U.S. House of Representatives: Committee on Energy and Commerce, Republicans Prepared Witness Testimony: Gregg, Billy Jack

Subcommittee on Telecommunications and the Internet
September 24, 2003
1:00 PM
2123 Rayburn House Office Building

Mr. Billy Jack Gregg
Director
Consumer Advocate Division Public Service Commission of West Virginia
723 Kanawha Blvd. East, Suite 700
Charleston, WV, 25302

My name is Billy Jack Gregg and I am the Director of the West Virginia Consumer Advocate Division. My office is charged with the responsibility of representing West Virginia utility ratepayers in state and federal proceedings which may affect rates for electricity, gas, telephone and water service. My office is also a member of the National Association of State Utility Consumer Advocates (NASUCA), an organization of 43 state utility consumer advocate offices from 41 states and the District of Columbia, charged by their respective state statutes with representing utility consumers before state and federal utility commissions and before state and federal courts.[1] I am a former member of the Board of Directors of the Universal Service Administrative Company (USAC) and currently serve on the Federal-State Joint Board on Universal Service. I greatly appreciate the opportunity to testify at this legislative hearing on the sustainability of the Federal Universal Service Fund (USF).

The most important issue facing the Federal Universal Service Fund is its long-term sustainability. We must ensure that the USF is sufficient, predictable and affordable for all parties involved: fund recipients, telecommunications providers and consumers. Before I address the current problems facing the USF, I believe it is appropriate to review the achievements of the USF since the passage of the Telecommunications Act of 1996 (the Act).

Section 254 of the Act enshrined and expanded universal service principles which had been followed by the Federal Communications Commission for decades. Based upon the requirements of Section 254, the FCC, after consultation with the Federal-State Joint Board on Universal Service, created a new Universal Service Fund in 1997 containing several distinct support mechanisms. As a result, total USF funding has grown from $1.8 billion in 1997 to $6.2 billion during 2003. While these support amounts are large, they must be kept in perspective. Total telecommunications revenues in the United States last year were in excess of $230 billion. By annually collecting and redistributing less than 3% of these total revenues, we are able to make phone service affordable in all high-cost areas of the nation; support low-income customers; assist rural health care providers; and connect all classrooms to the internet. Moreover, all states and territories benefit from the USF as shown on Attachments 1 and 2.[2] That=s quite an accomplishment, and one that everyone involved in the USF should be proud of as we move forward to ensure the long-term sustainability of the fund.

As I mentioned earlier, total funding for the USF has grown from $1.8 billion to $6.2 billion. Unfortunately, the funding base for the USF has not kept pace with the growth in the fund, resulting in higher and higher USF assessments on carriers and their customers.

The contribution base problem stems in large part from the wording of the Act itself. Section 254(b)(4) states that: "All providers of telecommunications services should make an equitable and nondiscriminatory contribution to the preservation and advancement of universal service." However, Section 254(d) states: "Every telecommunications carrier that provides interstate telecommunications services shall contribute on an equitable and non-discriminatory basis, to the specific, predictable, and sufficient mechanisms established by the Commission to preserve and advance universal service." In other words, even though the principle set forth in the Act is that all telecommunications providers should contribute to the fund, and even though the fund benefits all areas of the country, Section 254(d) limits the obligation to support the fund to a subset of telecommunications carriers - providers of interstate telecommunications services.[3]

In 1997 the FCC decided to base the funding for the high-cost and low-income support mechanisms on each carrier=s interstate and international revenue, while the funding for schools and libraries and rural health support mechanisms were supported by assessments on all revenues, interstate and intrastate. The use of intrastate revenues for USF assessment purposes was struck down by the Fifth Circuit Court of Appeals in 1999.[4] Since that time the contribution base for the USF has been limited to only interstate and international revenues. As the USF has grown in order to meet the Act=s direction that support be sufficient and explicit, and as the interstate revenue base has leveled off, the assessment rate has increased rapidly.

Attachment 3 shows the change in USF funding since 1997, along with changes in the interstate revenue contribution base for the USF.[5] As you can see, the introduction of the schools and libraries fund and increases in the high-cost fund have driven the overall size of the fund. As a result, the fund has tripled, rising from approximately $1.8 billion in 1997 to approximately $6.2 billion this year. So long as interstate revenues grew at a reasonable rate, the ultimate impact of fund growth on the USF assessment rate and customers= bills was fairly moderate. However, beginning in 2000 interstate revenue growth began to flatten out, and during 2002 started to decline. The result has been a steep escalation in the assessment rate, from 5.7% in the fourth quarter of 2000 to 9.5% in the third quarter of 2003.[6] A universal service fund which cannot depend on the stability of its funding base is not predictable, is not sufficient, and is clearly not sustainable.

There are several alternatives available in order to stabilize the USF contribution base. One alternative would be to retain the current system, but remove restrictions in current rules which artificially depress the existing interstate revenue contribution base. One such restriction is the so-called "safe harbors" which limit the contribution responsibility of certain classes of carriers. Beginning in the second quarter of 2003, the FCC raised the safe harbor for wireless carriers from 15% to 28.5%.[7] However, in spite of these changes the interstate revenue base continues to decline.

Another restriction limits the contributions from broadband providers, one of the fastest growing areas of telecommunications. Under current rules, providers of broadband by means of digital subscriber line (DSL) service must contribute to the fund, while cable modem service providers are exempt. It is obvious that such an inequitable and artificial system of assessment on similar services cannot be maintained. However, proposals to eliminate the inequity by eliminating contributions from DSL providers would only further shrink the interstate contribution base.

A second alternative would be to grant the FCC the authority to base contributions to the fund on total telecommunications revenues. While growth in the interstate revenue base has flattened out and begun to decline, total telecommunications revenues from end-users have continued to grow at a healthy pace. Shown on Attachment 4 is a comparison of changes in the universal service fund, the interstate revenue base, and total telecommunications revenues from 1997 to 2003.[8] As you can see, total telecommunications revenues would provide an adequate funding base for the USF. In fact, if total telecommunications revenues had been used as the funding base from the start, we would not be discussing this issue today. The growth in the fund could have been accommodated while keeping the assessment rate below 3%.

Use of total revenues would also eliminate disputes about whether revenues are intrastate or interstate, and would equitably spread the obligation to support universal service to all providers and to all customers based on their use of the network. However, basing federal universal service on total revenues would require a statutory change to clarify that the FCC has the authority to base contributions on all revenues, intrastate as well as interstate.[9] In addition, a total revenues base could be susceptible to erosion in the future as more and more traffic, including voice traffic, migrates to the internet and is classified as "information services," currently exempt from USF assessment.[10] Finally, the impact of the use of total revenues on state universal service programs is unclear.

A third alternative would be to base assessments on connections to the public switched telephone network, or on assigned telephone numbers. The FCC is currently considering several such proposals. While these connection-based or numbers-based proposals do enlarge the base of the USF, and minimize problems with classification of services or revenues as information services, they do have several flaws: (1) each proposal radically shifts the funding of the USF among industry groups; (2) each proposal appears to exempt pure providers of interstate long distance from making any contribution to the fund in contravention of the plain wording of Section 254(d); (3) each proposal requires capacity-based connection equivalents for high-capacity customers; and (4) each proposal shifts responsibility for payment of USF charges from high-use to low-use customers.

A final alternative, which my office has proposed to the FCC, would be a hybrid of the proposals described above. For example, the Commission could continue to base 50% of the universal service assessment on interstate revenues, and assess the remaining 50% on end-user connections to the public switched network. Such a hybrid would not require a statutory change and would ensure that all providers of interstate services, even those that did not provide end-use connections, would continue to contribute to support universal service. In addition, this 50/50 hybrid approach would mitigate impacts on low-usage customers, and result in contributions from various industry sectors that are very close to those produced by use of total telecommunications revenues.

In finding a solution to the contribution base problem, I agree with Senator Stevens of Alaska who said last spring: "All companies that use the network, in my judgment, should contribute to universal service, regardless of the type of service they provide."[11] I believe we must expand contribution responsibility to encompass all revenues and all services that connect to the telecommunications network. Since all benefit, all should contribute.

In looking at the long-term sustainability of the fund, we need to focus not only on broadening the contribution base, but also on controlling and focusing the funds paid out for the individual support mechanisms which make up the overall USF. Each of these support mechanisms presents unique issues which will have to be resolved. Even though many have argued that we must stabilize the fund - which implies that we should limit funding - we must be mindful that the Act requires the fund to be sufficient to carry out each of the universal service principles. For some mechanisms this may require a limitation in funding, while for others an expansion will be needed.

The high-cost support mechanism is the oldest portion of the fund, and is still the biggest, amounting to $3.3 billion this year. Of this amount, approximately $800 million goes to non-rural companies, while $2.5 billion goes to rural carriers.[12]

As shown on Attachment 3, total high-cost support has grown by over $1 billion since 2000. Most of this increase is the result of three new mechanisms which have been added to the fund: high-cost model support, interstate access support, and interstate common line support. These new funds have helped adapt the USF to the introduction of competition by making support explicit and portable. However, the continued growth in the high-cost fund has added to the unrelenting pressure on the assessment rate which must be paid by all consumers.

Earlier this year, the FCC referred to the Joint Board a number of issues related to the growth of the high-cost fund. These issues include determination of how many lines to support, the cost basis of per line support, and whether guidelines should be adopted for state eligible telecommunications carrier (ETC) determinations.

There is one issue common to all parts of the high-cost fund which threatens to enlarge the fund to an unsupportable size. Under current rules, all lines provided by ETCs in high-cost areas receive support. The support in any particular wire center is the same for all carriers, and is based on the costs of the incumbent carrier. However, rather than competing for universal service support, all ETCs that provide service receive support in equal per line amounts for all lines that they provide to a home or small business. For example, a single family in a high-cost wire center could be provided two landlines by an incumbent ETC and three cellular lines by a wireless ETC. Each of these carriers would receive equal support for each of the lines provided.[13] As a result, the potential exists for a large increase in the high-cost fund as more and more carriers - especially wireless carriers - attain ETC status.

It is estimated that during 2002, support for secondary lines amounted to $336 million, or 11.5% of the entire high-cost fund. Moreover, support paid to wireless carriers represents the fastest growing component of secondary line support. As shown on Attachment 5, high-cost support for wireless carriers has grown from $500,000 in 1999 to approximately $120 million in 2003.

If the high-cost fund is going to continue to provide affordable access in all parts of the country, then it cannot continue to subsidize the unlimited desires of each individual. I believe that federal USF support should be limited to a single line for each household,[14] and that the choice of which carrier receives USF support should be left to each customer. This would mean that carriers would have to compete for the USF subsidy. This will increase customer benefits and stabilize the federal high-cost fund. Individual states should be free to subsidize additional lines if they so choose.

As I previously mentioned, the current high-cost system bases per line support on the costs of the incumbent carrier, and offers this support to all ETCs serving the same area. This is true even when competitive carriers - such as wireless carriers - may have costs that are substantially less than the wireline incumbent. Another means of limiting the growth of the high-cost fund would be to use each carrier's own costs as the basis for per line support. In order to ensure that no carrier receives an unwarranted windfall from USF support, support to competitors should be capped at the per line support received by the incumbent.

Under Section 214(e) of the Act, two different standards were adopted for designation of ETCs, depending on whether an area is served by a rural or non-rural incumbent carrier. For areas served by non-rural carriers, the Act mandates that states must designate additional carriers as ETCs if they can provide all of the supported services[15] and advertise the availability of those services throughout the service area. However, for areas served by rural carriers, states may designate additional ETCs, and must first find that it is in the public interest to do so.[16]

Unfortunately, there are currently no standards to guide states' determination of the "public interest" under Section 214(e) of the Act. As a result, state ETC determinations in rural study areas have varied widely in terms of conditions which must be met by carriers prior to and after ETC designation. In many states the obligations on competitive ETCs are less than those imposed on incumbent ETCs.

Almost every party agrees that one of the purposes behind Section 214(e) was to allow states to identify those areas where it was so costly to serve, that it made no sense to have more than one subsidized carrier. However, since states have no responsibility for funding the federal USF, and under current rules additional ETCs mean more federal USF money coming into the state, it is very difficult for states to find that it is not in the public interest to designate additional ETCs in rural areas. This is true regardless of the cost to serve any particular area.

I believe the FCC should establish guidelines for the public interest determination. The guidelines should allow states to level the playing field among ETCs by requiring all ETCs to offer an unlimited local calling plan, equal access to long distance carriers, and a comparable monthly price for local service. ETCs should also be required to follow the same consumer protection rules, including billing and collection rules, that apply to incumbents.

In order to provide guidance to the states in identifying those areas where there should be a limit on the number of subsidized carriers, I believe the FCC should also establish ETC guidelines based on the amount of per line support received by each study area. Under this approach, in rural study areas receiving an average of $30 or more per line in monthly support the guideline would state that it is presumed that it is not in the public interest to designate more than one subsidized carrier, i.e., more than one ETC. In areas receiving more than $20 per line in monthly support, but less than $30 per line, it would be presumed that no more than one additional subsidized carrier should be designated. There would be no limitation on the number of ETCs in study areas receiving less than $20 per line in support. States would be able to overcome these presumptions by specific evidence about particular carriers or particular areas.

Establishing such presumptive benchmarks based on the amount of monthly per line support for each study area would be easy to administer, and would encompass the truly small study areas where it is especially costly to serve. Of the 1400 rural study areas, those study areas receiving over $20 per line in monthly high-cost support serve only 1.7% of the total access lines in the United States, but receive almost 45% of total high-cost support. In other words, these study areas represent the small, high-cost areas where presumably it makes no sense to have more than a limited number of subsidized carriers. Placing limitations on the number of ETCs in these truly high-cost areas will help ensure the long-term sustainability of the fund, and will help ensure that consumers in those areas continue to have high-quality access at affordable rates.

The FCC greatly expanded the eligibility criteria and the size of the low-income support mechanism in 1997. Nevertheless, participation in the Lifeline and Link-Up programs varies widely among the states. As shown on Attachment 1, of the $673 million paid out for low-income support in 2002, almost half went to one state, California. This is not to disparage California's low-income program, but to point out that low-income support funds are distributed very unevenly throughout the nation. There are also overall fund size implications from this skewed distribution. If every state=s program was as successful as California=s, the size of the low-income support fund would more than double to $1.5 billion. The FCC currently has a proceeding open to review the operation of the low-income support mechanism. A Recommended Decision from the Joint Board was issued in April 2003 which endorsed expanding Lifeline and Link-Up eligibility to include customers with incomes at or below 135% of the federal poverty guidelines. NASUCA has supported the use of a benchmark based on 150% of the federal poverty guidelines, and has encouraged the use of automatic enrollment and self-certification to ensure that as many eligible customers as possible receive Lifeline benefits.

The schools and libraries fund has been capped since its inception at $2.25 billion. Demand for schools and libraries funds have always far exceeded the cap. As noted by the FCC in its Order of June 13, 2002, annual demand for e-rate funding is almost double the funds available. As more and more schools have become connected to the internet through the e-rate, the demand for recurring or priority one funds has increased. The result has been that the money available for internal connections in the schools yet to be wired has been declining. The FCC=s decision to allow unused schools and libraries funds to be rolled forward to increase future funding may help resolve this problem, but pressure on the cap is likely to continue. The FCC is also currently considering comments on reforms to the schools and libraries fund to address allegations of fraud and abuse, and inefficiency in the administration of the program.

Unlike the other support mechanisms, the rural health fund has had difficulty generating sufficient demand. The FCC originally anticipated a rural health fund sized at $400 million per year. However, in spite of repeated attempts to remake the fund, disbursements have remained low, only $16.4 million in 2002. Like the low-income program, benefits under the rural health care program are distributed unevenly. During 2002 Alaska received 72% of total USF rural health care funding.

Although the FCC is currently examining the operation of the rural health fund, it is clear that the root cause of the problems with the fund lie in the wording of Section 254. Unlike the schools and libraries support mechanism which provides discounts from regular prices on all telecommunications services, and pays for internal connections, Section 254(h) limits the rural health fund to the difference between rates available to health care providers in rural and urban areas of a state. Since many states have rural rates which are lower than urban rates, or have "postage stamp" rates for data services, the rural support mechanism has been of limited utility in meeting the needs of rural health providers. A statutory change should be considered which would make the rural health section of the Act parallel with the schools and libraries by providing services "at rates less than the amounts charged for similar services to other parties."

In order to be stable and sustainable in the long-term, the USF must be configured like a pyramid: it must have a broad and stable base of contributions at the bottom, and a narrow but sufficient focus of support at the top. The current universal service fund requires work on both ends of this structure. Issues related to the contribution base must be resolved. Since all benefit, all should contribute. In addition, the limited resources of the fund must be properly targeted to carry out the purposes of the Act. In order to continue the public policy success of the universal service fund, we must support access, not excess.

[1] In most respects, my testimony reflects the positions taken by NASUCA, although there are some areas where NASUCA has not yet reached a consensus position.

[2] Attachments 1 and 2 show actual disbursements to states during 2002 under each of the federal USF support mechanisms. Attachment 1 ranks the states based on total support received. Attachment 2 considers the number of access lines in each state, and ranks the states based on monthly support received per line.

[3] As a practical matter, virtually all telecommunications carriers provide some sort of interstate service.

[4] Texas Office of Public Utility Counsel v. FCC, 183 F.3d 393 (5th Cir. 1999) at 448.

[5]Through 2002 the interstate revenue base for a particular year represents revenues reported from the previous year. The USF assessment rate shown on Attachment 3 is not the actual rate used in any quarter, but is derived by dividing annual funding by the annual interstate revenue base. The interstate revenue base for years 1998 - 2003 comes from USAC reports. The interstate revenue base for 1997 is estimated. Beginning in the second quarter of 2003, assessments are based on projected collected revenues.

[6] These increases have been flowed through to most customers by means of line items. Beginning in the second quarter of 2003, carriers can no longer mark up these assessments, but can only flow through the assessment rate approved by the Commission.

[7] Under the "safe harbor" provisions, a wireless carrier can claim that 28.5% of its total revenues are interstate without further documentation. A wireless carrier claiming a smaller percentage of interstate revenues must have adequate documentation to back up such a claim.

[8]On Attachment 4 USF Funding and the Interstate Revenue Base are taken from USAC reports. The Total Revenue Base is taken from the FCC=s Telecommunications Industry Revenues reports. The funding base for 1997 is estimated. Beginning in the second quarter of 2003, the USF funding base has been based on carriers' projected revenue collections.

[9] On May 19, 2003, the members of the Federal-State Joint Board on Universal Service sent a letter to Senator Conrad Burns of Montana suggesting legislative changes to enable the FCC to use a total revenue base for universal service contributions.

[10] It should be noted that the FCC already has the discretionary power under 254(d) to require contributions from any other provider of interstate telecommunications "if the public interest so requires."

[12] The term "rural carrier" is defined at 47 U.S.C. 153(47). Generally, rural carriers are small carriers serving rural and high-cost areas, while non-rural carriers tend to be larger carriers, such as the regional Bell operating companies. There are approximately 80 non-rural carriers which serve 90% of the access lines in the nation, while the 1400 rural carriers serve the remaining 10%.

[13] Under the example provided above, if the per line support in the wire center was $10 per line per month, the incumbent ETC would receive $20 (2 X $10) per month in support. Once the wireless ETC began providing the three wireless "lines," the wireless carrier would receive $30 (3 X $10) per month for providing service to the same household. However, the incumbent's support would not be reduced. Thus, the USF would be obligated to pay out $50 per month in total support for this household, even though per line support for the wire center is only $10 per month.

[14] In order to mitigate the impact of this change on rural carriers, per line support should be redetermined based only on single lines. However, once an additional ETC enters the rural incumbent's service territory, per line support should be frozen. This will prevent an unwarranted spiraling of per line support which is possible under current rules.

[15] The complete list of supported services is found at 47 C.F.R. §54.101(a).

[16] Section 214(e)(5) of the Act also requires any additional ETCs in a study served by a rural carrier serve the rural carrier's entire study area, unless the state and FCC concur that an area less than the entire study area is appropriate.

The Future of Universal Service