Next Texas Skirmish: Universal Service

8/18/2006 8:00 PM Eastern

The battle over the shape of regulatory authority in Texas between incumbent cable operators and telephone companies did not end with the passage of SB5, the precedent-setting bill most notable for implementing statewide cable franchising.

The omnibus reform bill also directed that the state Public Utility Commission should shoulder another regulatory task. That department now is reviewing Texas’s Universal Service Fund, the mechanism that allows service providers in the state to collect taxes from urban phone users in order to subsidize service for rural homes. It is separate from the national USF program administered by the Federal Communications Commission.

The Texas review has become the latest inter-industry skirmish between cable and telephone providers, both through filings to the PUC and on the editorial pages of the state’s newspapers.

Squawking Points
Cable and telephone companies have different views on the operation of the Universal Service Fund in Texas:
Source:Multichannel News research
Technology has cut the cost of providing phone service to remote areas.
Telcos: The fund was never designed to reflect the actual cost of providing service. The companies stress they actually spend more to serve rural accounts than they take in from the Universal Service Fund.
USF funding should be eliminated for advanced services, such as call waiting, for remote customers.
Telcos: That would necessitate raising the price of advanced services to cover the lost revenue, in effect using advanced services to subsidize high-cost service areas.
Funding should be eliminated in rate-deregulated areas.
Telcos: This is a non-issue. Verizon, for instance, states that only 11 of its service areas are deregulated, and none receive USF monies.


In Texas, the fund includes various elements. One pool of money is collected by large telephone providers, such as AT&T Inc. and Verizon Communications Inc. Smaller incumbent local-exchange carriers contribute to a second fund.

Both funds support lifeline rates for low-income customers and Relay Texas, a communications service for the deaf and hearing impaired.

The state’s cable lobby stresses it supports continued funding of lifeline service and Relay Texas. It is not interested in changes to the way small providers collect and disburse USF funds.

But cable executives have said the Large Carrier Fund needs review to ensure that Texans are not being overtaxed, and to ensure that universal-service revenues are not misused to cross-subsidize the telcos’ video initiatives, for instance.

In a recent editorial submitted to Texas papers, Ron McMillan, chairman of the board of the Texas Cable & Telecommunications Association, cited PUC reports that USF’s Large Carrier Fund collected $2.6 billion from Texans between 1999 and the current year. The funds are raised through a 6% tax on most phone users’ bills.

“Yet not a single independent, public analysis or audit proves specifically how these companies spend it,” he wrote in the editorial, released July 6.

In a letter the same day to James Epperson Jr., president of AT&T Texas, McMillan stressed that the TCTA does not advocate the abolition of the USF. But the association finds it “inexplicable that AT&T and Verizon urge deregulation of their markets on the grounds that the industry has fundamentally changed, while refusing to acknowledge that the hundreds of millions of dollars you receive from hard working Texans, including small businesses, need to be re-examined as a result to competitive changes in the marketplace.”

TCTA general counsel and vice president of government affairs Todd Baxter said the trade group sees the dispute as a transparency issue. The large companies are the ones that define their “high-cost service areas,” and they collect and disburse funding without outside auditing, according to Baxter.

The cable lobby believes that technological advances have decreased the cost to serve remote areas, while urban creep has diminished the size of service areas deemed remote years ago.


Asked for a response to the cable lobby criticisms, AT&T Dallas spokesperson Kerry Hibbs objected to suggestions by the opposition lobbyists that the USF is a “slush fund.”

“AT&T spends much more providing service in rural Texas than it ever takes out of the fund. As the provider of last resort, AT&T is required to provide phone service to all consumers in our territory, regardless of where they live,” he said.

Verizon countered cable’s criticisms point by point in a filing to the PUC.

The telco noted that large providers are not the only beneficiaries of the fund. The revenue is portable, so a competitive provider in a high-cost area collects from the fund, too.

Cable’s assertions that the telcos collect more than they spend is based on the assumption that the tax is based on a cost-of-service model, which it is not, the company added.

The cable industry also struck out with an argument that fund use should be eliminated in areas that have been deregulated, according to the Verizon filing. Only 11 of its exchanges have been deregulated, and none of those utilize the USF, according to Verizon.

The PUC will present universal-service recommendations to the state legislature by Jan. 5. The regulators will hold meetings monthly, with review of the high-cost program draft scheduled for the Nov. 16 meeting.

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