Universal Service Reform in '08

Now that the FCC has issued its three notices of proposed rulemakings regarding potential reform of the bloated and insufficiently-targeted Universal Service funds, it is appropriate to point out once again that the agency should make USF reform a top priority this year. The truth is that, now that we have a competitive marketplace with multiple choices of communications services using different technological platforms, the universal service regime needs a pretty radical overhaul. This would mean changing the program so that USF funds are directed mostly to support to consumers who demonstrate they need financial support, rather than, as now, mostly to communications providers who may use the support in ways that do not necessarily benefit underserved consumers, or serve them in the most cost-effective, efficient ways.

Be that as it may, radical USF change is not likely a near-term prospect. This makes it even more important for the FCC to seize the opportunity this year to make some meaningful, even if modest, progress towards reforming the regime. FCC Commissioner Deborah Taylor Tate and Oregon Public Utility Commissioner Ray Baum deserve credit for their patient leadership of the Federal-State Universal Service Joint Board. The panel made some worthwhile recommendations to the Commission.

In line with the Joint Board recommendations, the FCC should cap the size of the high-cost universal service fund at $4.5 billion; stop wireless carriers from receiving subsidies based on the “identical support” received by the incumbent wireline carriers, even though the wireless companies generally have lower costs; and adopt some form of “reverse auctions” as a method of determining which communications providers can serve designated high-cost areas on the least costly basis.

A few of the Joint Board’s statements in its November 2007 Recommended Decision are especially noteworthy. Regarding the overall size of the high-cost subsidies, now at approximately $4.5 billion per year and growing, the Board said this:

"Many areas of government enterprise operate within a budget, and we think that high-cost funding can do likewise, provided that we are willing to make realistic estimates of the funding needed to meet the statutory requirement that we preserve and advance universal service. Over the longer term, we anticipate that total funding can and should be decreased as broadband and wireless infrastructure deployment becomes widespread throughout the country."

Without delay, the Commission should adopt the proposed cap on the size of the high-cost fund. This would stem the growth of the USF tax paid by all consumers, which currently stands over 10%, in contrast to 6.8% in the first quarter of 2002.

The Commission should move with more than its usual dispatch to adopt the Joint Board’s recommendation to eliminate the identical support rule which provides support to wireless carriers without regard to costs. Regarding the wastefulness inherent in this element of the current regime, the Board stated:

"The Joint Board recognizes that the identical support rule has resulted in the subsidization of multiple voice networks in numerous areas and greatly increased the size of the high-cost fund. High cost support has been rapidly increasing in recent years due to increased support provided to competitive ETCs. These carriers receive high-cost support based on the per-line support that the incumbent LECs receive rather than the competitive ETCs’ own costs. Support for competitive ETCs has risen to almost $1 billion. We believe it is no longer in the public interest to use federal universal service support to subsidize competition and build duplicate networks in high-cost areas…The rule bears little or no relationship to the amount of money competitive ETCs have invested in rural and other high-cost areas of the country."

From 2001 through 2007 the financial support to the competitive wireless carriers increased from $17 million to $1 billion, and much of this subsidy has not gone for build-outs to unserved areas.

And, finally, the Commission should adopt some form of reverse auctions, even if initially on some less-than-universal experimental basis. Reverse auctions would provide a means of determining which provider (or providers) should be awarded subsidies to serve designated high-cost areas. The auction mechanism would encourage the provision of service on the most cost-effective, efficient basis, and spur the development of more innovative new network technologies.

Realistically, designing and implementing an appropriate auction mechanism may well take most of the year. But there is no reason why the FCC cannot adopt a high-cost fund cap right away. FCC Chairman Kevin Martin has endorsed the idea, and, with Commissioner Tate, has shown leadership on USF issues. And, it ought not to take that many months, after all the discussion over the past couple of years and the work already done on the issue by the Joint Board, for the agency to adopt the change in the identical support rule.

More comprehensive and fundamental reform of our nation’s communications laws and policies consistent with the new marketplace realities arguably may require several more years of congressional gestation and new presidential leadership. But, in the meantime, the FCC should set its sights on achieving meaningful progress this year in the cause of universal service reform.