Universal Fund Changes Are Coming

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The cable industry could soon find itself paying into a massive subsidy pool to help some telcos survive, but it’s too early to know exactly how contributions will be structured.

Known as the Universal Service Fund, the decades-old system takes a portion of money collected from interstate telecommunications (primarily long-distance revenues) and redistributes it to help ensure customers in low-income, rural, insular and high-cost areas have telephone access. The universal-service system also aspires to provide greater access to advanced services.

But in recent years, a perfect storm has developed. Long-distance rates have plummeted as fewer people make long-distance calls in favor of e-mail and flat-rate plans via voice-over-Internet protocol services. Other than cable companies, many of those VoIP outlets don’t pay into the USF.

FUND IS SHRINKING

“The USF is shrinking,” said Donna Epps, a partner in the regulatory consulting practice of Deloitte & Touche. “I think there are definitely going to be changes around universal service. If we want to keep using it in the manner it has been used, something has to change.”

Andrew Cole, vice president and leader of A.T. Kearney’s North American Communications and Media Practice, agreed change is coming: “It’s not if but when.”

For small telcos, the prime recipients of universal service funds, the solution is clear.

“We need as broad a space as possible,” said Stuart Polikoff, director of government relations for the Organization for the Promotion and Advancement of Small Telecommunications Companies (OPASTCO). “The more carriers that pay into this thing, the better.”

Polikoff said that should include the cable industry, which has long escaped paying into the USF because the fund only derives money from “telecommunications services.” Cable service falls under a different regulatory classification.

Despite the fact that telcos must pay into the USF out of digital-subscriber-line revenue, the Federal Communications Commission has so far deemed cable-modem service an “information service” not subject to common-carrier regulations, including paying into the USF.

In late June, the U.S. Supreme Court basically upheld the FCC’s finding in the controversial Brand X case. Following that decision, FCC Chairman Kevin Martin said he wants to finish a three-year-old proceeding expected to result in DSL deregulation and which could include an exemption from universal service obligations.

“It sounds like Martin feels like that gives him what he needs to equalize the treatment of DSL and cable modems,” Verizon spokesman Eric Rabe said.

Added BellSouth’s Bill McCloskey: “We should both be treated the same. All in all, getting cable to pay soon is probably not in the cards. So, exempting telco DSL from USF contributions now would restore parity, and full USF reform should broaden the base and put the system on a solid footing.”

Of course, smaller telcos that typically receive more than they contribute to the USF want the fund to receive both DSL and cable-modem revenues.

Also at issue is what to do about VoIP services, which use a broadband connection to offer voice. Operators are rolling out VoIP nationwide as a component in their “triple-play” strategies.

The FCC has yet to determine whether VoIP is a “telecommunications service” subject to universal service obligations. Because its status is unclear, some operators have been paying into the USF even on its VoIP revenues (Time Warner Cable, for example, designates 28.5% of its VoIP revenues as interstate for the purposes of paying into the USF).

CABLE’S NUMBER-FEE IDEA

Worried that VoIP could get caught up in a regulatory maelstrom, cable has advocated legislation that would reform the entire universal-service system. To achieve that, the industry wants Congress to restructure the current revenue-based regime into a system based on phone numbers.

That way, any customer who has a phone number — whether associated with VoIP or traditional circuit-switched telephony — would pay a monthly fee into the USF.

“If you use a phone number, you pay about a dollar a month,” Rick Cimerman, National Cable & Telecommunications Association senior director for state telecom issues, said of the cable proposition. “It solves a lot of problems.”

Not only would regulatory classification of VoIP not matter under a number-based system, but carriers would no longer struggle to discern interstate from intrastate revenues.

At the same time, a number-based system would presumably exempt Internet-based services such as Skype Technologies S.A. and Pulver.com Inc., which are software based and generally don’t assign phone numbers to users.

Cimerman also argued that a revenue-based model that included VoIP could end up including services with no relation to traditional phone services. One example: new video game consoles allow players to talk to each other with headsets while they play each other over a broadband connection. “The Xbox is a VoIP service,” he said, referring to Microsoft Corp.’s Xbox Live game platform that requires a cable-modem or DSL connection.

But the numbers-based system also would continue to exempt cable-modem services from feeding the USF, which concerns small telcos anxious to tap into growing Internet access revenues. Cable-modem revenues are also considerably larger than VoIP revenues, at least for now.

Partly for that reason, OPASTCO supports a “connections-based system” that would collect USF money based on the actual VoIP or broadband connection rather than a specific phone number.

'WHO HAS NUMBERS?’

Polikoff said a numbers-based system would create too many loopholes as Internet communications grows in popularity. “In the Internet world, who has numbers and who doesn’t?” He added that policymakers could devise provisions to exempt certain services, such as video-game consoles. “I’m sure there are ways to get around that.”

The USF is shrinking, but doesn’t face a major funding crisis quite yet. And Congress appears keen to reform the system before it reaches crisis level.

“Everyone agrees that it’s broken and that something needs to be done,” said Epps. “It could be that indeed something pushes the FCC or Congress to address this earlier than later.”

Indeed, Senate Commerce Committee Chairman Ted Stevens (R-Alaska) and Co-Chairman Dan Inouye (D-Hawaii) warned after the Brand X ruling that they would “review the decision’s impact on existing public interest obligations, including its effect on the Universal Service Fund.”

Many expect the universal-service issue to get wrapped into the upcoming rewrite of the 1996 Telecommunications Act. “I think that’s a good call,” said Cole.

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