TMCnews Featured Article

A new study commissioned by the Seniors Coalition, a non-profit education and advocacy group that represents the interests of America’s senior citizens, reveals what might be termed “gross improprieties” in the distribution of funds through the Universal Service Fund (USF), which is run by the federal government and used to subsidize rural telephone carriers.

The study, entitled “Universal Service Telephone Subsidies: What Does $7 Billion Buy?” shows that some rural telephone companies are charging U.S. taxpayers up to $13,000 per telephone line, per year, for long distance service through USF subsidies.

Conducted by Thomas Hazlett, a professor of law and economics at George Mason University, the study shows that the waste and inefficiency of USF disbursements “is so out of control that taxpayers actually could save at least $1 billion or more each year by simply giving away at full retail cost satellite or cellular phone service to the few remaining Americans who do not currently have access to wireline phone service.”

Perhaps most enraging is the fact that most of the USF funds are not being used to provide affordable long distance service, as is intended, but rather are being transferred into the coffers of tiny, relatively-unknown rural carriers which, according to a press release, are “so engorged with tax dollars that they can afford to pay out more in dividends to shareholders than they actually charge for phone service.” Some of these tiny carriers, which are located in the rural areas of Alaska, Arizona, Arkansas, Colorado, Hawaii, Kansas, Mississippi, Nebraska, Nevada, New Mexico, Oklahoma, Texas, Utah and Wyoming, have only a few hundred customers. The study finds that many of these carriers pass along inflated overhead charges to U.S. taxpayers in the range of $1,000 to $3,000 per phone line per year.

Frustratingly, rather than using USF funds to upgrade their telephone networks and provide better access, these tiny carriers are simply using them to line the pockets of their shareholders.

“The incentives created by these subsidies encourage widespread inefficiency and block adoption of advanced technologies - such as wireless, satellite, and Internet-based services - that could provide superior voice and data links at a fraction of the cost of traditional fixed-line networks,” the coalition’s press release states. “Ironically, subsidy payments are rising even as fixed- line phone subscribership falls, and as the emergence of competitive wireless and broadband networks make traditional universal service concepts obsolete. Unless policies are reformed to reflect current market realities, tax increases will continue to undermine the very goals ‘universal service’ is said to advance.”

“America’s seniors and other taxpayers are getting a real wake-up call today,” said “Grandma” Flora Green, spokesperson for the coalition, in the release. “The Universal Service Fund is such a costly mess that it makes those bills we all paid for Pentagon hammers and toilet seats look like a downright bargain! American taxpayers need to insist on reining in the runaway Universal Service Fund, which should only help out those who really need it. The Fund should be capped and then reviewed from top to bottom to squeeze out all the billions of dollars of waste and fraud going on today. We think FCC (News - Alert) Chairman Kevin Martin is correct in calling for a reverse-auction system to make sure that those Americans who really need USF help get it with the best available technology and at the lowest possible cost to taxpayers.”

The FCC just recently ruled that broadband providers must pay into the USF fund based on revenues derived from VoIP calls.

Meanwhile, a new group comprised of the major U.S. carriers and several other telecoms organizations, called the “USF by the Numbers Coalition,” is lobbying Congress to change the current revenue-based scheme used for contributions to a numbers-based system. The newly formed group, which includes CTIA-The Wireless Association, IDT Corporation, GCI, National Cable & Telecommunications Association (NCTA (News - Alert)) and USTelecom, has found itself pitted against the “Keep USF Fair Coalition,” which is opposed to a numbers based system (although it is not entirely opposed to USF reform).

According to the Senior Coalition, the USF tax has ballooned from $4 billion to $7 billion annually since 1998. During this period, the tax rate applied to long distance revenues has increased five-fold, from 2.1 to 10.5 percent.

The primary cause of these increases is rising payments to rural carriers, labeled “High-Cost Support,” where annual payments increased from $1.7 billion in 1998 to $3.7 billion in 2005. These rising expenditures are, in turn, driven by increasingly expensive per-line payments to rural phone carriers - and by new payments to wireless phone carriers now qualifying as recipients of such funds.

“High Cost Fund payments are distributed in a manner that encourages rural phone carriers (RLECs) to be inefficiently small,” the study states. “RLECs tend, as a result, to be extremely expensive to operate, even as they are highly profitable. HCF subsidies are as much as $13,000 per year per line, a remarkable outcome given that retail satellite phone service is available nationwide for about $800 annually …”

The study adds: “Sending $3.7 billion annually to inefficient, high-cost RLECs succeeds in transferring income from telephone users to phone company stockholders, but it does almost nothing - even under favorable assumptions - to expand access to telephone networks.”

“Federally subsidized phone service costs taxpayers a large multiple of what the most efficient network solutions would,” the study states. “That is because ‘high-cost’ subsidies are delivered not to low- income customers, but to rural phone companies, typically on a ‘cost- plus’ basis. The more service costs, the more money the phone carrier receives - a clear incentive to avoid cost savings. This not only bloats administrative expenses, it undercuts market forces that would naturally lead consumers to abandon traditional fixed lines in favor of newer, cheaper, and functionally superior technologies.”

The study goes on to assert that these small rural carriers are really in the business of making money through the USF, rather than from their customers. Some of the carriers, the study finds, get up to 70 percent of their annual revenue from the USF. Yet many of them have failed to make regular upgrades in service, meaning that, even though they are receiving more and more revenue from the USF, their customers have basically the same quality service they had years – perhaps even decades ago.

As a solution to these perceived improprieties, Professor Hazlett suggests capping, and then reducing, USF payments.

“Owing to the stark ineffectiveness of current payment schemes, this option could be smartly executed without any loss in universal service outcomes,” he said. “New technologies and emerging networks allow customers in what were once high-cost areas to be served by modern telecommunications systems at a fraction of the cost of the current regime ... ”

“One encouraging sign is that many policy makers, including FCC Chairman Kevin Martin, are considering the use of ‘reverse auctions’ to assign universal service obligations,” Hazlett continued. “Here, phone carriers compete to become the ‘provider of last resort’ in areas where regulators deem local services (without subsidies) insufficient, bidding a price (paid by the government) to supply such services.”

The full Hazlett study findings are available online at http://www.senior.org/USFstudy/.

For the full list of the highest annual per-line subsidies paid by U.S. taxpayers, visit http://www.thehastingsgroup.com/biggestHCFsubsidies/.

For the full list of the highest overhead charges subsidized by U.S. taxpayers, visit http://www.thehastingsgroup.com/biggestHCFsubsidies/.

Earlier this year, the Seniors Coalition released the results of a survey conducted by the Opinion Research Corporation which shows that two out of three older Americans are opposed to changing the USF contributions system from a revenue based model to a flat tax based on numbers. According to the press release, roughly half of the 860 seniors who responded to the survey said that it would be “very unfair” to change the USF in this manner – and fewer than one in four said they considered the line-based approach to USF as “fair.” More than four out of five said they were opposed to increasing USF fees on phone bills to start paying for broadband access in rural areas.

For more information about the Seniors Coalition, visit http://www.senior.org/.

--------

Patrick Barnard is Associate Editor for TMCnet and a columnist covering the telecom industry. To see more of his articles, please visit Patrick Barnard’s columnist page.