HR-5072 Could Be Vehicle for Keeping USF Vigorous, Some Believe

As the Fund has grown and its portfolio has diversified, garden-variety fiscal leakage to which programs so large are prone, plus sometimes spectacular episodes of fraud and abuse, have marred the USF’s record, spurring calls for more rigorous scrutiny -- and sometimes demands that the Fund be shut down.

More such calls may come today (Wed.) at a House Telecom Subcommittee hearing on high-cost USF funding. The colloquy is part of a House quest for a stance from which to conference with the Senate on a telecom reform effort of such breadth and fractiousness some lobbyists are calling it “a 2-Lexus bill,” a tongue-in-cheek reference to their workload on the measure.

Traditionally supported by assessing long-distance charges -- amid VoIP and flat-rate cellular calls, a vanishing breed -- USF is seen in some precincts as losing its revenue base. That’s why reformers, including FCC Chmn. Martin and some in Congress, have been trying to alter the contribution mechanism by basing payments on phone numbers, revising the “safe haven” equation and dragooning into the base providers of new-tech services DSL, cable modem, broadband and VoIP.

But not everyone thinks the USF is going broke. In Feb., the Pacific Research Institute called the Fund “out of control,” a conduit through which pass “wasteful subsidies [to] entrenched local carriers.” Instead of roping VoIP et al into the Fund’s assessment corral, Congress should set up a voucher program, the think tank said.

Detractors in industry, even those on the USF tab, assail many Fund conventions, such as geographic averaging of state universal service needs. In places like N. Dakota, where the density of service in cities pushes up the state-wide average, barring participation in USF, the Fund’s so-called “parent trap” clause extends that barrier to large phone companies’ rural subsidiaries even if spun off by parent firms -- a drag on the market for spin-offs and phone service, they said.

Defenders consider the Fund a key for keeping not only distant communities, but small business, the poor, schools and libraries, and special-needs users connected via existing and future communications tools. They don’t want it eliminated, only reconfigured to fit the present and future.

Capitol Hill’s main USF players are ardent USF advocate and Senate Commerce Committee Chmn. Stevens (R-Alaska) and implacable USF foe and House Commerce Committee Chmn. Barton (R-Tex.). Stevens sees USF as critical for his very-rural state. Texas has its share of wide-open spaces, but Barton’s take on universal service is diametrically opposed.

Stevens and Barton are not alone in having sharply etched opinions on the issue. Other interested parties include Reps. Terry (R-Neb.) and Boucher (R-Va.), Sens. Burns (R-Mont.) and Smith (R-Ore.), the ubiquitous Bells, small rural providers that depend on the Fund, interest groups like NTCA, OPASTCO, NARUC, NASUCA and sundry ad hoc coalitions, and the Fund itself.

That interest is illustrated by Stevens’ Communications, Consumers’ Choice & Broadband Deployment Act of 2006, the latest telecom reform effort. Of the bill’s 159 pages, almost 1/5 -- 31 -- address universal service. Among key provisions: (1) Use of telephone numbers to calculate USF contributions. (2) Removal of the interstate/intrastate distinction in setting providers’ USF payments. (3) Addition of VoIP providers to the rolls of USF contributors. (4) Reorienting USF to encourage broadband deployment in unserved areas. (5) Injecting net neutrality into universal service support. (6) Mandating random periodic audits of USF recipients as a hedge against fraud and abuse. (7) Protecting existing USF support for schools, libraries, rural health care, Life-Line, link-up and toll limitation programs

Notably absent from the Senate bill is any effort to limit USF size, which critics like Barton see as a minimal gesture in the direction of fiscal restraint. The debate includes many possible ways to rein in the Fund. The bluntest would cap it. Others include reverse auctions, with USF recipients landing lowest-bid contracts to provide service; block grants to states; and vouchers to customers.

“The problem is, none of these ideas are baked enough that they can be sold to Congress and the stakeholders,” an industry source told us: “The rural phone companies look at that block grant idea and say, ‘DOA, baby!’ And when it comes to block grants, they say, ‘The Fund is controlled by the FCC, whose members are confirmed by the Senate Commerce Committee, which is disproportionately rural.’ They say, ‘We like those guys. We don’t know what we'd be dealing with at the state level, but it would be bound to be less fun than it is now.”

As a practicable strategy, that may leave a USF cap, seen as easier to comprehend, and to sell. But that ignores the elephant in the hearing room: The impact on the USF of reforming intercarrier compensation, the implicit subsidies built into the phone system that, among other things, cover costs carriers incur when moving calls through other networks.

Another element of USF rendered obsolescent by technology, the intercarrier compensation component ran afoul first of cell phones and now VoIP. Under intercarrier compensation, a call might cost customers 10 cents but have a real cost of 12 cents. That equation went out the window with the arrival of cell phones, which have no access charges and lower termination costs. VoIP has even lower costs, since it disguises a call as local no matter how many miles it travels.

“All these differing rates are not sustainable. They're distorting the market,” a lobbyist said: “This situation could be fixed with regulation, or eventually market forces will grind down the rural phone guys. The solutions to the ICC dilemma all involve increasing retail prices, increasing rural phone companies’ efficiency, and increasing the universal service payment. If you cap the USF, the ICC tsunami will hit. You can’t do it all at once.”

Despite its voluminous presence in the Senate bill, the USF generally is flying below the public and political radar, obscured by the sexier topics of net neutrality and video franchising. But universal service is no sideshow. For Stevens and Barton, it’s a linchpin of the legislation.

“Stevens feels he has to pass USF,” a lobbyist told us: “On the rest -- 911, franchising -- he doesn’t have a specific position. He’s saying, get me to conference, get me past the committee and onto the Senate floor, and we'll get what we need from Barton’s bill.”

Barton, who wants telecom reform with ardor similar to that Steven shows for USF, sees the USF as a font of waste, an affront to economics and a bar to technology transfer. He will be moved by considerations that contrast with but ultimately resemble Stevens’, this source predicted. “Barton says, ‘In a perfect world, I'd eliminate the USF, but it’s not a perfect world, and I'm a practical politician, so when I hold that hearing I'm going to showcase my views and hear from witnesses who beat up on USF,'” the lobbyist said.

Rather than go into conference without a specific legislative agenda, Barton may embrace a centrist bill (HR- 5072) by Reps. Terry and Boucher, who have built a vehicle that nods to both powerhouses. That bill would: (1) Cap all high-cost USF reimbursement. (2) Bring VoIP providers, and any entity providing network communications by such means as cable modem, DSL and emerging technologies, into the USF base in addition to any current participation. (3) Reimburse carriers under USF at actual, not incumbent cost. (4) Eliminate the “parent trap” that pinions Bells and would-be spin-offs now kept from getting USF payments.

By embracing elements acceptable, if not desirable, to both warlords, HR-5072 may offer a solution that gets telecom reform passed before the election -- an outcome of increasing utility to a beleaguered majority party and White House.

“The GOP needs some major legislative victories before November,” a Hill source said. “The immigration bill is not going to do that. The only other vehicle that will be seen as a major piece of legislation that saves consumers money is telecom reform. There is going to be top-down pressure in the House and Senate to get that bill through conference quickly, and that same pressure is going to lead Stevens and Barton to look for middle ground like the Terry/Boucher bill.”

If that scenario comes to pass, Stevens and Barton probably will agree to cap USF, leaving intercarrier compensation for another round of legislative tinkering, some believe. Even a Judiciary Committee campaign to get in on aspects of telecom reform isn’t likely to keep the bill being passed by Congress before Nov., some believe. If and when that occurs, the headlines may emphasize video franchising and related topics, but the submerged portion of the bill that is USF reform will sail into law as well.