Need for Universal Service Reforms


Universal service has long enjoyed widespread support in principle as an objective of US telecommunications policy. However, changes in technology, regulation and markets over the years have complicated its pursuit and raised serious questions about best to define its objectives and to fashion rules to govern administration of universal service programs. The Federal Communications Commission and state regulatory bodies continue efforts to implement the universal service goals of the Telecommunications Act of 1996, but do so under increasing weight of criticism of their efforts and of the 1996 Act’s provisions. There is no shortage of calls and specific suggestions for reform, but little consensus even on fundamental matters such as who should pay and in what measure; or who should be entitled to draw support and for what purposes. The leadership of responsible committees of Congress have committed to reform, including most recently an announcement by the Chair of the Telecommunications Subcommittee of the House of Representatives. The purpose of this Consumer Gram is to provide context for these hearings and suggest some elements of a more explicit consumer orientation to the programs.


Two things are clear. First, consumers spend substantially to support different government programs under the broad rubric of universal service policies. Consumers pay a tax of over 11% on interstate telecommunications services, a rate greater than the rate of taxation on all but a handful of other goods and services. Collections from consumers and business were well in excess of $7 billion dollars in 2007. Of that over $4.3 billion was earmarked for the “High Cost Fund” which provides support to (mainly rural, wireline, return-regulated) carriers that are designated as eligible telecommunications carriers by a state regulatory body or the FCC.

Secondly, while details vary by USF program, we have no good measure of what consumers get for their expenditures. We know who got the money, but less or nothing about how it was spent, nor most importantly what specific, measurable value to consumers was created – or consumer welfare lost without the fund. According to a growing list of critics, USF expenditures are a black box shrouded in promises, good intentions and rhetoric.

Legislative Reform is Past Due and Especially Urgent
In the context of the current financial chaos and continuing economic slide, the benefits of the USF program have become much, much more expensive in real terms to consumers. Stagnating incomes, rising unemployment, rising costs for essential services like health care, the prospects of higher taxes to offset recession-related state and local budget deficits will provoke well-informed consumers and voters increasingly and rightly to inquire about what bang they are getting for these bucks. But, the case for reform now goes beyond the current distress. Some study findings:
• Given the inelastic demand for local wireline connections and services, most people would subscribe without the subsidies, the flip side of which is that the subsidies do little if anything to expand the number of subscribers;
• The estimated incremental cost for each added subscriber attributable to the high cost fund of the USF is between $5,000 and $5,500 per year per added subscriber;
• Low income, urban users of long distance services subsidize high income local service users in rural areas; similarly, the poor wide up subsidizing the rich;
• Owners of subsidized companies often receive more benefits than the average subscriber of the same companies; many of the universal service dollars go to fund inefficient business operations;
• Consumers often subsidize themselves by paying more for some services, so to be able to pay less for others;
• Companies rather than consumers benefit directly and consumers only indirectly;
• Because high-cost support is doled out to companies using different formulae, and for no good policy reason, rural consumers get differing levels of support; and
• Several studies conclude that, aside from redistributional aspects, the economic costs of the programs exceed their total benefits.

The Federal Communications Commission has been considering USF reform for almost a decade and has accumulated a massive record. Several proceedings in which universal service is a key element are now open at the FCC. A Federal State Joint Board has also been actively engaged, as has almost every state public utility regulatory body. Congress has had numerous hearings on issues directly germane. Hundreds of thousands of pages of filings have been made in these formal proceedings, as well as many off-the-record communications. If there is not enough information for a decision, it is not for lack of input, but the right questions are not being asked.

Doubts about the Capacity of the FCC to Fix the Problems
Our review of the very extensive critiques of universal policy created by the telecom policy community (universities, think tanks, public interest institutions, and government funded consultancies) is by no means exhaustive. But, the literature appears unanimous in concluding the need for reform. About the only defenders of the current scheme are private and public institutions who receive the lion’s share of the subsidies, or regulators and legislators in political (rural) jurisdictions where beneficiaries reside and vote.

Big issues with big consequences debated by diverse and big, private and public stakeholders do not yield easily to timely, dispositive FCC resolution. (As Casey Stengel famously said, “You can look it up!”) Universal service reform is such an issue and the FCC appears to be incapable of enacting substantial and meaningful rule changes. The stakes are enormous as billions of “free money” rides on the FCC decisions. Stakeholders and reform advocates are large and powerful. Beneficiaries, who believe their economic or political largesse may be the target of reform, argue for delay, studies, more data, or more negotiators in the room. The directions in Section 254 of the 1996 Act are so diverse, vague and contradictory that almost any resolution is arguably on its face lawful or subject to judicial reversal and remand. There is no agreement on operational goals of the funds.

What Can Congress Do?
There will be enormous pressure in the next round of hearings for Congress only to “fine tune,” while making minimal change to the overall combined failure of government and markets. There will be strong counterarguments for fundamental reform. We think consumers would be served by some of the following general guidelines:
• Minimal Delay. If policy analysts who have studied the matter are correct, there is an enormous ongoing hemorrhage of consumer welfare in the current scheme. The existence of volumes of analysis and commentary cited above should suffice to conclude that the failure to resolve problems in universal service schemes is not due to the lack of evidence or analysis, but the absence of political will. Calls for more analysis and delay are hard to support. Congress should stop the bleeding and redirect the program ASAP.
• Greater Specificity and Clarity as to Purpose. Statutory language regarding USF is contained in Section 254(B) wherein Congress set forth six “principles” (plus “such other principles as Joint Boards and the FCC determine to be necessary) which should provide the basis policies for “preservation and enhancement” of universal service. We recognize the statute must balance between providing specific direction and regulatory discretion, but the current statute provides almost none of the former and virtual carte blanche on the latter.
• Greater Recognition and Emphasis the Structure of Incentives. The current scheme is full of perverse incentives that encourage waste and inefficiency from avoiding responsibility for contributing to the fund to a stampede of firms wanting access to draw from it. Firms have no clear incentive, beyond their own sense of public responsibility, to make efficient use of the funds and to maximize the extent to which they are in reflected in increased consumer welfare.
• Greater Accountability. Last and by no means least, Congress should find a way to provide comfort to consumers by assuring that their dollars paid into the USF are used in ways that create value, not waste. Some form of ex post reporting of explicit consumer benefits by recipients is needed to address the frequent assertion that it is companies, not consumers who are harvesting the benefits of USF dollars.
• Rethink the Notion of Competitive Neutrality. Like technological neutrality, it is hard to oppose competitive neutrality on principle. But, its application must not defeat the requirement for good USF policy to reflect the unexceptionable fact that some technologies are to be preferred on grounds of cost, convenience and service quality to others; that not every technology or competitor is likely to stand equal in the eyes of consumers; and, that rational public policy must (forgive the use of the term) discriminate carefully to determine who pays into the fund and who draws from it.
• Retarget funds to reflect past and foreseeable market and technology trends. USF provisions in the Telecom Act of 1996 were drafted before the explosion (and promise) of wireless communications and the Internet (broadband in particular). Events have rendered those provisions obsolete and, more specifically, incomplete. No reasonable USF policy can fail a) to make broadband a priority and b) to recognize, and provide for continuation of, the enormous growth and contribution of wireless networks.

There remains within these suggested guidelines an enormous amount of discretion. They will easily embrace numerous general schemes and assorted details. However, they clearly exclude most elements of what today passes as federal policy toward universal service. USF reform hearings should focus on these or close variations.

(1) Robert Crandall and Leonard Waverman, Who Pays for Universal Service?: When Telephone Subsidies Become Transparent, Brookings Institution Press, April 2000.
(2) Thomas W. Hazlett, “Universal Service” Telephone Subsidies: What Does $7 Billion Buy?” June 2006,
(3) Joseph Kraemer, Richard Levine, Randolph May, “The Myths and Realities of Universal Service: Revisiting the Justification for the Current Subsidy Structure,” Progress & Freedom Foundation, Jan. 2005.