The New Deal on USF Recovery
Intercarrier Compensation
Access USF draws
This paper deals with the subject of Intercarrier Compensation, USF Contributions, and access to USF for purposes of “cost” recovery. Though they are all different subjects, they all share a common ideology.
Quality telephone service was made available in rural America at affordable rates largely through the availability of universal service, access charges, and other intercarrier compensation cost recovery mechanisms. From 1996 to about 1998, the industry continually made statements and worried about how we (Telephone Industry) must make sure that there would be “three legs on the revenue stool”.
The competitive telecommunications environment has stirred-up much debate regarding these mechanisms and policy makers and Legislators are addressing their sustainability. Since the enactment of the Telecommunications Act of 1996, the rural local exchange carrier (RLEC) industry has been concerned about how to ensure the continuation of these three legs of the revenue stool.
While continuing to make sure the legs are there, important points are missing – not only are the legs not equal in length, they are decreasing in length. Some are even suggesting the creation of a stool with a single leg (a new pool) that would replace all three of the existing compensation mechanisms.
Whether a stool balances on three legs of different lengths or one leg, one thing is certain – the stool is unstable, as are the traditional compensation mechanisms relied upon by RLECs for recovery of costs.
Providing a Fair Return on Actual Investment Accomplished Universal Service Goals.
Is This Wrong?
Today, for the most part, telephone service is available to all American households. This is not because there was an overabundance of money to spend. It was not because there were inexpensive ways to provide the service. It is because people came together to provide consumers telephone service where it did not make economic sense to provide the service. It was all based on the concept of providing a quality product for a fair return on the investment - a profit. Why have the ideas of actual cost recovery and a fair return on investment become bad things? They are not ideas from the prehistoric ages. Even though the 1996 Telecom Act, (clearly not from prehistoric times), was written to assure both of these principles, the implementation of The Act has possibly put in jeopardy the idea that every American should have access to affordable telecommunications services.
The Act did envision some competition in providing telecommunications service. However, it did not go so far as to promote competition merely for competition’s sake. In the ’96 Act, Congress envisioned that quality service would be available for all consumers. Accordingly, The Act was not written to promote the use of one technology over another. It did, however, promote the opportunity for a fair profit for providing quality service.
Unfortunately, “profit” has now become an unmentionable. Those who endorse this ideology are the same people that also think it is acceptable to provide USF cost recovery on the basis of proxies or according to another company’s cost. These costs are often significantly different than the actual co sts underlying the current rate levels and other recovery mechanisms. The term “fair profit” is overlooked or assumed to be, for all competitors, about the same as the profit based on the return of the incumbent carrier’s embedded investment. It is evident that proxies typically by design will not provide for a fair return on a telephone company’s actual investment.
Proxies can, however, be manipulated to create the return wanted, including a greater return than a fair one.

USF Support Based on Actual Costs for All Providers Best Promotes the Public Interest
It has been decided by the powers that be, that for the sake of competition, USF will be provided on the basis of the cost of the ILEC. Other eligible telecommunications carriers (ETCs) are not required to prove their costs or even guarantee that the USF money is being used for the provisioning of quality telecommunications service. Why is actual cost a problem? Recovery is not on a neutral basis. In the case of Federal USF, an ILEC starts recovering its actual cost two years after the investment is made. However, the competitor starts receiving USF once they say they are serving one consumer.
How is this fair? Again, why is it wrong to use the actual cost to compensate each provider of service?
What are we trying to protect?
In most cases, using the ILEC’s actual costs is providing a windfall for the competitor.
Federal rules allow wireless carriers to receive USF funds for customers that they are already serving, regardless of whether the support is necessary for the recovery of costs. If the wireless provider did not need the USF to provide the service to the consumer initially, why would they need it now, when nothing has changed? Clearly, USF support for wireless carriers could be a windfall and substantially increase the size of the fund. This is not warranted nor is this philosophy in the public interest.
Since the wireless carriers are relishing the fact that they are able to receive USF recovery for customers they are already serving, there should perhaps be another fund created for the wireless carriers. Allow the wireless carriers to submit their costs to get the USF wireless recovery.
Oh, I’m sorry, that is not allowed.
We cannot think of having a wireless carrier subject to a cost study. They do not have cost studies.
Why do wireless carriers fight so hard to avoid cost studies? Do they have something to hide? Why do we think wireless carriers cannot come up with their costs? Do they not keep track of their financial records? Do they not follow standard accounting principles? Even though they do not follow the same accounting practices as an ILEC, they do have financial records. If they did not, how would they know if they have a profit or loss? How do they publish audited annual financial statements for their investors? Wireline-based carriers have to prove-in their costs. Why should a carrier that wants to receive USF for services provided not have to do the same? Competitive neutrality - what does it actually mean?
Access Charges are a Reasonable Basis for Recovery of the Actual Costs of Originating and
Terminating Telecommunications Traffic
Switched Access Charges were created to provide for the recovery of costs associated with originating and terminating long distance calls. For rural LECs, access charge revenue represents a significant portion of their cost recovery. Why is there such a desire to make access charges equal to zero?
Somehow the perception exists that the access rate should be zero in spite of the fact that the significant costs they now recover in rural areas would have to be recovered somewhere else, perhaps from the customer. This would make local service unaffordable in rural areas, at odds with The Act.
Proposals are afloat suggesting shifting access cost recovery to the USF. This makes as much sense as fighting a California forest fire with a colander. No matter how many times you go to the well, you will not have enough water to put the fire out.
No one in the telecommunications industry would argue that increasing the USF by the amount necessary to recover the lost revenue and cost recovery of access is sustainable. Since the USF is supposed to be portable, how do you recover your costs? Once you lose the USF portion for a consumer, you will not recover the cost of doing business. You will fail to receive a “fair return on your investment”.
It has even been suggested that a company that has provided quality service for many years should just accept the fact that at some point in the future they will have stranded investment. Does that mean that the millions of dollars that are being spent to provide broadband services just disappeared?
Does that mean that RUS and other lending institutions are not going to want their loans paid back?

There are those out there that would say, “ Let the cost causers pay for it”. This is definitely in opposition to the Telecom Act. “Reasonable and affordable” is not just a catch phrase. It is what the public switched network was based on. In most cases, basic local service in rural America would have to increase to an amount close to or even exceeding $100.00 per month - that is before you add any long distance charges. Just because access charges go to zero, do not be duped into thinking that there won’t be any long distance charges. AT&T is not routing traffic from New York to Los Angeles for free. If we think that Long Distance charges will be eliminated, we are kidding ourselves. Ask
WorldCom or Global Crossing how long you can operate without recovering your costs! Someone will be paying a bill. How many consumers will pay $100.00 per month for basic local service? How many consumers can afford to pay $100.00 per month for anything in our current economy? Who is the actual “cost causer”? Is it the customer, the IXC, or the local telephone company?
Access is Access
Lets talk about another aspect of Intercarrier Compensation.
Reciprocal Compensation is a new part of the compensation picture. In an Incumbent Local Exchange
Carrier’s (ILEC’s) world, calls are handed off to the customer’s presubscribed IXC when they are not terminated on the ILEC’s own facilities. When a call goes from one consumer to another and they are not within the same ILEC serving area, an IXC becomes a part of the equation. The ILEC carries the call to a point of connectivity where the IXC picks up the traffic.
Just because there are lines drawn on a map called an MTA does not mean that the calls don’t have to be handed off to the cu stomer’s presubscribed IXC. An ILEC must still hand the call off to an IXC, unless the wireless carrier in the MTA has direct trunks to the ILEC. In this case, the ILEC can hand the calls to the wireless carrier. Now the wireless carrier has access to t he ILEC’s local customer.
Once again, the word “access” appears. Why should an ILEC pay access to the wireless carrier just because they are a wireless carrier? If the “cost causer” idea were applied, then the wireless carrier would pay access. They are the ones that created the need for interconnection. They caused the need to have direct trunking.
The Bottom Line –
To Continue to Provide Quality Services, Rural LECs Must be Able to Recover Their Costs
One cannot compare Rural America to the suburbs of Washington D.C., New York, Dallas or Los
Angeles. Rural America is not comprised of homes or apartments that are twenty feet apart on a paved street or cul-de-sac. Rural America has dirt roads with a house every mile or two or sometimes tens of miles and sometimes a hundred miles. In some parts of West Texas, New Mexico, Arizona,
Kansas, Oklahoma, Nebraska, Montana and Wyoming, one can go for a 100 miles before seeing a house. Who will provide the communications services to these consumers? Right now it is being provided by a RLEC. Once the USF is sucked away to provide profits to other carriers and intercarrier compensation diminishes, how will a LEC be able to afford to provide quality services to these areas?
How do you provide for the broadband services that legislators and regulators want in rural America?
Quality services and broadband are not possible without constructing and maintaining adequate facilities and obtaining recovery of the associated costs.
Without sufficient cost recovery, we will need to accept the idea that most rural consumers will not have access to quality service. Additionally, not all rural consumers that want service will be able to obtain it. Some companies will file for bankruptcy and possibly close their doors for good. How many bankrupt companies is an acceptable number? Competition at any cost may be where we are headed. Consequently, the once stable “revenue stool” may tumble and the impacts on rural telecommunications service could be severe.
We must rethink the current USF recovery ideology so that the Rural LECs can continue to provide quality telecommunication services at reasonable and affordable prices in rural America for future generations.
Mr. Mark Gailey
President, Totah Telephone Company, Inc.