Senators opposed to plan to curb USF taxes

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Senators oppose plan to curb phone taxes



There are few defenders of those rapidly multiplying taxes, fees and other surcharges that appear at the end of Americans' phone bills every month.
But in the U.S. Congress, senators from rural states that benefit from the mandatory levies on Tuesday attacked a proposal to cap those taxes.

At issue is whether those unpopular taxes, which flow into a pool of money called the Universal Service Fund, have spiraled out of control. Last month, a federal panel recommended some temporary caps on funding for wireless providers--which would effectively keep in place the 2006 level of $1 billion.

"When you're assessing surcharges that high, you ought to be delivering something that's measurable, that's tangible and that's going to those people who need it the most," said Sen. John Sununu, a New Hampshire Republican.

Around $1 billion might seem like a lot of money being diverted to wireless providers in what federal rules call high-cost areas (typically rural ones). But it may not be enough for senators such as Ted Stevens, an Alaska Republican, or Olympia Snowe, a Maine Republican, who expressed their steadfast opposition to limits during Tuesday's hearing.

Limits on federal spending will "place rural America at a tremendous disadvantage," Snowe said. States like Maine depend on subsidies for better mobile phone coverage, she said.

"When you're assessing surcharges that high, you ought to be delivering something that's measurable, that's tangible and that's going to those people who need it the most."
--Sen. John Sununu The federal panel's proposal would rein in the Universal Service Fund, which overall doled out more than $7.3 billion last year alone to subsidize telephone service in rural and low-income areas and in schools and libraries. Since its inception during the Clinton administration, the fund has been plagued by waste, fraud and abuse.

Senators on Tuesday were vocal, however, about their frustrations with the panel's plan, which some dubbed a "piecemeal" approach that did nothing to address fundamental concerns with waste and fraud in the program. Some said they were concerned, for instance, that consumers would continue to see rising line-item charges on their phone bills, and with no guarantee that their money was going to areas that truly need help.

Right now, phone companies--including wireline, wireless and Internet phone providers--are subject to a federal tax of 11.7 percent of their long-distance call revenues, which they typically collect from their subscribers each month.

Federal Communications Commissioner Deborah Taylor Tate, who heads the joint board, endured repeated questioning from the politicians about why the FCC hadn't done more to stabilize the fund. She suggested it was difficult to reach a consensus but repeatedly said it was necessary "to move forward absolutely as quickly as possible toward fundamental reform."

Plagued by controversy, fraud and abuse

At issue in the board's recommendation is a portion of the controversy-plagued Universal Service Fund used to help fund wireless carriers building cell sites and other network infrastructure in rural areas. The amount doled out to those companies has grown from about $15 million in 2001 to about $1 billion in 2006--representing an annual rate of more than 100 percent--according to the board.

Without immediate changes, the entire fund is in danger of becoming unsustainable in the future, the board, which is also composed of other FCC commissioners and staff, state utility commissioners and consumer advocates, said in its recent report. That's why it suggested restricting those payments to their 2006 levels for the next 18 months.

But some senators suggested a cap was the wrong approach. Rather than going that route, some suggested the FCC should restructure the way it doles out the funds in the first place--and threatened to step in with new laws if the regulators didn't act.

"As I understand it, if Carrier A is serving and Carrier B comes in to compete...the reimbursement of Carrier B is based on costs of Carrier A, not Carrier B," said Sen. Stevens, the committee's vice chairman. "In almost every circumstance, Carrier B has substantially lower costs. Why the windfall?"

Senators oppose plan to curb phone taxes | Tech News on ZDNet

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New Studies Question Benefits of USF Subsidies to Wireless Carriers

Two new studies call into question whether the USA's universal service subsidies received by cell phone companies generate benefits for consumers.
Specifically, the studies show that subsidized cell phone companies actually provide less coverage than unsubsidized companies serving the same areas, and that there is no basis for wireless carriers' claims that they use the subsidies to build out coverage to areas that otherwise would not be served.

Wireless companies are expected to receive more than $1 billion in subsidies from the Universal Service Fund (USF) in 2007. The subsidies have grown by more than 185% annually in recent years, raising concerns that about the financial sustainability of the fund. In May, the Federal-State Joint Board proposed capping the subsidies at 2006 levels; a final decision on the proposal is pending at the FCC.

The first study, by Criterion expert Nicholas Vantzelfde, compares the coverage of subsidized wireless carriers with coverage provided by unsubsidized wireless carriers in the same areas. Vantzelfde finds:

In the approximately 800 study areas where wireless carriers receive USF subsidies, unsubsidized carriers provide substantially more coverage. Unsubsidized carriers cover 97% of the population in these areas, while subsidized carriers cover only 70%.

Of the 148 million people living in areas where wireless carriers receive subsidies, subsidized carriers provide unique coverage to only 2% of the population. On the other hand, unsubsidized carriers provide coverage to 44 million people who do not have coverage from the subsidized carriers.

Wireless carriers receive over $1,000 in subsidies for each incremental line served, or $95 per subscriber per month.

Subsidies to wireless carriers are highly duplicative: More than half of the population in areas where wireless carriers receive subsidies is covered by two or more subsidized carriers.

The second study, by Criterion economist Kevin Caves and Chairman Jeffrey Eisenach, examines the relationship between subsidies and wireless availability. Utilizing a regression analysis approach, they find:

Contrary to the claims of wireless carriers, and holding constant such other factors as topography and population density that affect the availability of wireless service, there is no statistical correlation between the amount of subsidies paid and the proportion of the population or land area that has wireless coverage.

Also contrary to the claims of wireless carriers, and again holding other factors constant, there is no statistical correlation between the amount of subsidies paid and the number of carriers from which consumers can choose, i.e., USF subsidies do not contribute to the level of wireless competition.
In explaining their results, Caves and Eisenach point out wireless carriers do not receive subsidies on the basis of the amount of coverage they provide, but rather on the basis of how many subscribers they serve in areas where they are eligible for subsidies.

Thus, they receive funds for subscribers they were serving even before becoming eligible. Furthermore, there are many ways they can expand the number of subsidized lines without expanding their coverage, such as increasing their marketing efforts or opening more retail outlets.

Both studies also provide important insight into the distribution of USF funds paid to wireless carriers. For example:

The 10 largest recipients of USF subsidies to competitive telecom carriers are all wireless companies. Collectively the 10 largest carriers received 80% of all subsidies.

The largest single recipient is Alltel, which received over $226 million in 2006, or 29% of all subsidies to paid to competitive carriers.
USF subsidies accounted for 27% of Alltel's operating earnings in 2006.

Among states, the ten states receiving the most funding USF funding for wireless carriers accounted for 59% of all funds. Thirty (30) states contribute more to the USF fund to support subsidies to wireless carriers than they receive in return. The biggest "losers" are California (-$58 million), Texas (-$32 million), New York (-$29 million), Florida (-$28 million) and Illinois (-$22 million).

About 45% of all study areas receiving USF support for wireless carriers have median household incomes above the national median income. Some areas receiving support have median household incomes of more than $70,000.

Wireless CETCs receive little support from the USF programs that provide service to low income consumers, indicating they are providing little benefit to this group.

In releasing the studies, Eisenach said "I hope our work will cause policymakers who are inclined to support this program to take another look. Enhancing wireless coverage in rural America is a laudable goal, but the current program is not an effective way of doing so."


New Studies Question Benefits of USF Subsidies to Wireless Carriers

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Report claims USF support wasted

Backing by Verizon, Verizon Wireless adds to impact

WIRELESS INDUSTRY EFFORTS to derail a federal-state panel’s recommendation to cap universal service fund support for wireless carriers in rural areas could be undermined by a new report that found billions of dollars in subsidies have been largely ineffective in bringing cellular service to high-cost, underserved markets.

The report, from Criterion Economics L.L.C., was filed with the Federal Communications Commission last week and could diminish cellular carrier arguments that USF support for competitive eligible telecommunications carriers is money well spent. Compounding the filing’s impact is the fact the report—comprising two studies—was underwritten by the parent company of a top national mobile phone operator, Verizon Wireless.

While it is not necessarily a secret in Washington lobbying circles that the No. 2 wireless operator is in lock step with parent

company Verizon Communications Inc. on the CETC issue, Verizon’s decision to fund the report and its delivery to federal regulators appears to raise the stakes at a critical juncture in the controversy.

Reading tea leaves

Separate from the CETC wireless issue itself, Verizon’s position offers a glimpse into corporate decision-making by a Bell telephone giant whose mobile phone unit is increasingly competing for the former’s customers. Indeed, wireline-to-wireless subscriber migration is one of the most disruptive trends in the telecom industry today.

Why wouldn’t Verizon Wireless want the kind of generous federal support sought by other mobile phone operators?

“We’re going to let the filings of our parent company speak for us, and as a policy, we don’t discuss or parse out internal decision-making processes,” said Verizon Wireless spokesman Jeffrey Nelson. Reply comments supporting the proposed CETC cap were filed last Thursday under the names of Verizon Wireless and its parent firm.

Criterion’s findings come off as powerful and potentially devastating to the wireless industry and in particular to top CETC recipients: Alltel Corp., AT&T Mobility, Sprint Nextel Corp., U.S. Cellular Corp., Rural Cellular Corp., Dobson Communications Corp. and Centennial Communications Inc. Most CETC support goes to wireless carriers.

“Overall, my analysis demonstrates that, to the extent subsidies to wireless CETCs are intended to increase the availability of wireless service in high cost areas, the vast majority of funds are simply wasted. There are many areas of the U.S. where wireless coverage remains inadequate, but the current programs do not effectively target coverage to those areas,” stated Nicholas Vantzelfde, author of one of Criterion studies in the report.

The report claims non-subsidized wireless service is available in most areas where subsidized carriers operate, with CETCs offering less than 4% of incremental coverage over wireless operators that do not receive federal support. Verizon Wireless is in the latter camp. Vantzelfde also found CETC funding tends to be highly duplicative, with more than 52% of households covered by CETCs having access to multiple subsidized wireless carriers. CETC wireless support is based on wireline costs, another factor making the subsidy vulnerable to criticism.

“Criterion is a very respected group. If Alltel had hired them, no doubt they would have supported our position on the issue just as eloquently,” said Alltel spokesman Andrew Moreau.

USF draws support, opposition

The federal-state joint board’s proposed emergency cap on high-cost USF disbursements to wireless carriers has strong support from FCC Chairman Kevin Martin. Martin is under pressure to rein in a mushrooming USF. The high-cost fund accounts for $4 billion of the total $7 billion in the USF.

Critics of the CETC cap—including key House and Senate members—argue wireless carriers should not be singled out for an outdated USF system that gives billions of dollars more to rural landline telecom carriers than to mobile phone carriers. They point out CETCs bring competition and choice to rural consumers.

Wireless trade association CTIA said Verizon and others that back a CETC cap have a strong economic incentive to do so.

Verizon and Verizon Wireless counter that support is strong from consumer advocates, state regulators and industry for a CETC cap.

“Capping competitive ETC support on an interim basis would stabilize the high cost fund and ease the increasing demand on consumer contributions to the fund. … Parties opposing the interim cap distort its impacts. Claims that the interim cap would adversely affect wireless voice or wireless broadband services in rural areas are simply not true. The interim cap would not reduce support to competitive CETCs, but rather would maintain such support at 2006 levels,” the companies stated.

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