Universal service high-cost subsidy reform: hindering cable-telephony and other technological advancements in rural and insular regions.

• Author: Dawson, Emily L.

1. INTRODUCTION

   Policymakers advanced the concept of universal service in an effort to ensure that all United States citizens receive widespread access to affordable telecommunications services. In developing the initiative, the Federal Communications Commission ("FCC") identified various areas that the universal service program should target, such as high-cost and rural areas. Regions that have fewer customers over which to spread fixed costs, and other factors such as less technologically advanced networks and rugged terrain, have inherently higher service costs. The universal service program provides subsidies to high-cost regions to ensure affordable telecommunications services to citizens in these areas.

   The FCC recently initiated an effort to reform the current universal service subsidy allocation system by implementing a computer model that determines eligibility for funding using specific cost inputs to calculate the cost of providing service to rural and insular areas. Although the initiative certainly has merits, the program determines eligibility for subsidies in a manner that will reduce the availability of universal service funding in certain high-cost regions. Without these subsidies, some high-cost areas will likely be excluded from technological advancements in the telecommunications industry. This Note explores the problems associated with high-cost subsidy reform, using recent developments in cable-telephony to demonstrate potential negative impacts.

   This Note provides a general overview of universal service in Part II, followed by a brief discussion of reform efforts for funding high-cost areas in Part III. A general discussion of recent innovations in cable-telephony follows in Part IV, along with reasons why high-cost areas will likely be excluded from these and other technological innovations, especially in light of the recent reform efforts. The discussion then shifts to the disproportionate impact that the reform will likely have upon local service providers and to the reality that many high-cost areas will likely be offered fewer technologically advanced services while rates for other telecommunications services will remain high. This Note concludes in Part V with recommendations for universal service reform, including the implementation of a specialized high-cost technology subsidy.

2. BACKGROUND ON UNIVERSAL SERVICE

   "Universal service" refers to a public policy initiative designed to provide widespread access to telecommunications services. Ensuring that high-cost areas receive access to telecommunications services and technology provides great social benefits, including enhanced educational opportunities, improved medical care, widespread availability of information, and increased economic competitiveness.(1)

   Most simply defined, universal service is an intertwined web of state and federal programs and regulations designed to promote affordable access to telephone and other telecommunications services through a series of subsidies.(2) Originally, the program only targeted widespread residential telephone service,(3) but the nation's entry into an increasingly complex and digitized era has presented many interesting opportunities to expand universal service to other telecommunications technologies, such as cellular telephones, cable television, and the Internet.

   Although the fundamental concepts behind universal service emerged prior to congressional action,(4) statutory provisions form the basis for universal service today. Congress first discussed the principles of what is now referred to as universal service in the preamble to the Communications Act of 1934 ("1934 Act"), a statute primarily designed to affirm federal authority over the telecommunications industry. Although the term "universal service" never specifically appeared in the 1934 Act or in the corresponding congressional records, the preamble provided a strong affirmation of the concept--"For the purpose of regulating interstate and foreign commerce in communication by wire and radio so as to make available, so far as possible, to all the people of the United States ... [a] Nation-wide ... communication service with adequate facilities at reasonable charges."(5) This preamble provided the conceptual framework for what would later be defined as "universal service."

   The Telecommunications Act of 1996 ("1996 Act") provides the modern statutory basis for universal service. Prior to the 1996 Act, universal service was funded in a piecemeal fashion through various subsidies collected from long-distance companies and other interstate services.(6) The primary purpose of the 1996 Act was to implement a competitive market system in place of the prior monopolistic system.(7) Most importantly, however, the 1996 Act codified and provided congressional support for all of the definitional aspects of the universal service program.(8) In section 254 of the 1996 Act, Congress failed to offer a definition for universal service, but mandated that the FCC establish a Federal-State Joint Board to make recommendations for the program and further define the concept so that the agency could execute a comprehensive universal service program.(9)

   The universal service program functions as a cooperative effort between the individual states and the federal government. The individual states may independently develop separate universal service programs as long as the provisions do not conflict with the FCC's general rules governing subsidy allocation and find support in "specific, predictable, and sufficient mechanisms ... that do not rely on or burden [f]ederal universal service support mechanisms."(10) In addition to adopting separate universal service programs, states are also free to exceed the federal standards, add services, and adopt further definitions and standards.(11)

3. UNIVERSAL SERVICE REFORM AND FUNDING HIGH-COST AREAS

   The 1996 Act expresses a fundamental commitment to encourage competition in rural and high-cost areas so that customers in these regions will receive the same benefits as their urban counterparts. Section 254 of the 1996 Act mandates:

   Consumers in all regions of the Nation, including low-income consumers and those in rural, insular, and high cost areas, should have access to telecommunications and information services ... that are reasonably comparable to those services provided in urban areas and that are available at rates that are reasonably comparable to rates. charged for similar services in urban areas.(12) Accordingly, as part of its Universal Service Order issued on May 8, 1997, the FCC included consumers in high-cost regions(13) among the four categories eligible for universal service support.(14)

   As discussed in Part II, subsidies support the programs, shifting some of the costs associated with providing service in high-cost areas to customers in lower-cost regions.(15) The federal Universal Service Fund currently offers subsidies to telecommunications providers serving high-cost regions, but the Federal-State Joint Board has recommended that the FCC revise the present system for determining a carrier's eligibility to receive these high-cost subsidies.(16)

   On June 14, 1999, the FCC announced specific proposed changes to the universal service subsidy allocation system,(17) intended to increase competition in high-cost areas through a $230 million increase insubsidies.(18) The new system makes both competitive external providers and established local companies eligible for subsidies in an effort to bring improved service and telecommunications technology to high-cost areas.(19) In revising the current subsidy allocation system, the FCC also approved a proposal to make high-cost subsidies "portable." In other words, if a customer decides to change local exchange carriers, the new carrier would be eligible to receive the subsidies associated with that user's line.(20) In theory, this system fosters competition, allowing new carriers to infiltrate these high-cost regions and qualify for high-cost subsidies.

   In an effort to convert the system to "an explicit, competitively neutral, and sustainable mechanism"(21) for allocating subsidies in high-cost regions, the FCC is in the process of employing a "`cost methodology based on forward-looking economic cost[s]'"(22) instead of the former "embedded cost" model. The previous system determined subsidies using account ledger figures from the individual telecommunications providers requesting support. The new computer model will calculate cost estimates using concrete cost inputs.(23)

   The new model will enable the FCC to design more efficient networks based upon the geographic location of customers and necessary upgrades in infrastructure. Using this model, the FCC can input cost variables, such as network components, into the system to estimate the forward-looking costs of providing telecommunications services to these high-cost areas. From these data, the FCC will determine in which geographic regions carriers will be eligible to receive subsidies.(24) The FCC has declined to reveal any of the cost estimates calculated in the early phases of the modeling,(25) but critics have suggested theories about how the new system will adversely affect high-cost regions.

   One of the biggest criticisms of the new system is that it determines carrier eligibility for subsidies on a statewide basis. Therefore, a carrier can only receive high-cost subsidies for services rendered in a particular state if the "carrier's average cost of providing service in [that] state exceeds 135% of [the] national average per line."(26) The problem is that calculating the cost of phone service in rural and high-cost areas is notoriously difficult, and the FCC has even acknowledged this potential uncertainty in the system.(27)

   Under the former "embedded cost" system, carriers in nineteen states and Puerto Rico were eligible to receive high-cost universal service subsidies. The new...