Committee to explore cap on rural wireless subsidies

A controversial proposal to cap temporarily the federal funds flowing to cell phone companies serving remote areas will be in the spotlight at a Tuesday Senate Commerce Committee hearing.

The proposal has provoked a backlash from the wireless industry, and several Republican and Democratic lawmakers have written letters to the Federal Communications Commission (FCC) opposing the measure, revealing sensitivity to any tweaks to the massive Universal Service Fund (USF) that subsidizes telephone and other services to rural America.

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“We urge you to consider more thoughtful measures to limit the growth of the USF,” Sens. Jay Rockefeller (D-W.Va.), Mark Pryor (D-Ark.), Byron Dorgan (D-N.D.), Amy Klobuchar (D-Minn.) and Gordon Smith (R-Ore.) wrote in a letter to Deborah Taylor Tate, a Republican member on the FCC, and Ray Baum of the Oregon Public Utility Commission, who jointly headed the federal-state panel that proposed the cap last month.

“We do not support any plan that would cap only one select group of providers but not others, as we believe such a fix would unfairly skew the marketplace,” wrote Sens. John McCain (Ariz.), John Sununu (N.H.), Jim DeMint (S.C.) and John Ensign (Nev.), all Republican members of the committee, in a letter to Tate.

The joint panel said the cap would be a temporary measure  while it works on a long-term fix to stabilize the USF, which has ballooned from $1.8 billion in 1996 to $7.3 billion today.

FCC Chairman Kevin Martin supports the emergency cap, but would need to garner the votes of at least two of his fellow commissioners on the five-member, Republican-controlled panel. So far, only Tate has expressed support for the proposal, while Democratic Commissioner Michael Copps has voiced opposition.

The FCC’s comment period on the proposal, which ended yesterday, yielded hundreds of letters from the public and industry stakeholders. Responses are due Wednesday.

The chairman and vice chairman of the Commerce Committee, Daniel Inouye (D-Hawaii) and Ted Stevens (R-Alaska), have yet to weigh in on the issue. Witnesses for the hearing have not been announced, but it is expected that Tate will testify.

Opponents of the stopgap measure on Capitol Hill and in the wireless industry are portraying it as a blow to people on the wrong side of the technological divide.

“Out in rural America, people want their wireless phones as well, but they don’t work as well,” said David LaFuria, counsel to several cellular phone companies fighting the proposal.

Meanwhile, supporters are pushing the measure as a way to rein in a government subsidy that they say has spiraled out of control. “This is a cost that is being passed onto taxpayers. People are going to start to scream bloody murder,” one telecom lobbyist said.

The USF is widely seen as urgently needing reform. The contribution factor, the amount assessed as a percentage of consumers’ monthly phone bills to pay for the fund, hit a high of 11.7 percent this year.

The portion of the USF used to subsidize rural phone service, known as the “high-cost fund,” topped $4 billion last year, up from $2.6 billion in 2001.

The bulk of the cash has gone to wireline operators, as cell-phone companies only entered rural markets in recent years.
Since 1997, about $22 billion in subsidies have gone to wireline, with about $1 billion having flowed to wireless.

But wireless subsidies constitute the fastest-growing portion of the fund. They jumped from $1 million a year in 2001 to nearly $1 billion in 2006. Meanwhile, total subsidies for wireline operators flattened in 2003.

The cellular providers reject a plan that targets them alone. “We think the answer needs to be wholesale, top-to-bottom reform of the USF,” said Joe Farren, the director of public affairs for CTIA-The Wireless Association, the cellular phone industry’s main trade group.

They also point out that wireline subsidies have held steady even as wireline operators have been losing rural customers.

“Over the past three years, over 10 percent of wireline customers have ‘cut the cord,’ yet federal support to landline companies remains steady at $3 billion per year,” U.S. Cellular’s president and chief executive, John Rooney, said.

The wireline industry, which competes with cell phone companies for rural customers, strongly supports the temporary cap.

“An interim cap is a critical step to reform the exponentially increasing distributions from the nation’s universal service system,” USTelecom President Walter B. McCormick Jr. said.

The wireline companies that benefit from federal subsidies include some of the biggest carriers, such as AT&T, Qwest and Verizon, as well as thousands of small rural phone companies, some of which have only a few hundred customers.

The wireline industry argues that wireless subsidies are not efficient because, unlike their own subsides, they aren’t tied to cell phone carriers’ costs, but rather, to their wireline competitors’ costs.

“Wherever there’s a wireline company that gets a big subsidy based on their costs, it can be very attractive for a wireless company to go there even if their costs are low,” the senior vice president of law and policy at the U.S. Telecom Association, Jon Banks, said.

The existence of rural markets with several cellular phone service providers is evidence that wireless is over-subsidized, he said.

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