Reform Universal Service Now: Two New Data Points

Universal Service Fund (USF) reform has returned to the foreground in recent weeks. Among other things, the National Cable & Telecommunications Association filed a petition for rulemaking that seeks to reduce universal service subsidies in geographic areas experiencing facilities-based competition that is not subsidized. The Federal Communications Commission (FCC) staff's policy framework on the National Broadband Plan suggests USF reform will be a critical component of the Plan. The FCC also issued a Further Notice of Proposed Rulemaking on interim reforms for the High Cost Fund for non-rural telecommunications carriers. And the U.S. Court of Appeals for the District of Columbia Circuit upheld the FCC's "interim, emergency cap" on the High Cost Fund for competitive eligible telecommunications carriers.

All this activity should be understood in the context of two new USF "data points" – perhaps the most important data points for factoring into the FCC's data-driven gristmill. First, the telephone subscribership penetration rate in the U.S. reached 95.7 percent in July 2009. This amounted to a .3 percentage point increase from a year prior, and it’s the highest rate since such data collection begun some 26 years ago. Second, the FCC announced that the proposed universal service contribution factor for first quarter, 2010 will be 14.1 percent. This means that beginning in the first quarter of next year telecommunications providers will add a "universal service fee" line item of 14.1 percent to each interstate and international call made by their customers. This 14.1 percent tax on phone calls is an increase from the 12.3 percent that prevailed for the fourth quarter of 2009.

Taken together, these two data points present a USF paradox: On the one hand, overall telephone subscribership has reached its highest penetration level ever; but on the other hand, at the same time, the universal service tax has reached its highest level ever – and approaching triple the 5 percent USF tax that was in place in 2000. Or, one might instead call it internal incoherency. But however it might be characterized, the juxtaposition between an all-time high level of subscribership and an increasing contribution factor highlights the continuing need for USF reform.

Earlier this fall, at the Free State Foundation's book release event for New Directions in Communications Policy, Professor John W. Mayo of Georgetown University's McDonough School of Business pointed to the consistent mid-90s telephone subscriber rate and suggested we should declare victory on universal service and turn attention to broadband. Among the economic principles outlined Prof. Mayo's book chapter on USF reform in New Directions: "make subsidies explicit and transparent" and "target subsidies to those in need of subsidies." In particular, Prof. Mayo pointed to the low income programs of LifeLine and LinkUp as preferred explicit and targeted approaches toward universal broadband service.

Former FCC Commissioner and FSF Distinguished Adjunct Senior Fellow Deborah Taylor Tate was even more specific in advocating this approach in "FCC Must Make Broadband Access Universal", an FSF Perspectives piece from this summer:

[T]here are tools available to the FCC to increase broadband adoption which the FCC can utilize immediately, specifically the Lifeline and Linkup federal subsidy programs which provide discounts on initial home telephone installation fees as well as for monthly service charges. These discounts are available for qualified low-income subscribers who meet stringent income eligibility criteria. There are already strict audit controls in place.

The Lifeline/Linkup programs, which thus far have been somewhat underutilized, could be expanded to provide discounts for installation and monthly charges for today's broadband services just as they have for old-fashioned telephone services. In addition to helping the urban poor who can't afford broadband, this expansion would help low- income persons in remote areas.

Targeting subsidies in an explicit and focused manner to promote the universal broadband service objective would result in a much more economically efficient and cost-effective regime than the existing wasteful USF regime. And that's the point. Rather than superimpose the unsustainable USF regime designed for telephone onto broadband, the hoped-for universal service transition from telephone to broadband must take a different course. (FSF President Randolph May has detailed additional needed reforms in his prior Perspectives piece, "Put Universal Service Reform Near Top of FCC’s Agenda." And the NCTA petition's detailed analysis showing the extent of USF subsidies paid to carriers in areas where unsubsidized competition already exists represents a way forward.)

The FCC's recent FNPR on universal service support for non-rural carriers admittedly kicks the can down the road on comprehensive USF reform. But the two data points indicating an all-time highs in telephone subscribership and the USF tax speak to the need for meaningful reform, and soon. Perhaps the National Broadband Plan, coupled with the new data points, will be the breakpoint for reforming universal service.