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Universal phone service.

The federal Universal Service Fund subsidizes telecommunications providers that serve high-cost rural areas, low-income consumers, and some schools and hospitals. In May, the Federal-State Joint Board on Universal Service recommended that the Federal Communications Commission "take immediate action to rein in explosive growth in high-cost universal service support." The Joint Board also committed "to making recommendations regarding comprehensive high-cost universal service reform" by October's end.

To achieve comprehensive reform on the federal level, the Joint Board can learn from the experience of similar state universal service programs. The Texas Universal Service Fund is a salient example. In 2005, Texas enacted sweeping legislation that deregulated rates and directed the Texas Public Utility Commission (PUG) to reform the state's universal service programs.

PURPOSE The Telecommunications Act of 1996, which created the federal fund, mandates that "quality services should be available at just, reasonable, and affordable rates." Similarly, the Texas fund is meant to "assist telecommunications providers in providing basic local telecommunications service at reasonable rates in high cost rural areas."

These programs best satisfy their public interest objectives when they achieve reasonable rates at the smallest possible social cost. Social cost can be split into two parts: actual assessment revenue collected and deadweight loss from the method of collection. In a forthcoming study in the Texas Review of Law and Politics, Jerry Ellig and I document several ways in which the PUC can achieve the purposes of universal service with less cost.

To raise money for the fund, Texas levies a uniform percentage assessment on all intrastate telecommunications services--including long distance and wireless. The assessments raised approximately $618 million in 2005, but they generated $151 million in economic "deadweight loss" because demand for wireless and long distance service is very price-sensitive. Texas consumers and telecom companies sacrificed a lot of value because of the price increase attributable to universal service assessments.

To reduce the deadweight loss from the assessments, the PUC could substitute a flat per-number charge for the percentage fee on total revenue. Our estimates show that if the PUC did this, deadweight loss from raising the required revenues could shrink by 57 percent.

On the other end, several ways exist to maintain "reasonable" rates and reduce disbursements to companies. Here are two:

First, the PUC could eliminate urban/rural rate disparities. The cost of providing traditional wireline telephone service in urban areas is generally lower than in rural areas because more customers are available in urban areas to help cover fixed network costs. In Texas, however, the PUC explicitly keeps basic rural rates below their urban counterparts. Texas statute requires that basic local rates remain "reasonable." But the PUC hinted in a recent report that higher rural rates could still meet the reasonableness standard. If rural basic rates were allowed to rise and equal similar urban rates, the PUC could save a substantial amount of subsidy money. The size of the cost savings would depend on the benchmark for equalization. If, for example, each individual company was allowed to raise its own rural basic rates to meet its comparable urban rates, Texas could save $46 million per year. More dramatically, if the PUC eliminated urban/rural rate differentials on all subsidized lines across the state, the program would shave $183 million off the $512 million 2005 subsidy.

Second, the PUC could update provider cost estimates. Because subsidy amounts are higher for companies whose estimated costs are higher, a calculation that includes lower cost estimates would decrease subsidy payments. Today's estimated costs for telecommunications providers in Texas are based on 2000 data. It is likely that per-line costs have decreased since then for two reasons. The first is that economic growth and migration have likely increased population density in many formerly rural areas that are now outer suburbs, vacation communities, or retirement havens. The second is that newer competing technologies-wireless, satellite, and Voice over Internet Protocol--achieve universal service more cheaply than traditional wireline service. If service costs have indeed decreased in the past seven years, the subsidy amount should reflect it.

FEDERAL LESSONS The Joint Board and the FCC can benefit from this analysis. In its upcoming recommendations, the Joint Board can focus on raising money with as little deadweight loss as possible, cutting taxpayer subsidies to corporations as long as rural rates remain "reasonable" and recognizing that technological advances have changed the cost to deliver telephone service. Reasonable people can disagree about what rates are "reasonable" and how much the federal and state governments should do to connect poor and rural residents to the rest of the world. But by any standard, we should avoid needless waste.
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Title Annotation:MERCATUS REPORTS; Telecommunications Act of 1996
Author:Rotondi, Joseph A.
Publication:Regulation
Geographic Code:1USA
Date:Jun 22, 2007
Words:767
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