Universal Service Follies Continue

by on November 16, 2004

If you want to know just how screwed up America’s universal service system is, take a look at this excellent report in today’s USA Today.

Author Paul Davidson documents some of the waste and abuse associated with the system and highlights just a few of the rural carriers that milk the system for all it’s worth.


The USF and the entire universal service system is an inefficient mess. It was established to ensure that a ubiquitous, nationwide telecom system. Later, it became a massive shell game to redistribute funds from one set of interests or subscribers (long-distance / urban / businesses) to another (local / rural / residential). These cross-subsidies absolutely kill competition in rural areas. Here’s the example I like to use:

- imagine that McDonald’s was the first burger joint in most rural towns in the U.S.;
- and policymakers decided they wanted to forever ensure cheap hamburgers for those rural communities in the name of “affordable access to burgers”;
- so they subsidized Big Macs by taxing other eateries outside those rural communities and then using the cross-subsidy to push down the cost of Big Macs forever more.

Under such a scenario would Burger King, Wendy’s, or any other fast food operator ever come and serve those rural communities? It’s highly unlikely they would have since they would not be able to compete against the artificially cheap Big Macs. Worse yet, they’d probably be the ones paying a subsidy to McDonalds! So it would be a double whammy against competition.

Just replace burgers with telephones in the above example and you begin to understand why America’s universal service system is such a nightmare. So, when people propose retaining or expanding this unjust, inefficient system, we need to:

(1) explain to them what a mess the current system is and how it destroys competition in rural markets by subsidizing one set of providers, thus discouraging others from coming in;

(2) point out that if this is nothing more than an entitlement system at root. If we want to subsidize phone service, there are better ways to do it. Namely, a direct, means-tested voucher to needy households that they can redeem with ANY provider of phone service.

(3) point out that regardless of what system we go with, there is absolutely no justification for expanding the subsidy pool beyond basic telephony. Give people basic dialtone and access to 911 / emergency services. Nothing else. If they want cheap broadband or cable, too damn bad. They’re not even entitled to cheap phone service, but politically, we’re not going to get rid of this entitlement.

Of course, before we get to this point, we need always make sure to point out that the best universal service policy is a good competition policy. Stated differently, a competitive market will deliver affordable, nationwide connectivity if we get the rules right and let companies (ESPECIALLY WIRELESS providers) go out and provide service to all these communities. This is why telecom reform is so important; especially liberalization of the spectrum. We don’t need to be re-wiring all these rural areas. That’s massively inefficient. Wireless (both terrestrial cellular and satellite-based) is the way to go for the deeply rural pockets of the U.S.

And consumers would flock to wireless more quickly if the costs of wireline service in these rural communities were unsubsidized and allowed to accurately reflect true supply and demand. In fact, the USA Today story quotes Ken Pfister, vice president of Nebraska-based Great Plains Communications, saying that scrapping subsidies for rural wireline carries would trigger at least a $20 monthly phone-bill increase. So what! That’s because it actually costs that much more to provide service to those communities! Let prices for wireline service rise to natural market levels and that will provide a strong signal to wireless carriers that an opportunity exists to enter and serve these markets. But if we continue to suppress wireline rates well below the actual costs of service, then wireless carriers will not come in. It’s simple economics.

Of course, politicians and regulators don’t want to hear any of this. They’re very happy with the old system because it allows them to control rates and hand out favors. Worse yet, they’re now interested in expanding the pot of goodies they subsidize through the system. In recent years, the “chicken-in-every-pot” mentality has grown stronger than ever before with various policymakers endorsing subsidy schemes for computers in schools, broadband at home, and even wi-fi. Where will it all end?

With Ted Stevens of Alaska about to take over chairmanship of the Senate Commerce Committee, things are only bound to get worse before they get better. Stevens is only concerned about keeping remote igloos wired together at low rates. Thus, Alaska’s screwy geographic situation is likely to prevent any serious universal service reforms from getting through the Senate. My suggestion: We need to “buy out” Sen. Stevens. Just send his state a big check via “The Igloo Wireline Connectivity Act of 2005″ and then tell him to let the contiguous 48 states get on with the much-needed business of universal service reform.

By the way, if you’re interested in reading more on this issue, I highly recommend this fine new report by PFF on universal service issues.

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