January 1999 
 

State Universal Service Fund Waits on FCC

Recently enacted state law requires the Public Utilities Commission (PUC) to establish a state Universal Service Fund (USF) for telecommunications services. That law also directs the PUC to collect fund contributions from all telecom services providers, including local, independent, cooperative and municipal phone companies; long distance carriers; competitive local service providers; and wireless (cellular and PCS) companies. The problem is that Minnesota, like all states, doesn’t know how much money it will have to come up with for its USF and what kind of funding mechanism will apply. That’s because the state is waiting to see how the Federal Communications Commission (FCC) decides to administer universal service program changes called for by the Telecommunications Act of 1996 and what costs may be shifted to the state.

Not a Small Matter
The issue is of vital interest to rural areas. Since the country began subsidizing phone service in high-cost-to-serve areas more than 60 years ago, rural areas have enjoyed rates and services comparable to those in urban areas, encouraging parity among all consumers. Today, rural areas fear that changed universal service programs could drive up rates, limiting rural access to the “information superhighway” and new technology that form the backbone of the modern global economy.
While there are many important details in FCC deliberations on USF that concern rural telecoms, their primary concern is making sure the FCC handles USF changes correctly for non-rural companies. That’s because the FCC is currently following its usual practice of dealing with non-rural (larger) companies first, then repeating its decisions for rural (smaller) companies. Despite the FCC’s avowal that USF funding will be adequate to support the needs of rural companies, even after non-rural and new USF demands are met, some rural telcos wonder whether there will be enough money to ensure that universal service continues to mean comparable rates and services for all.

Universal Service History
When the FCC was born in 1934, part of its mandate was to promote phone service to link all households to emergency and government services and surrounding communities. The program worked—over 97 percent of Minnesotans have phone service. With the breakup of AT&T in 1984, the FCC established the Universal Service Fund and set up a system where all interstate service providers paid access charges to local companies to continue to keep local rates affordable for all consumers. In 1985, universal service programs began to help those with low incomes and in 1990, subsidies for hearing- and speech-impaired individuals were added (the Telecommunications Relay Services Shared Fund). Currently, Link-Up America covers up to $30 of a low-income consumer’s initial hook-up fee, while the End User Subscriber Line Charge Waiver (TAP in Minnesota) waives $7 in monthly line charges for qualifying consumers.
The ‘96 Telecom Act added new universal service programs with no new funding source, but also expanded the types of companies that support these programs. Schools and libraries have already begun receiving federal “E-rate” discounts when they purchase telecom services, Internet access and internal connections. Rural health care providers will be targeted for future financial aid. Beginning this year, the various USF programs are supported by all telecom carriers that provide interstate service, including long distance, local, wireless, paging and payphone companies. Everyone is charged less than 4 percent of the amount they billed the previous year.

“25/75” Doesn’t Fly—But What’s Next?
In 1998, the FCC recommended that states pay 75 percent of USF costs. This federal mandate was a burden that states had not borne before. Because of the less than favorable response it elicited from states, the Federal-State Joint Board on Universal Service, a group set up by law to advise the FCC, is looking at the problem. Its latest recommendations to the FCC are:
- That no state should receive less high-cost support for non-rural carriers than it currently receives from federal support mechanisms.
- That the 25/75 division of responsibility for high-cost areas should be replaced with a new methodology. After determining if the cost to serve an area is significantly above a national average, the FCC would determine whether a state has sufficient resources to provide necessary support through “reasonable efforts.” If not, the federal support mechanism would supply the balance.
- That federal universal service support should be based on forward-looking economic costs, not an incumbent company’s “embedded” costs for providing services. This would be done to “send the correct signals for entry, investment and innovation” in the new competitive telecom environment. The cost model to be used is still under development.
- That telecom carriers should be prohibited from using line items on bills to charge consumers more than a carrier’s universal service assessments. 
 That carriers should be prohibited from describing USF charges to consumers as mandatory or federally-approved (they are not), thus discouraging consumers from changing companies because the consumers are misled into thinking all companies make the same charges.
- The FCC plans to make final decisions this spring so non-rural carriers can begin receiving federal USF cost support by July 1 as scheduled. Support for rural carriers will not be altered until Jan. 1, 2001, at the earliest.
For rural areas, the major concern is that a changed USF not abandon its original purpose. As Jerry Knickerbocker of the Minnesota Telephone Association says, “Our first obligation is to maintain what our current universal service fund has done so well—provide communications services to everyone at an affordable cost.”

The Situation in Minnesota
The PUC has a USF rule-making task force made up of commission staff and representatives from industry and consumer groups. It will start drafting rules for PUC consideration this spring. Some issues it will need to address include how to provide service to unassigned areas, how to administer a state USF, and how companies will pay into a fund and recover costs. “It’s based on the assumption the state will have to pay something,” says Diane Wells, the task force’s lead staffperson.

Dan Lipshultz, assistant attorney general and counsel for the PUC, says the state USF must be consistent with the federal fund. “The FCC doesn’t require that state and federal support mechanisms be identical, just consistent,” he says. “Defining ‘consistent’ will be a big part of what the PUC will wrestle with.”
 

PROFILE: Loretel Systems, Inc.

The need was immediate and Loretel Systems responded —housing employees temporarily at its Ada, Minnesota headquarters when that town bore the brunt of the 1997 Red River Valley “flood of the century.” Loretel crews worked ‘round the clock for several days to make sure phone service was not interrupted. Their work included sandbagging company facilities, performing house-by-house inspections of submerged telephone lines and rural inspections to determine pedestal damage caused by ice flows. Temporary cable had to be laid where ice had ripped apart pedestals. Loretel’s Ada office became “home” to management and service staff during the flood as they kept the generator running to maintain power to the central office’s switch. When the town’s hospital, clinic, and nursing home were declared unusable, Loretel stepped in and provided administrative office space for the medical facility.

Incorporated in 1931, Loretel’s roots go back to 1899 with the Norman County Telephone Company. Today, Loretel employs approximately 60 people and provides phone service to more than 12,000 customers in the Valley and Lakes area of northwestern Minnesota. Loretel also offers cable TV service to over 6,000 customers, provides Internet service to nearly 1,000 homes and businesses, and is a Cellular 2000 agent.

Active supporters of many organizations in the communities it serves, Loretel is also part of the Foundation for Rural Education and Development program (FRED), which provides financial aid to students who desire to return and work in their home area after graduating from college. Five FRED scholarships have been awarded over the past two years to students from communities served by Loretel. In addition, Loretel is a member of VAL-ED Joint Venture, which provides area schools with interactive video capability and network facilities for long distance carriers.
Steven Katka, General Manager, says Loretel looks to a future where consumers will benefit from “one-stop shopping” for their phone service, Internet, data services, video, wireless and long distance — at competitive prices. He thinks Loretel’s future will mirror its past because the company “remains committed to providing its customers with the latest and very best in communications solutions.”