Federal Universal Service Plan Could Harm Millions of Rural Phone Customers - Government Activity

Cambridge Telcom Report, Nov 1, 1999

The Federal Communications Commission has issued universal service rules that may raise phone bills for millions of rural Americans, force rural states to shoulder the majority of the expense of ensuring affordable phone service, and widen the growing Digital Divide. That is the fear of a number of people close to the issue, including U S WEST's chief counsel.

"This issue is a run-away train barreling down the tracks -- and it's aimed straight at the rural West," said Mark Roellig, U S WEST's executive vice president - Public Policy, Human Resources and Law. "The FCC has unfortunately decided that the Information Superhighway stops at the Mississippi River. Universal Service support is critical to maintain affordable basic phone service -- which for many Americans is their only link to the Internet."

Roellig added that more than two-and-a-half years past the deadline set by Congress, the FCC's plans to restructure the Universal Service Fund will send the wrong message to rural states -- fend for yourselves. "These new rules could tell large companies serving rural communities to stop investing in advanced telecommunications services in high-cost areas," said Roellig. "The burden of ensuring affordable rates will be left to the states."

Economic development and rural leaders also voiced their concerns: Terry Brewer, executive director - Grant County (Washington) Economic Development Council, said: "One of the keys to economic development is an advanced communications infrastructure. I'm concerned that the FCC's universal service ruling will hinder further network investment and negatively affect Grant County's ability to attract and retain new businesses."

Dr. Florine P. Raitano, executive director - Colorado Rural Development Council, said, "This looks like typical federal behavior: one step forward and two giant leaps back. The 25/75 split the FCC proposed last year was scrapped because of the outcry from rural areas. My concern is that this ruling looks a lot like a backdoor approach to the same solution. They've placed the burden back on the states, particularly the interior Western states. Rural customers served by the regional Bell companies are going to be hurt the worst."

The FCC has indicated that its overall universal service plan will include three parts. The first, sets up a complex economic cost model that will be used to determine how much support is needed and where the money should be spent. Critics have argued that, under the FCC's models, the fund will likely be inadequate to ensure affordable phone service for millions of Americans in high-cost areas.

The second part, which the FCC still hasn't established, will determine what happens with the substantial implicit subsidies built into fees long- distance companies pay to local companies for use of the local network. To make these subsidies explicit, U S WEST supports converting them into an adequate fund that is accessible to any telephone company willing to serve rural and high-cost areas. The FCC's third part will leave the remaining affordability problem to each state to solve.

Scott Hirschi, director - Washington County Economic Development Council in St. George, Utah, said, "It appears that the FCC's new rules will pit densely populated parts of the country against parts of the country that are less populated, like the Mountain West. From an economic development perspective, that's deeply troubling. Just when access to an advanced telecommunications network has never been more important, the FCC's basically telling rural Utah that we need to fend for ourselves."

Roellig said that it's likely the FCC's new cost model won't target support where it's needed most -- to rural, high-cost areas. "The FCC's cost model shows that the need is around $3.8 billion. Unfortunately the FCC's solution is to create a fund of less than one-tenth of that amount."

Bill Barr, executive director - Richland Development in Sidney, Montana, said: "A national fund that is too small means that rates will go up in rural states like Montana. That hurts everyone. We have to find a way to let federal regulators in Washington know that affordable phone service is as important in Montana as it is in Massachusetts."

"Congress laid out clear instructions when it passed the Telecommunications Act of 1996 -- promote competition, ensure affordable phone rates and eliminate implicit subsidies," added Roellig. "The FCC seems to be wedded to implicit subsidies. Some experts have argued that more than $20 billion in total subsidies support affordable phone rates in the country. It looks like larger phone companies will be expected to continue subsidizing high-cost areas through the rates they charge businesses and urban customers. If so, that's in direct violation of the Act. As long as local phone rates in rural areas are supported by hidden, implicit subsidies, competitors will have little appetite for offering customers a choice."