Universal Service

Paying for Porn

The Federal Communications Commission is looking into a scam involving the attempt by local phone carriers in rural areas to collect more access fees from the major long-distance providers by increasing the number of calls from “adult” chat lines. Rural carriers have long received fees (up to 5 cents per minute) from long-distance carriers for every call they connect. The original intent behind this, of course, was to ensure that rural citizens have (subsidized) phone access. So when you make a call from New York City to your grandparents in North Dakota, Verizon pays an access fee to your grandparents’ local carrier for the connection. And the smaller you grandparents’ local carrier is, the higher the per-minute fee it gets Read More ›

Interesting ideas for designing auctions to reduce USF subsidies

The FCC received public comments on the concept of using auctions to determine
who gets Universal Service support to provide subsidized phone service in rural areas. The leading trade association representing rural local exchange carriers (the Organization for the Promotion and Advancement of Small Telecommunications Companies) predictably claimed that “[s]electing winners based solely on price would surely be a ‘race to the bottom.'” According to OPASTCO, “[q]uality of service, service capabilities, and existing service area coverage should all be included in the criteria for evaluating carriers bidding for a rural service area, and those criteria should be given at least equal weight as the bidding price.”
OPASTCO’s premise is surely correct. The trick is to balance quality, reliability and price in a way that creates maximum value for everyone — including the taxpayers, er, ratepayers — and doesn’t create insurmountable hurdles for newer, more efficient and potentially more useful technologies in the earlier stages of development.

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“Continuity and community presence” in Universal Service

FCC Chairman Kevin Martin

A few weeks ago, the FCC courageously requested public comment on the merits of using auctions to determine who gets Universal Service support to provide subsidized phone service in rural areas. One difficulty with a reverse auction is what, if anything, to do about stranded investment. What are the legitimate investment expectations that the incumbent provider deserves to recover?
Under the current system, the incumbent rural phone companies will be subsidized in perpetuity. Yet, cable VoIP service and wireless systems have been built in many rural areas without Universal Service support. Many of the competitors are now seeking their fair share. Chairman Kevin Martin noted yesterday at a Senate hearing that these competitors received $1 million when he came to the commission but get $1 billion now.
Martin stood up for reforming Universal Service so it supports the best and most efficient new technologies, and he took a beating from Senate Commerce Chairman Ted Stevens (R-AK) — an ally of the incumbent rural phone companies — who, like most politicians, focused on who would be the winners and losers:

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Study disputes need to subsidize rural broadband

The telecom reform proposal under consideration in the Senate Commerce Committee would create a $500 million account as part of the Universal Service Fund to subsidize broadband deployment in rural areas. The anecdotal evidence for some time has been that rural areas actually are not far behind urban areas as it is. Part of the reason that there is not much of a lag is small rural telcos have been able to finance broadband upgrades with USF. In a paper released Friday, the Congressional Budget Office sheds some much-needed light on the rumors. CBO claims that broadband is in fact permeating rural areas at a “rapid pace,” and cites a finding from the Pew Internet and American Life Project that Read More ›

“Where’s The Outrage?”

Sen. Ted Stevens (R-AK) rightly worries that current universal service mechanisms are unsustainable as consumers migrate to Internet phone services that are lightly taxed and regulated (these services clearly should contribute their fair share). Stevens and others also believe that rural America won’t get broadband services without subsidies (we can’t know this for sure, because we have never tried the alternative approach of removing all of the barriers to competition and investment). Anyway, while Internet content and conduit providers obsess over net neutrality, something equally harmful is lurking in the shadows. A little noticed provision in the Senate’s “staff working draft” designed to expand the universal service funding base could have profound consequences. Currently, consumers of “telecommunications” services contribute billions Read More ›

The Stevens bill

This week Senate Commerce Chairman Ted Stevens (R-AK) introduced comprehensive telecom reform legislation which, as Adam Thierer notes, is a 135-page monster, represents a counterproductive obsession on the part of some policymakers over the smallest details of communications policy and doesn’t tear down any of the old regulatory paradigms that it sould. That said, the proposal would move the country in a positive direction in several respects. Net Neutrality — Unlike the House bill, which grants the FCC specific new authority to enforce the commission’s net neutrality principles — and which is guaranteed to lead to questionable enforcement proceedings and perhaps litigation between grasping and delusional competitors — the Stevens bill wisely requires the FCC to merely keep a watchful Read More ›

Universal Service suffers same defect as health care system

Professor Vernon L. Smith provides a helpful analytical tool which explains why the cost of health care has doubled in the past decade and generally outpaces inflation and also demonstrates why Universal Service is inherently flawed and ultimately unsustainable (see “Trust the Customer!” in the Wall Street Journal).

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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 Read More ›

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 Read More ›