Desperately Seeking USF Funds

BY MID-AUGUST, Universal Service Fund (USF) contributions from DSL providers will be a thing of the past. Its a deadline that has had the FCC scrambling to adopt interim policies ensuring the fund has a future.

Ironically, the base of contributors was diminished in August 2005 when the FCC deregulated DSL; like cable modem Internet access, DSL was deemed a Title I information service, which made it exempt from paying USF proceeds. To achieve deregulation, though, telcos had to agree to continue contributing to the USF for a year, while the FCC was supposed to figure out the best way to sustain the USF without DSL money. That didnt happen as soon as FCC Chairman Kevin J. Martin would have liked. Lacking a full commission until June 2006, Martin let USF contribution methodology reform take a backseat to other matters.

The addition of COMPTEL lawyer Robert McDowell in late May as the FCCs third Republican seemed to spur movement on the USF issue. Days later, industry insiders leaked knowledge of an interim order Martin was circulating to his colleagues. He proposed to increase the amount wireless providers pay 37.1 percent of their end user revenue, up from 28.5 and require interconnected VoIP providers to chip in as well, at 65 percent, almost twice the wireless rate. What this means is that the FCC is assuming that 64.9 percent of VoIP provider revenues are attributable to interstate calling, explains Staci Pies, president of the Voice On the Net (VON) Coalition, which represents VoIP providers. At the current USF contribution factor of 10.9 percent, assuming an average monthly rate of $25,VoIP consumers would be hit with a new charge of approximately $1.77 per month in USF fees.

Industry analysts said Martin would allow VoIP providers to submit traffic studies proving deviating levels of interstate traffic that could justify their paying lower USF taxes.

Jessica Zufolo, telecom analyst for Medley Global Advisors LLC, says the order would be positive for rural LECs that depend on highcost loop support funding and moderately negative for wireless providers, which will be required to pay more into the USF. In a May 31 note to clients, Zufolo adds cable and independent VoIP providers such as Vonage Holdings Corp., will be hit the hardest since they are likely to lose retail pricing advantage by having to pass through additional USF costs to their customers.

The interim order would be just that, though a temporary fix to the long-term problem of keeping the $7 billion USF viable. That bothers The VON Coalition. Consumers of VoIP services would be the primary casualty of this legal and regulatory whipsaw, says Pies. The VON Coalition also fears the FCCs initiative which was likely to be adopted at the commissions June 15 meeting, after PHONE+ had gone to print would hurt some citizens. Requiring VoIP providers to pay double what wireless subscribers currently pay, then only to change it again a few months later once the FCC completes comprehensive reform, could actually slow the deployment of technology that has the greatest potential to benefit rural and lowincome Americans, Pies contends.

The stickiness of the stopgap FCC order was further in question at press time because Congress still was in the midst of telecom rewrite debates (see sidebar at left). Anything the Senate or House of Representatives decides could override FCC rules. In fact, the Senate, says Pies, was likely to take an entirely different and more comprehensive approach to USF reform requiring the FCC to develop a contribution methodology that assesses broadband services.

Zufolo says there is a chance Martin could embrace a methodology other than the numbers-based system, but that would require even more time to flesh out, and time is of the essence since DSL providers will stop contributing to the USF next month. [T]he FCC has little choice but to expand the contribution base soon. The anticipated interim order, she says, certainly brings the industry closer toward a numbers-based approach, which must include VoIP and wireless to work.

The Fast and Furious

Congressional work to rewrite the 1996 Telecom Act has been a blur of new bills from all sides. With involvement from the House and Senate committees overseeing telecom regulation, to the insistence that the House Judiciary be involved in antitrust oversight, to controversies over net neutrality, movement on new legislation has been constant, but actual progress has been slow. Stay abreast of the changes by clicking over to for day-to-day coverage of efforts to pass a new communications act.

Keep USF Fair Coalition
Medley Global Advisors LLC
The VON Coalition

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