Federal Communications Commission member Robert McDowell said he supports imposing an interim cap on high-cost universal service funds primarily benefitting wireless carriers that serve rural areas, paving the way for agency approval of a policy that the mobile industry and some lawmakers assert is technologically discriminatory.
“Funding for competitive eligible telecommunications carriers is increasing at a rate of roughly $150 million per year, and some estimate that the CETC funding level could reach as high as $1.4 billion by 2009, if left unchecked,” McDowell said. “Moreover, this estimate does not even take into account the additional potential increase in demand for CETC funding to build out AWS [advanced wireless services] and 700 MHz spectrum when services on those frequencies come online.”
McDowell said he backs an exception for all telecom providers serving tribal lands across the country and Alaska Native lands, noting such areas comprise some of the most under-served parts of the country.
The FCC is expected shortly to enact the CETC cap, which was recommended by a federal-state joint board on universal service fund reform.
“The FCC rulemaking will likely set the cap to begin retroactively on March 31, 2008, to ensure that all CETC designations granted in the last year remain unaffected,” said Jessica Zufolo, an investment analyst at Medley Global Advisors L.L.C. “The cap will remain in place until the FCC adopts long-term reform measures, which may not happen until next year.”
Zufolo said she expects the FCC to grant an estimated 30 CETC applications pending before the commission. She added that the cap is likely “to apply to carriers on a statewide basis, mainly to ensure that wireless CETCs utilize their existing support more broadly so that it covers additional customers at a lower revenue amount. An exception will apply if a CETC files its actual costs with the FCC on a per-line basis.”
The cap is regarded as a victory for incumbent landline companies, including rural wireless carriers, which collectively receive the lion’s share of high-cost USF support.
“It will . squeeze funding for already-capped Alltel [Corp.], which went private (and AT&T Mobility, which took over Dobson Communications Corp.), as petitions for new support are approved, reducing support for existing recipients,” said analysts at Stifel, Nicolaus & Co. Inc. The analysts added: “While Mr. McDowell said he looked forward to pursuing more comprehensive actions to reform universal service, we note there is some thought the cap will reduce the chances for an overhaul by taking away some of the urgency – and thus pressure – for action.”
Top wireless CETC beneficiaries this year are projected to be Alltel ($230 million), U.S. Cellular Corp. ($150 million), Rural Cellular Corp. ($40 million) and Dobson/AT&T ($127 million), according to Medley Advisors.
Reverse auction
The FCC is also considering a reverse auction approach for awarding high cost USF support to telecom carriers that can provide service at the lowest cost, and repealing an identical support policy whereby wireless carriers serving rural areas receive government support based on the costs of rural landline telephone companies. Instead, federal subsidies would be based on wireless carrier’s actual cost of deploying service in rural areas. That means wireless carriers would take another hit as their infrastructure costs are less than those of rural wireline carriers.
In a recent filing, Alltel said proposed identical support guidelines “are systematically jerry-rigged to reduce or eliminate support for wireless carriers, while retaining funds for ILEC [incumbent local exchange carriers] without change, in clear violation of competitive neutrality and the 1996 telecom act.”
Another top CETC recipient, U.S. Cellular, said the FCC’s grand plan for overhauling the rural telecom subsidy regime is destined to backfire.
“The commission’s proposed revisions to the universal service fund’s high-cost support mechanisms would do more harm than good,” said U.S. Cellular. “The current fund mechanism was designed to provide for sufficient and stable funding mechanisms capable of preserving and advancing universal service in a competitive marketplace. Improving the universal service system cannot be accomplished simply by reducing support to the very carriers who promise to provide consumers living in rural and high-cost areas with modern services that they so obviously desire.”
High-cost USF reform has divided the wireless industry. For example, neither Verizon Wireless nor its parent company pursues government subsidies for rural deployment. However, that wouldn’t be the case if federal officials approve Verizon Wireless’ $2.67 billion purchase of RCC, a beneficiary of government telecom subsidies.
“Consumers will be happy to hear the FCC is taking control of the fund’s growth,” said Tom Tauke, executive VP of public affairs, policy and communications for Verizon Communications Inc. “This is a responsible first step. The next step is comprehensive reform of the universal service high-cost fund to make it more efficient and useful for consumers who need it.”
AT&T agrees.
“The FCC action to cap the CETC fund is good news for consumers, and a responsible step to stop digging the hole of runaway universal service fund expense – dollars ultimately paid by consumers every month,” said Robert Quinn, AT&T’s senior VP for federal regulatory affairs. “Hopefully, now the commission can turn its attention to two other pressing universal service issues: adopting a telephone numbers-based assessment mechanism and finally engaging in comprehensive reform of the universal service distribution mechanism.”
Rep. Joe Barton (R-Texas), ranking member of the House Commerce Committee, has circulated a “staff discussion draft” of a USF reform bill that contains some elements similar to those being considered by the FCC.
On a related front, Reps. Bobby Rush (D-Ill.) and Fred Upton (R-Mich.) have co-sponsored legislation to permit universal service support for schools to be used for enhanced emergency alert services in elementary and secondary schools.
