Just when you thought you needed another example of the law of unintended consequences, here it comes—this time from Federal telecommunications regulation. Amid the recent discussions of broadcast decency, á la carte, and media ownership at the FCC, few have noticed that the FCC is investigating an alleged scam of epic proportions.
Soon after Woodrow Wilson finished making the world safe for democracy, FDR’s administration was busy making America safe for socialist redistribution schemes. One such scheme involving telephone access, known as Universal Service, remains today. It was simple, really. All long-distance users would be taxed to subsidize phone companies that provide affordable phone service to rural Americans. While technology has advanced greatly—copper and switches given way to fiber and computers—regulation has not. This charge is still on your monthly phone bill.
In addition to your tax, rural local exchange carriers (RLECs), the folks who originate and terminate calls, also collect fees from major long-distance providers like AT&T and Verizon. Every long-distance call connected earns RLECs up to five cents per minute. So when Washingtonians call their grandparents in Iowa, their long-distance company pays a connection fee to grandma’s local carrier. And as the operating principle (no pun intended) is “to each according to his need,” the smaller grandma’s local carrier, the higher the per-minute fee.
But recently, some shrewd RLECs granted local numbers to “adult” chat lines. This way they now collect fees from the long-distance providers for all these additional calls. Revealing how out of control all this has gotten, one Senate staffer recently explained: “In July 2005, the rural phone company in Wayland, Iowa showed 40,000 minutes of long-distance calls received; in December 2006, they showed 10 million minutes. Of those calls, half were to the same four phone numbers, all adult chat lines.” AT&T refused payment to the Iowa RLECs for this traffic and filed suit. They allege that some Iowa RLECs charge 13 cents per minute, and last week the FCC suspended these fees pending investigation.
In what seems an increasing rarity these days, this issue is uniting social and fiscal conservatives. Family groups complain about porn lines having local numbers. Parents can block 1-900 numbers automatically; not so these local numbers. And fiscal conservatives see a textbook example of the folly of regulation. When government forces redistribution of wealth, companies adapt in Darwinian fashion to the new environment.
Universal Service has yet another unintended consequence: Because RLECs can sit back and collect fees on existing infrastructure, they have little incentive to innovate. Contrastingly, cable VoIP and wireless companies deployed competitive services without subsidies—though they now want a slice of the pie. If FCC Chairman Kevin Martin’s vision is truly to “remove regulations that inhibit innovation,” he should start here.
At a recent Senate hearing Chairman Martin championed the reformation of Universal Service. He advocates supporting the most efficient technologies, whatever they may be. “We want to make sure that we have a system that doesn’t freeze in place one set of technologies but rather encourages the most efficient technology,” Martin said. Standing in Martin’s way and revealing a disturbing attitude, Senator Ted Stevens (R-AK) objected that “the existing local providers are just going to be wiped off the map—quick!” Well, yes. They may be. But Americans should not be forced to subsidize old technology because of 1930s-style regulation, especially if the subsidy promotes indecency.
More suspicious readers may wonder what incentive adult chat lines have to operate in rural Iowa anyhow. AT&T alleges that such traffic-pumping co-conspirators receive “kickbacks” and can thus operate free or near-free services. At the very least, the Universal Service regime creates the opportunity for indirect subsidy of dial-a-porn. A free society allowing indecent businesses to operate is one thing; subsidizing them is another. It has never been clearer: Universal Service needs reform.
Mr. Gage is a policy analyst with Discovery Institute’s Technology & Democracy Project