Consumers Paying Too Much for Universal Service Phone Subsidy, Verizon Executive Says

WASHINGTON - The subsidy system that has helped provide affordable telephone service to generations of Americans since the Great Depression is broken and needs repair.

That was the message delivered to Congress Thursday (March 1) by a senior telecommunications executive, who outlined new principles for reform and a number of practical steps to modernize the universal service program.

"Unfortunately, the federal high-cost funding mechanisms intended to ensure that universal service goals are met have not adapted to the changing marketplace," said Tom Tauke, Verizon executive vice president for public affairs, policy and communications.  "In fact, these programs are often an impediment to the kind of transformation consumers and the marketplace require." 

While the price of basic telecommunications service has gone down, he said, the cost to consumers of funding the universal service program has gone up.

"The percentage rate of the surcharge on phone bills has tripled, with more increases on the horizon," Tauke said in testimony before the Senate Committee on Commerce, Science and Transportation.  In the last eight years, he explained, the cost of the program that provides subsidies in parts of the country that are expensive to serve has grown from $1.7 billion to $4.1 billion - a 142 percent increase.

That increase is due, in part, to the fact that there are "three, four, even five wireless carriers receiving universal funding" in many areas, he said.  To further compound the problem, the subsidy paid to wireless carriers is determined by the cost incurred by wireline carriers to deliver service.  "To add insult to injury, as wireline telcos lose traditional lines to wireless, the per-line cost increases, thus driving up the subsidy per customer," he said.  "This increased subsidy is passed on to all providers."

Tauke told lawmakers that the predictability of support is in question because carriers with higher costs are rewarded with higher subsidies, thus depleting funds available for other, lower-cost carriers.

He said modernization of the fund should be guided by four principles:  Funding should be targeted to geographic areas where consumers will be denied service without universal support; the fund should ensure affordable service in high-cost areas, while limiting consumer costs to no more than is required to accomplish that goal; the new policy should recognize the need to maintain a rural wireline infrastructure even as the number of wireline voice customers declines; and a new and fairer system is needed to fund high-cost support.

Tauke said Verizon supports reforms of how funds for the high-cost program are collected and dispersed.  The former would be based on telephone numbers, so the fund is supported by all voice customers; the latter would include a "reverse auction," or competitive bidding mechanism, through which the carrier with the lowest bid would gain the support.

Verizon filed a "reverse auction" proposal with a joint state-Federal Communications Commission board late last month.

"This proposal meets the needs of rural consumers of high-quality services at an affordable price," Tauke said. "It stabilizes the fund, encourages a competitive and innovative marketplace, and promotes efficiency so consumers are treated fairly when they pick up the tab for universal service support."

He suggested four steps for determining the payment of universal service support: Initially capping the funding in each area at current levels; adopting a "reverse auction," or competitive bidding, to select the most efficient provider and the best terms; starting the new market-based process in areas where there are at least two wireless carriers in the program; and, after the initial wireless auctions, opening a new FCC proceeding to review the auction process and determine next steps.

Verizon Communications Inc. (NYSE:VZ), headquartered in New York, is a leader in delivering broadband and other wireline and wireless communication innovations to mass market, business, government and wholesale customers.  Verizon Wireless operates America's most reliable wireless network, serving more than 59 million customers nationwide.  Verizon's Wireline operations include Verizon Business, which operates one of the most expansive wholly owned global IP networks, and Verizon Telecom, which is deploying the nation's most advanced fiber-optic network to deliver the benefits of converged communications, information and entertainment services to customers.  A Dow 30 company, Verizon has a diverse workforce of approximately 242,000 and last year generated consolidated operating revenues of more than $88 billion.  For more information, visit www.verizon.com.