FCC votes to cap universal service fund payments: Moves stands as a blow to smaller wireless carriers

A divided Federal Communications Commission voted to impose an interim cap on high-cost universal service fund payments to competitive eligible telecommunications carriers, a blow to some smaller mobile-phone carriers that rely on subsidies to bring competitive services to underserved rural areas of the country.
“This is a terrible day for rural consumers,” said David LaFuria, a wireless industry attorney. “Carriers will be telling states this summer that new cell site construction will be cut as a result of the cap. In very real terms, hundreds of communities that thought they were going to get service will be told it is not happening.”
The FCC’s ruling was no surprise coming just days after Commissioner Robert McDowell announced his support for the cap. The cap was one of the changes recommended by a federal-state joint board on universal service fund reform.
FCC Chairman Kevin Martin said action was needed, given the ballooning payments to mostly wireless carriers that have grown from $1.5 million in 2000 to more than $1 billion in 2007. At the same time, rural wireline carriers receive three times as much as wireless operators from the high-cost universal service fund.
“A large and rapidly growing portion of the high-cost support program is now devoted to supporting multiple competitors to serve areas in which costs are prohibitively expensive for even one carrier,” Martin stated. “These competitive ETCs don’t receive support based on their own costs, but rather on the costs of the incumbent provider, even if their costs of providing service are lower.”
Commissioners Michael Copps and Jonathan Adelstein, the two Democrats on the GOP-led FCC, dissented from the FCC ruling. However, they backed the cap exception for CETCs serving woefully underserved tribal lands or Alaskan regions. The regulatory caveat is expected to largely benefit General Communications Inc., an Alaska-based telecom company. The FCC also said CETCs that file their own cost data may obtain an exemption from the cap.
“The outcome is an illusory band-aid that is supposed to contain costs but, in reality, imposes the much heavier cost of lost opportunity to reform universal service and put America back in the vanguard of advanced telecommunications,” said Copps. “As a result of today’s vote, real reform is on the back-burner. What a pity!”
Adelstein said that “the cap mechanism adopted by the commission today suffers from a major flaw because it penalizes most harshly the very states that heeded calls for discretion in the designation process.”
Some mobile carriers and various lawmakers regard the cap as unfair because it discriminates against the wireless industry. AT&T Inc. and Verizon Communications Inc., parent companies of the two largest national cellular carriers, favor the cap.
“Alltel’s position throughout the debate has been that limits of any kind on wireless USF are bad for consumers, especially in rural areas,” said Andrew Moreau, an Alltel Corp. spokesman. “We’re studying the impact of the cap but have no other statement.”
Alltel was scheduled to receive about $230 million in rural USF support this year.
“We’re deeply disappointed with the order,” said Jeffrey Smith, a spokesman for U.S. Cellular Corp. The carrier was on track to collect $150 million in high-cost USF support in 2008.
The FCC said the cap is intended to remain in place while other USF reforms are pursued.
“We believe proposals to use reverse auctions, eliminate identical support and generally overhaul distribution mechanisms are a heavy lift, particularly in an election year,” stated analysts at Stifel, Nicolaus & Co. “A renewed push to shift industry contributions from a system based on interstate/international telecom revenues to one based on telephone numbers appears to have a somewhat better chance.”
Legislation drafted by Rep. Joe Barton (R-Texas), ranking member of the House Commerce Committee, proposes to do just that. However, Stifel analysts said that though the measure is unlikely to move forward this year, it could prompt the FCC to act on USF contribution reform.