The FCC recently instituted an interim cap on universal service funding (USF) for competitive eligible telecommunication carriers (CETCs). CETCs are primarily wireless carriers who have qualified for USF subsidies. These subsidies have been somewhat of a catalyst for building out wireless infrastructure in rural areas. The CETC issue has created controversy because CETCs have been getting USF support based on the costs of the incumbent wireline provider in the territory they want to overbuild with wireless. Wireline infrastructure is much more costly to build than wireless, and thus CETCs have been gaining somewhat of a “windfall,” because they receive subsidies based on a higher cost model than what their actual costs are. It has led to accelerated growth in the high cost fund of the USF program. CETC support was about $1.5 million in 2000 and close to $1 billion in 2007. The cap will be in place until more comprehensive USF reform takes place.
Pivot Media estimates annual wireless substitution rates to average about 2.3% for small rural wireline carriers and 5.7% for larger multi-state rural providers. An argument can be made that the past CETC USF structure certainly contributed to these growing wireless substitution rates. According to Bennet and Bennet’s Rural Spectrum Scanner, “…annual support for competitive ETCs will be capped at the level of support that they were eligible to receive in each state during March 2008. States may still designate additional ETCs, but the new entrants will have to share diluted support with established competitive ETCs.” This interim cap may slow additional rural wireless deployments, and thus temporarily slow wireless substitution in rural areas. Many rural carriers have identified wireless substitution as their most immediate competitive threat.