Different approaches before and
after Telecom Act
• Before Telecom Act
– Implicit cross subsidies
– Based on rate of return approach
– ILECs only receivers/IXCs only payers
• After Telecom Act
– Explicit subsidy payments
– Based on economic costs (except for small ILECs)
– ILECs and CLECs receivers/all providers payers
Different types of LECs
• Large ILECs (including RBOCs)
– New Cost Proxy Model
– CALLS plan
• Small ILECs (mostly rural)
– Actual costs (no Cost Proxy Model)
– Continuation of former support programs
– Part of the MAGS plan
• CLECs
– Depends on the status of the ILEC with whom they
compete
The Loop
Cost recovery: 75% from state and local
25% from interstate
--SLC and CCLC
(unless you are a small high cost ILEC)
The Switch
Cost recovery: weighted DEM from interstate
jurisdiction for small ILECs (under 50,000 lines,
usually “Ma and Pa” local telcos)
Before the
Telecom Act
Before Telecom Act of 96
• Universal service support paid by
– IXCs (based on presubscribed lines)
• LifeLine and LinkUp
• Universal service fund
– LECs (who left the CCLC pool)
• Long term support
High Cost Loops
• Universal Service Fund (former USF)
– Support for loops in excess of average loop cost
• Small company: 65% of amount between 115%--150%; 75% of
amount over 150%
• Larger company: 10% of amount between 115%--160%; 30% of
amount between 160%--200%; 60% of amount between 200%-250%; 75% of amount over 250%
– Based on national average of actual loop costs of all ILECs
– Before breakup of AT&T—recovered through intra-company cost
shifting—no need for separate fund
– Before end of NECA CCLC pool—recovered through NECA
pool—no need for separate fund
– Before Telecom Act of 1996—fund paid into only by the IXCs;
payments made only to ILECs
Averaged CCLC
• Long term support payments
– Paid by ILECs who left the CCLC pool
– Paid into the CCLC pool so that averaged
CCLC would be charged by the smaller high
cost companies
– Support received by ILECs in the CCLC pool
Example
• Average-to-low cost LEC:
– Loop cost covered by
• Interstate jurisdiction (25%)
– SLC and CCLC
• State jurisdiction (75%)
– State access charges
– Contribution from intraLATA long distance
– Local service charges
Example
• High cost LEC
– Loop cost covered by
• Interstate jurisdiction
– SLC and CCLC
– Long term support
– Universal service fund
• State jurisdiction
– State access charges
– Contribution from intraLATA long distance
– Local service charges
Weighted DEM
• Recovered by small (under 50,000 line)
companies through:
– Access charges (specifically local switching
rates) if filed own tariff
– NECA switched access pool if participated in
NECA pools
• Paid by IXCs through access charges
After the
Telecom Act
After the Telecom Act
• Telecom Act adds new categories to the
list
– Schools and libraries
– Rural health care providers
• Telecom Act continues LifeLine and
LinkUp
• Telecom Act injects competition into
universal service
– Eligible Telecommunications Carrier
The challenge
• Non-discriminatory, pro-competitive high
cost support
– Whose costs do you use? ILECs? CLECs?
– What costs reflect competitive rather than
monopoly marketplace?
• The answer: a Cost Proxy Model
The cost proxy model approach
• Calculate nationally averaged forward-looking cost per
line: $21.92
• Establish benchmark for support: Has been 135% of
national average, or $29.59 (10/16/03 changed by FCC
to two standard deviations above the national average)
• Calculate state averages—only for non-rural carriers
• For states that exceed the benchmark, multiply the
amount over $29.50 by 76%--multiply the result by
number of lines served and that is support for the state; if
state average is below $29.59, no support for that state
• Federal support is targeted to the highest cost wire
centers in that state
Issues with the proxy model
• Lots of arguments over the inputs
• Huge shifts in subsides among states
– Maine ILECs got no support under old system; get
$10.2 million under proxy model; California ILECs got
$6.3 million under old system, get nothing under
proxy model
– Hold harmless provision – phased out $1 per line per
year
• Applied only to the non-rural carriers
– small “Ma and Pa” companies stayed under old
system and even get more support if showed growth
in lines or more investment
So what do we have now?
• One fund, called a Universal Service
Fund, that includes payments for a host of
universal service programs
• Paid into by all telecommunications
carriers
• Funds received by a host of entities,
including ILECs, CLECs.
What’s in the fund?
• Low Income Support Programs
• Rural health care support (capped at $400
million annually)
• Schools and Libraries support (capped at
$2.25 billion annually)
What’s in the fund?
• High cost program
– Continuation of old support programs
• High cost loop--Continuation of former USF fund
• Local switching support (DEM
– New support programs
• Interstate access support--created by CALLS plan and originally
capped at $640 million annually
• Interstate common line support
• Non-rural forward looking cost support (from Proxy Models)
USF disbursements 2007
Estimates for 2008
•
•
•
•
High cost support: $4.48 billion
Low Income:
$819 million
Rural Health Care: $49.5 million
Schools & Libraries: $1.8 billion
USF disbursements 1998-2008
•
•
•
•
Over $34 Billion in High Cost support
Over $7.5 Billion in Low Income support
Over $266 Million in Rural Health Care
Over $23 Billion in Schools an Libraries
• Ohio has received a little over $1 Billion
So what are the controversial
issues?
• Some carriers make money on their contribution—owe the fund
11.4% but collect more from consumers
• Who is eligible to be an ETC?
– Wireless providers getting about $1 billion in support a year
• How are the schools and libraries using their support?
• Increase the base for USF
– June 2006 FCC raised the wireless safe harbor percentage from
28.5% to 37.1%
– Extended duty to contribute to interconnected VoIP providers;
64.9% safe harbor
• Looking for other bases to calculate universal service needs
– By telephone number?
– Reverse auctions?
• Should broadband be added as a supported service?
What about inter-carrier
compensation?
• Efforts to decrease inter-carrier
compensation result in suggestions for
even more USF funds
– Missoula Plan—decrease intrastate and
interstate access charges and the result is a
need for an additional $2.225 billion in
support—hasn’t been passed but does
illustrate the problem