States' Universal Service Revenue Shrinking

USF costs exceed revenue in many states, said a spokesman for CenturyLink, which is participating in Nebraska and Utah proceedings to update their contribution approach. "Many people who live in rural parts of America would not have access to the voice and broadband services they need without both the federal and state USF programs." By statute, USF duties are shared between federal and state governments. NARUC didn't comment.

"The decline is primarily related to a drop in the number of wired lines as customers migrate to other technologies, including wireless, cable, and IP-based services," emailed Sherry Lichtenberg, principal for telecom research and policy at the National Regulatory Research Institute. NRRI, the research arm of NARUC, released a paper in 2015 showing how state funds have declined. "Some states, like South Carolina, have changed their assessment rules to include these newer services, while others have not," said Lichtenberg.

Since 2012, annual revenue for the Utah USF sank $3.4 million to an anticipated $8 million this year, with the rate of decline accelerating in the past 12 months, the Division of Public Utilities said at a Public Service Commission meeting last month (see 1606210035). That’s well below the fund’s estimated expenses this year of about $11 million, it said. The fund balance could dip $3 million this year and run out completely by early 2017, it said. The division reported a large decline in contributions from wireless companies, which provide 70 percent of the money. At the PSC meeting, a CTIA official said the state USF is unbalanced because wireless consumers are the fund’s main contributors but wireless carriers don’t receive any universal service funding.

To remedy the situation, the division recommended a connections-based surcharge of 32 cents per line, replacing the current model, where companies contribute 1 percent of billed intrastate retail collections. “A decision will be forthcoming,” emailed Bill Duncan, DPU telecom manager. The commission wants the new rule effective by Oct. 1 and must publish the rule in the state register 60 to 90 days in advance, he said.

State Reforms

The Nebraska PSC is seeking to revamp contribution as the first step in broader state USF reform, the commission said in an April order. The contribution base “has eroded as customers continue to migrate to services not subject to NUSF surcharge remittance requirements,” it said. "Since 2009, NUSF remittances have experienced an average decline of greater than 2 percent per year.” The Nebraska USF got $10.4 million in contribution remittances in the three-month period ending March 2016, down from $12.4 million in the same quarter in 2014, according to a commission report.

Similar to the Utah plan, the Nebraska PSC proposed moving to connections-based contribution. “As the FCC recognized in its 2012 Contributions [Further] NPRM the number of connections has remained stable while assessable revenues have been declining,” it said. A connections-based model would be easier to administer and would increase NUSF stability and predictability, it said.

Kansas commissioners also raised alarm over falling state USF revenue, but a 2016 statute bars the Kansas Corporation Commission from changing its revenue-based contribution method, a KCC spokesman told us. The annual amount of money collected for the Kansas USF dipped more than $20 million to $47.6 million in 2016, from $67.7 million in 2011, according to a KUSF history document on the KCC website. HB-2201, signed into law in 2013, contributed to the decline, the KCC spokesman said. It “made numerous changes to the KUSF including capping and phasing out [competitive eligible telecommunications provider] support, capping support for price cap carriers, and capping support for rate-of-return carriers,” he said.

Kansas Commissioner Pat Apple voiced concerns over declining intrastate revenue at the commission’s Oct. 20 meeting, the KCC spokesman said. But another bill, passed this year, said the KCC “shall not require any provider to contribute to the KUSF under a different contribution methodology than such provider uses for purposes of the federal universal service fund.” Unless the FCC changes its contribution method, “the KUSF contribution methodology shall remain unchanged,” the KCC spokesman said. Before that law, the commission replaced per-line contribution fees for local exchange carriers with the same revenue-based model used for wireless, cable and VoIP providers. The rule change took effect in March, but “should not affect the amount of money collected overall,” the KCC spokesman said.

Intended Reductions

Regulators deliberately sought to reduce the size of the fund in other states with declining USF revenue. The Texas USF fund received $58.9 million in the quarter from December 2015 to February 2016, but the figure was $77.4 million in the same quarter last year, and $102.6 million in that quarter in funding-year 2013, according to quarterly financial reports on the Texas Public Utility Commission website. Expenses also dropped, to $61.8 million in the most recent quarter, from $87 million in the FY 2013 quarter.

The Texas PUC shrank its fund as a matter of policy, deliberately reducing the contribution rate paid by telecom companies and reducing money distributed, a spokesman told us. "It has been the commission's policy to reduce the ratepayer burden, and that has been done. As a result, that creates a drop in the contributions." The commission keeps the balance large enough to provide a cushion of three to four months, he said. In a January 2015 competition report to the legislature, the PUC summarized efforts to reduce USF, including reduced support to ILECs and removing AT&T’s eligibility for state USF support through deregulation of the company.

State deregulation of AT&T contributed to a revenue drop in the South Carolina USF, too, said Dukes Scott, executive director of the state’s Office of Regulatory Staff (ORS). Expenses reduced at the same pace as revenue, and the state’s shrinking USF isn't a problem, he said. In 2014, its total revenue was $28.8 million, with expenses of $29.1 million; in 2011, revenue was $41.3 million and expenses were $41.2 million, according to independent audits published on the PSC’s website. The PSC expanded the USF revenue base in a January order requiring wireless carriers to pay into the fund (see 1511050040). In testimony quoted by the PSC, ORS Telecommunications Director Christopher Rozycki said the addition of wireless would reduce the current surcharge for all contributors but not increase the fund's size. On May 25, Gov. Nikki Haley (R) signed a telecom bill limiting the size of the fund, providing for random compliance audits of fund recipients.

Oklahoma Concerns

In Oklahoma, an effort to reduce the size of its USF has raised concern. A few years ago, the Oklahoma Corporation Commission deliberately lowered its contribution factor when it found a surplus in the fund, but the factor has remained low since, said Deborah Sovereign, chief financial officer of Kellogg & Sovereign, a consulting firm that advises schools and libraries on the E-rate program. In the most recent funding year ended this June, the OCC reported $21 million in annual USF revenue received, compared to $46.4 million in the funding year ended June 2013, according a May 26 OUSF annual cash flow summary.

Seeking to use up a state USF surplus, Oklahoma commissioners reduced the factor to 0.64 percent in the 2014 funding year from 3.14 percent in FY 2013, Sovereign said. Then the commission kept the factor at 0.64 percent for another six months, removing the carry-forward balance, she said. Going into FY 2016, staff for the Public Utility Division recommended a 4.32 percent factor, but Oklahoma commissioners approved only 2.16 percent. The PUD recommended a 3.96 percent factor for FY 2017, but it hasn’t yet been voted on.

While annual fund disbursements also dropped, according to the OUSF cash flow summary, Sovereign said the commission has kept expenses down by denying large swaths of funding for “public interest” reasons. The summary shows $16 million in fund disbursements in FY 2016. “Their open cause list is extensive, with some causes over three years old,” she said. “We have lots of requests for funding tied up in litigation. The fund currently does not have sufficient cash reserves to pay for the outstanding causes much less new requests.”

“The Corporation Commission has the authority to investigate and take action accordingly on OUSF funding requests, and will continue to meet that responsibility,” said an OCC spokesman, citing a change in state law that took effect in late 2012. At the commission’s public meeting Thursday (see 1606300037), Chairman Bob Anthony said he wanted to crack down on fund distributions: “I have made the statement numerous times that we have overpaid out of this program millions of dollars.”