Universal Service Fund Needs FCC Attention this Year, Policy Analysts Say

Published April 1, 2008

Now that the Federal Communications Commission (FCC) has issued its three notices of proposed rulemakings regarding potential reform of the bloated and poorly targeted Universal Service funds (collectively, USF), analysts are pointing out once again that the agency should make USF reform a top priority this year.

The United States has a competitive marketplace with multiple choices of communications services using different technological platforms, they say, and the universal service regime needs a pretty radical overhaul.

This would mean changing the program to direct USF funds mostly to support consumers who demonstrate they need financial help, instead of the current policy of giving the money largely to communications providers who may use the support in ways that do not necessarily benefit under-served consumers or serve them in the most cost-effective, efficient ways.

Unfortunately, serious USF reform is not likely in the near future. This makes it even more important for FCC to seize the opportunity this year to make some meaningful, even if modest, progress towards reforming the regime.

FCC Commissioner Deborah Taylor Tate and Oregon Public Utility Commissioner Ray Baum deserve credit for their patient leadership of the Federal-State Universal Service Joint Board. The panel made some worthwhile recommendations to the commission in November of last year.

Joint Board Recommendations

In line with the joint board’s recommendations, FCC should cap the size of the high-cost universal service fund at $4.5 billion; stop wireless carriers from receiving subsidies based on the “identical support” received by the incumbent wireline carriers, even though the wireless companies generally have lower costs; and adopt some form of “reverse auction” as a method of determining which communications providers can serve designated high-cost areas on the least-costly basis.

A few of the joint board’s statements in its November 2007 Recommended Decision are especially noteworthy. Regarding the overall size of the high-cost subsidies, now at approximately $4.5 billion per year and growing, the board said this:

“Many areas of government enterprise operate within a budget, and we think that high-cost funding can do likewise, provided that we are willing to make realistic estimates of the funding needed to meet the statutory requirement that we preserve and advance universal service. Over the longer term, we anticipate that total funding can and should be decreased as broadband and wireless infrastructure deployment becomes widespread throughout the country.”

Costs Ignored

Without delay, FCC should adopt the proposed cap on the size of the high-cost fund. This would stem the growth of the USF tax paid by all consumers, which currently stands at more than 10 percent of the consumer’s phone bill, in contrast to 6.8 percent in the first quarter of 2002.

The commission should move with more than its usual dispatch to adopt the joint board’s recommendation to eliminate the identical support rule, which provides support to wireless carriers without regard to costs. Regarding the wastefulness inherent in this element of the current regime, the board stated:

“The Joint Board recognizes that the identical support rule has resulted in the subsidization of multiple voice networks in numerous areas and greatly increased the size of the high-cost fund. … We believe it is no longer in the public interest to use federal universal service support to subsidize competition and build duplicate networks in high-cost areas. … The rule bears little or no relationship to the amount of money competitive ETCs [Eligible Telecommunications Carriers] have invested in rural and other high-cost areas of the country.”

From 2001 through 2007, taxpayers’ financial support to the competitive wireless carriers increased from $17 million to $1 billion, and much of this subsidy has not gone for build-outs to unserved areas.

Reverse Auctions

Finally, the commission should adopt some form of reverse auction, even if initially on some less-than-universal, experimental basis, to determine which provider (or providers) should be awarded subsidies to serve designated high-cost areas. The auction mechanism would encourage the provision of service on the most cost-effective, efficient basis and would spur the development of more innovative new network technologies.

Realistically, designing and implementing an appropriate auction mechanism may well take most of the year. But there is no reason why FCC cannot adopt a high-cost fund cap right away. FCC Chairman Kevin Martin has endorsed the idea and has shown leadership on USF issues with Commissioner Tate.

It ought not to take many months, after all the discussion over the past couple of years and the work already done on the issue by the joint board, for the agency to adopt the recommended change in the identical support rule.

More comprehensive and fundamental reform of our nation’s communications laws and policies consistent with the new marketplace realities arguably may require several more years of congressional gestation and new presidential leadership. But in the meantime, FCC should set its sights on achieving meaningful progress this year in the cause of universal service reform.

Randolph J. May ([email protected]) is president of the Free State Foundation, an independent, nonprofit, Maryland-based, free market-oriented think tank. From 1978 to 1981, May served as assistant general counsel and associate general counsel at the Federal Communications Commission. An earlier version of this article appeared on the Free State Foundation’s blog (http://freestatefoundation.blogspot.com/). Used by permission.

For more information …

Recommended Decision of the Federal-State Joint Board on Universal Service, November 19, 2007: http://www.heartland.org/article.cfm?artId=22916