Report Blasts Federal Universal Service Fund

Published November 1, 2006

The federal Universal Service Fund (USF) is both wasteful and inefficient, encouraging rural phone companies to keep costs high while doing little to make service affordable, according to a report by Thomas Hazlett, professor of law and economics and director of the Information Economy Project at George Mason University.

Hazlett’s 91-page paper dissects the inefficiency of the USF, concluding that its processes, which ignore current telecom market realities such as wireless and Voice over Internet Protocol (VoIP), actually undermine the “universal service” mission.

Funds rarely find their way into the hands of those who truly need them, Hazlett writes. Instead, they flow directly to the coffers of small and mostly rural phone companies, some in quite wealthy areas such as Jackson Hole, Wyoming, where they act largely as huge reimbursements for hefty infrastructure investments, the necessity of which is never adequately reviewed.

Hazlett’s paper, “Universal Service” Telephone Subsidies: What Does $7 Billion Buy? released on June 1, meticulously documents what many have long suspected: That it would cost taxpayers less if the government directly paid the phone bills for individuals living in high-cost areas.

Inefficient Subsidies

“Federally subsidized phone service costs taxpayers a large multiple of what the most efficient network solutions would,” Hazlett writes. “That is because ‘high-cost’ subsidies are delivered not to low-income customers, but to rural phone companies, typically on a ‘cost-plus’ basis. The more service costs, the more money the phone carrier receives–a clear incentive to avoid cost savings.

“This not only bloats administrative expenses, it undercuts market forces that would naturally lead consumers to abandon traditional fixed lines in favor of newer, cheaper, and functionally superior technologies,” Hazlett continues.

Hazlett details the political and regulatory inertia that resists USF overhaul, and he suggests a good starting place for reform would be to cap and reduce the USF’s “High Cost Fund.” This program disperses payments to rural companies to extend service to remote areas, and does so, as noted, on a cost-plus basis.

Another recommendation is the use of “reverse auctions” to assign universal service obligations, a plan endorsed by FCC Chairman Kevin Martin. Phone carriers would compete to become the “provider of last resort” in areas where regulators deem local services insufficient, bidding a price, to be paid by the government, to supply such services. The lowest-cost bidder wins.

Steven Titch ([email protected]) is a senior fellow of The Heartland Institute and managing editor of IT&T News.

For more information …

Thomas Hazlett’s paper, “Universal Service” Telephone Subsidies: What Does $7 Billion Buy? is available through PolicyBot™, The Heartland Institute’s free online research database. Point your Web browser to, click on the PolicyBot™ button, and search for document #19520.