^{Democracy & Technology Blog} How can the cost of Universal Service double while technology is driving down costs?

The FCC took comments Friday on what to do about an enormous rate of growth in the demand for Universal Service subsidies. The High Cost Fund has almost doubled in size since 1999. Part of the growth is attributable to a variety of familiar problems. For example, support for rural carriers is still determined using a rate-of-return methodology despite the fact that price-cap regulation has proven to be far more effective in controlling costs. And rural carriers can choose to be subsidized not on the basis of their own actual costs, but according to an “average” cost incurred by many carriers. So it doesn’t matter that some rural carriers contend with mountains, deserts, lakes and rivers while there are others who serve flat patchworks of farms as far as the eye can see. Well, it doesn’t matter in terms of keeping the size of the fund low. It’s great for the carriers serving the flat areas.
The bulk of the growth since 1999, however, is due to the availability of subsidies for competitors, such as competitive rural wireless carriers. Some incumbent phone companies argue it is inefficient to subsidize two networks serving the same area: The resulting competition is artificial because it depends on continuing government subsidies. But their proposal virtually guarantees that the availability of subsidies will be limited to the incumbents. The solution is not to outlaw competition. The real question is why should Universal Service continue to be biased in favor of wireline services when it is cheaper in most cases to deploy wireless technology in rural areas? Many rural areas have mobile services that do not require any subsidies at all. One example of this bias is the fact that the subsidies available to rural wireless carriers are set according to the cost data submitted by the incumbent wireline provider! No attempt is made to capture the benefits of lower costs for the fund.
Universal Service policy is highly political and impossible for the FCC to manage successfully. As a result, it incorrectly focuses on the needs of providers not consumers. That’s one reason why larger “non-rural” carriers don’t receive any support for the rural areas they serve. These carriers are forced to overcharge their urban customers, leading to arbitrage which undermines investment. This policy is a subtle but real form of “taking,” which no court has figured out yet.
The cost of telecommunications is declining while the cost of Universal Service is exploding. Something is wrong. But it would be a mistake to control costs by discriminating for and against various technologies. Technology offers the best opportunity to reduce and eventually perhaps eliminate Universal Service.