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Universal Service Fund: Inefficiencies and Abuse

Universal Service Fund:  Inefficiencies and Abuse

Universal Service Fund:  Inefficiencies and Abuse

Universal Service Fund Mandates

We all know the inefficiencies and abuse which can arise when subsidies are mandated in funding either incentives or motivation for private companies to provide services that are deemed economically unfeasible to deliver to some constituents. This designation, Universal Service fund, mostly targeted rural areas where service costs were prohibitive based on limited populations.

The Universal Service Fund was originally funded in the Telecommunications Act of 1934 for companies like AT&T, a monopoly mandated to create and deliver universal telecommunication services to all Americans at reasonable prices. The fund was amended in the Telecommunications Act of 1996 to include language for advanced telecommunications services, including residents in low-income, rural, and high cost areas, and include services to entities such as rural healthcare agencies, libraries, and schools.  Funds are collected through taxes of long-distance and mobile telecommunication services.

Inefficiencies

By taxing other telecommunication services the fund collects $7.5 Billion per year which is distributed to ILECS and CTECS to off-set costs in providing phone services. The inefficiencies arise from cross-subsidizing from other services where price sensitivity is high, causing subscribers of other services to under-subscribe to those services.  Since this is a usage tax, it is estimated that for every dollar collected under the tax, the cost to our economy is anywhere from $.72 to $1.12. This study was done when collections were $2 Billion less than they are now.

Also included in a 2000 study is the contention that since subsidies are paid to increase access, most potential customers will subscribe when prices change, and if high-cost subsidies were eliminated, the effect on subscription would be one-half of one percent. Another earlier study concluded that high-cost subsidies were uncorrelated to rural penetration. See Technology Policy Institute: (Over Half of USF High Cost Fund used for “General Expenses”) – (Wallsten: What Do High Cost Subsides Subsidize?)

Jerry Hausman, Efficiency Effects on the U.S. Economy from Wireless Taxation. 53 NAT’L TAX J. 733, 735 (2000). Ellig, Jerry. 2005. “Costs and Consequences of Federal Telecommunications Regulations” FederalCommunications Law Journal. Vol 58, No. 1pp. 37-102

Abuses

The way the Universal Service Fund creates an incentive for providers to over-estimate their costs of providing service.  It is based on a function of cost which stimulates companies to throw everything but the “kitchen sink” into their accounting.  As related by the Technology Policy Institute, rural carriers tend to have a higher over-head cost as non-rural carriers. In digging deeper it is found that the rural carriers tend to allocate high-cost to:

  • Formulating corporate policy and providing overall administration and management
  • Developing and maintaining long-term courses of action
  • Maintaining relationships with government, regulators, and other companies
  • Performing personnel administration activities

Procuring material and supplies, including office supplies See High-Cost Universal Service Support; Federal-State Joint Board on Universal Service, WC Docket No. 05-

337, CC Docket No. 96-45, Order, 23 FCC Rcd 8834 (2008) (Interim Cap Order); available at http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-08-122A1.pdf

Do We Need A Universal Service Fund?

Back in the day, government subsidies proved to be needed as with “The New Deal” that provided electricity to rural and remote areas along with monopolies like AT&T who ran phone lines to rural areas. But times have changed and dramatically, where mobile communications and new satellite and terrestrial providers will provide telecommunications access for all Americans, to include both phone and broadband services.

The best intended government mandates never seem to work as intended, or they are left to languish for years to become entitlements that only benefit inefficiency and abuse. The Universal Service Fund should be examined for validity, purpose and benefit to taxpayers before being reformulated again into an entitlement that serves no-one.

Universal Service Fund:  Inefficiencies and Abuse
Universal Service Fund:  Inefficiencies and Abuse Leonard Grace (270 Posts)

Founder of Broadband Convergent, a Broadband-Mobile-Cable-Wireless-Telecom market website focused on highlighting industry news and strategic issues within technology arenas. Highly researched and experienced insights and trends both inform and enlighten readers on current industry convergence of Broadband-Cable-Mobile-Wireless and Telecom Sectors.

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