When consumers are forced to pay a 15.5% tax on a service the government continually describes as vital in order to support a subsidy regime the government admits is "wasteful and inefficient," you would think there would be calls for a Tea Party – whether of the 1773 Boston variety or the 2010 nationwide variety.
I refer, of course, to the FCC's universal service and intercarrier compensation regulations which create both explicit and implicit subsidies that transfer money from various service providers to other service providers and from various telecom customers to other telecom customers. For example, lower income urban and suburban customers are charged above-cost prices for telephone service in order to subsidize the cost of telephone service for wealthy Aspen and Jackson Hole ranchers.
Most readers of this space are familiar with these byzantine, inefficient legacy subsidy systems, which I have addressed many times in detail. My purpose here is not to explain their intricacies again.
Rather, as the Commission embarks on yet another in a long series – way too long for recounting here -- of thus far fruitless reform embarkations, I want only to offer a few observations.
In the news release announcing the launch of this latest proceeding to fix what FCC Chairman Julius Genachowski describes as a "broken system" that is "locked in the last century," the Commission itself says the universal service regime is "wasteful and inefficient in some situations." This is understated.
The Commission's news release goes on to say, with respect to the intercarrier compensation system which is intertwined with the Universal Service Fund (USF): "The system is rooted in outdated distinctions between local and long-distance telephone service, and inefficient per-minute charges. ICC also suffers from loopholes that distort markets and derail investment in advanced Internet Protocol (IP) networks."
Lest you think the defects of the subsidy regimes are newly discovered on the agency's part, please disabuse yourself of that notion. Here are excerpts from FCC orders in 2001:
“We believe it essential to re-evaluate these existing intercarrier compensation regimes in light of increasing competition and new technologies, such as the Internet and Internet-based services, and commercial mobile radio services (CMRS). We are particularly interested in identifying a unified approach to intercarrier compensation – one that would apply to interconnection arrangements between all types of carriers interconnecting with the local telephone network, and all types of traffic passing over the local telephone network.”
“The existing intercarrier compensation rules raise several pressing issues. First, and probably most important, are the opportunities for regulatory arbitrage created by the existing patchwork of intercarrier compensation rules.”
These 2001 quotes were clipped from a piece I wrote in October 2008 entitled, "The Time for Bold Action Is Now," when the FCC appeared it might be – yet again -- on the verge of taking meaningful steps in the direction of reforming the USF and intercarrier compensation regimes. There are many more quotes from commissioners going back to the early years of the past decade to the very same effect.
With little originality, I ended the 2008 piece this way: "The time for kicking the can down the road has past. The can is broken." William Faulkner once said: "The past is never dead. It is not even past." With regard to universal service, for the Commission, it is as if the past is never dead and not even past. Just give the can another good kick.
But here is what finally may be sinking in: The agency's failure to have reformed the regulatory regimes, which it has recognized as broken for at least a decade, is an institutional failure of a high order. The almost universal explanation, usually put just this way or very similarly, is that "the politics are too tough." But this perennial excuse calls into question the very raison d' etre for the agency. With its bipartisan members serving fixed, staggered terms, and not removable at will by the President or by Congress, by design the FCC is supposed to be an independent regulatory agency largely (but not exclusively) insulated from politics. In accordance with the Progressive-era foundational theory that underpins its creation, the FCC's decisions are supposed to be guided mostly by the commissioners' expertise, not politics. (As you may know, I have real problems with the Progressive-era theories, including with respect to the nature of independent agencies, but the FCC is what it is.)
And, in any event, we are where we are – the can is where it is in the road. And, for the moment, the expectation – and certainly most of the industry participants already have fallen into line – is that everyone should cheer the fact that Chairman Genachowski and his fellow commissioners finally have started yet another proceeding to reform the USF and intercarrier compensation regimes.
Okay, I don't want to be churlish. Hip-hip-hooray!
I'll even gladly commend the Commission for nodding in the direction of recognizing the need to be guided by certain important principles, such as "ensuring fiscal responsibility," "demanding accountability," and "enacting market-driven and incentive-based policies." In and of themselves, these words have a nice ring to them.
But it is the way the Commission implements its first announced principle that is the key to whether the Commission's effort, assuming it ever moves forward, constitutes sound public policy. This first principle is "modernizing USF and ICC to support broadband networks." This notion of transforming an admittedly broken, wasteful, and inefficient subsidy regime into one supporting broadband is highly problematic, unless the regime is carefully limited, targeted, and constrained.
Here's the nub of the matter concerning what should be done. The size of the current USF subsidy fund – now over $8 billion spent annually – should be reduced very significantly. Voice telephone penetration, which the fund was created to support, is now as "universal" as it ever will be. Mission accomplished.
With broadband service available to approximately 95% of American households (not counting satellite or wireless broadband), there is simply no need for the universal service program to be converted wholesale from its original purpose into an expansive ongoing subsidy regime to support broadband. To the extent subsidies are used to support broadband, funds should be targeted only to unserved areas, not to areas already served by another provider. And it is appropriate for funds to be targeted to low income persons in a Lifeline-Linkup program in order to help get those persons connected to broadband.
The FCC's news release did not mention the current 15.5% tax collected on all interstate calls to support the various universal service subsidy funds, nor did Chairman Genachowski in his statement. (I know that it is denominated a "fee" and not a "tax," but the economic effect is the same as a tax.) This omission seems curious and unhelpful if the Chairman really wants to rally public support for meaningful reform which would incorporate the principles of fiscal responsibility, accountability, and market-driven incentives. Only Commissioners Robert McDowell and Meredith Baker took note of the size of the tax.
Regardless how one feels about so-called "sin taxes" on goods like cigarettes and alcohol, no one argues that it is a positive good to suppress the demand for telecommunications services. Yet suppression of demand for telecom services is exactly the result of the USF tax.
Absent indications that meaningful reform is on the way, and soon, you would think the 15 percent tax on telecom services would be a tax worthy of a Tea Party, if only one to dump dozens of phone bills into the Potomac River as it flows by not far from the FCC's headquarters.
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