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August 13, 2012
No More Backscratching Between Phone Companies

An ad campaign urged residents of Butler, GA to "Stop AT&T From Raising Your Rates" by planning to attend a public hearing earlier this month at the Taylor County Courthouse to provide testimony in Docket #35068, Rate Cases on the Track 2 Companies.

The Georgia Public Service Commission sets the phone rates in Butler, but politics are politics, and AT&T is a better scapegoat for an ad campaign. AT&T doesn't even provide the town's phone service, although the telecom giant does help finance it. That's because Georgia consumers pay a hidden tax on their phone bills that subsidizes the phone service provided by Public Service Telephone Co. in Butler. You guessed it, PST paid for the ads.

>Continue reading

April 17, 2012
Landline rules won't work for telecoms, or for Susan Shaw

Cecilia Kang of the Washington Post reports that

the telecom industry is forcing policymakers to re-examine what has long been a basic guarantee of government - that every American home should have access to a phone, along with other utilities such as water or electricity. Industry executives and state lawmakers who support this effort want to expand the definition of the phone utility beyond the century-old icon of the American home to include Web-based devices or mobile phones.
The quid pro quo for a monopoly franchise was an obligation to provide timely service upon reasonable request to anyone, subject to regulated rates, terms and conditions. The Telecommunications Act of 1996 eliminated the monopoly franchise, but the obligation to serve remains in the statute books of most states. Telecom providers, aka carriers-of-last-resort (COLR), are stuck with the quid without the quo.

This has become a problem as more and more consumers are "cutting the cord" in favor of wireless or VoIP services. AT&T, for example, has lost nearly half of its consumer switched access lines since the end of 2006. However, most of the loops, switches, cables and other infrastructure which comprise the telephone network must be maintained if telecom providers have to furnish telephone service to anyone who wants it within days.

Continue reading "Landline rules won't work for telecoms, or for Susan Shaw" »

December 16, 2011
Further uncertainty for universal service and intercarrier compensation reform

The National Telecommunications Cooperative Association (NTCA) began the process of litigating the Federal Communications Commission's recent Connect America Fund Order on in the U.S. Court of Appeals for the Fourth Circuit Friday.

NTCA, which represents over 570 "locally owned and controlled telecommunications cooperatives and commercial companies throughout rural and small-town America," notes, among other things, that "[p]rovisions [of the Order] mandating an ultimate price of zero for all switched access and reciprocal compensation services, imposing retroactive and dynamically changing caps on USF-supported costs and blurring the lines between regulated and nonregulated operations are inconsistent with law."

What this particular dispute is ultimately about is not whether NTCA's members are entitled to recover their reasonable costs as a matter of law (they certainly are), but whether they should continue to be allowed to shift a significant portion of those costs to the urban and suburban customers of unaffiliated communications providers that are subject to intensive competition. Implemented to ensure reasonably comparable rates throughout the nation, this arrangement has become difficult to justify for many reasons, one of which is that, in many cases, urban and suburban consumers are forced to pay rates that are much higher than the rates charged by small phone companies who receive the subsidies.

According to the Order, two carriers in Iowa and one carrier in Minnesota offer local residential rates below $5 per month (�235), and approximately 60 percent of small company service territories studied have local residential rates that are below the 2008 national average local rate of $15.62. (�236). "While individual consumers in those areas may benefit from such low rates," the FCC commendably acknowledges, "when a carrier uses universal service support to subsidize local rates well below those required by the Act, the carrier is spending universal service funds that could potentially be better deployed to the benefit of consumers elsewhere." (fn. 378)

The FCC, to its credit, has acted decisively in adopting a long-overdue "bill-and-keep" framework for both inter- and intrastate telecommunications. "Under bill-and-keep," the commission has explained, "carriers look first to their subscribers to cover the costs of the network, then to explicit universal service support where necessary." (�34) In other words, providers will no longer charge originating and terminating access fees for inter-exchange (toll) traffic. Bill-and-keep is just like an Internet peering agreement. Telecommunications providers will transition to bill-and-keep within six years for larger (price cap) carriers and nine years for smaller (rate-of-return) carriers.

There are many other wonderful reforms in the Order; unfortunately, the treatment of VoIP traffic is not one of them. The FCC has hesitated for years to rule whether VoIP is a "telecommunications" service that should bear a full measure of the burden of subsidizing legacy networks throughout rural and small-town America. Almost everyone recognizes that taxing a more efficient new technology to subsidize a less efficient legacy technology does not tend to promote innovation.

The commission has imposed subsidy obligations on some VoIP services, but not others. The resulting "lack of clarity," by the FCC's own admission, has led to "significant billing disputes and litigation," including pending disputes in a number of courts and state commissions. (�937) I recently noted one of these, the case of Southwestern Bell Telephone Company et al. v. IDT Telecom, Inc., et al., here. The FCC further acknowledges that "the current uncertainty and associated disputes are likely deterring innovation and introduction of new IP services to consumers." (�939)

Here, the FCC has decided to subject "toll" VoIP traffic to interstate switched access fees and local VoIP traffic to lower "reciprocal compensation" fees (note: it is still up in the air whether the VoIP services at issue in IDT Telecom are toll or local; the FCC refuses to say). Although some VoIP services may not currently be fully taxed as if they are telecommunications services (which they are not, since the FCC has declined to rule), and although all traffic, including VoIP, will ultimately be subject to a bill-and-keep framework, the commission has decided to treat VoIP as a telecommunications service for billing purposes during the 6-9 year transition. Why? Politics are politics.

By declining to apply the entire preexisting intercarrier compensation regime to VoIP-PSTN traffic prospectively, we recognize the shortcomings of that regime. At the same time, we are mindful of the need for a measured transition for carriers that receive substantial revenues from intercarrier compensation. (�935)

Since some VoIP services currently generate less taxes than others, the FCC could have lowered taxes for all VoIP services to the lowest current level (a bill-and-keep framework is the goal, after all). Nope. The commission has resolved some uncertainty (although it has not resolved the IDT Telecom issue), in favor of more interim taxation, not less. This is a politically-driven decision which attempts to generate payoffs for politically-influential "stakeholder" groups for 6-9 years. Tributes for trolls is another way of looking at this.

The FCC's treatment of VoIP services is unsatisfactory. It does not tend to promote innovation; rather, it tends to penalize innovative new approaches for promoting consumer welfare. We now face a new round of litigation. The NTCA lawsuit is the first major challenge, and there may be others.

November 23, 2011
What is the FCC's jurisdiction to subsidize broadband?

The Federal Communications Commission issued its Connect America Fund Order to ensure ubiquitous broadband Internet access services on Friday.

When Congress debated the Telecommunications Act of 1996, the section concerning Universal Service (Section 254) was somewhat controversial. Broadly speaking, there seemed to be considerable support in the House of Representatives for limiting Universal Service, and there were some influential senators who wanted to expand it (the House is somewhat more representative of urban areas that contribute subsidies, and the Senate is somewhat more representative of rural areas that receive subsidies). The result was a compromise in which Universal Service is defined (in Sec. 254(c)(1)) as "an evolving level of telecommunications services that the Commission shall establish periodically ... taking into account advances in telecommunications and information technologies and services." Notice how information services are missing in the first half of that sentence. Although the FCC is allowed to take notice of information services, Universal Service has to support telecommunications services only.

This is relevant because the FCC subsequently ruled that broadband Internet access is an information, not a telecommunications service (Order at paragraph 71). The commission also subsequently ruled that a service has to be one or the other, and that it cannot be both ("hybrid services are information services, and are not telecommunications services," ruled the FCC in a 1998 Report to Congress at paragraph #57).

Continue reading "What is the FCC's jurisdiction to subsidize broadband? " »

October 12, 2011
States must reform rates for intrastate switched access

Federal Communications Commission Chairman Julius Genachowski's criticism of intercarrier compensation in extensive remarks on telephone subsidies last week is a reminder for many states of the need to reform intrastate switched access rates.

Although Congress mandated the elimination of implicit subsidies embedded in the rates for both interstate and intrastate telecommunications services in the Telecommunications Act of 1996, it did not set a deadline. The FCC has substantially reduced interstate switched access rates in recent years, but a considerable amount of hidden subsidies remain in intrastate switched access fees.

In Florida, for example, one telecom service provider charges 5.64 cents per conversation minute for intrastate long distance versus only 1.65 cents for interstate long distance. The difference represents a hidden subsidy component that operates as a form of tax that only residents of Florida pay, since the lower interstate fees apply to calls which cross state lines.

Continue reading "States must reform rates for intrastate switched access" »

October 11, 2011
Reforming Universal Service is Plan C for broadband regulation

Chairman Julius Genachowski of the Federal Communications Commission spoke of the need to reduce subsidies for traditional wireline telephone service last week, as well as a perceived need for his agency to use the savings to subsidize broadband services (see the press release and the text of the speech).

Genachowski is absolutely correct about the need for reforming universal service and intercarrier compensation. Unfortunately, his determination to reform telephone subsidies is not for the purpose of generating consumer savings, but about redirecting resources currently at his disposal for the purpose of gaining some measure of control over unregulated broadband networks. Though cleverly disguised, this is actually a third major attempt to (slowly) impose public utility regulation on broadband service providers.

Continue reading "Reforming Universal Service is Plan C for broadband regulation" »

June 23, 2010
Is regulation better than competition?
Late last week the Federal Communications Commission voted along party lines to open a proceeding to "seek the best legal framework for broadband Internet access," a process that could culminate in the imposition of stifling, telephone utility style regulations on America's privately financed broadband networks pursuant to Title II of the 1934 Communications Act.

A statement by Commissioner Michael J. Copps explains in more detail than the rest why he thinks regulation is necessary for achieving this country's "broadband hopes and dreams."

The FCC has been deregulating communications services in response to increasing competition for years. Copps and others believe it is necessary to reverse course, although in his statement Copps doesn't question the policy of deregulating a competitive market. He questions the facts, arguing that broadband is less competitive than it used to be. This is a misleading argument.

Continue reading "Is regulation better than competition?" »

March 24, 2010
Broadband taxes

The National Broadband Plan is going to take a while to digest.

The following recommendations are included in the description of how the FCC plans to subsidize broadband -- which may be necessary if it frightens away private investment with network neutrality regulation which deprives private investors of a fair return on their capital:

RECOMMENDATION 8.2: The FCC should create the Connect America Fund (CAF). (p. 145-46)

RECOMMENDATION 8.3: The FCC should create the Mobility Fund. (p. 146)

RECOMMENDATION 8.4: The FCC should design new USF funds in a tax-efficient manner to minimize the size of the gap. (p. 146)

RECOMMENDATION 8.6: The FCC should take action to shift up to $15.5 billion over the next decade from the current high-cost program to broadband through common-sense reforms. (p. 147-48)

RECOMMENDATION 8.15: To accelerate broadband deployment, Congress should consider providing optional public funding to the Connect America Fund, such as a few billion dollars per year over a two to three year period. (p. 151)

Does the FCC have the power to do all of these things?

This language makes it sound like the FCC views itself as a mini-Congress with the power to tax and spend.

I cannot imagine this is the sort of thing the Founding Fathers had in mind when they provided that "The Congress shall have Power To lay and collect Taxes," (Art. I, Sec. 8) "All bills for raising Revenue shall originate in the House of Representatives," (Art. I, Sec. 7) and "No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law." (Art. I, Sec. 9)

October 30, 2008
Reform intercarrier compensation

The Federal Communications Commission began a broad inquiry of intercarrier compensation in 2001 and now it may finally be getting around to acting on it on Nov. 4 while everyone's thoughts are on something else.

This is about 12 years overdue. Congress in 1996 foresaw that implicit phone subsidies were unsustainable and ordered the FCC to replace them with a competitively-neutral subsidy mechanism. Due to political pressure, regulators have failed to complete the job.

Intercarrier compensation refers to "access charges" for long-distance calls and "reciprocal compensation" for local calls. A long-distance carrier may be forced to pay a local carrier more than 30 cents per minute to deliver a long-distance call, but local carriers receive as little as .0007 cents per minute to deliver calls they receive from other local carriers.

Once upon a time, before fiber optics, there were significant distance related costs. Now distance isn't a major factor.

The high access charges remain only because the recipients, typically small and mid-size phone companies serving sparsely populated areas, have successfully lobbied regulators and legislators to keep them.

Thanks to outdated regulatory classifications, wireless and VoIP services pay far less when the connect to the legacy phone network.

This is the reason a small phone company named Madison River Communications attempted to block its customers from accessing VoIP services, however the FCC intervened. As a result of that episode, and others have argued for imposing common carrier regulation on broadband providers under the guise of net neutrality. Regulation truly tends to beget more regulation.

Reducing the hidden subsidies for local phone service would put incumbent phone companies in a better position to attract private investment to expand their broadband offerings and ought to be a key item in any agenda for promoting broadband deployment.

Otherwise, investors face a choice between investing in one category of broadband providers whose broadband profits may be forced to subsidize plain old phone services, and another category who get to reinvest 100% of their broadband profits or distribute them as dividends.

Reducing access charges would also remove a perverse disincentive which may be inhibiting some providers of legacy phone service in rural areas from updating their networks. If they offer wireless or Internet phone service, they are deprived of the generous compensation they currently receive for handling long-distance calls.

It may no longer be politically correct to criticize regulation, but intercarrier compensation is an example of harmful regulation which distorts competition. It needs to be eliminated and replaced with something which does not harm competition.

The FCC ought to just allow the carriers to negotiate these rates. The small and mid-size carriers would be afraid of that, and even the big carriers might prefer a reasonable FCC-set rate to endless bickering with 1,400 other carriers.

Either approach would be a huge improvement and is long overdue.

January 31, 2008
(Telephone) welfare as we know it

Reforming the system of heavy subsidies for rural telephone service, which dates back to the Great Depression, has long been a topic of discussion for telecom policy wonks. The Universal Service program is proof-positive that subsidies grow like weeds. Universal Service has spawned a constituency of more than 1,000 small telephone companies who've waged a Jihad to preserve their entitlement.

Politicians have always found it expedient to look the other way. This may be changing. In recent years, wireless companies have set up shop in rural areas. Although their costs are generally far less than those of the incumbent wireline providers, one of the FCC's brilliant "pro-competitive" policies bestows a subsidy for wireless service which is identical to the subsidy for wireline service that's more expensive to provide. Cable companies who provide telephone service are also entitled to identical support. So guess what? As competing providers have demanded their fair share, the overall cost of Universal Service has exploded. Even some politicians are finding the size of the fund harder to ignore.

If it ever went to court, there could be a problem. Universal Service is really a tax, although it's still officially classified as a user fee. The distinction is critical. Agencies can't levy taxes. They must originate in the House of Representatives -- and tax legislation is referred to the House Ways & Means Committee, which has never played an active role in telecom policy. (Note: To influence the Ways & Means Committee, you would need a different set of lobbyists -- a scary prospect for many.)

FCC Chairman Kevin Martin has long advocated taking action, and now the FCC has issued three notices of proposed rulemaking for reforming this mess.

Identical Support
The Identical Support NPRM seeks public comment on basing every carrier's subsidy on their own costs. Obviously, a good idea. Anna-Maria Kovacs, one of the best regulatory analysts, claims the idea appears to have the support of all five FCC commissioners. Unfortunately, the FCC may have torpedoed this initiative by loading the NPRM with questions about how to determine support. Actual costs? Forward-looking costs? There's a rich history of telecom companies exaggerating their costs and regulators choosing to ignore legitimate costs for the purpose of reducing rates or limiting increases. This NPRM will be a slugfest.

Reverse Auctions
The Reverse Auction NPRM seeks comment on the idea of letting competing providers bid for the subsidy. The low bidder could get the entire subsidy for a particular serving-area. Wireline providers fear that wireless providers, with their inherent cost advantage, would capture the subsidy and put them out of business. They will write to their members of Congress.

There's an obvious solution here: Wireless and cable telephony, excellent though they are, still don't quite match the reliability of wireline service. In a power outage, for example, your wireline phone service still works because it's powered out of the central office which has batteries and even generators. So let reverse auctions kick in as soon as competitors match the reliability of wireline service.

A third NPRM deals with other issues. One is to broaden the base of contributors. Right now, the FCC manages only the taxation of interstate services. Some would like it to be able to tax intrastate services, as well. (Never mind that intrastate services are already heavily taxed at the state level.) One fear I and others have is that "broadening the base" could lead to the taxation of Internet traffic. Another is to step up FCC audits so as to reduce waste, fraud and abuse. You might wonder: Don't they do that already (what do we have the FCC for if it isn't to conduct audits)? But FCC oversight, while successful on occasion, has been a farce overall.

June 7, 2007
Paying for Porn

The Federal Communications Commission is looking into a scam involving the attempt by local phone carriers in rural areas to collect more access fees from the major long-distance providers by increasing the number of calls from "adult" chat lines.

Rural carriers have long received fees (up to 5 cents per minute) from long-distance carriers for every call they connect. The original intent behind this, of course, was to ensure that rural citizens have (subsidized) phone access. So when you make a call from New York City to your grandparents in North Dakota, Verizon pays an access fee to your grandparents' local carrier for the connection. And the smaller you grandparents' local carrier is, the higher the per-minute fee it gets to collect. So, unsurprisingly, some small local carriers figured out that they more calls they connect, they more money they will collect.

Hence, some rural carriers decided to sell local area codes to adult chat lines. That way every time someone calls the adult line, the rural carriers get a connection fee. Revealing how out of control all of this has gotten, one Senate staffer said recently:

To illustrate the success this program has had, consider this: in July 2005, the rural phone company in Wayland, Iowa showed 40,000 minutes of long-distance calls received; in December 2006, they showed 10 million minutes. Of those calls, half were to the same four phone numbers, all adult chat lines.

Family advocacy groups are upset, because such calls to regular area codes can not be automatically blocked. At least with the old 1-900 numbers, parents could automatically block such calls.

We hardly needed one more example of the unintended consequences of regulation. But here it is anyway.

October 11, 2006
Interesting ideas for designing auctions to reduce USF subsidies

The FCC received public comments on the concept of using auctions to determine
who gets Universal Service support to provide subsidized phone service in rural areas. The leading trade association representing rural local exchange carriers (the Organization for the Promotion and Advancement of Small Telecommunications Companies) predictably claimed that "[s]electing winners based solely on price would surely be a 'race to the bottom.'" According to OPASTCO, "[q]uality of service, service capabilities, and existing service area coverage should all be included in the criteria for evaluating carriers bidding for a rural service area, and those criteria should be given at least equal weight as the bidding price."

OPASTCO's premise is surely correct. The trick is to balance quality, reliability and price in a way that creates maximum value for everyone -- including the taxpayers, er, ratepayers -- and doesn't create insurmountable hurdles for newer, more efficient and potentially more useful technologies in the earlier stages of development.

Continue reading "Interesting ideas for designing auctions to reduce USF subsidies" »

September 13, 2006
"Continuity and community presence" in Universal Service

FCC Chairman Kevin Martin

A few weeks ago, the FCC courageously requested public comment on the merits of using auctions to determine who gets Universal Service support to provide subsidized phone service in rural areas. One difficulty with a reverse auction is what, if anything, to do about stranded investment. What are the legitimate investment expectations that the incumbent provider deserves to recover?

Under the current system, the incumbent rural phone companies will be subsidized in perpetuity. Yet, cable VoIP service and wireless systems have been built in many rural areas without Universal Service support. Many of the competitors are now seeking their fair share. Chairman Kevin Martin noted yesterday at a Senate hearing that these competitors received $1 million when he came to the commission but get $1 billion now.

Martin stood up for reforming Universal Service so it supports the best and most efficient new technologies, and he took a beating from Senate Commerce Chairman Ted Stevens (R-AK) -- an ally of the incumbent rural phone companies -- who, like most politicians, focused on who would be the winners and losers:

Continue reading ""Continuity and community presence" in Universal Service" »

June 20, 2006
Study disputes need to subsidize rural broadband

The telecom reform proposal under consideration in the Senate Commerce Committee would create a $500 million account as part of the Universal Service Fund to subsidize broadband deployment in rural areas. The anecdotal evidence for some time has been that rural areas actually are not far behind urban areas as it is. Part of the reason that there is not much of a lag is small rural telcos have been able to finance broadband upgrades with USF.

In a paper released Friday, the Congressional Budget Office sheds some much-needed light on the rumors. CBO claims that broadband is in fact permeating rural areas at a "rapid pace," and cites a finding from the Pew Internet and American Life Project that "rural areas are only about two years behind urban areas in their broadband subscription rates." (See "Factors That May Increase Future Spending from the Universal Service Fund," Jun. 2006.)

CBO confirms that USF is in fact already subsidizing broadband deployment, since current telephone equipment eligible for the subsidies is capable of providing voice and data services.

The proposal in the Senate to expand USF may be bad for innovation, since new technology could be forced to subsidize obsolete technology. The CBO study provides evidence that the popular notion of a rural broadband divide is actually a myth, and not a justification for expanding USF.

May 18, 2006
"Where's The Outrage?"

Sen. Ted Stevens (R-AK) rightly worries that current universal service mechanisms are unsustainable as consumers migrate to Internet phone services that are lightly taxed and regulated (these services clearly should contribute their fair share). Stevens and others also believe that rural America won't get broadband services without subsidies (we can't know this for sure, because we have never tried the alternative approach of removing all of the barriers to competition and investment).

Anyway, while Internet content and conduit providers obsess over net neutrality, something equally harmful is lurking in the shadows. A little noticed provision in the Senate's "staff working draft" designed to expand the universal service funding base could have profound consequences.

Currently, consumers of "telecommunications" services contribute billions of dollars to subsidize telephone service in rural areas. "Telecommunications" include telephone, cell phone and, for the moment, DSL services. DSL has been deregulated, and the requirement that it contribute to universal service is temporary. VoIP contributes a small amount, but nothing like a fair share. The Senate staff draft expands the category of contributors and ensures that they all pay equally. Its true that the Internet backbone would not contribute to universal service, but so what? Everything that travels to or from the public Internet would pay.

Here's how this looks:

''(1) CONTRIBUTION MECHANISM.-- ''(A) IN GENERAL.--Each communications service provider shall contribute as provided in this subsection to support universal service."
''COMMUNICATIONS SERVICE.--The term 'communications service' means telecommunications service, broadband service, or IP-enabled voice service (whether offered separately or as part of a bundle of services)."
''(A) BROADBAND SERVICE.--The term 'broadband service' means any service used for transmission of information of a user's choosing with a transmission speed of at least 200 kilobits per second in at least 1 direction, regardless of the transmission medium or technology employed, that connects to the public Internet for a fee directly-- ''(i) to the public; or ''(ii) to such classes of users as to be effectively available directly to the public."
Setting aside the issue of VoIP -- whose free ride should clearly end -- advocates of expanding the funding base sound like tax collectors when they argue that spreading the burden will lower the individual contributions. Contributions that are set low initially are, of course, much easier to raise in the future. And that will happpen, because there are no limits on the growth of most of the universal service funding mechanisms.

May 4, 2006
The Stevens bill

This week Senate Commerce Chairman Ted Stevens (R-AK) introduced comprehensive telecom reform legislation which, as Adam Thierer notes, is a 135-page monster, represents a counterproductive obsession on the part of some policymakers over the smallest details of communications policy and doesn't tear down any of the old regulatory paradigms that it sould.

That said, the proposal would move the country in a positive direction in several respects.

  • Net Neutrality -- Unlike the House bill, which grants the FCC specific new authority to enforce the commission's net neutrality principles -- and which is guaranteed to lead to questionable enforcement proceedings and perhaps litigation between grasping and delusional competitors -- the Stevens bill wisely requires the FCC to merely keep a watchful eye on industry practices and issue annual reports for 5 years. The reports may contain recommendations, but the commission may not recommend new rulemaking authority for itself. Unfortunately, the commission shall report on peering and other business arrangements that are appropriate objects for antitrust -- if egregious -- but not for an agency which is not governed by a clear and principled competition standard which emphasizes consumer welfare, as Randy May and the Regulatory Framework Working Group have outlined. It is unnecessary to include any provision regarding net neutrality in telecom reform legislation, as I have argued here, for example. However, Senator Stevens has the best net neutrality proposal so far.
  • Video Franchising -- The proposal encourages negotiations between cities and competitive entrants, but establishes a 30-day shot clock and eliminates the ability of the cities to extort in-kind contributions (beyond 1% of gross revenues for Public, Educational and Governmental channels) or set anticompetitive buildout requirements. It also ensures comparable treatment for cable operators who face competition from a new entrant. Unfortunately, the proposal preserves almost all of the existing video regulations -- such as must-carry, PEG and I-Nets -- even though the market is competitive and all vendors need to be able to raise vast sums of capital to deliver broadband speeds of 50 mbps to 100 mbps.
  • Universal Service -- On the distribution side, the bill would require periodic audits of universal service recipients and would set up a review process to prevent waste, fraud and abuse. That Senator Stevens, one of the strongest defenders of universal service, acknowledges the potential for waste, fraud and abuse in what is nothing more or less than an entitlement program is welcome and significant. Although this is a great start, ways must be found to ensure that the size of the fund declines as technology reduces the cost of services. One way to do this is to mandate price caps on all recipients. Another way is to auction the loans and/or subsidies for broadband services to the providers and the technologies that can offer the service at the lowest cost.

    On the contribution side, the bill would authorize the FCC to expand the contribution base in virtually any conceivable way and would hide everything from the Congressional budget process. Sinces taxes and regulation go hand-in-hand, Senator Stevens' proposal raises the worrisome possibility that not only taxes but also regulation may be coming to the Internet. I'm not sure which is worse: that taxes and regulation could ruin the Internet, or that the Internet might provide potentially limitless opportunities for taxes and regulation to stifle everything else. At a minimum, Congress should cap the fund if its going to give the FCC virtually unlimited authority to collect "fees."

  • Video and Audio Flag -- The bill would preserve the brodcasting business model by withholding content from the Internet. This is protectionist and anti-consumer. Congress should not pick winners and losers.
  • Sports Freedom -- The bill would outlaw exclusive contracts with programming vendors for sporting events. In a free market, exclusive contracts can benefit producers and consumers. Government, as a general matter, should not interfere with private contractual arrangements. On the other hand, these particular arrangements are not the product of a competitive marketplace and have the potential to retard competitive entry. A permanent prohibition is heavy-handed and could be damaging, but some kind of transitional relief seems appropriate.

March 8, 2006
Universal Service suffers same defect as health care system

Professor Vernon L. Smith provides a helpful analytical tool which explains why the cost of health care has doubled in the past decade and generally outpaces inflation and also demonstrates why Universal Service is inherently flawed and ultimately unsustainable (see "Trust the Customer!" in the Wall Street Journal).

Continue reading "Universal Service suffers same defect as health care system" »

December 14, 2005
Proposal of the Universal Service Working Group

A first-rate report describing the shortcomings of Universal Service and suggesting several options for reform has been issued by the Progress & Freedom Foundation. The report is timely because a lot of service providers support a "numbers-based" contribution mechanism designed to spread the cost of Universal Service to include any service that connects to the telephone network and uses an assigned number.

Overall, the report confirmed by own impression that Universal Service is a classic example of "regulatory capture," the theory that regulation can be manipulated by regulated firms to bring them unwarranted profits and thus actually harm the consumers (through artificially higher prices) that it purports to serve. The report doesn't state this conclusion quite so candidly, though. It diplomatically notes that smaller rural telephone companies receive subsidies based upon "rate-of-return" regulation, which can "distort the regulated firm's choice of inputs, so the regulated firm fails to produce at minimum cost." Regulators, the people we all assume are there to protect us, have "little incentive ... to scrutinize the use of universal service funds" and "few incentives ... to reduce expenditures." The report cites comments that were filed in 2004 by Western Wireless, subsequently acquired by AllTel, that "no comprehensive audit of the regulatory accounts of rural ILECs has been conducted in the past decade, either by the FCC, NECA, USAC, or independent auditors retained by the ILECs themselves."

The report does recommend a "numbers-based tax," which is one way to reduce the inequitable burden that the current system imposes on legacy service providers. But it would be throwing money at a problem which is, in effect, subsidizing the problem and only making it worse. That is not the aim of the report, which contains many useful ideas for reducing costs.

Need for audits

One idea is a requirement that the FCC conduct periodic audits. This is an obvious starting point, and it is truly appalling that Congress may be forced to enact fundamental reforms without the benefit of extensive audit findings. The Congressional committees of jurisdiction ought to put an immediate end to this dereliction of duty by regulators. My friend John Dillard, who owns and operates a smaller rural telephone company in Oregon recommends "First, effective audit oversight of all recipients by NECA and USAC acting for the FCC. The current USAC audits do not meet that requirement and are ineffective, worthless even. NECA and USAC need to question and deny claims for USF support. The companies must justify their costs to the overseers. If a company doesn't want that level of oversight, they do not need to apply for the USF support."

Proposal for state block grants

Another idea from the report is to allow the states to "tailor universal service solutions to meet their own needs," resulting in a "process of interstate competition that will help to identify a set of best practices." This is called a "Performance-Based Block Grant Model." As one who sympathizes with the need for universal service in some parts of the country, I fear that devolving responsibility for administering universal service to the states could jeopardize the program by making it easier politically for the federal government to reduce its commitment in the future. When Congress deregulated the airlines, the Essential Air Service block grants were supposed to ensure that smaller communities would continue to receive commercial air service, but they fell victim to budget cutting. I also question whether most states could handle this responsibility. Most state commissions struggle with very limited resources and broad jurisdictional responsibilities that cover energy, water, transportation and other distractions. State commissions have sometimes proven effective in monitoring service quality and are probably more sensitive to consumer complaints that arise locally. Sometimes a state commission in one of the larger states has blazed a trail for others to follow, but this often depends on a combination of coincidences that includes the presence of a commissioner with unusual vision and leadership abilities. Another problem with assigning significant policymaking responsibilities to state commissions is that in the process of experimenting with universal service they could unwittingly impact interstate networks and balkanize the Internet. Also, state commissioners are as susceptible to regulatory capture as the FCC. Therefore, if a state commission thinks it can build a better mouse trap, why not let them apply for a federal waiver?

Other useful suggestions

John would add the following ideas:

"The FCC needs to convene a Joint Board to bring telecommunications accounting, cost allocations and separations methodologies into GAAP compliance. The various factors need to be reviewed and recast to reflect current technologies that are being deployed. The Joint Boards will need explicit direction to do that.

"The old circuit based telephone equipment needs to be phased out in a timely but quick fashion over a specified period of time. USF surcharges for a period of time may be needed to help rural carriers do this," and

"There needs to be a date certain where state regulation is limited to quality of service issues only. The telecommunications regime is basically federalized."

October 7, 2005
How can the cost of Universal Service double while technology is driving down costs?

The FCC took comments Friday on what to do about an enormous rate of growth in the demand for Universal Service subsidies. The High Cost Fund has almost doubled in size since 1999. Part of the growth is attributable to a variety of familiar problems. For example, support for rural carriers is still determined using a rate-of-return methodology despite the fact that price-cap regulation has proven to be far more effective in controlling costs. And rural carriers can choose to be subsidized not on the basis of their own actual costs, but according to an "average" cost incurred by many carriers. So it doesn't matter that some rural carriers contend with mountains, deserts, lakes and rivers while there are others who serve flat patchworks of farms as far as the eye can see. Well, it doesn't matter in terms of keeping the size of the fund low. It's great for the carriers serving the flat areas.

The bulk of the growth since 1999, however, is due to the availability of subsidies for competitors, such as competitive rural wireless carriers. Some incumbent phone companies argue it is inefficient to subsidize two networks serving the same area: The resulting competition is artificial because it depends on continuing government subsidies. But their proposal virtually guarantees that the availability of subsidies will be limited to the incumbents. The solution is not to outlaw competition. The real question is why should Universal Service continue to be biased in favor of wireline services when it is cheaper in most cases to deploy wireless technology in rural areas? Many rural areas have mobile services that do not require any subsidies at all. One example of this bias is the fact that the subsidies available to rural wireless carriers are set according to the cost data submitted by the incumbent wireline provider! No attempt is made to capture the benefits of lower costs for the fund.

Universal Service policy is highly political and impossible for the FCC to manage successfully. As a result, it incorrectly focuses on the needs of providers not consumers. That's one reason why larger "non-rural" carriers don't receive any support for the rural areas they serve. These carriers are forced to overcharge their urban customers, leading to arbitrage which undermines investment. This policy is a subtle but real form of "taking," which no court has figured out yet.

The cost of telecommunications is declining while the cost of Universal Service is exploding. Something is wrong. But it would be a mistake to control costs by discriminating for and against various technologies. Technology offers the best opportunity to reduce and eventually perhaps eliminate Universal Service.

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