(Telephone) Welfare As We Know It

by on January 31, 2008 · 6 comments

Reforming the system of heavy subsidies for rural telephone service, which dates back to the Great Depression, has long been a topic of discussion for telecom policy wonks. The Universal Service program is proof-positive that subsidies grow like weeds. Universal Service has spawned a constituency of more than 1,000 small telephone companies who’ve waged a Jihad to preserve their entitlement.

Politicians have always found it expedient to look the other way. This may be changing. In recent years, wireless companies have set up shop in rural areas. Although their costs are generally far less than those of the incumbent wireline providers, one of the FCC’s brilliant “pro-competitive” policies bestows a subsidy for wireless service which is identical to the subsidy for wireline service that’s more expensive to provide. Cable companies who provide telephone service are also entitled to identical support. So guess what? As competing providers have demanded their fair share, the overall cost of Universal Service has exploded. Even some politicians are finding the size of the fund harder to ignore.


If it ever went to court, there could be a problem. Universal Service is really a tax, although it’s still officially classified as a user fee. The distinction is critical. Agencies can’t levy taxes. They must originate in the House of Representatives – and tax legislation is referred to the House Ways & Means Committee, which has never played an active role in telecom policy. (Note: To influence the Ways & Means Committee, you would need a different set of lobbyists – a scary prospect for many.)

FCC Chairman Kevin Martin has long advocated taking action, and now the FCC has issued three notices of proposed rulemaking for reforming this mess.

Identical Support
The Identical Support NPRM seeks public comment on basing every carrier’s subsidy on their own costs. Obviously, a good idea. Anna-Maria Kovacs, one of the best regulatory analysts, claims the idea appears to have the support of all five FCC commissioners. Unfortunately, the FCC may have torpedoed this initiative by loading the NPRM with questions about how to determine support. Actual costs? Forward-looking costs? There’s a rich history of telecom companies exaggerating their costs and regulators choosing to ignore legitimate costs for the purpose of reducing rates or limiting increases. This NPRM will be a slugfest.

Reverse Auctions
The Reverse Auction NPRM seeks comment on the idea of letting competing providers bid for the subsidy. The low bidder could get the entire subsidy for a particular serving-area. Wireline providers fear that wireless providers, with their inherent cost advantage, would capture the subsidy and put them out of business. They will write to their members of Congress.

There’s an obvious solution here: Wireless and cable telephony, excellent though they are, still don’t quite match the reliability of wireline service. In a power outage, for example, your wireline phone service still works because it’s powered out of the central office which has batteries and even generators. So let reverse auctions kick in as soon as competitors match the reliability of wireline service.

A third NPRM deals with other issues. One is to broaden the base of contributors. Right now, the FCC manages only the taxation of interstate services. Some would like it to be able to tax intrastate services, as well. (Never mind that intrastate services are already heavily taxed at the state level.) One fear I and others have is that “broadening the base” could lead to the taxation of Internet traffic. Another is to step up FCC audits so as to reduce waste, fraud and abuse. You might wonder: Don’t they do that already (what do we have the FCC for if it isn’t to conduct audits)? But FCC oversight, while successful on occasion, has been a farce overall.

  • http://enigmafoundry.wordpress.com/ enigma_foundry

    Well, you’re making a case that the universal service subsidy may have outlived it’s usefullness, which is possible.

    However, I still think that before wireless became available the subsidy was a reasonable policy.

  • http://enigmafoundry.wordpress.com eee_eff

    Well, you’re making a case that the universal service subsidy may have outlived it’s usefullness, which is possible.

    However, I still think that before wireless became available the subsidy was a reasonable policy.

  • http://www.glennblackmon.com Glenn Blackmon

    Okay, let’s say the FCC pays each company based on its own costs and, as you suggest, the new competitor’s costs are lower. What is the rationale for paying the incumbent a higher subsidy for providing the same basic local phone service? Perhaps the problem with the current system is not that competitors get identical support but that this support is tied to the less efficient competitor. If a competitor offers service and does so at lower cost, it makes sense to reduce the support paid to the incumbent in recognition that a lower cost provider is available. To do otherwise simply subsidizes ineffiency.

  • http://www.glennblackmon.com Glenn Blackmon

    Okay, let’s say the FCC pays each company based on its own costs and, as you suggest, the new competitor’s costs are lower. What is the rationale for paying the incumbent a higher subsidy for providing the same basic local phone service? Perhaps the problem with the current system is not that competitors get identical support but that this support is tied to the less efficient competitor. If a competitor offers service and does so at lower cost, it makes sense to reduce the support paid to the incumbent in recognition that a lower cost provider is available. To do otherwise simply subsidizes ineffiency.

  • http://www.techliberation.com/ Tim Lee

    I agree with Glenn. Paying based on cost is silly. If consumers can be provided by one firm for $X, and another firm can only do it for $X+1 dollars, then that difference should be visible to customers in the form of different prices. Providing equal subsidies to all carriers makes the price differentials to consumers and puts pressure on companies to find ways to cut costs. Providing larger subsidies to less efficient firms gives firms every incentive to exaggerate their costs in order to get larger subsidies.

  • http://www.techliberation.com/ Tim Lee

    I agree with Glenn. Paying based on cost is silly. If consumers can be provided by one firm for $X, and another firm can only do it for $X+1 dollars, then that difference should be visible to customers in the form of different prices. Providing equal subsidies to all carriers makes the price differentials to consumers and puts pressure on companies to find ways to cut costs. Providing larger subsidies to less efficient firms gives firms every incentive to exaggerate their costs in order to get larger subsidies.

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