Competitive Universal Service

TC 310June 5, 2008

Universal Service Premise

Network Externality Individuals Society

Subsidies (implicit) Rationale for Implicit challenged

Essential, people will pay Programs don't keep people on

USF funded by industry fees, not “taxes”

Current Programs

Universal Service Fund Life Line & Link-Up Non-need based: High cost suppression Broadband to schools/libraries Broadband to rural health care facilities

Without these, who leaves the network? Isn't that our concern?

Competition Kills Old System

Monopolies can cross-subsidize Competitive entities struggle to

Arbitrage rate opportunities New telecom techs

VoIP Wireless

1996 Act Mandates Explicit Less popular, look like taxes

Universal Service Problems Solely Regulation Based

Non-Needs Based

Primary focus Willing to pay at cost rate Largest user of USF Least socially desirable

Greatest challenge to reform Vested State interests Arbitrage opportunities Politically sensitive

High Cost Customers

Pure competition would not serve rural communities

State Demands Carrier-of-last-resort (ILECs) AT low costs

USF helps cover costs Eligible Telecommunications Carriers (ETC) Wireless and CLECs compete

Non-Rural Carriers

Interstate v. Intrastate Interstate: Dominate ILECs lower rates

USF makes up difference Intrastate: Only help high averages (135%)

No help without this threshold Burden is on States

Free to experiment Few do, leaving implicit subsidies in tact

Rural Carriers

Small ILECs, few customers Insulated from 1996 Act

Safe from unbundling, pro-competition sections Still face wireless & VoIP challenges Untenable

Still allow ECTs Arbitrage opportunity Enter market, get a subsidy USF needs to keep growing!

Funding USF

Impose both Intra and Interstate contributions Supreme Court rules only has Interstate jurisdiction

Long Distance bears burden Based on retail revenues, approx 9%

Problems Fewer customers, competition Unfairly dampens demand for services No technological rationale

Solutions

Connection-Based Based on customer connections to public network Irrespective of what technology Exempts LD, they never connect customers,

instead they use a LEC Numbers-Based

Assign numbers, make a contribution Excludes LD and broadband Does preserve 10 digit numbers

Information v. Telecommuncations

Problematic distinction Cable does not have to contribute Telephone companies do (even for DSL) VoIP also excempt

Problem defining telecommunications Use numbers and connection together

Pulls in VoIP and Cable (bundled VoIP)

Universal Service for What?

USF policies consider only voice as essential USF applies to what is essential to society

1996 Act grants expanded authority Likely to include “enhanced” services Broadband minimally

Do we need it? Broadband subsidies already $2 billion Makes more sense than telephone Who's going to pay?