Qwest's Support For Senate USF Bill Sours BellSouth

Telecom Policy Report, Sept 29, 2004

The Senate Commerce Committee's 13-9 vote last week approving legislation that would adjust payments from the federal Universal Service Fund (USF) has BellSouth infuriated at its sister Bell Operating Company, Qwest Communications.

S. 1380, also known as the Rural Universal Service Equity Act, if signed into law as written, would reduce USF support for customers in the BellSouth states of Alabama and Mississippi by more than $100 million. Customers in Puerto Rico would lose $24 million in USF support, says Herschel Abbott, BellSouth's vice president for governmental affairs.

"It was Qwest that drove this bill," Abbott told TPR. "This is strictly a money issue for them ... But it's a money issue for us, too. This is an effort to redirect a larger portion of the USF subsidies to states where Qwest sold off many of its rural properties. In our case, it's as if we're being punished for not selling off our rural properties."

Indeed, between 1992 and 1999, Qwest (when it was still US West) divested nearly 1 million access lines, virtually all of them in rural areas.

"No one is arguing that the Universal Service Fund is perfect and doesn't need to be fixed,' Abbott says. "But this bill doesn't fix anything."

BellSouth argues that S.1380, which was authored by Sen. Gordon Smith (R-Ore.), does not address key policy questions that the Congress will need to answer in the next year or two if current federal universal service programs are to remain in tact.

Those unanswered questions include, but are not limited to, the following:

* Who should pay for universal service -- users of interstate services only or all communications services?

* Who should receive universal service support -- one carrier serving a given market or competing (e.g., wireline and wireless) carriers?

* Should universal service support for all telcos be based on actual costs or some hypothetical "forward looking" cost model?

* How can universal service funds be collected in a competitively neutral manner -- though a percentage surcharge on revenues or a flat rate assessment on lines or phone numbers?

* Should the definition of universal service be broadened to include broadband services, and if so, who should pay the added cost?

BellSouth says S.1380 is "engineered" to take upwards of $137 million in annual high-cost support from Mississippi, Alabama, and Puerto Rico (where annual median household income averages $28,702) and give it to 38 other states, 12 of which are served by Qwest (where annual household income averages $43,688). The shift would increase the level of high-cost support Qwest receives by $38 million.

Additionally, the bill would require the FCC to redistribute high-cost support to large telcos based on the cost of providing phone service in geographic areas served by a given local telephone switching office (i.e., wire center), as opposed to a company's statewide average costs.

The FCC currently calculates the need for high-cost support based on statewide average costs and rates. It does so on the grounds that if a large phone company can recoup its total costs of serving a particular state (by averaging its high-cost rural and low-cost urban areas) while keeping its statewide average rates comparable to the nationwide average, then high-cost support is not needed to preserve universal service in that state.

Today, Qwest does not receive any high-cost support in 10 states where it provides local service because the FCC has determined that the company's service territory in those states encompasses enough low-cost, urban areas to allow Qwest to recover its total costs (including the cost of serving high-cost areas) by charging statewide averaged rates comparable to nationwide average rate levels.

Abbott says S.1380 asks Congress to "micromanage" distribution of a small part of the USF in a manner favorable to Qwest, but it adversely effects universal service. He notes that even if the measure is enacted -- and that isn't likely to happen given the brief amount of time left on the congressional calendar -- the bill would have no significant effect on local rates in Qwest's 14-state service territory. That's because the $38 million in additional universal service support that Qwest would receive amounts to only 0.6 percent of the company's annual local telephone revenues. However, the bill could cause rates in Mississippi, Alabama and Puerto Rico to go up because the loss of highcost support in those areas would constitute a much higher percentage of total monthly local phone revenues and, thus, would have to be made up, Abbott says.

[Copyright 2004 PBI Media, LLC. All rights reserved.]