Joint Board mulls cost recovery: Non-rural recommendations are a small step

The Federal-State Joint Board on universal service made recommendations to the FCC last week on subsidies for high-cost non-rural areas, where local phone service prices do not allow an incumbent carrier to recover its costs of providing service. Currently, subsidies to support high-cost areas represent the largest component of the federal universal service fund-although the non-rural portion represents only $250 million of a $1.7 billion total annual cost.

Previously, the FCC mapped out a plan in which the federal high-cost program, funded by carriers that handle interstate traffic as a percentage of revenues, would cover 25% of the cost of serving high-cost, non-rural areas. The remaining 75% would be funded at the state level. Often, state-level contributions are collected against intrastate revenues. In some states, carriers have argued that it's difficult to collect the required funding without raising end users' rates to a level that defeats the purpose of universal service.

The new recommendations include a funding methodology whereby the commission would determine if the cost of serving an area is significantly above a national average. If so, and if the commission determines that a state does not have sufficient resources to provide the support needed, the federal fund would make up the difference.

The Joint Board also recommended a "hold harmless" approach whereby no state should receive less support from the new mechanism than it does currently and reaffirmed a previous recommendation that universal service support should be based on forward-looking economic costs.

"Today's recommended decision is also important for what it does not do," said FCC Commissioner Susan Ness in a statement. "It does not preordain any significant increase in explicit universal service funding nor create any colorable excuse for carriers to increase charges to customers."

The new federal mechanisms are scheduled to go into effect July 1, 1999. A different support mechanism for rural carriers is targeted to become effective no sooner than Jan. 1, 2001.

"The numbers involved in this particular decision are small. $200 million is a rounding error in this industry," said George Reed-Dellinger, senior vice president for HSBC Washington Analysis. "If the politics of this issue were difficult and controversial, imagine what the politics will be like surrounding the bigger numbers." He believes Congress eventually may have to step in with some type of technical correction act.