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Prepared Witness Testimony The House Committee on Energy and Commerce
The Future of Universal Service
Subcommittee on Telecommunications and the Internet
Mr. Joel Lubin
Mr. Chairman, and members of the Subcommittee, thank you for inviting me to testify on behalf of AT&T as you address the important topic of universal service reform. It was AT&T that brought the term "universal service" to the telecommunications lexicon. We are proud of our more than 125-year history as the nation's oldest and most far-reaching long-distance carrier; more than any other carrier, we tie together all parts of America. On the basis of this experience, we understand the importance of maintaining a vibrant and sustainable universal service system. * * * * * In 1996, the Congress directed the Federal Communications Commission, with the assistance of a Federal-State Joint Board, to charter a new universal service mechanism - one that would work with, not against, competition in all markets. This new universal service mechanism was to be specific, predictable, and sustainable as competition grew, and it was to be competitively neutral, both in the way that contributions were collected and support distributed. Unfortunately, seven years and many Commission proceedings later, these goals have yet to be achieved. Some progress has been made, most notably through adoption of the CALLS plan in May 2000 and later with adoption of the MAG plan in October 2001, but we cannot yet say that we have a universal service system that meets all of the goals set forth by Congress in 1996. Instead, we have an ever-increasing fund that is being raised from an ever-shrinking funding base - interstate and international end-user telecommunications revenues - and a collection mechanism that is discriminatory and self-defeating. Something has to give. It is beyond question that the fund is increasing. The fund today stands at more than $6 billion per year. Both the Office of Management and Budget and FCC staff project additional increases in the size of the universal service fund, even if the Commission makes no further policy changes that add to the obligations supported through the USF. OMB projects total growth at just under 2% per year for FY2004-2007. Only two parts of the fund won't grow - the schools and libraries fund and the $650 million interstate access support for areas served by price-cap carriers. All other parts of the USF can and are likely to increase. At the same time the system faces increasing demands for support, the universal service funding base --interstate and international end user telecommunications revenues -- continues to shrink. In 2001 and 2002, the universal service funding base shrank by an average of 8% per year. If that rate of decline continues in combination with the projected growth in the demand for universal service support, in three years, the USF contribution factor - the rate carriers are assessed and that they pass on to consumers at the bottom of the bill - would rise from 9.5% today to 12.8% in 2006. I believe that such a result is likely to be both economically and politically unsustainable. The competitive inequities built into the current system for raising universal service funding will only speed the shrinkage of the universal service funding base. These competitive inequities take several forms. For example: · if a consumer is a high-volume user of interstate long-distance service -- the customer who traditionally has contributed the most to the support of universal service - that consumer can pay substantially less into the fund by migrating his or her long-distance calling to a wireless phone. · if a consumer purchases interstate long-distance service bundled with local service or information services, he or she can contribute less to the universal service fund if the carrier providing the bundle allocates more revenue to the parts of the bundle that do not contribute to the support of universal service than to the interstate long-distance portion of the bill, which does contribute to universal service. · if a consumer uses service provided by international carriers that carry little or no interstate traffic, he or she can avoid universal service charges altogether on that international calling. · if a consumer uses some Voice over Internet Protocol services, e-mail, or instant messaging, it is likely that he or she would not contribute anything to support universal service. Each of these outcomes encourages carriers to seek ways to avoid contributing to the universal service fund and, increasingly, price sensitive consumers are moving to services that allow them to avoid charges related to the support of universal service. When this happens, the universal service fund's contribution base shrinks, which causes the assessment rate to rise, which drives more consumers to find ways to minimize their contribution. Perpetuation of this scenario will drive the fund into a "death spiral," something that is completely at odds with what the Congress directed when it added Section 254 to the Communications Act. Because AT&T is deeply concerned about this problem, we have proposed a solution to the FCC - a universal service contribution system based on telephone numbers for those services that use telephone numbers, and on connections associated with special access and private line services that do not use telephone numbers. If numbers and number-equivalent connections grow 2% per year, a 2% annual increase in the fund would not change the projected $0.98 per number universal service assessment. Moreover, a numbers-based solution offers the advantage of being "future-proof." Voice-over-Internet-Protocol (VoIP) providers give their customers a telephone number so that those customers can receive calls from the public switched network. This assignment of numbers will trigger an obligation to support universal service, with the effect of keeping VoIP in the universal service contribution base. Preventing "leakage" from the universal service system is key to maintaining the stability of the fund, and by focusing on numbers rather than technologies, we can avoid the need to impose "one-size fits all" regulation on emerging services such as VoIP. A numbers-based solution could be implemented today by the Commission, under its existing statutory authority. This is not true with respect to the call to "expand the base" by assessing intra-state revenues. Statutory change clearly would be necessary to achieve that goal, and even with such a change, it is not clear that just adding intra-state revenues to the mix would be sufficient to sustain the fund over the long haul. Revenues are unpredictable and it is not clear that revenues will continue to climb; if revenues plateau or drop, the assessment factor will have to rise - exactly as it has today as interstate revenues have stagnated. The connections-based solution proposed by BellSouth and SBC suffers from the fact that it would not necessarily eliminate the problem of having customers face multiple USF charges. In my view, this is a major failing both because it contributes to consumer confusion and because it imposes additional cost on the industry. Whether or not the Congress contemplates amendments to Section 254, what is needed is the will for reform. If, however, Congress decides that additional statutory authority is a necessary precursor to reform of the universal service system, such legislation should be narrowly tailored and exclusively focused on enabling the Commission to consider a wider array of inputs for funding universal service programs. An "enabling approach" to universal service legislation should permit the Commission to consider a funding mechanism based on inter- and intra-state revenues, assigned, working telephone numbers, connections to the public switched network, or any combination of these elements, so long as such funding mechanism is competitively neutral among all providers and technologies. Reform along these lines could help to ensure the near- and long-term sustainability of the fund, maximize the support of universal service among the broadest array of providers of telecommunications services, reduce the need for regular revisions in the assessment mechanism (which would minimize carrier costs and consumer confusion associated with such changes), and reduce the likelihood that any reforms adopted by the Commission would be subject to challenge in the courts. * * * * * As I said at the outset, AT&T is proud of its heritage as the carrier that truly ties America together. But today, the burden of tying America together - of providing long distance service in all corners of the country - is being borne substantially by AT&T. AT&T is carrying this burden, even as it must increasingly compete in long distance with RBOCs that provide long distance service only in their largely urban, lower-cost service areas. As part of the 1996 Act's universal service provisions, Congress ensured that all Americans could be tied together affordably by mandating rate averaging and rate integration for long distance services. But interstate access charges - a significant component of the cost of long distance service - are not the same in all parts of the country. The geographic toll rate averaging provisions of Section 254(g) make it imperative that the remaining traffic sensitive cost disparities be removed from interstate access rates and this support be provided instead through the universal service fund. In most areas served by the RBOCs, this reform was implemented through the CALLS plan, and interstate access charges are now approximately .6 cents per access minute. In the areas served by small, rural carriers not covered by the CALLS plan, the average interstate access charges AT&T faces are much higher. For example, the average NECA minute of access averages 2.6 cents per minute. When AT&T averages its toll rates nationwide, it has to charge its customers in the RBOC territory more than it otherwise would, in order to charge the customer in the small, rural carrier's service area the average rate. This burden was barely bearable before Bell entry into the long distance market, when AT&T had to compete with MCI, Sprint, and other carriers that could choose not to serve certain geographies or service areas. Now, with the Bells having secured approval to enter the long distance market in most of the country, this burden has become intolerable. Verizon, which is already the nation's third largest long distance carrier, gets an unfair competitive advantage from the Act's toll averaging requirements because it doesn't serve all of America. In addition to incenting certain carriers not to serve rural America, these high access changes - and the desire to avoid paying them -- provided the economic incentive for the "Canadian Gateway" access fraud committed against AT&T. Fortunately, the 1996 Act allows for a solution that preserves toll averaging while restoring a level playing field to long distance competition. The local network costs - primarily high switching and transport costs - that lead to these high rural company access charges - which can be as high as 10 cents per minute of use -- could be supported through explicit universal service funding. More than two years ago, AT&T and several other carriers presented just such a proposal to the FCC. Unfortunately, the Commission has not implemented our proposal, and since that time, the economic challenges that led us to file our plan have gotten worse. The need for relief is now acute. In order to alleviate these competitive problems and eliminate any incentive for parties to "game the system," the Commission should move expeditiously to reform the inter-carrier compensation regime. Unless the Commission acts aggressively, the marketplace will force AT&T and other national carriers to find other, less optimal solutions. Those options are not attractive to us, nor should they be attractive to policymakers, and rural America should not be forced to bear their cost. * * * * * Thank you again for the opportunity to testify here today. At AT&T, we believe firmly that a vibrant, sustainable universal service system is important to the well-being of both the telecommunications industry and the American economy. But decisions must be made, and some bold actions taken to secure universal service for the future. On behalf of my company, I hope you agree, and look forward to working with you and the members of this Subcommittee as you continue your important work in this area.
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