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Defining the New Policy Conflicts

Failing to address and adapt to the new ratemaking realities could result in increased costs for the economy.

Fortnightly Magazine - July 2006

housing, the Food and Drug Administration, the Center for Disease Control, and the Federal Bureau of Investigation. 9

Analyzing the Universal Service Challenge

The facts about the universal service programs are well-known and accepted. Controversy surrounds the distributional effects, questions of jurisdiction, and purposes of the programs. These controversies relate primarily to the HCF and low-income programs.

The distribution issues involve who benefits and who pays. Traditionally, high-cost support was for small, primarily rural wireline telephone companies, and was intended as a replacement for payments that these companies used to receive from AT&T before the breakup in 1984 (and have received from access charges since that time). 10 Competition in long distance made the AT&T-centric system unworkable, and the development of competition in local service made the access charge-based system unworkable.

Prompted in part by the Telecommunications Act of 1996 requirement that telephone-subsidy systems be competitively neutral, the Federal Communications Commission (FCC) responded to these competitive realities by funding all of the federal universal service programs (those now administered by the USAC) through fees assessed against interstate revenues received by telecommunications carriers. In the case of the high-cost program, the FCC allowed small telephone companies to draw from the fund monies that they would lose from lowering their access charges to more competitive levels.

This raised issues of competitive neutrality because rivals to the traditional companies would be at a competitive disadvantage unless they, too, could draw funds from the HCF. So the FCC allowed the new competitors to receive high-cost support. The result has been that the fund’s growth rate has increased rapidly. New rivals applying for high-cost support account for most of this growth rate, but most of the increase in dollars of support has come from the traditional companies lowering their access charges and replacing the revenue with monies from the HCF. 11

In addition to raising the issue of who should receive high-cost support, competition creates issues of who should pay. Competition from non-telecommunications services, such as Voice over Internet Protocol (VoIP) and broadband local access via cable modems, and from mobile telephony is decreasing the interstate revenues that the FCC assesses to fund universal-service programs. Since 2002, the FCC’s fee has increased from 6.8 percent of interstate revenue to 10.2 percent, and all indications are that this percentage will continue to grow. 12 Furthermore, the distribution of payments into the funds and receipts from the funds are not uniform across the country: Florida, for example, provided almost 7 percent of the funding for universal service programs in 2003 but received only 2.5 percent of the funds, for a net loss of $234 million for the state. In contrast, Arkansas and Kansas together received 4.6 percent of the funds, but contributed only 1.8 percent, for a net gain of $156 million for these states. 13

Facing the Hard Questions

These distribution issues arise because of the underlying adaptive challenges of jurisdiction and program goals. The HCF’s growth results from conflicts among the goal of effective competition in all areas of telecommunications, the preservation of price averaging, and the