Phil Davies - Senior Writer
Published May 1, 2007 | May 2007 issue
Congress is unlikely to scrap high-cost universal service subsidies. Many lawmakers in predominantly rural states consider continued support for rural telephone service essential to the social and economic welfare of their constituents.
Rural telephone and cellular carriers have an obvious financial stake in the continuation of high-cost payments. Some consumer groups also oppose changing the system, on the grounds that residential and especially low-income phone users would suffer.
Nevertheless, the Federal Communications Commission, state utility regulators and various think tanks have proposed measures intended to curb rising costs and put the universal service fund on a firmer financial footing. Reform proposals floated in recent years include the following:
Auctioning off subsidies to cut costs. FCC Chairman Kevin Martin has endorsed the idea, explored at various times in the past decade, of holding "reverse" auctions to allocate universal service funds. The FCC would specify high-cost service areas and then take bids from rival telecom firms willing to serve each area as the provider of last resort. The company bidding the lowest per-subscriber subsidy wins. By forcing providers to reveal their true costs and become more efficient, "technology neutral" reverse auctions would inexorably drive down high-cost outlays. Auction systems have been employed in Latin America to provide Internet access and pay phone service. But in this country rural telcos have objected that low bidding would foster inferior service.
In order to fix universal service, regulators and the telecom industry must grapple with another contentious issue—intercarrier compensation, a complex set of rules governing who gets paid what for handling voice and data traffic. National and regional carriers pay access charges to local telephone companies that originate and terminate long-distance calls. Because access charges levied by small rural carriers usually exceed the actual cost of completing calls, ICC is an implicit subsidy that supplements USF high-cost payments. But growth in wireless-to-wireless calls and free VoIP services (both of which bypass interstate and intrastate access charges) together with proliferating "phantom" or disguised traffic threaten to choke off this steady revenue stream.
Telecom firms are unlikely to agree to overhaul universal service without revamping ICC as well, said Tony Clark, chairman of the North Dakota Public Service Commission. "Intercarrier comp is, for a lot of rural companies, probably as big if not bigger an issue than universal service," he said. "They are joined at the hip, and everybody recognizes that."
One stab at a new ICC regime is the FCC's Missoula Plan, named for the Montana city where the National Association of Regulatory Utility Commissioners and industry representatives hammered out the details last year. An attempt to level the regulatory playing field for different telecommunications technologies and classes of carriers, the plan would reduce and unify ICC charges while allowing telecom firms to recover some of their lost revenues from increased line charges paid by subscribers.
Like reform proposals for universal service, the Missoula Plan has supporters and detractors, with rural telephone companies and other wireline carriers generally backing it and cable and wireless providers opposing it. As of March the FCC was still reviewing proposed amendments to the plan.