Keys to Successful State Universal Service Funds Enumerated

The keys to running a successful state universal service fund are clarity of purpose and clarity of process, said panelists at the winter meeting of the National Association of Regulatory Utility Commissioners. In a Tuesday session, consultants Peter Bluhm of Rolka, Loube, Salzer Associates and Eric Seguin, vice president corporate development with contract fund administrator Solix, joined Elizabeth Barnes, a lawyer with the Pennsylvania Public Utility Commission, in parsing the best methods for managing a fund.

“Be clear in your regulations as to the duties of administrators,” Barnes said. She emphasized the need for utility commissions to hold administrators to deadlines for reports. “Be firm on this,” Barnes said. “You're going to want to get comments from the public and be able to incorporate those, as well as to account for commission oversight, so that you meet your own deadlines to set fund size and contribution rate.”

“Some states want their fund administrators to audit and pursue fraud,” Barnes said. “We don’t. We handle that ourselves.” The Pennsylvania commission, for example, watches its own calendar for overdue payments 90 days for large carriers, 120 days for small carriers and directly contacts carriers. “We have a late payment charge of 1.5 percent per month pro rata and per diem,” she said. “We do have a first-time waiver on the late fee.” Pennsylvania has a de minimis rule under which carriers whose payments would be less than $120 a year are exempt from paying. “This is a $34 million fund,” Barnes said. “$120 is nothing.”

Adoption of online filing by contributors has increased the Pennsylvania system’s efficiency, Barnes said. In 2008, 60 percent of carriers filed online, but in 2009 that figure was 83 percent, she said. The state still accepts paper filings, but the advantages of the online method are overwhelming, she said.

State contracts for fund administration should include a clause automatically renewing the arrangement for another year at the same price, Barnes recommended. “Otherwise, you're going to have to go through a request for proposals than can take a year,” she said. Pennsylvania bars contributing carriers from putting USF surcharges on customer bills. “Otherwise, we'd be getting these calls about, ‘What’s this PAUSF $3 every month?'” Barnes said.

The advance setting of consistent policy on handling of delinquencies, carrier bankruptcies, late fees and the like will save state fund administrators effort and trouble, Barnes told listeners. “Our state keeps a 5 percent contingency fund that enables us to avoid going into the hole if a big contributor is late paying,” she said.

On the investment side, current market conditions reinforce the urgency of keeping surpluses in safe settings like money markets, Barnes said. It’s also important to set up systems to prevent check fraud and to keep USF monies separate from other funds, she added.

The streamlining and accuracy possible with automated data collection is of paramount importance, said Seguin, whose company administers USFs for Arizona, Indiana, Nevada, New Mexico, Oklahoma, Oregon, Pennsylvania, Puerto Rico and Texas, as well as Lifeline, telecom relay and other programs in California, Texas, Connecticut and Hawaii. “You need a system that is flexible and able to adapt and evolve,” he said. He emphasized the need for clean data, as current a contributor list as possible and clarity on goals and the process used to attain them.

“There should be a lag between collecting and disbursing funds to event out the cash flow,” Seguin said. “You need time to work out delinquencies before you pay out monies.” He urged a monthly schedule for checking federal and state resources as a means of identifying new contributors.

“The Web-based approach to contact with contributors works much better,” Seguin said. “You have to have online access that’s controlled and secure, but it means that you can get away from paper and communicate by e-mail. And there’s an electronic audit trail, with all revisions traceable.” Online filing also enables the administrator to program in limits and account for variances and avoid errors, he said. “You can set the criteria to alert the user who enters a wrong number,” he said. “The software can ask, ‘Are you sure you meant to enter X?'”

Bluhm, who besides his own presentation was standing in for colleague David Rolka, snowbound in Harrisburg, Pa., summarized the absent Rolka’s recommendations. “Develop and maintain multiple contacts at each company so that you always can get in touch with someone,” he said. “Regularly send statements of account to carriers, so that they expect a regulatory relationship. Prescribe reasonable penalties for late payments and late reports. Survey your reporting agencies so that you understand their operations. And even if you have carriers who are exempt from contributing require them to report, so that you maintain contact.”

Citing a report he recently co-authored for the National Regulatory Research Institute, Bluhm said that the 21 states now operating high-cost funds use or have considered using four modes to distribute state support.

Hold-harmless mode seeks to minimize the financial impact of regulatory change on carriers or categories of carrier, the report, issued in mid-January, said. “States have created high cost funds to replace revenues lost as a result of access charge reductions or changes in regulatory rules,” the report said. “Some states limit the amount of support provided by establishing benchmark rates for local service. The amount of support is decreased by the amount of revenue a carrier can realize by raising local rates to the benchmark.”

Cost-based mode provides support to help defray the cost of providing service in high-cost areas, the report said. “Support is calculated using either embedded costs or forward-looking costs,” it said. “Some states use an embedded-cost approach for rural carriers and a forward- looking cost approach for larger, non-rural carriers. As with the hold-harmless approach, many states limit support through the use of benchmarks for local rates. A major issue is whether to include costs related to broadband infrastructure.”

States using bill credit mode require carriers to provide explicit bill credits for customers who otherwise would pay retail rates above a specified benchmark, the report said. The high-cost fund then reimburses the carriers for the credits. Auctions could be used determine support by competitive bidding, but as yet states have only considered the approach, the report said.

The key to approaching the establishment of a state universal service fund is to gauge need, pinpoint legal authority for the fund and set its goals, Bluhm said. The rest of the decision tree should focus on the services, providers and facilities to be supported, the choice of a distribution mechanism and any controls on fund size, as well as figure out how to collect funds, who administers the fund and how to evaluate the fund and make it accountable for results, he said.