Report Attacks Universal Service Program

Rural telephone companies are “laughing all the way to the bank,” said Dave Herman, vice president of policy for the Alliance for Generational Equity, on a conference call with reporters today. The purpose of the call was to announce the results of a study that is highly critical of the high-cost Universal Service Fund, which pays part of the cost of delivering communications services in rural areas where the costs of providing service are high.

The study, titled “Unrepentant Policy Failure: Universal Service Subsidies in Voice & Broadband,” was penned by George Mason University Professor Thomas Hazlett and Scott J. Wallsten, vice president for research and a senior fellow at the Technology Policy Institute and at Georgetown University Center for Business and Public Policy.

In the study, the authors argue that “any plausible cost-benefit test reveals that economic welfare would increase were the entire $9 billion per year USF program eliminated.” The $9 billion number that the authors cite includes not only the high-cost Universal Service program but also several other components of the program that target low-income users, rural healthcare providers and schools and libraries. The authors also argue that in transitioning today’s voice-focused high-cost program to a broadband-focused Connect America Fund, the FCC is providing “a new rationale for subsidies.”

Rural broadband association NTCA promptly issued a statement saying that the authors’ claims “rely upon tired, old canards about the program and paint a distorted picture of the rural telecommunications marketplace.” The NTCA added that “with respect to the specific operations and effectiveness of the high-cost program, the authors miss the mark in too many respects to count.”

The association noted, for example, that Hazlett and Wallsten ignore the fact that high-cost funding has been used not only to help cover some costs of providing voice service but also has helped cover some costs of providing broadband service.

This has occurred because some network facilities are shared by voice and data services.

Study assertions
In an abstract of the study, the authors argue that the high-cost Universal Service program extended voice services to, at most,  600,000 homes representing one-half of one percent of U.S. households and cost $64 billion over the five-year period since 1998. By dividing the $64 billion number by 600,000 homes the authors argue that the program cost $106,000 per home.

The 600,000-household number is not based on the number of homes for which carriers collect Universal Service funding, as the authors acknowledged on today’s conference call. Instead the number is based on estimates made by other economists of the number of additional phone lines for which the fund has been responsible.

In the report, the authors also highlight data — from 2010 — showing that the top 10 high-cost funding recipients received between $5,826 and $24,000 per line in high-cost Universal Service funding that year.

The NTCA argued that only a small number of carriers in extremely high-cost areas have received such high payments. And in a statement provided to Telecompetitor, the FCC  suggested that Hazlett’s and Wallsten’s numbers are outdated. An FCC spokesman noted that in 2011 — a year after the period the authors studied — the commission took “unprecedented steps to end waste, fraud and abuse,” including capping subsidies at a maximum of $250 per line per month and limiting corporate overhead expenses.

That equates to a cap of $3,000 per line per year. The study authors on today’s call acknowledged that the FCC has imposed the $3,000 cap since the data about the 10 carriers was collected.

But they also argued that rural households could get voice and broadband over satellite for about $600 per year—which they said is considerably less than $3,000. That logic hasn’t been lost on the FCC which has recommended satellite for a small percentage of U.S. homes that would be especially costly to serve using landline broadband.

It’s important to note, though, that the $3,000-per-year number is not typical of what small telcos receive in annual high-cost funding or what they will receive through the Connect America Fund. According to the Telergee Benchmark Study conducted annually by several accounting firms that specialize in rural telecom, the average small telco collects less than $600 per line per year in Universal Service funding.

A spokesman for the Alliance for Generational Equity did not respond to an inquiry from Telecompetitor asking how the organization is funded or who its key funders are and that information does not appear on the organization’s website.  According to an announcement issued by the organization about the study, the alliance is “committed to protecting each generation from abusive public polices and other practices that erode their quality of life, rob them of their hard-earned wages.”