Federal Communications Commission Chairman Kevin Martin is said to be pushing universal service fund changes that would reduce government subsidies for mobile phone carriers serving rural areas, likely setting up a showdown with the agency’s Democratic members, cellular operators and key lawmakers from states where wireless operators would take a financial hit if reforms are adopted.
“State and federal regulators are putting the final touches on proposals to stabilize the fund, which is under pressure from a shrinking contribution base and a surge in subsidy demand from competitors, which are mostly wireless carriers,” said Jessica Zufolo, a telecom analyst at Medley Global Advisors L.L.C. Industry sources confirm that outlook. An FCC spokesman declined to comment.
Zufolo said the USF has ballooned to about $7.4 billion, with the high-cost rural component eating up more than $4.3 billion of the total. Martin has focused on USF support for competitive eligible telecommunications carriers as a big reason for the fund’s explosive growth, even though rural telephone companies collectively continue to receive billions of dollars from the fund even as they are losing subscribers.
The most controversial reform pursued by Martin-based on a proposal by the Federal-State Joint Board on Universal Service-would cap subsidies for CETCs -mostly wireless operators-at June 2007 levels. The FCC applied the same formula in imposing a USF support cap as a condition of approving the $27.5 billion acquisition of Alltel Corp. by private-equity firms TPG Capital L.P. and the Goldman Sachs Group Inc. In fact, there is talk of the FCC finally taking action on a slew of pending CETC applications.
According to Medley Global Advisors, Alltel is on track to receive about $240 million in USF high-cost rural support by year’s end. By that point, AT&T Inc., parent of the largest cellular carrier, is expected to receive $87 million; Dobson Communications Corp., which is set to be acquired by AT&T Mobility, will receive $40 million; and Rural Cellular Corp., which is being acquired by Verizon Wireless, between $35 million and $40 million, in USF rural subsidies.
Regional differences
Chicago-based U.S. Cellular Corp. is also a major recipient of USF rural subsidies and thus faces diminished government support, prompting CEO John Rooney go public with sharp criticism of the FCC.
“You have a bunch of urban elites at the (FCC) who have no understanding of the dire need of people in rural areas where there is little or no wireless service at all,” Rooney told an Illinois newspaper. “Landline companies can’t provide the services we provide. It’s essential for public safety, essential for commerce and essential for people being in contact with each other.”
Regional iDEN operator SouthernLINC Wireless proposed that the USF should provide full support in each geographic support area until the area is served by an incumbent local telephone company and three CETCs.
The mobile phone industry is largely unified in opposition to the USF wireless cap, with No. 2 operator Verizon Wireless-which does not seek CETC high-cost support-a major exception. House and Senate members are divided over the imposition of a USF wireless cap in rural areas.
Zufolo said the Joint Board is expected to issue final USF reform recommendations shortly, but Martin is moving forward. She said Martin next month wants to issue an order imposing a USF rural support cap, while initiating proposals to set the cap at June 2007 levels; to eliminate a rule whereby competitive mobile phone carriers get support identical to that received by incumbent rural landline companies (because wireless infrastructure is less costly than wireline infrastructure to deploy); and to institute a reverse auction whereby CETC high cost support would go to the lowest bidder.
CTIA supports reverse auction
Cellphone industry trade association CTIA backs the reverse auction concept, but favors a technology-neutral approach in which wireless and wireline carriers would compete against each other. In addition, CTIA proposed that losing entities in a reverse auction should receive a lesser level of universal service support-a proposition that keeps rural wireless competition in play. Rural wireless carriers remain leery of the reverse auction concept.
“This approach has long been supported by Chairman Martin and may end up getting supported by his two other Republican colleagues (Commissioners Deborah Taylor Tate and Robert McDowell),” Zufolo stated. “However, we don’t expect the FCC’s two Democrats (Commissioners Michael Copps and Jonathan Adelstein) to support this approach. Rural [incumbent local exchange carriers] are also fiercely opposed to it, saying it will threaten their current support levels at a time when access line loss is acute. In the end, we expect the FCC will pursue a modified version of this proposal by requiring mobile (wireless competitors) to bid competitively for support first while establishing a longer glide path that gradually includes incumbents in the bidding structure.”
While the overriding objective is to rein in the growing universal service fund, Zufolo said Joint Board recommendations likely will include proposals to expand USF support to broadband services. The FCC is not apt to embrace such a policy, she said.
