Wednesday, September 14, 2011

New USF Tax Hike Adds Urgency to Reform Effort

On September 13 the FCC issued a public notice announcing that for the fourth quarter of 2011 the universal service contribution factor will be climbing back up to 15.3%. The contribution factor translates into the line-item surcharge amount that is added to the interstate long-distance portion of consumer’s monthly phone bills. So, in essence, for the last few months of this year consumers will get hit with a 15.3% surcharge (a tax, in effect) on the long-distance part of their bills.

The USF system subsidizes telephone companies in rural or high-cost areas, as well as schools, libraries, and some health care facilities. And, in some instances, it subsidizes providers serving qualified low-income consumers. The USF subsidy system has also grown exponentially over the last decade, with the program subsidies for telecommunications service in high-cost areas growing from $2.6 billion in 2001 to $4.3 billion in 2010.

Below is a chart that shows the decade-long trend of steady increases in the USF contribution factor that is resulting in
surging surcharges hitting consumers to fund the system:

This dramatic growth of the USF system, as reflected above in the dramatic growth in the USF contribution factor, highlights the urgency of USF reform.

Earlier this year, FSF submitted
comments and reply comments to the FCC in its comprehensive USF and intercarrier compensation reform proceeding. In those comments we emphasized the need to impose a cap on the overall size of the USF high-cost fund. We also urged the FCC to set a goal of eventually eliminating subsidies for telecommunications providers altogether by establishing a ten-year sunset on USF high-cost subsidies.

comments submitted by FSF in the Lifeline and Link Up Reform and Modernization proceeding, we recommended the FCC implement reforms to control waste, fraud, and abuse. Just as important, we urged the FCC to treat Lifeline and Link Up as the exclusive, or at least the near-exclusive, mechanism for distributing USF support once the high-cost fund is sunset. Lifeline and Link Up are targeted to low-income individuals who can choose a communications service that best fits their needs. Such targeted subsidies are more efficient and can be more reliably monitored for accountability than subsidies targeted more broadly to service providers.

And in FSF's
comments in response to the FCC's Further Inquiry regarding comprehensive USF and ICC reform, FSF President Randolph May commended the FCC for its urgency in finally undertaking such reforms. And he called the ABC plan offered by six price cap companies "a major step forward." But he also offered points for the FCC to consider for improving on the ABC plan. Reiterating the position FSF staked out in earlier comments, the FCC should "explicitly and immediately impose a hard cap on the high-cost fund at $4.5 billion per year, without any loopholes for overall subsidy increases above that cap." The FCC should also establish a sunset date for rate-of-return ("ROR") regulation.

As Mr. May further explained:

"Rate of return regulation provides all the wrong economic incentives – incentives that inevitably lead to an inefficient, wasteful allocation of societal resources. In most areas of the country, incumbent wireline telcos are subject increasingly to intense competition from wireless, cable, and satellite operators. Under these circumstances, it is difficult to understand why these providers are subject to ongoing rate regulation at all, much less ROR regulation. In any event, however, at this stage in the development of marketplace competition, it makes sense for the Commission to establish a firm – and not unduly long – transition for ending all ROR regulation. If any rate regulation is deemed necessary,it should be in the form of price cap (incentive-based) regulation."

Many of these USF and ICC reform issues were discussed and debated at FSF's July 13 seminar
"Universal Service and Intercarrier Compensation Reform: Will the FCC Finally Bite the Reform Bullet?" And Professor Gerald Brock, a member of FSF's Board of Academic Advisors, recently wrote a Perspectives paper urging the FCC to "Abolish Access Charges Now."

By imposing a cap on the USF high-cost fund and eventually eliminating subsidies to carriers resulting from high-cost service, ROR, and outdated access charges, the FCC can reduce waste and inefficiencies, limit subsidies and target them to those who actually need them. And, of course, it would give consumers much-deserved relief from a USF surcharge now exceeding 15%.

And in so doing, the FCC can transform the outdated system we are still stuck with into a more disciplined system that fits the intermodal competition and broadband-centric world that exists today.