^{Democracy & Technology Blog} Proposal of the Universal Service Working Group

A first-rate report describing the shortcomings of Universal Service and suggesting several options for reform has been issued by the Progress & Freedom Foundation. The report is timely because a lot of service providers support a “numbers-based” contribution mechanism designed to spread the cost of Universal Service to include any service that connects to the telephone network and uses an assigned number.
Overall, the report confirmed by own impression that Universal Service is a classic example of “regulatory capture,” the theory that regulation can be manipulated by regulated firms to bring them unwarranted profits and thus actually harm the consumers (through artificially higher prices) that it purports to serve. The report doesn’t state this conclusion quite so candidly, though. It diplomatically notes that smaller rural telephone companies receive subsidies based upon “rate-of-return” regulation, which can “distort the regulated firm’s choice of inputs, so the regulated firm fails to produce at minimum cost.” Regulators, the people we all assume are there to protect us, have “little incentive … to scrutinize the use of universal service funds” and “few incentives … to reduce expenditures.” The report cites comments that were filed in 2004 by Western Wireless, subsequently acquired by AllTel, that “no comprehensive audit of the regulatory accounts of rural ILECs has been conducted in the past decade, either by the FCC, NECA, USAC, or independent auditors retained by the ILECs themselves.”
The report does recommend a “numbers-based tax,” which is one way to reduce the inequitable burden that the current system imposes on legacy service providers. But it would be throwing money at a problem which is, in effect, subsidizing the problem and only making it worse. That is not the aim of the report, which contains many useful ideas for reducing costs.
Need for audits
One idea is a requirement that the FCC conduct periodic audits. This is an obvious starting point, and it is truly appalling that Congress may be forced to enact fundamental reforms without the benefit of extensive audit findings. The Congressional committees of jurisdiction ought to put an immediate end to this dereliction of duty by regulators. My friend John Dillard, who owns and operates a smaller rural telephone company in Oregon recommends “First, effective audit oversight of all recipients by NECA and USAC acting for the FCC. The current USAC audits do not meet that requirement and are ineffective, worthless even. NECA and USAC need to question and deny claims for USF support. The companies must justify their costs to the overseers. If a company doesn’t want that level of oversight, they do not need to apply for the USF support.”
Proposal for state block grants
Another idea from the report is to allow the states to “tailor universal service solutions to meet their own needs,” resulting in a “process of interstate competition that will help to identify a set of best practices.” This is called a “Performance-Based Block Grant Model.” As one who sympathizes with the need for universal service in some parts of the country, I fear that devolving responsibility for administering universal service to the states could jeopardize the program by making it easier politically for the federal government to reduce its commitment in the future. When Congress deregulated the airlines, the Essential Air Service block grants were supposed to ensure that smaller communities would continue to receive commercial air service, but they fell victim to budget cutting. I also question whether most states could handle this responsibility. Most state commissions struggle with very limited resources and broad jurisdictional responsibilities that cover energy, water, transportation and other distractions. State commissions have sometimes proven effective in monitoring service quality and are probably more sensitive to consumer complaints that arise locally. Sometimes a state commission in one of the larger states has blazed a trail for others to follow, but this often depends on a combination of coincidences that includes the presence of a commissioner with unusual vision and leadership abilities. Another problem with assigning significant policymaking responsibilities to state commissions is that in the process of experimenting with universal service they could unwittingly impact interstate networks and balkanize the Internet. Also, state commissioners are as susceptible to regulatory capture as the FCC. Therefore, if a state commission thinks it can build a better mouse trap, why not let them apply for a federal waiver?
Other useful suggestions
John would add the following ideas:
“The FCC needs to convene a Joint Board to bring telecommunications accounting, cost allocations and separations methodologies into GAAP compliance. The various factors need to be reviewed and recast to reflect current technologies that are being deployed. The Joint Boards will need explicit direction to do that.
“The old circuit based telephone equipment needs to be phased out in a timely but quick fashion over a specified period of time. USF surcharges for a period of time may be needed to help rural carriers do this,” and
“There needs to be a date certain where state regulation is limited to quality of service issues only. The telecommunications regime is basically federalized.”