Does the USF Do More Harm Than Good?

by Bruce Stewart

With the recent decision to require VoIP companies to contribute to the Universal Service Fund, Daniel Berninger has written a scathing letter to the Commerce Committee questioning the basic premises and implementation of the USF today that is well worth a read. If you've been wondering what exactly goes on with the USF, Daniel's letter will not fill you with a warm fuzzy feeling. While I think most would agree that the goal of providing universal telecommunications service is a worthy one, it's certainly worth investigating how this long-standing funding system is achieving that goal.

The FCC and Universal Service Administration Company (USAC) don't appear concerned about the lack of results, because they don't actually track the impact of the fund in terms of universal service metrics. The USF represents a bureaucrat's dream, because there exists no accountability for results. Success gets judged purely in terms of collecting and spending money. (The USAC's annual report) does not mention penetration rates or any other metric that might qualify as a measure of universal service (i.e. fund results) rather than money (i.e. fund input.) The fact that the telephone industry insiders dominating the USAC board remain silent about the lack of results further shows the program exists to serve telephone companies not the cause of universal service. The FCC's 150 page NPRM that accompanied the order assessing VoIP companies does not include a single mention of how or whether the funds contributed to the USF actually further the cause of universal service.

Tracking the number of households participating in the USF's Low Income Program is as close as the FCC comes to tracking results. The monies collected and distributed by the Low Income Program doubled from $400mn to $800mn since 1997, but the nature of local telephone monopoly keeps people disconnected. The program provides on average $8 per month subsidy for qualifying low income telephone customers, but the subsidy does not solve the affordability problem given an average telephone bill of $50 per month. Even aside from basic rates that increase year after year, setup charges, strict credit terms, and demand for deposits keep as many as 20% of households in low income areas without telephone service. Competition from VoIP companies recently led Verizon to advertise a price reduction of $17 per month (i.e. twice the USF Low Income subsidy) on its unlimited usage plan. VoIP companies serve less than 3% of access lines, so this represents only the beginning of the industry's competitive potential. Yet, the new USF assessment helps defeat VoIP competition.

The lack of results deserves attention, but the lack of results coupled with rapid growth of the fund represents a crisis. The FCC's plan to assess VoIP does not come near to solving the funding challenges. The USF grew from $1.5bn in the year before the changes implemented by the Telecom Act of 1996 to $6.5bn in 2005. The fund continues to grow 12% annually in recent years, so at this pace it will double again in the next six years. LD revenues have declined 50% from a peak in 1999, so the FCC mandated revenue assessment grew twice as fast as the fund (from 1.2% in 1997 to 10.7% in 2005.) It does not help matters the Bells find ways to minimize USF contributions even as they increase their share of LD revenues. In 2005, the Bell LD division USF contributions amounted to about 1/3 of those by the former LD pure plays (i.e. AT&T, MCI, and Sprint) even given about equal market share positions. Note that FCC removed USF obligations on Bell company DSL revenues at the same time it asserted them on VoIP companies.

2 Comments

hadv
2008-07-14 21:47:29
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hadv
2008-07-14 21:47:53
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