In a blog post on September 14 titled New USF Tax Hike Adds Urgency to Reform Effort, I called attention to the USF fourth quarter contribution rate increase to 15.3%. The contribution factor translates into the line-item surcharge added to the interstate long-distance portion of consumers' monthly phone bills. That USF surcharge (a tax, in effect) pays for subsidies to telephone companies in rural or high-cost areas, as well as schools, libraries, some health care facilities. In the last ten years, the USF subsidy system has also grown exponentially, with subsidies for service in high-cost areas climbing from $2.6 billion in 2001 to $4.3 billion in 2010. As explained in that post, reforms are urgently needed to reverse this costly upward trend in USF subsidies.
A recent study now points to problematical aspects of government loans to carriers receiving USF subsidies. "The Rural Utilities Service Should Reassess Its Reliance on Universal Service High-Cost Support to Leverage Broadband Loans," a study released earlier this month by Jeffrey Eisenach of Navigant Economics and commissioned by NCTA, asserts that "current RUS rules create a self-reinforcing multiplier effect, in which USF subsidies not only support inefficient investments, but provide the financial basis for RUS loans to support still more inefficient investments (which, in turn beget more USF subsidies, and so forth)."
RUS operates three major programs to subsidize construction of telecommunications infrastructure through below-market rate loans: the Broadband Initiatives Program (BIP), the Rural Broadband Loan Program (BLP), and the Telecommunications Infrastructure Loan Program (TIP). Between 2008 and 2010 the programs approved some $2.23 billion in loans to carriers to build telecommunications infrastructure, particularly for broadband services.
The study provides an interesting overview of how RUS rules for its loan programs and how they relate to USF subsidies. In short, RUS has historically assumed that USF subsidies constitute a stable revenue source during the terms of long-term loans, thereby providing security for such loans. Moreover, "RUS effectively assumes that the increased USF subsidies that will result from the investment indicate the project is deserving of public support." As the study explains:
[R]ather than signaling the social value of a particular infrastructure project, [high-cost fund] subsidies under the current system may instead indicate nothing more than an individual firm's success in making investments – however unjustified or inappropriate – solely to increase its USF support. By tying RUS loans directly to USF support, RUS effectively creates a vicious circle: The more a firm invests in inefficient infrastructure, the more it gets in USF support; the more it gets in USF support, the more it can qualify for in RUS loans; the more it can qualify for in RUS loans, the more it can invest; and, the more it invests, the more it gets in USF support.
The study includes an estimate that increased USF subsidies procured by RUS-financed investments "leav[e] borrowers themselves responsible for less than 25 percent of the payments, even though they earn 100 percent of the resulting profits." This means that taxpayers, by funding the RUS loan programs, are "in the fundamentally unsound fiscal position of being the primary source of repayment on their own outstanding loans."
Along the way, the study challenges RUS claims that USF reforms would result in financial calamity for loan-receiving carriers that are dependent on future high-cost subsidies. USF reform has been a long time in the making, and for that reason it is not an unexpected event that should blindside recipients of high-cost subsidies. Moreover, the FCC has made clear in its NPRM for comprehensive USF and ICC reform that it will avoid "flash cuts" and implement its reforms incrementally.
In the end, the study calls for RUS to:
implement an immediate moratorium on further loans to USF-supported entities, or require such entities to qualify for any further loans without relying on USF subsidies. After the FCC concludes its proceeding and new rules are in place, Congress and RUS can reassess whether a loan program continues to be needed and if so, how that program can be better coordinated with the USF program to eliminate the problems inherent in the current RUS regime.
That is a sensible policy recommendation worthy of consideration, as is the study.