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Capitol Comment

    Capitol Comment 192 - Universal Service Reform: Benchmarks for Success

    06/16/1998

    Universal service subsidies keep the price of telecommunications service in hard-to-reach and high-cost areas on par with the price of service to inexpensive areas. Substantial reform for this system of wealth transfers is now politically viable. All universal service reform proposals should begin by facing the following economic reality: Consumers pay for subsidies. With this proposition in mind, the policy benchmarks that follow can be utilized to measure reform proposals.

    Background.
    "Universal service" is the insider term to describe telecommunications subsidies. Last year the federal budget estimated the value of these subsidies for the first time. By the end of fiscal year 1998, a $3.3 billion transfer from long-distance, urban, and business consumers to local, rural, and residential consumers will take place. This would have passed with barely an eyebrow raised, except, the proponents of universal service subsidies have created programs that are now highly visible. Equally as important, the cost of universal service is on the rise. In fiscal year 1996 universal service cost consumers $957 million, but by fiscal year 2000 these subsidies are estimated to cost more than $10.3 billion.

    In the past, long distance companies made payments to the federal universal service fund. Currently, any company that provides interstate service is required to contribute to the subsidy fund. Beginning next month, some long-distance service providers will begin to itemize a charge on consumers’ bills that is specifically dedicated to federal universal service programs.

    Comments from the Speaker of the House and other leading members of Congress, the president and members of his Cabinet, the vice president, members of the Federal Communications Commission (FCC), and leading providers of telecommunications services have elevated an obscure question of telecommunications policy to the forefront of Washington’s political battles. Unless the rhetorical heat of policymakers is tempered by common-sense policy prescriptions, consumers will continue to be losers in the subsidy shell game called universal service.

    The Telecommunications Act of 1996 expanded the pool of universal service beneficiaries. Schools, libraries, and rural health care providers became eligible for discounted telecommunications services. In order to administer this new federal giving program, the FCC established a series of non-profit corporations. The Schools and Libraries Corporation, the non-profit corporation under the most scrutiny, has received more than 30,000 requests for the e-rate subsidy. The cost of these requests is estimated to be in excess of $2 billion.

    Three tests that any reform must pass.
    Many universal service reform proposals are now in circulation. A proposal that meets the following three tests will provide the most benefit to consumers.

    The costs and benefits of universal service subsidies must be made explicit.
    The universal service programs should be consolidated, targeted to those in need, and limited.
    The funding of universal service programs should be linked to objective measures of performance.
    The costs and benefits of universal service subsidies must be made explicit. The proponents of universal service subsidies — for rural and high-cost consumers as well as for schools, libraries, and hospitals — assert that the programs are necessary. If this is the case, then there is no harm in providing taxpayers with information about the size, scope, and administration of universal service programs. It is only natural that information about these "necessary" programs would make taxpayers feel better about the effectiveness of their government. Clarity for the costs and benefits associated with universal service is the right step to take as well as the correct legal step to take. Section 254(e) of the 1996 Telecommunications Act expressly mandates that universal service support be "explicit."

    Universal service should be changed from an entitlement based on geography and type of service to a means of helping those truly in need. The General Accounting Office has identified 40 federal programs that provide financial support for telecommunications. The programs — found everywhere from the Department of Education to the Rural Utility Service — should be consolidated and targeted to those most in need. The high cost associated with providing telecommunications services to millionaire ranchers, ski bunnies in Aspen, Colorado, or vacationing golfers at Hilton Head Island, South Carolina, should not be subsidized by poor and urban consumers.

    Finally, the revenue stream, or source of funding, for universal service programs should be directly related to the performance of the programs. This requires a change to current policy. First, universal service programs must meet objective criteria for success. Analysis of the current system is trapped in a failed New Deal mentality that counts how much money is spent as a measure of success. Usually the goal of universal service is stated in terms of providing additional people with service — not in terms of how much money is shifted from one part of the economy to another. Therefore, funding should not continue unless a universal service program is able to make significant progress toward achieving its measurable objectives, namely higher penetration rates or better learning environments for schoolchildren.

    If the merits of universal service exist, they are able to stand up to an honest assessment by taxpayers.