You Can Do Something About the Growing Universal Service Burden

Business Communications Review –

With new regulations coming, businesses must make their concerns known to the FCC.

Everyone hates to see universal service sur­charges on their bills. (AT&T calls it the Universal Connectivity Charge, MCI labels it the Federal Universal Service Fee and Sprint identifies it as the Universal Service Carrier Charge). Over the last year, the federal surcharge has ranged from 8.7 percent to 9.5 per-cent. In effect, it means that telecom subscribers have paid 8.7 percent to 9.5 percent more for interstate and international telecom services than most rate analyses show. Telecom customers should prepare themselves to pay even higher- substantially higher-universal service sur­charges.

An ongoing FCC proceeding, however, holds a glimmer of hope for lower universal service sur­charges for business telecom customers. The odds of that possibility becoming a reality would improve if business telecom customers inform the FCC of their views.

A Little Background

A little background is in order to understand how we have arrived at this point. Historically, some residential and rural telephone service subscribers paid below-cost rates because the high volume and urban telecom service subscribers paid above-cost prices. Simply put, implicit cross-subsidies supported this country’s universal service goals. Suf­fice it to say that the policies that produced the foregoing cross-subsidizations largely reflected political considerations.

The 1996 Telecom Act, however, mandated fundamental changes in the way this country supports universal service. Universal subsidies now must be explicit, not implicit as had been the case. This change has helped produce lower long dis­tance rates because the cross-subsidies that were buried in interstate access service charges, and that in turn inflated long distance rates, now are very visible (i.e., the universal service sur­charges).

An additional benefit is that making the sub­sidy explicit allows a reasoned debate on the size of universal service subsidies, who should get the subsidies and what services should be subsidized. That is as good as news on universal service gets, and it is very good news.

Now the bad news: Several factors have caused universal service surcharges to climb steadily since their initiation in 1998, and they will cause the surcharges to go even higher.

First, the funding requirements for universal service have soared as rural local exchange carri­ers have claimed more and more subsidies. In 1999, the high-cost component of the universal service fund was about $1.7 billion and the entire Universal Service Fund was $3.9 billion. For 2004, the high-cost component of the Universal Service Fund, the trough from which local exchange carriers feed, is forecast to be at about $3.6 billion and the entire Universal Service Fund may top $6.5 billion.

Virtually all the growth in universal service subsidies over the last four to five years has gone to local exchange carriers. With influential elected officials proclaiming the need for virtually ubiqui­tous availability of broadband service, the high-cost component of the Universal Service Fund probably will continue to grow at an alarming rate.

Technically, broadband is not covered under the Universal Service Fund, but in practice, it’s being deployed with this money. Rural local exchange carriers are installing broadband plant under a provision that states that the FCC does not expect the carriers to install old technology. More-over, with broadband subscribership growing, broadband may be included in the subsidized ser­vices in the not too distant future. Given the direc­tion of the political winds, it is not surprising that the FCC appears disinclined to take any serious action to curtail growth in this part of the univer­sal service subsidy system.

The second reason for higher universal service surcharges is that the carriers’ interstate revenues, against which an FCC-prescribed factor is applied to obtain universal service subsidies, have been dropping since 2000. The revenue drop is attribut­able to two main factors: Consumers now often use wireless service plans and email instead of tra­ditional long distance service; and long distance service rates have fallen.

As telecom revenues fall, the percentage factor must increase as a matter of simple arithmetic in order to raise the same amount of universal ser­vice subsidies. The higher percentage assessments provide additional incentives for users to choose services that bear smaller

or no universal service funding obligations compared to the funding obligations imposed on traditional services.

As more and more telecom services are bundled with non-tele­com services, and unregulated information services replace telecom services, the pool of inter‑

state telecom revenues will continue to shrink and the universal service assessment, expressed as a percentage, will continue to increase. Universal service funding is not sustainable under these con­ditions.

The third reason to expect higher universal ser­vice surcharges is because the FCC eventually will replace the existing access charge scheme- i.e., charges long distance carriers pay local carri­ers to complete calls-with a system that recovers a greater portion of access service costs through charges imposed directly on end users. Rural local exchange carriers reportedly recover about one-third of their annual revenues from LD access ser­vice charges (Wall Street Journal, May 20, 2004). Those carriers will almost certainly argue that they cannot recover those revenues solely through higher Subscriber Line Charges because the resulting Subscriber Line Charge would be too high to be politically viable.

One industry observer has predicted that some providers, politicians and regulators will try to cover lost rural local exchange carrier access rev­enues through higher universal service payments. In effect, universal service payments will be used to assure that rural carriers suffer no revenue ero­sion from replacing the current access charge sys­tem.

The Future

For good reason, the FCC is worried about the sustainability of universal service funding, and consequently is considering whether it should replace the current method for assessing universal service contributions-i.e., a percentage applied to interstate and international revenues-with a method that would assess contributions based on either “connections” to the public switched telecommunications network or “assigned tele­phone numbers.” Either of the replacement methodologies could

a.) be more economically rational than the current system;

b.) be a sustainable source of universal service funding even with the proliferation of wireless and Internet usage; and

c.) lower the universal service burden borne dis­proportionately by high-volume telecommunica­tions users.

If the FCC were to assess universal service contribution obligations based on telephone numbers assigned to end users, the universal service burden for each such number would likely be in the range of $1 to $1.15, given the current size of the uni­versal service funding obligation. Residential consumers would certainly still be able to afford telephone service. Indeed, the average residential telecom service subscriber would pay less in uni­versal service subsidies than under the current sys­tem. Proponents of this approach would also exempt low-income subscribers from paying any universal service charges, which is not the case under the current system.

High-volume telecom customers, particularly those with large data networks should, however, understand that even the very favorable assigned telephone number assessment methodology could produce very undesirable results. For example, if the FCC were to decide that it wanted indiscrimi­nate subsidization of residential telephone service to continue, it could try to implement a system in which multi-line business users and special access connections would pay some multiple of the uni­versal service assessment levied on residential telephone numbers.

Indeed, one suggested method would result in customers of special access services paying 60 percent of the universal service contributions assessed on services used by multi-line business service customers. The $2 billion that would come from special access connections alone would be an obviously unjustified burden imposed on spe­cial access subscribers.

Business users should also be concerned about any plans to assure rural exchange carrier revenue streams. If history teaches anything about telecom regulation, it is that regulatory authorities usually try to extract cross-subsidies from business users before they turn to residential subscribers.

The obvious question is: Would government regulators, i.e., the FCC, adopt an anti-business approach to subsidizing universal service? We do not know that the FCC will actually do so. We do, however, know that the FCC is sensitive to the views of elected officials who, of course, are mindful of their constituents’ views. These condi­tions could cause the FCC to decide to subsidize universal service through mechanisms that are economically inefficient and clearly anti-business.

What You Can Do To Protect Your Company

How can a business that subscribes to a significant quantity of telecom service know whether it should try to influence government decisions on universal service subsidization? As a baseline, it should first estimate how much it pays under the current system by multiplying its monthly charges for interstate and international service (include only international service that is provided in the U.S.) by 8.7 percent.

To evaluate whether a change in the collection mechanism would be detrimental or beneficial, the next step is to determine the approximate number of telephone numbers (including DID and wireless and paging) assigned to it, and the number of spe­cial access units of capacity. Assume one unit of special access capacity for a DS0 cir­cuit, five units for DS1 circuits and 40 units for DS3 and larger special access circuits. Multiply the sum of the telephone numbers and the units of special access capacity by $1.10.

Compare the product of the last calculation with the result of the baseline calculation. (Of course, both calculations should be annualized.) Then change some of the assumptions, because none of the weightings or possible prices are yet set in stone. Assume that the charge per telephone number would be $2.50 or $3.00, and assume that DS1 circuits are assigned 26 units of capacity, DS3 circuits are assigned 78 units and higher-capacity arrangements are assigned units equal to their voice grade channel capacity. You might also want to do a comparison that develops the base-line calculation based on a 9.5 percent surcharge instead of 8.7 percent.

The FCC could adopt any of the aforemen­tioned examples and others. Obviously, a lot of money could be at stake.

Conclusion

Businesses that consume large amounts of telecommunications services will most certainly be affected, either favorably or detrimentally, by whatever decision the FCC makes regarding fund­ing universal service. These businesses should expect that carriers, consumer advocates and some elected officials will inform the FCC of their views. Concerned businesses should also weigh in at the FCC. At a minimum, they should consider sending letters to FCC Commissioners that make the following substantive points:

– Universal service cannot be sustained through assessments on billed interstate and international telecom revenues. Funding requirements will con­tinue to increase while telecom revenues will con­tinue to fall.

– Assigned telephone numbers would be the best basis for universal service assessments because all connections to the public switched telecommuni­cations network require a 10-digit telephone num­ber.

– There is no defensible basis for discriminating against multi-line business subscribers by impos­ing a higher universal service assessment on tele­phone numbers assigned to business subscribers than would be levied on residential subscribers.

– Universal service subsidy mechanisms should not discourage use of high-capacity special access lines through excessive universal service assess­ments.

If businesses decide to send letters to the FCC, they should write to the following FCC Commissioners at the

indicated addresses, with copies to the FCC Secretary. All letters should show a “Re:” line that states “Ex parte contact in CC Docket No. 96:”

Commissioners:

Michael K. Powell
Kathleen Q. Abernathy
Michael J. Copps
Kevin J. Martin
Jonathan S. Adelstein
Federal Communications Commission 445 12th Street, SW Washington, DC 20554

Secretary:

Marlene H. Dortch
Federal Communications Commission
9300 East Hampton Drive
Capitol Heights, MD 20743

If business telecom subscribers do not commu­nicate with the FCC while other parties who have taken positions averse to business telecom subscribers to do, business telecom subscribers should not complain if the FCC modifies its universal ser­vice rules in ways not favorable to business tele­com subscribers.