This excerpt taken from the EQ 10-K filed Mar 9, 2007.
Federal Universal Service Programs
The federal universal service programs provide funding for services provided in high-cost areas, for reduced-rate services to low-income consumers, and for discounted communications and Internet services for schools, libraries and rural health care facilities. These programs are funded largely by contributions from communications carriers. These contributions are based on an FCC-prescribed percentage (currently 9.7% of
revenues from interstate and international revenues) and are recovered from customers through surcharges. Historically, this contribution mechanism subjected us to competitive disadvantages in at least two respects. First, companies that offered competing services that they characterized as information, rather than telecommunications, services, including some providers of VoIP services, did not contribute to federal universal service funding and, therefore, were able to charge their customers less for the competing services. Second, in September 2005 the FCC classified the cable modem broadband Internet access service offered by cable companies (in competition with our high-speed Internet access service) as an information service which is not subject to universal service fund contributions, while requiring ILECs to make universal service contributions on a portion of their high-speed Internet access revenues.
Both sources of competitive disadvantage for us have recently been addressed by the FCC. With respect to VoIP services, the FCC, on June 21, 2006, approved interim rules for determining the payment obligations of certain VoIP providers contributing to the universal service fund, which are based on their telecommunications revenues from interstate and international services. The order established a safe harbor of 64.9% as the portion of total VoIP revenues deemed to be interstate (and therefore, subject to the universal service fund obligations), unless proven otherwise. The new rules took effect in the fourth quarter 2006 and should achieve greater parity across telecommunications companies as intended by the FCC. With respect to high-speed Internet service, the FCC, in a September 2005 order, put high-speed Internet access service on an equal footing with cable modem service. Pursuant to the order, our high-speed Internet services ceased to be assessed in August 2006. The FCC is considering whether to replace this revenue-based assessment in whole or in part with an assessment based on telephone numbers or connections to the public network. An assessment mechanism based on numbers or network connections could increase our contributions to federal universal service funds, but at the same time could eliminate the competitive disadvantages we face under the current system.
The size of the federal universal service fund has grown significantly in recent years, primarily due to increased dollars flowing to competitive carriers including wireless carriers. In response to this growth, the Federal-State Joint Board on Universal Service has initiated a proceeding to investigate the possibility of controlling the size of the fund through the use of reverse auctions. In a reverse auction, carriers would bid for the right to serve a high-cost area in exchange for a specified amount of USF support, with the lowest bidrather than the highest bidwinning, hence the reverse nature of the auction. At this point in time, it is unclear whether some form of reverse auction mechanism will be adopted by the FCC in place of existing, largely cost-based mechanisms. Other proposals have been suggested including one that would alter distribution of universal service support by targeting it to much smaller geographic areas, therefore tying support more directly to the high cost areas that need support. Additionally, as part of this proceeding, proposals have been put forth by various industry participants (both wireline and wireless), to cap the fund to stop further growth until these issues are resolved. Until a more specific plan is developed, we are unable to determine what effect, if any, a reverse auction mechanism would have on Embarqs universal service receipts.
In 2006, we received $153 million from federal universal service funds to support our service in high-cost areas. A portion of this support is based on average loop costs. Where loop costs exceed the nationwide average, which is the case in many of our local service territories, we receive federal universal service support. The FCC has proceedings underway to reexamine contribution levels to the funds and the distribution of high-cost support and to consider expanding the fund to include support for broadband deployment. FCC decisions in those proceedings could affect the amount of high-cost support we receive in the future.