Universal Service Fund Under Fire

Published July 1, 2007

The embattled Federal Universal Service Fund (FUSF) is taking more licks these days due to a sudden increase in its quarterly contribution requirements and closer scrutiny by Democrat-led committees in Congress. The fund has an annual budget of $7 billion for subsidizing basic telephony in rural areas and wiring public schools and libraries.

Following consecutive increases of 9.1 and 9.7 percent in “contribution factor” assessments–the formula used to calculate FUSF collections–for the fourth quarter of 2006 and first quarter of 2007, respectively, the federal government produced an 11.7 percent tax on long-distance subscriber bills for FUSF during the second quarter of 2007.

A long-awaited FUSF revamp recommendation is now being floated in Washington and among state regulators to cap outlays for the program’s fast-growing, aptly named “High Cost” program, which involves direct subsidies to carriers.

‘Out of Control’

“For the last seven years, these rate spikes have been seen during off-election years,” said Vince Vasquez, a research fellow at the San Diego Institute for Policy Research. “But everyone knows the FUSF is out of control with no accountability–it is just rubber-stamping funding requests. Too much money is being taken out of the whole pot.”

Rep. Edward Markey (D-MA), a long-time legislative nemesis of the telco industry and now chairman of the House Subcommittee on Telecommunications and the Internet, has sent the Federal Communications Commission (FCC) some five pages of wide-ranging general and detailed questions on nearly all aspects of the FUSF’s current status and future prognosis.

Among Markey’s queries to FCC Chairman Kevin Martin are elements of the Republican regulator’s suggested “reverse auction” initiative that would allocate FUSF money to whichever company claims it can serve a rural area for the lowest cost, in order to stem the currently expensive construction outflows.

Extensive Hearings Promised

Although Markey supports the FUSF in principle, he has alerted the FCC that hearings will examine the fund from top to bottom. Markey’s axe is clearly aimed at the FUSF’s High Cost fund for carrier companies. He has expressed concern that payments from that fund were increasing at the expense of outlays from the Low Income fund, which underwrites service to rural and urban poor telephone subscribers.

Payments from both funds go not to telephone customers but to incumbent and competitive telephone companies, known as “Eligible Telecommunications Carriers (ETCs).” Currently, almost any public telecom carrier can request ETC status so long as that carrier agrees to collect FUSF fees from its subscriber base.

Normally business-friendly GOP members of the House have been irked by the High Cost mechanism’s rules, which allow increasing amounts of money to fund capital-intensive construction by fund recipients. The High Cost fund has been the target of telecom policy think tanks, research groups, and consumer activist groups that want to see dramatic FUSF overhauls. The FCC’s Federal-State Joint Board on Universal Service recommended capping the High Cost fund’s share of FUSF spending.

‘Uneconomic and Inefficient’

Thomas W. Hazlett, a George Mason University professor of law and economics, is a critic of FUSF in general and the High Cost program in particular. His 2006 study, “‘Universal Service’ Telephone Subsidies: What Does $7 Billion Buy?” blasted the High Cost program for allegedly aiding “uneconomic and inefficient” telcos and cooperatives that are usually privately held.

The study included 20 profiles of fat-cat recipients of the funds, prompting Hazlett to posit it would be less expensive for the government simply to give away free satellite communication or mobile wireless services and equipment to the small number of end users handled by those 20 companies.

In a study released last year, the Pacific Research Institute (PRI), a free-market think tank, flatly labeled FUSF as “welfare.” It maintained stronger competition would counter FUSF’s current practice of redistributing consumer payments to finance and subsidize wasteful carriers and fraudulent technology vendors.

Both the Hazlett and PRI studies also strongly criticized the FUSF’s use of “cost-plus” subsidy formulas. Under these formulas, ETCs are reimbursed from the High Cost fund at 110 percent of the cost of their capital expenditure, a process critics say discourages investment in lower-cost alternatives.

FUSF defenders, such as the Organization for the Promotion and Advancement of Small Telecommunication Companies (OPASTCO) and the National Telephone Cooperative Association (NTCA), insist the program is a “support mechanism” necessary to ensure the viability of smaller telcos and cooperatives and to bring telecom services to the remote residents of America’s sparsely populated regions and smaller communities.

Legislative Action

Markey is not the only member of Congress interested in FUSF reform.

As they did last year, Reps. Lee Terry (R-NE) and Rick Boucher (D-VA) have introduced the Universal Service Reform Act (H.R. 2054), which tightens restrictions on who can qualify as an ETC. The measure awaits action in the House Commerce Committee.

Sens. Gordon Smith (R-OR), Byron Dorgan (D-ND), and Mark Pryor (D-AR) are on a similar FUSF reform track with their proposed Universal Service for the 21st Century Act (S. 711), introduced in February and referred to the Senate Commerce Committee.

The incumbent telcos will likely support most of these bills, especially if they get their way on limiting who can qualify as an ETC and allowing fund recipients to use FUSF money for broadband deployment instead of just plain old telephone service (POTS). The telco establishment also is demonstrating some support for the “reverse auction” idea and the FCC joint board’s suggestion that the agency impose an interim, emergency cap on the amount of support competitive ETCs may receive from the High Cost fund for each state, based on the average level of competitive ETC support distributed in that state in 2006.

Vasquez, however, said temporary rate caps on FUSF collections are acceptable only if other reforms–such as redefining ETC qualifications, overhauling funding formulas and processes, and creating stronger accountability mechanisms–can’t be achieved.

“If we don’t have any stronger controls, then at least let’s go ahead and set some temporary limits,” Vasquez remarked.

Frank Barbetta ([email protected]) writes from Little Falls, New Jersey.

For more information …

Rep. Ed Markey’s letter to the FCC,

Universal Service Reform Act,

Universal Service for the 21st Century Act,

Thomas Hazlett, “‘Universal Service’ Telephone Subsidies: What Does $7 Billion Buy?”http://www.senior.org/Documents/USF.Master.6.13.06.pdf

Vince Vasquez, “Digital Welfare: The Failure of the Universal Service System,” Pacific Research Institute, http://liberty.pacificresearch.org/publications/id.244/pub_detail.asp