work cut out. "The FCC keeps providing crutches to help universal service hobble along," Kaut said, "but at some point they have to do major surgery."
Several ideas for restructuring the fund are being floated. Traditional and wireless carriers currently contribute based on a percentage of their long-distance and international calling revenue. There is talk about tapping local phone revenue as well, though one source said it is unclear whether the FCC has the authority to do so without congressional action.
Republican FCC Chairman Kevin Martin wants to base contributions on phone numbers, but critics worry that would hurt the pocketbooks of Americans whose USF fees are now low if they make few long-distance calls. OPASTCO wants contributions based on phone and broadband connections, but businesses that are heavily dependent on telecom lines oppose the idea.
Some observers want to cap USF money awarded to so-called competitive carriers -- mostly wireless firms -- that are tapping the fund in markets where dominant wire-based carriers are receiving support. Money going to competitive carriers has ballooned by $1 billion in the last three years. There already is a cap on the subsidies awarded to dominant firms under a portion of the fund that aids carriers serving rural areas.
"As competition pushes into rural town centers, it makes sense to channel that [USF] support to the outlying areas where it is most needed," suggested Brian Adkins, director of legislative affairs at the telecom provider Embarq.
Obstacles Abound
While rural lawmakers, telecom companies and regulators generally agree that the subsidies should be expanded to cover broadband deployment, that view is tempered by concerns over the added strain it would place on the fund. Polikoff noted that reducing distributions to wireless carriers would free money for the purpose.
Cingular, the nation's largest wireless carrier and part of the new AT&T, receives universal service money in four states, has applications pending in Alabama and Florida, and recently sought to add Georgia and Virginia. That has stoked speculation that Verizon Wireless, which has never sought subsidies, might apply for them, placing more pressure on the fund. Verizon Wireless spokesman Jeffrey Nelson said the company has no plans to seek assistance.
Yet another threat looms: eliminating waste and fraud associated with the so-called "e-rate" portion of the fund, which provides $2.25 billion in subsidies to schools and libraries for phone and Internet connections.
The e-rate recently celebrated its 10th anniversary, which supporters touted at posh events in Washington. Yet over the years, the FCC's inspector general has not been complimentary of the e-rate, churning out a steady stream of reports about subsidies being awarded for phantom equipment or Internet connections in schools without computers. Rep. Joe Barton of Texas, the top Republican on House Energy and Commerce, has been a frequent e-rate critic.
Meanwhile, Vonage asserts that the FCC is requiring it and other Internet phone providers to pay too much into the fund. The case is pending before the U.S. Circuit Court of Appeals for the District of Columbia.
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