1. 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

2. 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

3. The Loop Cost recovery: 75% from state and local 25% from interstate
--SLC and CCLC
(unless you are a small high cost ILEC)

4. The Switch
Cost recovery: weighted DEM from interstate jurisdiction for small ILECs (under 50,000 lines, usually “Ma and Pa” local telcos)

5. Before the Telecom Act

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. After the Telecom Act

13. 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

14. 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

15. 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 $ (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

16. 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

17. 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.

18. 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)

19. 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)

20. Contribution Factor
Latest factor is 12.9%; for first quarter of 2011 will be 15.5%
Levied on interstate and international revenues

21. USF expenditures, December 2009 $7,256,367,000

22. 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

23. So what are the controversial issues?
Some carriers make money on their contribution—owe the fund 12.9% 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?

24. 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