USF KEEPING RURAL AMERICA CONNECTED

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USF KEEPING RURAL AMERICA CONNECTED

• Presentation to
• NARUC Staff Subcommittee on Accounting and
  Finance
• By Stuart Polikoff,
• Director of Government Relations
• OPASTCO
• September 16, 2003

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THE FUTURE OF THE HIGH-COST PROGRAMIS IN
JEOPARDY

• There is an impending train wreck in universal
  service funding. The USF has experienced
  tremendous growth since the passage of the
  Telecommunications Act of 1996 and may be
  approaching an unsustainable level.
• Total USF High-Cost Low Income
  Schools/Libraries Rural Health Care
• 1996 1.70B 1.54B 166.4M
  
• 1997 1.77B 1.61B 161.3M
• 1998 2.16B 1.69B 464.5M
• 1999 3.91B 1.72B 480.2M
  1.71B 3.4M
• 2000 4.89B 2.25B 519.0M
  2.12B 7.1M
• 2001 5.30B 2.63B 584.0M
  2.08B 10.8M
• 2002 5.65B 2.92B 587.0M
  2.13B 12.0M
• 2003 6.44B 3.43B 737.7M
  2.25B 24.8M

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THE FUTURE OF THE HIGH-COST PROGRAMIS IN
JEOPARDY

• The number of CETC study areas and the support
  being received by CETCs has skyrocketed over the
  past several years. Absent a change in the
  current support portability rules and CETC
  designation policies, the growth rate of these
  numbers show no sign of abatement.
• Number of Approved and Pending CETC Study
  Areas
• 4Q 2000 9
• 4Q 2001 22
• 4Q 2002 60
• 4Q 2003 231
• Projected High-Cost Support for Approved
• and Pending CETCs (Annualized)________
  
• 4Q 2000 3.1M
• 4Q 2001 10.9M
• 4Q 2002 74.5M
• 4Q 2003 251.7M

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THE FUTURE OF THE HIGH-COST PROGRAMIS IN
JEOPARDY

• The USF contribution factor continues to rise and
  may be approaching an unacceptable level.
• USF Contribution Factor
• 4Q 2000 5.7
• 4Q 2001 6.9
• 4Q 2002 7.3 (would have been 9.3 absent
  borrowing from SL Program)
• 4Q 2003 9.2
• Congress is concerned and looking for solutions.
  

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THE FUTURE OF THE HIGH-COST PROGRAMIS IN
JEOPARDY

• Rural ILECs are the only providers of ubiquitous,
  high-quality, facilities-based telecommunications
  service throughout their respective service
  areas.
• For rural ILECs, high-cost support is a critical
  means of genuine cost recovery.
• If support levels were to be frozen or curtailed,
  the financial health of many rural ILECs would be
  placed at risk and the availability of
  high-quality modern service to rural consumers
  would be jeopardized. At greatest risk would be
  service to customers living in the most remote
  and high-cost areas.
• FCC Commissioners Abernathy Adelstein We
  must ensure that companies that have
  traditionally invested in infrastructure to serve
  rural and high cost areas are not subject to a
  framework that unintentionally undercuts their
  ability to perform their critical universal
  service function.

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OPASTCO UNIVERSAL SERVICE WHITE PAPER

• In January 2003 OPASTCO released white paper
  Universal Service in Rural America A
  Congressional Mandate At Risk.
• The 1996 Act requires state commissions and the
  FCC to treat additional ETC designations
  differently in the areas served by rural
  telephone companies. It requires state
  commissions and the FCC to find that an
  additional ETC in a rural service area is in the
  public interest before such a designation is
  made.
• In many instances, state commissions and the FCC
  have not been following the intent of Congress.
  They have been routinely designating additional
  ETCs in rural service areas without thoroughly
  considering all of the factors that determine the
  public interest.
• Standardized public interest principles and
  eligibility criteria are needed to guide state
  commissions and the FCC in their consideration of
  ETC applications for rural service areas.

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OPASTCO RURAL USF PRINCIPLES

• 1. Rural consumers should have affordable
  telecommunications services, comparable in
  quality and price to urban areas.
• 2. Funding should be sufficient to provide for
  critical infrastructure in rural areas.
• 3. The USF is a scarce national resource.
  Therefore, supporting multiple carriers is in the
  public interest only when benefits exceed costs.
• 4. The USF should not be used to create
  uneconomic competition.
• 5. All carriers receiving support should be held
  to the same service obligations and regulatory
  standards.
• 6. Funding should come from the broadest base of
  providers and services.

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JOINT BOARDPORTABILITY PROCEEDING

• In Feb. 2003, the Federal-State Joint Board on
  Universal Service issued a Public Notice. It
  asked
• What is the state of the marketplace in rural and
  high-cost areas?
• How should support for CETCs be calculated?
• Should support be limited to a single connection
  to the end user (primary lines)?
• Are federal guidelines needed for state
  commissions and the FCC to follow when
  considering CETC applications?

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PORTABILITY PROCEEDINGOPASTCOS COMMENTS

• COMPETITON IS THRIVING IN RURAL SERVICE AREAS AND
  DOES NOT REQUIRE AN ARTIFICIAL JUMP START FROM
  REGULATORS.
• Carriers using a variety of technology platforms
  already effectively compete throughout rural
  America.
• The FCCs CMRS Competition Report states that
  rural markets, on average, have slightly more
  than three CMRS providers.
• Once one CMRS provider obtains ETC status in a
  rural area, the other CMRS providers in the area
  will be compelled to seek ETC designation as
  well. This is already occurring.
• Most recently, large CMRS providers, such as
  ALLTEL and Nextel, have begun to apply for ETC
  designation in numerous states.

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PORTABILITY PROCEEDINGOPASTCOS COMMENTS

• COMPETITON IS THRIVING IN RURAL SERVICE AREAS AND
  DOES NOT REQUIRE AN ARTIFICIAL JUMP START FROM
  REGULATORS.
• If all CMRS providers nationwide were granted ETC
  status, it is estimated that the USF would grow
  by approximately 2 billion annually.
• If the size of the Fund reaches a point where
  further growth is no longer permitted, yet the
  number of carriers receiving support continues to
  grow, then no carrier will have the necessary
  funding to provide rural consumers with
  affordable, high-quality telecom services. This
  is an inefficient use of limited universal
  service resources.
• Thus, the issue is not competition. The real
  issue is When does using limited public funds
  to support multiple competing carriers in
  high-cost rural areas serve the public interest?

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PORTABILITY PROCEEDINGOPASTCOS COMMENTS

• HIGH-COST SUPPORT FOR CETCS IN RURAL SERVICE
  AREAS SHOULD BE CALCULATED BASED ON THEIR OWN
  EMBEDDED COSTS.
• Would result in payments that are sufficient,
  but not more so, and specific to each carriers
  own circumstances, consistent with Sec. 254(b)(5)
  of the 1996 Act.
• Would promote compliance with Sec. 254(e)
  requirement that support only be used for
  provision, maintenance and upgrading of
  facilities and services.
• Would promote efficient competitive entry in
  high-cost areas, since carriers would no longer
  have perverse incentives to seek ETC status
  merely to receive windfall support payments.
• Utilizing the same support calculation
  methodology for all ETCs is competitively
  neutral.

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PORTABILITY PROCEEDINGOPASTCOS COMMENTS

• SUPPORT FOR CETCS IN RURAL SERVICE AREAS SHOULD
  BE CALCULATED USING THEIR OWN EMBEDDED COSTS.
• There should be cost reporting parity between
  ILECs and CETCs.
• The FCC may wish to consider developing an
  average schedule-like option for CETCs that would
  provide these carriers with a choice between
  submitting their own annual cost study or relying
  on formulas that would simulate the embedded
  costs of similarly situated carriers using the
  same technology.
• The change in methodology for calculating CETC
  support should be made as soon as the FCC can
  develop cost reporting requirements for these
  carriers.

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PORTABILITY PROCEEDINGOPASTCOS COMMENTS

• THE HIGH-COST PROGRAM SHOULD SUPPORT THE COST OF
  ETCS NETWORKS, NOT LINES.
• Service providers do not build lines. They build
  networks.
• If service providers are uncertain of network
  cost recovery due to a primary line restriction,
  investment in network infrastructure will be
  inhibited.
• It makes no sense to designate multiple ETCs in a
  rural service area and then have a primary line
  policy that curtails support to such an extent
  that no ETC has the predictable and sufficient
  funding necessary to cover their costs and
  encourage network investment.

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PORTABILITY PROCEEDINGOPASTCOS COMMENTS

• THE HIGH-COST PROGRAM SHOULD SUPPORT THE COST OF
  ETCS NETWORKS, NOT LINES.
• The administrative complexities that resulted
  from applying different primary and non-primary
  residential SLCs would be even greater in the
  context of a primary line restriction.
• A primary line restriction defeats the Acts
  objectives of affordable and reasonably
  comparable rates for additional lines in
  high-cost areas.
• If support is limited to primary lines, rural
  ILECs should no longer have any obligation to
  serve a customer for which it has not been chosen
  as the primary line provider. If a rural ILEC
  chooses to provide customers with unsupported
  non-primary lines, it should be completely
  deregulated for those lines and be permitted to
  charge a market-based rate.

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PORTABILITY PROCEEDINGOPASTCOS COMMENTS

• PUBLIC INTEREST PRINCIPLES AND STANDARDIZED
  CRITERIA SHOULD BE ADOPTED TO GUIDE STATE
  COMMISSIONS AND THE FCC IN THEIR CONSIDERATION OF
  ETC APPLICATIONS FOR RURAL SERVICE AREAS.
• Congress did not always presume that supported
  competition would always serve the public
  interest in rural service areas.
• Both the costs and the benefits of designating an
  additional ETC must be carefully weighed if
  limited federal funding is to be managed for the
  optimum public benefit.
• Standardized criteria would help to make sure
  that before a carrier is designated as an ETC
  that it is capable of, and committed to, being a
  true provider of universal service.
• CETCs in rural service areas should adhere to the
  same service obligations and regulatory standards
  that are imposed on the ILEC.
• CETC designations in rural service areas should
  be made at the study area level.

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CONTRIBUTION METHODOLOGYOPASTCOS POSITION

• Broaden the contribution base to include
  intrastate revenues through narrow legislation.
• Would address marketplace factors presently
  causing instability in the contribution base and
  would allow the revenues-based system to continue
  to be workable going forward.
• If intrastate revenues are not added, adopt a
  flat-fee mechanism that requires equitable
  contributions from both interstate transport and
  switched access providers. IXCs must not be
  relieved of their statutory obligation to
  contribute!
• Require all facilities-based broadband Internet
  access providers over all platforms to contribute
  equitably to the USF.
• Would sustain the contribution mechanism for the
  long-term as an ever-growing amount of network
  traffic migrates to broadband platforms.
• Would address the present inequity in which DSL
  providers are required to contribute but cable
  modem and other broadband platforms are not.

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RECAP OF RECOMMENDATIONS

• COMPETITON IS THRIVING IN RURAL SERVICE AREAS AND
  DOES NOT REQUIRE AN ARTIFICIAL JUMP START FROM
  REGULATORS.
• SUPPORT FOR CETCS IN RURAL SERVICE AREAS SHOULD
  BE CALCULATED USING THEIR OWN EMBEDDED COSTS.
• THE HIGH-COST PROGRAM SHOULD SUPPORT THE COST OF
  ETCS NETWORKS, NOT LINES.
• PUBLIC INTEREST PRINCIPLES AND STANDARDIZED
  CRITERIA SHOULD BE ADOPTED TO GUIDE STATE
  COMMISSIONS AND THE FCC IN THEIR CONSIDERATION OF
  ETC APPLICATIONS FOR RURAL SERVICE AREAS.
• BROADEN THE CONTRIBUTION BASE TO INCLUDE
  INTRASTATE REVENUES AND BROADBAND INTERNET ACCESS
  PROVIDERS.