In the 1996 Telecommunications Act Congress charged the FCC to administer the Universal Service Fund (USF) in a fiscally responsible manner. But the multi-billion dollar subsidy program is oversized and inefficient. And for consumers, the program is a costly burden. The system's heavy tab is stuck to consumers in the form of USF surcharges or de facto taxes tacked onto their monthly phone bills.
To its credit, the FCC, under Chairman Julius Genachowski's leadership, finally set about reforming things in its November 2011 USF Reform Order. The agency's comprehensive reform plans are intended to modernize USF and to inject some fiscal responsibility into the subsidy program. These new reforms offer a path forward for imposing limits on the program's size, curbing its waste and inefficiencies, and relieving consumers from burdensome surcharges or taxes.
The FCC's USF reforms deserve support and must be allowed to continue their course. This means resisting anti-reformer efforts to roadblock changes to the system. In order to have any hope of limiting subsidy spending, curbing waste, and giving financial relief to consumers, it is critical that these reforms be implemented without delay.
Over the years USF subsidies have snowballed, with annual subsidy distributions now surpassing $8 billion annually. As FCC Commissioner Robert McDowell has pointed out, "USF is larger than the annual revenues of Major League Baseball." Subsidies directed to carriers serving high-cost areas have increased in size from $2.6 billion in 2001 and to $4.5 billion in 2011.
In many cases, USF subsidies to rural carriers lack accountability. For instance, subsidies have been directed to multiple carriers serving the same geographic area. Studies indicate that dollars distributed to carriers for purposes of network upgrades, investment, and rate reduction have instead been directed to administrative expenses. And subsidies reimbursing capital and operating costs have failed to incentivize carriers to control capital expenditures or operate more efficiently. Despite these problems, snowballing subsidy dollars continue to roll to carriers with little discernible benefits for consumers.
But consumers are the ones facing the avalanche of USF surcharges that are, in effect, USF taxes. As I explained in a September 2011 blog post, "New USF Tax Hike Adds Urgency to Reform Effort," the rise in USF subsidy distributions corresponds with the rise in forced USF contributions from consumers. Consumers' monthly phone bills contain a USF surcharge or tax line item amount. And that amount has grown over the years. The surcharge or tax rate based on the long-distance portion of consumers' bills, for example, has risen from just over 6% in 2001 to nearly 16% today. (See chart below.) This growing USF surcharge or tax burden suggests that the system lost sight of those consumers who it ultimately intended to serve.
Finally, after years of kicking the can down the road, the FCC's 2011 USF Reform Order adopted a framework for modernizing and disciplining the system. Those reforms include a first-time budget to govern USF's "high-cost" fund and keep costs under control. The agency eliminated its identical support rule to stop duplicate subsidies to carriers serving the same areas. The FCC also established new rules regarding rate-of-return carriers serving high-cost areas, including a $250-per-line subsidy limit. And in transitioning to a broadband-centric world, the FCC is turning to market mechanisms. It plans to conduct reverse auctions for allocating support for service to certain high-cost areas. Many of these reforms will be phased in over time. And the FCC set up a waiver process to accommodate carriers demonstrating special hardship under the new rules.
These reform efforts are now being attacked from those bent on preserving the status quo. This shouldn't be surprising, but it is nevertheless disappointing. Huge amounts of money are at stake for carriers that have become reliant on annual subsidies. For example, the USF Reform Order points out that "[r]ate-of-return carriers’ total support from the high-cost fund is approaching $2 billion annually." In proposing its reforms, the FCC observed that USF subsidy mechanisms often gave carriers little to no incentive to improve operating efficiencies. Similarly, we should expect that carriers will have little to no incentive to see their subsidy amounts limited through reforms.
Moreover, attacks on USF reforms are far from compelling when those reforms are put into proper perspective. On the whole, the FCC's USF reforms are decidedly moderate. However important the nature of the FCC's USF reforms and however comprehensive their scope, the reforms stress stability and continuity. The FCC's USF Reform Order is not a slash-and-burn operation. The framework it sets out is primarily directed to sustaining existing levels of support while repurposing that support to reflect the technological and marketplace realities of wireless and broadband. In its USF Reform Order the FCC even stated that "[w]e expect rate-of-return carriers will receive approximately $2 billion per year in total high-cost universal service support under our budget through 2017." And as mentioned, many of the FCC's reforms are phased in.
At the Free State Foundation, we have advocated a more sweeping overhaul of USF. This includes placing hard caps on its high-cost fund and lowering those caps each year to ensure serious reductions in the size of the fund. In addition, we believe the FCC should establish a date-certain timeframe for sunsetting all high-cost subsidies to carriers. In our view, the FCC should transition USF to a model that provides subsidies directly to consumers most in need, not carriers. The Lifeline program for low-income consumers offers an example of how subsidies can be targeted to intended beneficiaries.
Instead of being attacked for destabilizing an overgrown, inefficient, and financially costly subsidy system, the FCC's USF reforms can be more justly criticized for not being reform-minded enough. Even so, the modest reforms that the FCC is advancing should provide a vantage point for reassessing USF's future direction as those reforms are implemented.
However far the FCC's USF reforms may be from the ideal world, the changes that the FCC has adopted deserve credit in the real world. Amidst enormous lobbying pressures, the agency has made significant strides in the direction of improving the USF regime. The USF Reform Order and the FCC's efforts to implement it are worth defending. And to ensure the ultimate success of USF reform, Congress and the FCC must see this current reform process through without interruption or delay.