Federal Universal Service Fund

There appeared to be little agreement among regulators or witnesses Fri. at FCC en banc hearing on how to fix current universal service system, whether it needed major overhaul or tweaking and, for that matter, whether it needed fixing at all. FCC scheduled hearing and invited state members of Federal-State Joint Board on Universal Service as best way “to gain input in the shortest time on various views and proposals for reform,” FCC Comr. Abernathy said as she opened hearing. Asked by Comr. Copps if there really was sense of urgency, consultant Kathleen Wallman said that was one of “the first assessments” Joint Board would have to make. “I don’t know if there is a sense of urgency on the part of all parties,” she said. “Some participants may disagree.” Wash. State U. Prof. William Gillis said he didn’t think there was consensus on urgency of reforming universal service because some parties would benefit more from change than others.

FCC is expected today (June 13) to take action on AT&T request that it apply unused e-rate funds to reduce universal service fund (USF) assessment on long distance carriers. Commission has scheduled vote on unused funds issue at agenda meeting, although it hasn’t indicated how vote will go. AT&T Vp Robert Quinn acknowledged that company had urged agency to take such action. He said AT&T first made proposal in March in response to FCC request for comment on what to do about $950 million in unused e-rate funds. Company stepped up its lobbying recently after Universal Service Administrative Co. (USAC) announced it would have to raise USF assessment to 8.77% of interstate revenue, up from 7.28%. Quinn said that would translate to further increase in 11.5% USF fee now charged to its customers to cover assessments. Customer fee is higher than percent paid by AT&T because of company’s continuing problem of declining revenue. Fee charged to AT&T is based on level of revenue 6 months earlier. By time AT&T makes contributions, its revenue is lower than that, meaning fees to customers have to be raised to get amount of money required. Quinn said AT&T also stepped up action because time had run out for action on waiver request to help ease revenue problem by letting AT&T base contributions on estimates of future revenue, rather than 6-month-old revenue. New assessments go into effect July 1. He said AT&T separately had asked FCC for longer term fix for declining revenue problem, such as basing contributions on number of lines rather than revenue. Quinn said problem appeared to be more acute for AT&T than some companies. Companies such as Verizon that are just entering long distance business have increasing revenue, he said. Some carriers have opposed AT&T’s initiative for fear it will muddy larger contribution reform issue. Meanwhile, FCC set 1 p.m. June 21 meeting to explore broader issue of whether to change USF contribution methodology. Agency late Wed. said it wanted “additional input from industry and other affected parties” on proposals to reform contribution system. Commission said it invited state members of Federal-State Joint Board on Universal Service to join in presiding over meeting.

Alaska Regulatory Commission (ARC) Chmn. Nan Thompson warned state’s lawmakers that failure to reauthorize her agency could endanger federal universal service funding that supported rural telecom service. In letter to legislature, Thompson said if there were no state commission, there would be no agency to handle annual universal service certifications required by FCC. Federal universal service fund (USF) rules require state commissions to make annual certification that USF money is being used for intended purposes. as prerequisite for continued federal support. Agency recently filed certification for 2002 and probably would be able to perform duty for 2003, but after that there would be no entity to ensure that state’s rural telecom carriers continued to receive the $70 million in annual USF support that now flows to Alaska. She said there would be other adverse consequences to Alaska’s economy, state budget and all regulated utilities if ARC weren’t renewed. She said “regulatory and legal confusion” surrounding dying ARC would undermine efforts by state’s telecom, electric, gas, pipeline, water and sewer companies to obtain financing for new projects. Legislature in regular and first special session was unable to break political barrier raised by key Senate Republicans that had blocked ARC reauthorization. Agency isn’t due to die until June 30, 2003, but Thompson warned that it must start curtailing its activities July 1 unless renewed. Legislature will try again to settle ARC issue in 2nd special session that’s due to convene June 24.

GAO report shows Universal Service Fund (USF) should be updated to take into consideration new technology such as IP telephony, Rep. Markey (D-Mass.), ranking minority member of House Telecom Subcommittee, said Mon. Report, requested by Markey, said IP telephony wasn’t widespread yet but eventually “could affect the revenue base from which universal service programs are funded.” Under current regulatory structure, providers of IP voice services don’t have to contribute to USF, GAO said. “As these new voice services gain popularity, concerns exist of whether federal funding levels for universal service might eventually decline,” GAO said: “In addition, there is much debate about whether the current federal regulatory framework for funding universal service -- with its reliance on interstate telecommunications revenues -- is appropriate for digital communications, where voice, video and data are carried in the same manner over networks that lack intrastate/interstate designations.” Report was based on views of state and federal govt. officials, academics and industry officials. GAO also reviewed local telephone rates provided by state PUCs, which Markey said revealed wide disparity in prices across country. He said wide differences were found among rural telephone companies’ rates as well as between rural and urban telco rates.

House Commerce Committee ranking Democrat John Dingell (Mich.) called on FCC to investigate AT&T’s recent increase in Universal Service Fund (USF) line-item fee for residential customers, but Chmn. Tauzin (R-La.) is considering congressional action rather than waiting for Commission response. Dingell urged FCC Chmn. Powell in letter dated Jan. 7 specifically to “open the books and records” of AT&T while raising questions whether long distance companies in general were using fee to “gouge” customers. Committee spokesman Ken Johnson said Tauzin “is giving serious consideration to holding congressional hearings” on AT&T decision to raise fees: “He will make a final decision after consulting with [Telecom Subcommittee] Chairman Upton [R- Mich.], but clearly we are very concerned about the impact the fee hike would have on consumers nationwide.”

As it warned in ex parte filing Dec. 13, AT&T raised monthly universal service line-item fee for residential customers to 11.5% starting first of year, from 9.9%. AT&T had asked Commission for permission to change formula used to determine contributions to Universal Service Fund (USF) because falling revenue had skewed it. It said problem was that FCC determined how much a company should contribute to USF using revenue from 6 months ago. When company’s revenue is falling, as AT&T’s is, using that contribution factor on lower current revenue results in larger per-customer fee, company said. It had asked for permission to base its contribution factor on projected revenue rather than 6-month- old revenue and had offered to true up contributions if there were shortfall once actual revenue total was available.

FCC approved proposal Tues. to explore whether and how to reform way agency assesses carrier contributions to Universal Service Fund (USF) and how carriers can recover such costs from customers. Notice of proposed rulemaking unanimously approved by Commission solicits feedback on continuing to require carriers to contribute to USF based on percentage of collected revenue or whether agency should move toward flat-fee alternative, such as per-line charge. Companies that have recovered universal service contributions from customers haven’t historically been held by FCC to particular cost recovery method, with agency instead generally requiring contributors not to shift more than “equitable” amount of contributions to any customer or group of customers. FCC said changes under examination are response to industry trends, including new entrants such as RBOCs into long distance market because contributions now are based on historical, not current, interstate revenue.

Federal court decision last week on ILEC access charges has ramifications for other proceedings such as FCC’s attempts to overhaul access charge and universal service regimes for rural telcos, industry observers said Mon. Fifth U.S. Appeals Court, New Orleans, ruled May 3 that ILECs couldn’t recover their Universal Service Fund (USF) contributions through access charges levied on long distance companies. Court, which remanded FCC regulations for 2nd time on this issue, said such action constituted implicit subsidy, which is barred by Telecom Act. At issue are contributions that all carriers must make to USF. Long distance companies, for example, recover those contributions directly from their customers. FCC in 1997 ordered ILECs to recover their costs from long distance companies as part of access charges. Fifth Circuit remanded that rule in 1999 because of implicit subsidy problem. Commission rewrote rule and said ILECs no longer were required to recover costs from access charges but were permitted to do so if they wished. FCC said it interpreted court’s decision to mean it couldn’t require contributions through access charges but instead had to give ILECs choice of how they recovered contributions. In latest ruling, court said FCC interpretation was wrong. It said ILECs couldn’t recover universal service contributions from access charges, period: “The distinction the agency draws between ‘require’ and ‘permit’ is one without a difference.” Court said its original ruling “turned on the recovery method per se, not whether the Commission permitted or mandated it.” AT&T Vp Joel Lubin said he was cheered by strong language court used in defining access charge recovery as implicit subsidy. Lubin said court’s ruling could affect decision FCC is expected to make Thurs. on rural universal service. At very least, proposals under study by FCC, such as one proposed by Multi-Assn. Group, should be revised to eliminate implicit USF subsidies in access charges, he said. AT&T and several other carriers proposed such action to FCC last month, Lubin said, so court’s ruling was pleasant coincidence. Appeals Court ruling doesn’t have as much effect on large price-cap-regulated ILECs because FCC directed them last year to stop recovering USF contributions through access charges. Action was taken as part of Commission’s adoption of CALLS proposal. Lubin said court’s strong statements barring implicit subsidies in access charges applied to other industry practices as well. Among them, he said, is practice of pooling carrier common line (CCL) charges for rural carriers. Because National Exchange Carrier Assn. (NECA) pools those charges, by nature they are not cost-based, he said. Pooling access charges discourages competition, he said. Competitors such as Western Wireless can’t share in that subsidy because it’s “buried in the pool,” he said. Judge Emilio Garza wrote decision. Also on panel were Judges Eugene Davis and Donald Pogue. Pogue concurred because he disagreed with 1999 decision, saying it might have gone too far