USF Reform Battle Lines Being Drawn

With the FCC set to undertake the Herculean task of reforming today’s voice-focused Universal Service system to one focused on broadband, policy wonks are taking the opportunity to promote their own agendas, including a mixture of policy recommendations with which small telcos would agree—and others with which small telcos would disagree.

For example, The Technology Policy Institute, a Washington, D.C.-based think tank, argues that about 59 cents out of every dollar distributed to recipients of high-cost USF funding goes toward general and administrative expenses “rather than to making telephone service more affordable.” The paper, titled “The Universal Service Fund: What Do High-Cost Subsidies Subsidize?” based its findings on an analysis of data submitted by about 1400 recipients of high-cost subsidies from 1998 to 2008.

The report argues that the current USF system essentially taxes phone network usage for all users in order to fund high-cost areas, which puts an inordinate burden on the backs of lower-income users. “Perhaps the most useful reform, based on what we know about adoption and elasticities of different technologies, would be to focus more on low-income people and less on high-cost areas,” the author argues.

This and at least one other recommendation made in the report—elimination of rate-of-return regulation in favor of reverse auctions—are in opposition to what small telcos that receive most high-cost funding would like to see. The report author argues, for example, that rate-of-return regulation eliminates the incentive for firms to operate efficiently and creates incentives to inflate reported costs. But small telcos say the ROR system provides the revenue predictability necessary to justify ongoing network investment.

The Technology Policy Institute report also recommends that USF reformers consider the use and cost-effectiveness of satellite broadband, “especially considering that the soon-to-be available next generation of satellites will offer download speeds of between 5 and 25 Mb/s.” Although small telcos could argue that they offer a lower-latency, and therefore superior service to satellite, some of them may admit that satellites would be a more economical alternative for bringing service to unserved areas that would be especially costly to serve. Ultra high-cost areas that already have landline broadband tend to be the ones that generate the negative headlines about carriers that receive thousands of dollars per line per year in high-cost support.

To his credit, the author of The Technology Policy Institute report recognizes that carriers receiving such enormous subsidies are the exception rather than the rule. He notes, for example, that the mean and median high-cost per-line payments were $649 and $361, respectively. The author also correctly recognizes that payments to competitive eligible telecommunications carriers (CETCs) receiving support at the same level as the incumbent carrier have contributed to the growth in the Universal Service Fund. One recommendation of his that should find support among small telcos is one that says if multiple providers are funded, the subsidy should not be set at the same rate the incumbent receives if costs do not justify that.

A report by an economist at KSF Partners, on the other hand, omits any discussion about the CETC program. Instead, the report titled “A Growing Burden: Taxes and Fees on Wireless Service,”, argues that the average U.S. wireless consumer now faces taxes, fees and government surcharges of 16.3%, which it says is double the average 7.4% rate imposed on other general goods and services. Dollars that wireless companies receive through the CETC program are not factored into the calculation–not surprisingly, considering that KSF clients include several wireless carriers.

As the report explains, some of the charges on wireless are exacted at the state or even local level, and the author speculates that the charges have increased as government entities seek new revenue streams in a down economy. The report also points the finger at the USF program, however, noting self-servingly that the fund size has been increasing without explaining the role that CETCs have played in causing that increase.

Like the Technology Policy Institute report, the KSF report argues that funding Universal Service and other government programs on a usage basis puts too much burden on lower-income people and hampers carrier investment in wireless networks. “Wireless carriers invested about $25 billion in their wireless networks in 2008, or roughly 17% of their gross revenues,” the report states. “If wireless service were subject to the same tax treatment as other taxable goods and services, carriers would have had up to $2.5 billion more available to invest in network improvements.”

Although the report doesn’t make any specific recommendations about USF, it does recommend that government entities focus more on “broad-based tax sources that do not distort consumer purchasing decisions and do not slow investment in critical infrastructure.”

The upshot is that it’s easy for USF critics to find alarming factoids about today’s program. The ones most commonly cited are the growth of the fund and the unusually large payments that a relatively small number of telcos have received. But as the Technology Policy Institute and KSF reports show, there is plenty of room to generate lots more factoids about the system that tell only part of the story.

Considering that the Genachowski FCC has vowed to be data-driven, reports such as these are likely to get some serious consideration as part of the reform process, which means anyone wishing to preserve the best elements of today’s system need to be prepared to respond to such reports with their own data.