Tackling Universal Service Fund reform

The Federal Communications Commission plans to vote on reform of rural telephone subsidies on Oct. 27 — and it’s not just the timing that reminds me of that perennial Peanuts classic, “It’s the Great Pumpkin, Charlie Brown.”

Remember the scene in which Charlie Brown falls flat on his back after trying to kick a football Lucy pulls away at the last minute? Like Lucy, the FCC implores us to believe it’s serious about that political football called “comprehensive reform,” even though it’s jerked the ball away so many times in the past.

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Yes, reform is long overdue. The rural subsidy programs have long acted as a “tax” on price-sensitive services, such as long-distance and wireless, in order to promote local telephone service that is now ubiquitous in rural regions.

In the past, the demographic distribution of benefits and costs made it hard for the FCC to push reform over the goal line. The commission’s rural subsidy policies concentrate benefits on a small portion of the population while spreading costs across everyone else. But since many policymakers now want to subsidize rural broadband, comprehensive reform of rural telephone subsidies has become the quid pro quo for rural broadband subsidies.

The rural telephone subsidies take two forms. “Intercarrier compensation” refers to per-minute payments that phone companies charge each other when the caller and recipient use different companies. The “contributions” that fund universal service appear as a separate line item on telephone bills. Both types of payments help reduce local phone rates in rural and high-cost areas — sometimes even lower than the rates paid by customers in urban and suburban areas who supply the subsidies.

The FCC is discussing a plan that would reduce intercarrier payments substantially and let rural phone companies increase rates by a few dollars a month to help make up for the lost revenue. This change benefits most telephone subscribers, who ultimately pay for these subsidies via higher rates.

Rural subscribers might pay more for local phone service under this plan. But their subsidized rates were initially justified on the grounds that rural customers had very small local calling areas and hence had to make more long-distance calls. Since the price of long-distance service has plummeted over the past decade, it’s hard to argue that rural residents can’t afford to pay a few dollars more toward the cost of their own phone service.

The real game changer in the universal service debate is broadband. The commission wants to use $4.3 billion of universal service funds annually to subsidize rural broadband instead of telephone service. This won’t reduce universal service charges on anyone’s phone bill. But it could make faster or cheaper broadband service available in rural areas, if the FCC can successfully target the subsidies.

Nevertheless, before this reform can occur, some questionable aspects of the FCC’s plan still have to be worked out. 

First, a commission proposal earlier this year defined “broadband” as a download speed of 4 megabits per second (mbps) and upload speed of 1 mbps. This definition artificially inflates the size of the rural broadband “problem” because it does not count 3G wireless, some small rural wireless Internet providers and basic satellite service as broadband. Refusing to count these providers as broadband will inflate the cost of the subsidies by classifying more areas as “unserved” and necessitating higher subsidies to achieve the faster speeds.

Second, the FCC seems bent on subsidizing at least two broadband competitors in rural areas through the Connect America Fund and a separate Mobility Fund. This essentially presumes that fixed wireless service and 4G mobile are, and always will be, separate services, and every rural customer is entitled to both. If the goal is basic broadband connectivity in places that allegedly have no broadband at all, why not make all technologies compete for a single subsidy in these places before subsidizing two?

Third, there’s some technological favoritism in the plans the commission is considering. Wireless subsidies will be awarded based on competitive bidding from the outset. Subsidies for (fixed) service to homes and businesses will transition from current payments to competitive bidding. Satellite is regarded as a special-purpose technology to serve the most remote areas, rather than a competitor that is almost universally available already.

The commission’s latest Lucy act comes three years after the last attempt at comprehensive reform fell flat on its back. But unlike Charlie Brown, the FCC will probably make contact with the ball this time, due to its enthusiasm for subsidizing rural broadband. Whether the decision is a field goal or a punt remains to be seen.

Ellig is a senior research fellow at the
Mercatus Center at George Mason University.