Eleven Point Four. We Won't Pay!

“Eleven Point Four. We won’t pay!
Eleven Point Four. No way, no way!”

You could almost hear – or maybe it was my imagination – a background chant at Tuesday’s hearing on the “Future of Universal Service” convened by Rep. Ed Markey in his capacity as Chairman of the House Subcommittee on Telecommunications and the Internet.

All consumers now pay an 11.4% surcharge, in effect, a tax, on all interstate telephone calls. This tax funds the various universal service subsidy programs. In 2000, the tax was 5.5%. I got the sense at Tuesday’s hearing that at some point between 5.5% and 11.4%, a threshold, a Universal Service Rubicon of sorts, was crossed. Because it seemed clear from statements at the hearing that a bipartisan consensus is developing that the current regime is broken and needs meaningful reform. Many of the committee members who spoke, including significantly Chairman Markey, referred to the 11.4% surcharge on all calls as an impetus for getting on with the business of reform. Consumers finally have begun to pay attention to the size of the dollar amount of the item typically denominated as “Federal Universal Service Charge,” or some such, on their bills.

Chairman Markey is to be commended for holding a future-oriented hearing on universal service. As a hearing witness, I offered the committee some key guiding principles for reform and some specifics for applying them in today’s competitive and rapidly-changing technological environment. The principles are pretty simple but fundamental: Market forces, rather than subsidies, should be relied on to the greatest extent possible to achieve the universal service objectives. If there are to be subsidies, they should be targeted narrowly and financed broadly. The current regime is at odds with these principles, which is why, despite more competition and new, less-costly technologies, the surtax on telephone calls has climbed to over 11%. You can read my full testimony here.

With an apparent emerging consensus that the current regime largely has achieved the goal of making voice service ubiquitous – universal, if you will – the hearing, quite appropriately, focused mostly on broadband. The question is whether broadband service should now be brought into the existing universal service subsidy regime, or one similar. I addressed this question in my testimony. I pointed out that, without any significant government subsidies, market forces already have worked to make broadband service widely available to the American public. I urged policymakers to “retain this minimally regulated environment that has encouraged so much private sector broadband investment in a relatively short time.” And, if policymakers determine that some subsidies nevertheless are desirable to achieve more ubiquitous deployment at a faster rate, I urged they be distributed through some form of competitive bidding process that narrowly targets disbursements only to unserved high-cost areas or low income persons. Any such subsidies should be financed through general Treasury appropriations.

At bottom, I urged: “Any broadband subsidies deemed necessary should not be disbursed or financed through an unreformed universal service regime that resembles the existing one. To do so would perpetuate a system that is economically inefficient, wasteful, and competition-suppressing. It would saddle the broadband world – and the American public – with an outdated relic of the narrowband world.”

Finally, another indication of what I take to be the gathering reform momentum is the bill introduced by Reps. Joe Barton and Cliff Stearns on the day of the hearing. Rep. Barton is ranking member of the Energy and Commerce Committee and Rep. Stearns ranking member of the Telecom subcommittee. To my mind, their “Universal Service Reform, Accountability, and Efficiency Act of 2008” is the most reform-minded, consumer-friendly universal service bill ever introduced. It deserves very careful consideration. Most importantly, the Barton-Stearns bill would not bring broadband into the existing subsidy regime, with all of its competition-distorting rules and built-in inefficiencies. With respect to narrowband, recognizing that the goal of universal voice service largely has been achieved, the bill would cap the universal service funds at their current sizes. Among other things, it would substantially change the subsidy distribution method to incorporate competitive bidding mechanisms for high-cost areas without affordable service and curtail subsidies presently going to high-income areas. (Aspen is the proverbial example of a high-income area that currently receives substantial subsidies under the current regime.)

Chairman Markey deserves credit for holding a hearing on “The Future of Universal Service” at which a serious conversation about serious reform was begun. And Reps. Barton and Stearns deserve much credit for fashioning a bill that ought to contribute significantly to pointing the way forward.

“Eleven Point Four Percent. We won’t pay!
Eleven Point Four Percent. No way, no way!”

Maybe the background chant I was hearing during the hearing was all imagined. But my sense is that something has changed, that the consumer’s “pain at the phone” threshold has been crossed. And that, as a result, there is now an opportunity for meaningful universal service reform that leads to a less costly, more efficient system that is also much less competition and technology-distorting than the existing regime.