Reforming universal service and intercarrier compensation

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Anna-Maria Kovacs, Georgetown University

Anna-Maria Kovacs, Visiting Senior Policy Scholar, Georgetown University

The implicit subsidy system that is the combination of intercarrier compensation--i.e. access charges--and the Universal Service Fund (USF) has been in place for decades and was designed for a monopoly telephone system whose finances could be controlled by regulators. In that world, local rates could be kept artificially low by subsidies that came from artificially high access charges paid by long-distance providers for carriage of their traffic on local networks. Rural customers could be subsidized by urban customers.

 

"Access charges that are higher for a call between neighboring towns inside a state than they are for a cross-country call invite arbitrage and exploitation."

In today's competitive marketplace that is no longer the case--competitors are forcing prices down to cost in the areas where it is economic for them to compete, leaving the uneconomic areas to the incumbents who are forced by regulators to serve them. At the same time, distinctions between local and long-distance traffic have been erased. Increasing amounts of traffic are using IP rather than TDM. Neither irrationally high access charges nor a USF based on levies on shrinking long-distance revenues are sustainable. Access charges that are higher for a call between neighboring towns inside a state than they are for a cross-country call invite arbitrage and exploitation. So does a system that requires access charges if a call uses TDM but not if it uses IP. A growing USF and a shrinking base of long-distance revenues keeps raising the levy on that base, so that customers now pay a 15 percent surcharge on the interstate long-distance portion of their bills to support USF. Worse yet, USF is still expected to support traditional services rather than the deployment of broadband.

The FCC has been trying to reform the system for several years, a necessary process but one which has created uncertainty for the industry and made it difficult for some of the small carriers to obtain financing. The telecommunications industry itself has now laid out a framework for reform. On July 29, a Joint Letter was sent to the FCC by the six largest communications carriers and four industry associations, three of which represent most of the small rural communications providers in the United States. The Joint Letter proposes a framework based on two complementary plans--one for companies that have already moved to federal incentive-based regulation under a price-cap regime and the other for companies that still operate under federal rate-of-return regulation.

 

"...in the beginning of the sixth year for the price-cap carriers and the beginning of the eighth year for rate-of-return carriers, ICC per-minute rates would be rationalized at sustainable rates that are a small fraction of today's access charges."

At the end of the proposed ICC transition, in the beginning of the sixth year for the price-cap carriers and the beginning of the eighth year for rate-of-return carriers, ICC per-minute rates would be rationalized at sustainable rates that are a small fraction of today's access charges. To make up for the loss of per-minute revenues, carriers could raise flat-rate subscriber-line charges by annual capped increments, but only as long as local rates, including the subscriber-line charge, remain under $30 per month in the case of price-cap carriers and $25 per month in the case of rate-of-return carriers. If that does not make up the revenue shortfall, a transitional access restructure mechanism would be provided.

Simultaneously, the USF would begin a transition from supporting telephony services to supporting broadband deployment. Subsidy for new broadband deployment would go only to areas where there is no business case for private investment. Providers who accept the subsidy would receive ten years of support in exchange for building out broadband and accepting the service obligations that go with it. The USF transition is budgeted to fit within the $4.5 billion currently being spent by the USF high-cost program.

The FCC's National Broadband Plan set out the goal of universal broadband deployment throughout the United States. It also presented the very high cost that would be required to achieve that goal. The framework outlined in the Joint Letter shows the operational and financial steps that can accomplish that goal. It would create a glide path to bring broadband to all Americans, by encouraging investment in rural areas and making broadband more affordable ultimately for both rural and urban consumers. After years of uncertainty, this reform, when enacted by the FCC, will bring predictability to the business and financial plans of small as well as large carriers, encouraging private investment in the sector.

Today's--and tomorrow's--highly competitive, innovative, global broadband ecosystem needs the flexibility to evolve naturally. Support and regulation must both be targeted strategically to the increasingly rare places where they are needed, and they must be eliminated from the places where they disrupt innovation and investment. The transition has to be made carefully, but it must begin.

Anna-Maria Kovacs is a Visiting Senior Policy Scholar at Georgetown University's Center for Business and Public Policy. She has covered the communications industry for more than three decades as a financial analyst and consultant.