Saturday, July 13, 2013

Study Spotlights How Heavy USF Subsidies Hurt Consumers More than Help

Economists Thomas Hazlett and Scott Wallsten have written perhaps the most devastating critique of the universal service fund (USF) to date. In "Unrepentant Policy Failure: Universal Service Subsidies in Voice & Broadband," Hazlett and Hallsten offer an across-the-board analysis of USF waste and inefficiency.
Consumers are the ones stuck with a several billion-dollar bill each year for USF. In particular, USF is funded by surcharges or de facto taxes that are included as a line-item on consumers' monthly phone bills. The USF surcharge ("tax") is assessed against the long-distance portion of consumers' bills, adjusted quarterly by the USAC. 
As Hazlett and Wallsten's study explains, "[b]etween 1998 and 2012, the USF disbursed about $94 billion ($110 billion in 2013 dollars) to support its programs." The study takes on all of the major USF programs, but it is especially hard-hitting when it comes to the High Cost Fund.
According to the study, "annual mean payments for subsidized carriers equaled $580 per line in 2010," thereby "exceed[ing] the price of a year’s worth of cell service with unlimited nationwide voice minutes, texting and data." Hazlett and Wallsten cite 2010 FCC data indicating 99.8% of U.S. households live in areas served by wireless voice service provider. To supply the remaining households with "free unlimited domestic telephone service via satellite would cost no more than $173 million per year using the retail prices stated by one satellite provider offering a recent low-cost unlimited service plan." That's far below the $4.5 billion annual cost of the High Cost Fund.
The $4.5 billion "budget" that the FCC established for the High Cost Fund comes under particularly close scrutiny in the study. The study does give the FCC credit for some of the reforms it has undertaken. (FSF President RandolphMay and I have likewise made the case for further implementing the FCC's USF reforms, all the while acknowledging the FCC still has a long way to go. We have, in fact, called for the sunsetting of the High Cost Fund.) Nonetheless, Hazlett and Wallsten offer a sobering perspective on how effective – or ineffective – the FCC's USF reforms may be in the time ahead.
As the study explains, prior to the FCC's reforms the High Cost Fund "was shrinking due to reductions in fixed lines, with the 2011 total closer to $4 billion than to $4.5 billion." Thus, "the first real effect of the Commission’s budget was to increase the annual HCF by more than $400 million beyond what it would have been otherwise."
Moreover, going forward "the rules now prevent CAF from collecting less than that amount or USAC from estimating demand for subsidies at less than that amount." The study cites to paragraph 560 of the FCC's USF Reform Order (2011), which appears to keep the High Cost Fund needlessly high by now prohibiting USAC from projecting lower demand: "...beginning with the quarterly demand filing for the first quarter of 2012, USAC should forecast total high-cost universal service demand as no less than $1.125 billion, i.e., one quarter of the annual high-cost budget.
The study's critique of E-Rate – which annually funds schools' and libraries' acquisition of telecommunication services, Internet services, and internal network connections to the tune of roughly $2 billion – should also be carefully considered, as the FCC now prepares to revisit the E-Rate program.