Free Press Testifies on Universal Service Reform at House Hearing

In testimony before the House Subcommittee on Communications, Technology, and the Internet, Free Press Research Director S. Derek Turner today urged lawmakers to make universal, affordable broadband a priority in any plans to reform the Universal Service Fund (USF).

The 10 a.m. hearing, titled "Universal Service: Reforming the High-Cost Fund," focused on ways to modernize universal service programs to meet the technological needs of the 21st century. Subcommittee Chair Rick Boucher (D-Va.) has indicated plans to introduce an updated version of the universal service reform legislation he co-sponsored with Rep. Lee Terry (R-Neb.) during the last Congress.

A live webcast of the hearing is available at www.energycommerce.house.gov

Turner advocated fixing the deeply flawed USF by promoting efficient, accountable and fair practices and transitioning support from telephone service to broadband infrastructure -- a process that can begin with the broadband stimulus grant programs.

Prepared testimony of S. Derek Turner, research director of Free Press, included below:

Technology is rapidly changing the way Americans interact, learn and do business -- and all for the better. But the rules governing our communications markets are not keeping up with this rapid pace of change -- and consumers are suffering as a result.

When the current universal service regime was created in 1996, the Internet was an application that rode on top of the telephone infrastructure. Today, it's the opposite. Telephony is just one of many applications that ride on top of broadband infrastructure. With this convergence, comes the tremendous opportunity to ensure universal, affordable broadband access while also reducing the future burden on the Universal Service Fund.

We strongly support the goals of universal service. Everyone benefits when consumers in rural America have access to affordable, high-quality communications. But as advocates for the consumers whose monthly bills support the fund, we want to ensure that our system of universal service is both fair and efficient.

Consumers in the 21st-century marketplace should not be forced to subsidize a 20th-century technology. We believe a bold and transformative shift in USF policy is needed. Done properly, we can bring affordable broadband to all Americans, while also substantially reducing the size of the fund in the long term.

We must begin by asking two basic questions: First, how much money is each customer receiving from USF each month; and second, is that support actually needed?

Our research shows that 40 percent of the High-Cost Fund -- nearly $2 billion -- goes to subsidizing lines that receive less than $10 per month. This is also true for small rate-of-return carriers. Two-thirds of these lines receive less than $10 per month in high-cost support.

These subsidies may be justified, but it begs the question: Is this the best use of that $2 billion? We should also question whether rates in these areas are already below the national average and if this money might be better spent on broadband deployment to bring these customers more than just a telephone line.

The data points us to a path forward -- a way to bring universal broadband and to end the over-reliance on subsidies. This path begins with recognizing how convergence has changed the businesses of telecommunications.

Before broadband, carriers were only able to earn perhaps $20 per customer each month selling phone service. In today's converged world, a carrier can earn well over $100 on that same line by offering phone, TV and Internet service.

Unfortunately, our current regulatory structure doesn't account for the fact that this additional revenue provides many carriers in high-cost areas the opportunity to operate profitably without ongoing subsidies. Instead, it tries to clumsily separate out regulated from unregulated costs and revenues, and just results in overpayments and anti-competitive subsidies.

As an alternative to this broken process, we suggest basing ongoing high-cost support on total revenue earning potential and forward-looking infrastructure costs, calculated for each carrier on a granular, disaggregated basis. This modernized regulatory structure will reduce the need for ongoing support, as many carriers will be able to recoup network costs and earn healthy profits from "triple-play" service revenues.

However, for some carriers, the upfront costs for deploying broadband into currently unserved areas are just too high. Here is where we have the opportunity to turn the regulatory structure on its head. We should use the fund to pay these upfront costs, and then only provide ongoing support where it is truly needed.

We propose a 10-year transition, where the new "total cost/potential revenue" support model is phased in, and the resulting cost-savings are used to fund the buildout of open access broadband infrastructure to unserved areas. We estimate that after the 10-year transition, the total size of the High-Cost Fund could be reduced by two-thirds, to less than $1.5 billion per year.

The $7 billion in broadband stimulus funds presents policymakers with a window of opportunity to transform USF. A substantial portion of the upfront costs for rural networks may be financed by taxpayer dollars. The carriers operating these networks will thus have little capital costs to recover, and therefore little need for traditional ongoing high-cost fund support.

But unless the FCC moves to modernize the regulatory structure, we may see "double-dipping." By that I mean carriers might ask ratepayers to reimburse them for the networks already paid for by taxpayers.

Getting universal service policy right isn't the only thing we need to do to ensure universal service. For rural carriers, the viability of the self-supporting triple-play business model depends on getting fair rates and terms for transport and special access services, and getting fair access to video programming.

In closing, we urge Congress to maintain its commitment to universal service, but to do so with policies that are flexible and that benefit all consumers.

The full written testimony can be read at https://www.freepress.net/files/FP_Congressional_Testimony_USF_March2009.pdf