USF broken, but no consensus on how to fix it

BOCA RATON, Fla. – The Universal Service Fund (USF) was the main topic of conversation at the U.S. Telecom Association conference yesterday. And while speakers and panelists all agreed that the fund is vitally important and in serious trouble, they advanced disparate ideas on how to shore it up.

Recently, the National Exchange Carriers Association released a study that indicated the fund could collapse by 2006 under the weight of ballooning payment obligations and diminishing contributions from long-distance carriers that have cut rates to remain competitive in a crowded market and have seen minutes shrink due to wireless substitution.

A collapse of the fund would be a disaster for rural America, according to Dan Glickman, director of institute of politics at Harvard University, and former agriculture secretary in the Clinton Administration. Glickman said USF is in a “precarious position,” and likened it to the current difficulties enveloping the nation’s social security system. He said the telecom industry would need to find a solution that doesn’t increase consumers’ monthly bills if it wants the support of lawmakers.

“Nobody in Congress wants to be responsible for raising the cost of essential services,” Glickman said. “This is a kitchen table issue that hits Americans in the pocketbook. That’s the political challenge.”

Albert Halprin, partner with Halprin, Temple, Goodman who previously headed the FCC’s common carrier bureau, called the commission’s USF policies “misguided” and suggested that the FCC start fund reform by reducing the budget for the Universal Service Administrative Co., which administers the fund. Halprin said USAC’s budget grew by 20% in 2002.

He also called for the FCC to return to market-driven policies to promote industry growth. “The FCC needs to grow the total pie, instead of doling out pieces of a shrinking pie,” Halprin said.

Glen Post, president and CEO of CenturyTel, suggested that all providers of local telephone service pay into the fund. “We need a broader base of funding. If local phone rates keep going up, we’ll see a drop off in demand.”

Post also said providers that qualify for subsidies by achieving exempt telecommunications company (ETC) status should be held to the same standards as incumbent carriers. “ETCs have no quality requirements and no responsibilities as the carrier of last resort. Yet, in many cases, they participate at the same level as the incumbent, which has much greater financial burdens due to these requirements,” Post said.

USTA President Walter McCormick said ETCs shouldn’t participate at the same level in many cases. “Subsidies are based not on the ETC’s costs, but on the basis of the ILEC’s costs. That needs to change,” McCormick said.

Margaret Greene, president of regulatory and external affairs at BellSouth and USTA’s incoming chair, agreed with Post that other providers should contribute to USF, particularly if they provide the same services as the telcos.

“Our DSL services are subject to USF assessment. If we’re assessed, then cable modem should be as well,” Greene said.

A new source of funding could be found by tapping in to the telephone excise tax, said Jim Cicconi, executive vice president of law at AT&T. Cicconi said the 3% tax assessed telephone users will generate about $6 billion this year, money that currently goes into the U.S. treasury. He added that a case could be made to apply those funds to USF.

“It ought to be considered a user fee because it’s collected from telecom customers,” Cicconi said. “It’s not unreasonable to say to the government that if they want to see rural broadband deployment, they should subsidize it to a degree.”

Also discussed was the connections-based plan that would be based not on a carrier's interLATA revenues but on the number of connections, and would include all carriers.

Critics of the plan believe it would be extremely difficult, if not impossible, to create an equivalent connections formula that would equitably compare transport technologies such as DSL, T-1 and frame relay because of their differing cost structures. However, Greene said BellSouth has the needed formulas already in place and that no new information would be required.

“People who say this is complicated are using formulas that are too simple,” Greene said.