Cable USF Payments May Soar

Cable operators that offer voice-over-Internet-protocol service could see their federal phone-subsidy payments more than double under a proposal supported by Federal Communications Commission chairman Kevin Martin, according to cable and other sources familiar with the plan.

Martin’s plan is designed to shore up the universal-service fund as a result of changes in the voice-communications market and the agency’s decision last year to exempt digital-subscriber-line revenue from going toward USF contributions. The DSL exemption alone is expected to drain $350 million annually from the $6.5 billion program.

The FCC could vote on Martin’s plan at its June 15 meeting, but an agency spokesman would not confirm any proposed changes to the USF.

If Martin’s plan is adopted, a Time Warner Cable Digital Voice customer paying $40 per month would see USF fees rise from about $1.24 per month to $2.83, a 128% increase.

Martin’s plan is considered an interim step. In an approach supported by the cable industry, he is in favor of adopting what’s called a numbers-based approach, which would involve charging a monthly fee on each working phone number in order to collect the $6.5 billion needed.

A cable-industry source said a numbers-based approach would cost a cable VoIP customer about $1 per month, compared with $2.83 under Martin’s interim plan. USF fees may be passed along to consumers.

“Cable firms and independent VoIP firms, such as Vonage [Holdings Corp.], will be hit the hardest [under Martin’s interim plan] since they are likely to lose retail-pricing advantage by having to pass through additional USF costs to their customers,” Medley Global Advisors LLC analyst Jessica Zufolo said in a client note Wednesday.

The USF fund is designed to keep dial-tone service affordable in rural America and to connect schools and libraries to the Internet.

Although the USF enjoys support among Capitol Hill lawmakers with rural voters, House Energy and Commerce Committee chairman Joe Barton (R-Texas) has talked about eliminating the program. Senate Commerce Committee chairman Ted Stevens (R-Alaska) is sponsoring a bill (S. 2686) that could expose cable-modem revenue to USF taxation to fund a $500 million rural-broadband program.

Apart from the FCC's DSL ruling, the USF is losing money because callers have switched to free or low-cost VoIP services or have signed up for flat-rate-calling plans that don’t impose per-minute long-distance fees. Meanwhile, demand for USF money by rural phone companies has not declined.

“Stabilizing the contribution base is a critical goal because interstate common-carrier revenues are shrinking while subsidy demands have expanded, placing upward pressure on the USF-contribution factor, which is currently at 10.9%,” Zufolo said.

Federal law requires telecommunications-service providers to contribute 10.9% of their interstate and international revenue to the USF. VoIP has been exempt since its arrival in the market because the FCC never classified VoIP as a telecommunications service.

Martin is apparently planning to impose USF mandates on VoIP for the first time while postponing action on the classification of VoIP.

Time Warner, with 1.4 million VoIP customers, contributes to the USF on a voluntary basis, relying on the FCC formula that wireless-phone carriers use as a proxy. The formula assumes that 28.5% of wireless revenue is interstate, and 10.9% of interstate revenue is contributed to the USF.

Under Martin’s plan, the wireless formula is to rise to 37.1%. But VoIP providers are to assume that 65% of revenue is interstate, forcing Time Warner to increase its USF payments. Zufolo said wireless carriers will end up paying 4% of total revenue and cable operators 7% of their VoIP revenue into the USF.

“A VoIP provider can contribute less than this [7%] amount if it proves that its actual interstate and interstate revenues are below this [65%] cap,” Zufolo said.

The FCC could have plugged the funding gap created by the DSL exemption by hiking the 10.9% contribution factor without hiking wireless USF taxes or imposing them on the fast-growing VoIP industry for the first time.

In the days ahead, the cable industry is probably going to question how the FCC determined that cable VoIP users make more interstate calls than wireless-phone users.

“We support the universal-service fund in general, and we are working with the [National Cable & Telecommunications Association] on potential changes that could take place,” said Maureen Huff, Time Warner Cable’s director of corporate communications.