Congress Bails Out Universal Service Fund–For Now

Published February 1, 2005

As one its last acts of 2004, the U.S. Senate on December 8 passed legislation that keeps alive a long-distance telephone fee subsidizing telecommunications service for low-income residents and rural areas. The National Taxpayers Union reluctantly endorsed the measure because failure to pass it could have driven the cost of telephone service far higher.

The Senate’s approval of the National Telecommunications and Information Organization Act, HR 5419, followed approval by the House of Representatives, which had passed the legislation by unanimous consent two weeks earlier. Contained in the legislation are three separate acts addressing the structure of nationwide 911 services, federal spectrum reallocation, and the Universal Service Fund (USF).

The “Universal Service Anti-Deficiency Temporary Suspension Act” proved to be the most politically difficult of the three. The USF is a federal program that collects an 8.9 percent fee from long-distance telecommunications companies to subsidize telecommunications services for low-income and rural customers. It also subsidizes discounts on Internet access for eligible schools, libraries, and rural health care providers.

Shortfall Triggered Action

In September, the Federal Communications Commission (FCC) decided to apply the federal Anti-Deficiency Act (ADA) to the Universal Service Fund. The ADA–passed in the nineteenth century to keep agencies from spending their appropriations all at once and reworded and reorganized in 1982–prohibits federal agencies from incurring financial obligations in excess of money on hand. However, because the USF already had overextended itself at the time of the FCC’s ruling, $2.5 billion in money earmarked for schools and libraries was temporarily frozen.

An immediate hike in contributions from subsidizing telecom companies would have been necessary to cover the shortfall and unfreeze the funds. Because telecom companies recoup these USF fees from their customers, the FCC’s decision would have meant a huge increase in consumer landline and wireless telephone bills.

The National Taxpayers Union (NTU) ultimately but reluctantly decided to lend its support to the legislation, for the sole reason of preventing the immediate tax increase that the FCC’s decision would have created. The group’s reluctance stemmed from its longstanding position that the USF itself should be eliminated. However, NTU officials argued consumers shouldn’t be further punished because of an accounting change, regardless of its merit, to a broken federal program.

“By enacting HR 5419, Congress may have saved taxpayers from the immediate threat of a USF-triggered tax hike,” said Pete Sepp, NTU vice president for communications. “But the long-term prospects for the modern, free-market telecommunications system Americans want will be greatly diminished unless elected officials stop looking backward and start moving forward.

“That means ending the USF, dramatically reducing telecom taxes, and clearing away the thicket of regulations that continue to choke development of technologies to help improve our lives,” said Sepp.

Received Strong Business Support

The purpose of the first act, the “ENHANCE 911 Act of 2004,” in HR 5419 is to coordinate 911 services at the federal, state, and local levels. The act also is intended to ensure that proceeds from the various charges levied on telecommunications bills for enhancing 911 services “are used only for the purposes for which the funds are being collected.”

The second act, the “Commercial Spectrum Enhancement Act,” is intended to streamline the process by which the airwaves now under federal control are reallocated to commercial users. Free-market advocates hope the act will facilitate economic growth, new jobs, and expanded services for consumers that would otherwise be hindered or delayed.

Currently, winning bidders in government spectrum auctions must negotiate with the federal entity from which the spectrum is being reallocated. HR 5419 establishes a centralized Spectrum Relocation Fund that will expedite the process by which the federal entity is reimbursed. Critical government communications capabilities will be protected and commercial bidders should have a clearer understanding of federal reallocation costs and timelines.

In a December 3 letter, a coalition of telecommunications, public safety, business, and state regulatory groups urged Senate Majority Leader Bill Frist (R-TN) and outgoing Senate Minority Leader Tom Daschle (D-SD) to pass HR 5419. There were 56 signatories, including the Cellular Telecommunications & Internet Association, Telecommunications Industry Association, U.S. Telecom Association, and individual telecom companies.

Free-Marketers Opposed

Of the three measures encompassed by HR 5419, the USF was the most controversial.

In an official statement, the National Grange, a farm organization that supports the USF, noted, “most rural areas in the United States receive little or no USF support if they happen to be served by one of the so-called ‘non-rural’ carriers that serve both urban and rural areas. Under the FCC’s current regulations ‘non rural’ telephone carriers that serve rural areas in only three states (MS, AL, WV) receive 83 percent of the annual $233 million in ‘non-rural’ carrier funding that is available.”

The National Grange also noted that 42 states, including all but two states (Montana and Wyoming) west of the Mississippi River, receive no “non-rural” carrier funding under the USF.

Free-market policy analysts, however, generally oppose the USF because it forces urban residents to subsidize the telecommunications services of rural residents.

The USF came in for criticism in a November 17 article in USA Today. “The Gambino crime family was able to fraudulently draw millions from the Universal Service Fund from 1996 to 2003 by controlling a Missouri rural phone firm,” noted reporter Paul Davidson.

Critics also contend the generous subsidies discourage recipient companies from economizing. The USA Today report cited the example of Big Bend Telephone, which serves 6,000 customers in Alpine, Texas. In 2003 Big Bend spent $3.6 million, or 25 percent of its total operating costs, on corporate overhead. At the same time, the company received $9.6 million and $3.3 million in federal and state universal service funds, respectively.

“The system is broken,” John Stanton, CEO of Western Wireless, told Davidson. He said the subsidies are “an incentive for abuse.”

Tad DeHaven ([email protected]) is an economic policy analyst with the 350,000-member National Taxpayers Union.