August 21, 2008
TECHNOS QUARTERLY Fall 1996 Vol. 5 No. 3
Universal Service Brings Fiber to Their Doorsteps
By Steven Vedro
In a time of overall fiscal belt-tightening, it is likely that many states will draw back from launching new multimillion-dollar distance education network projects—costs are high and technological change makes any long-term investment somewhat risky. Instead, states are more likely to concentrate on regulatory initiatives that stimulate the deployment of affordable advanced services by the private sector. This article will discuss the limitations of the regulatory strategies used by states in the past in light of the emerging competitive communications marketplace. In fact, states are already using the evolving demand-side-based “advanced universal service” (AUS) concept to help their schools, hospitals, libraries, and other public entities get connected to the services that are at the core of the information highway. Federal legislation could have a significant impact on state AUS programs.
If you read the Conference Committee report on the recently passed Telecommunications Act of 1996, you would get the impression that education was a prime focus of the bill. Getting public schools connected to the “information highway” was on every speaker's lips. In reality, however, educators were given few direct resources—no new funds to purchase network services, no grants to build or buy broadband facilities. Instead, the act focuses on opening the local communications market to competition while creating incentives to bring affordable advanced communications services to education and health-care institutions. While states are empowered to create educational discount programs, they are prohibited from using many traditional regulatory tools that have helped educators in the past—tools that have been quite effective, but are no longer viable as competition undermines the monopoly-provider environment.
Traditional Tools for Developing Infrastructure
In the past, state utility commissions have used a number of strategies to “push the infrastructure” in both technical directions (mandating modernization and specific features) and in geographic and social scope (setting service levels to include rural areas and/or features and discounts to special classes of customers). These tools have included (1) technology mandates, (2) over-earnings reinvestments, (3) targeted discount programs, and more recently, (4) infrastructure investments in exchange for regulatory relief. These strategies have benefitted educators in a number of ways, but they have also been controversial.
The “FYI Tennessee” Plan is a good example of an aggressive mandated technology plan. The state required all of its major communications companies to modernize their switching equipment—including the availability of inter-office fiber, ISDN capacity, and SS-7 at all major central offices—based on a targeted schedule, with all upgrades completed by the year 2000. The majority of the costs were paid for by a $111 million over-earnings fund. This approach has provided Tennessee with ISDN years ahead of its neighbors (near-statewide availability). The only problem is that the state's rate-payers have supported these investments (with higher phone bills) for a number of years without seeing the benefits of a boom in ISDN-based services or the promised ISDN-related jobs.
More common is the use of over-earnings settlements to fund network upgrades. Under these arrangements, telephone company profits—which are set by utility commissions in exchange for protecting the company from competition—are reviewed every few years. When profits exceed the established rate, customers usually get refunds and/or lower bills. In some cases, however, a portion of the “excess” has been redirected to both network improvements and specific educational services discounts. State over-earnings settlements have funded a number of distance learning projects.
States Use Over-Earnings Settlements
Arkansas ($231 million) and Michigan ($23 million) have used over-earnings settlements to support major network modernization commitments, including significant investments in school video links, classroom computers, and teacher training institutes. In Georgia, a portion of Southern Bell's over-earnings ($58 million) has been supplemented by state lottery contributions to fund a Telemedicine and Distance Learning Board.
Michigan has directed $23 million from an Ameritech rate settlement to distance learning projects. The Missouri PSC agreed to forgo a rate review of Southwestern Bell until 1999 in exchange for a price freeze on local phone service and a commitment to support a fiber-optics network for public entities in Kansas City, to fund a number of distance education networks, and to develop up to five Tele-Opportunity Training and Information Centers in that state's rural areas.
Special discounts for educational applications have also been approved by a number of state regulatory commissions. These discounts have been funded by utility company contributions, over-earnings settlements, or special legislative action granting the commission the right to modify common carrier rules to allow one class of user—education—to benefit at the expense of higher rates for other customers. States have authorized discounts for everything from basic telephony (a phone line in each school used to connect with Learning Link in Rhode Island) to ISDN (in California and Tennessee) and interactive video (in Alabama, Delaware, Kansas, Maryland, Missouri, and Texas).
Recently, the promise of lessened regulation has been the main bargaining tool for securing promises of infrastructure investments and school connections from regulated carriers. According to the National Association of Regulatory Utility Commissioners (NARUC), in the last two years nearly 30 states have combined some form of lightened regulation (such as profit-sharing plans, price caps and/or price freezes, and moves to price-based regulation) in exchange for telephone company agreements to deploy digital services and fiber-optics networks at a pace faster than the companies might have done on their own.
New Jersey Bell's “Opportunity New Jersey” Plan, for example, includes a promise to bring fiber to 100 percent of NJB's subscribers by the year 2010. Residential rates are capped through 1999, and company revenues over 13.7 percent on rate-regulated services are to be shared with customers in the form of rebates on a 50-50 basis.
In exchange for surrendering its local phone monopoly and agreeing to sell services to its new competitors, Ameritech has won the right in most of its territory to move to price regulation. In exchange for ending rate-based reviews on its earnings, the company's promised Illinois investment is more than $1.2 billion in new fiber, switching upgrades, ISDN availability, and digital connection to 340 high schools, 35 community colleges, 850 public hospitals, 50 correctional centers, and 350 libraries.
In Wisconsin, the company's infrastructure investment plan requires it to invest $700 million by 1999, along with an agreement to “bring fiber to the doorstep” of every public and private high school, regional library, hospital, correctional facility, college, and university by 1998. The company has also agreed to contribute $13 million to a newly created Wisconsin Advanced Telecommunications Foundation. Similarly, the company's “Opportunity Indiana” Plan offers $120 million for similar connections; an additional $30 million is to be contributed to a new nonprofit telecommunications technology training center.
Advanced Universal Service
The difficulty with all of these programs is that they are becoming harder to implement as competition threatens the monopoly status of the incumbent (regulated) carrier. As states move to open their local communications markets, both the regulated communications providers and their challengers are resisting carrier-specific regulatory mandates. The regulated providers resist because they can no longer pass the costs (and the risks) on to their captive customers, and the challengers resist because they do not want one provider's subsidized discounts to undercut the potential market for competitive services.
The new Telecommunications Act requires states to introduce greater competition into local communications, and to use “price cap regulation, regulatory forbearance, or other regulating methods that remove barriers to infrastructure investment,” not directed technology mandates to bring services to their citizens. In fact, carriers are given new powers to challenge state regulations that limit market entry or direct specific-service investments and offerings. Should the FCC find that deployment is lagging due to burdensome regulatory constraints, it may preempt state and local rules or set aside its own regulations. Thus, it is unlikely that we will see many more over-earnings settlements, technology investment mandates, or required educational service orders from utility commissions.
The required abandonment of supply-side push regulation will leave state regulators with few bargaining chips when negotiating on behalf of educational customers. Fortunately, a number of states have begun to experiment with market-based incentives to pull advanced offerings into the community. These incentives are based upon extending the concept of universal service from its core concern with delivering affordable basic telephony to rural and other high-cost areas to a wider interest in promoting the availability of a range of advanced services to all network customers. Education, health care, library, and local government institutions are at the cutting edge of this new approach. By becoming the pioneer customers for such services, they help promote advanced infrastructure applications to other potential customers.
Wisconsin's Information Super-Highway Act (enacted in July of 1994) established a Universal Service Fund Council to advise the public service commission as to basic service elements as well as “a set of advanced service capabilities” that should be available at affordable prices throughout the state. Funded by a tax on the intrastate revenues of the state's communications companies, the new universal service fund (USF) could be tapped to underwrite the costs of bringing advanced services to “education, library, and health care information services.” The council has recommended that a portion of USF funds be used to pay for vouchers allowing public and private schools, public universities and technical colleges, libraries, and nonprofit hospitals to order discounted interactive video and/or high-speed internet connections from any network company that contributes to the USF.
Texas' new Public Utility Regulatory Act establishes an Infrastructure Development Fund to support grants and loans to schools, hospitals, and other public institutions. Funds can be used for equipment, services, and inside wiring. The fund is to be capitalized at $1.5 billion over a ten-year period.
A similar expansion of universal service definitions is taking place in Hawaii, where the state's new telecommunications law sets a goal of access to advanced services that provide “a combination of voice, data, image, and video” for all consumers at reasonable rates. One notable provision will extend the universal service program to promote “enhanced government information and services, including education, health care, public safety, and other government services.” Another provision dedicates universal service funds to “provide service drops and basic service at discounted rates to public institutions.”
Several other states recently enacted state AUS programs that include advanced service elements, while many more are studying how best to implement these new funding mechanisms.
Federal AUS Regulations
The Federal Telecommunications Act of 1996 also recognizes the importance of extending the universal service concept. Its current formulation, however, is much more restrictive than many of the programs of the state USF pioneers. The current legislation is more restrictive than last year's Senate draft bill, for example, which was fairly generous in its definitions of (1) the customers who could qualify for advanced services (public schools, libraries, hospitals, local public television stations, and “other public or non-profit community telecommunications users”); (2) the applications to be made available to those customers (allowing the FCC and states to define what universal service would include for them); and (3) the rates for these services to be underwritten by state fees on carrier revenues (“not higher than incremental cost”).
Section 254(h) of the federal act declares that “essential” telecommunications services must be made available to K–12 public schools, public libraries, and nonprofit health-care institutions at reasonable rates. These basic telephony services, which initially are limited to those already deployed and subscribed to “by a substantial majority of residential customers,” are to be offered at rates less than the amounts charged for similar services to other parties. The amount of these discounts will be determined by the FCC for interstate and by the states for intrastate services. The difference between the rates is to be subsidized from provider-neutral USF mechanisms to be established by the states and (for interstate services) by the FCC.
Advanced services for these targeted civic institutions [Section 254(c)(2)] are also to be discounted compared to prices charged commercial customers in the same region. Based upon the discussions in the Conference Committee, high-speed internet access and video conferencing are expected to be included in most state programs. Health-care facilities in rural communities are singled out for additional discounts. Fees for advanced services must not only be less than those charged for commercial organizations in the same service area, but must also be “reasonably comparable to rates charged for similar services in urban areas in that State.” Advanced services are defined as those “necessary for the provision of health care services” and include instruction relating to such services [Section 254(c)(1)(h)]. Thus, videoconferencing to support instruction appears to qualify for such geographic parity pricing.
Towards a More Inclusive Definition of AUS
Many advocates of advanced infrastructure deployment had hoped that the federal legislation would mandate a timetable for adding specific technology features into the nation's telecommunications networks. Some of the more expansive definitions of universal service considered—and rejected—by Congress included the addition of digital network (ISDN) elements into the phone system, a cap on the surcharge for such service over basic voice telephony, and a call for bringing broadband service to all communities at affordable rates. Notably absent from the federal AUS definitions are discounts for linking higher education, civic (freenet) bulletin boards, public broadcasting and community access centers to the nation's communications infrastructure. (See the excerpt from the Benton Foundation's report in the sidebar for a more inclusive vision of universal service.)
While the federal act encourages states to meet the specific advanced telecommunications services needs of their “[e]lementary and secondary schools and classrooms, healthcare providers, and libraries,” the range of experimentation may turn out to be somewhat limited. States, such as Wisconsin, that have added specific infrastructure technology milestones to their deregulation plans may be challenged by carriers arguing that any such mandate is an “unnecessary regulatory burden.” More to the point, although Section 254(f) of the federal act allows states to “provide for additional definitions and standards” for AUS, such standards must be linked to “specific, predictable, and sufficient Mechanisms to support such definitions.” They must be economically reasonable to the carriers and not “rely on or burden Federal universal service support mechanisms.”
Educators interested in telecommunications issues will face major legislative challenges in the coming year. At the federal level, they will fight to preserve the major research and network funding programs under the budget ax. At the state level, they may try to pass new initiatives for education technology or save endangered programs. It would be a shame, however, if in their focus on these efforts they miss the opportunity to build new models for universal service. The next set of negotiations will occur at state regulatory commission and legislative levels—negotiations that will determine how public service goals will be met under the new rules of the competitive communications marketplace. Educators and other civic agencies dependent upon the information highway should be sitting at these tables.
Steven
Vedro is a public telecommunications policy consultant based in Madison, Wisconsin.
He was the state project director for the Wisconsin Governor's Blue Ribbon
Telecommunications Task Force and has worked with public broadcasting stations,
major universities, and the states of Missouri, North Dakota, Mississippi,
New Jersey, and Arizona on educational telecommunications policy alternatives.
He writes regularly for InfoP@ckets, the new technology issues newsletter
of the Corporation for Public Broadcasting, in which an earlier version of
this article appeared.
Photo courtesy of Steve Behrens.
Click here to access the Public Interest Issues in the Telecommunications Act of 1996 Sidebar that accompanied this article.