The Universal Service Fund: What Do High-Cost Subsides Subsidize?
Over half of subsidies, or $.59 of every dollar, paid through the High-Cost Universal Service Fund go to general expenses of firms, not to directly providing support to high-cost lines.
This research underscores the inefficiency in the current universal service subsidies program and, in particular, the high-cost fund. Policymakers should use the push to include broadband as part of USF to implement radical reforms. The findings are based on an analysis of data submitted by 1400 recipients of high-cost subsidies from 1998 to 2008.
While Wallsten suggests that the most useful reform would be to focus more on low-income assistance instead of high-cost areas, he offers suggestions on how to make high-cost subsidies more efficient:
- The program should explicitly consider the use and cost-effectiveness of satellite broadband, especially considering that the soon-to-be-available next generation of satellites will offer download speeds of between 5 and 25 Mbps.
- The universal service program should be reformed so it does not rely on cost-based, rate-of-return regulation, which eliminates the incentive for firms to operate efficiently and creates incentives to inflate reported costs.
- To the extent that the Fund will subsidize multiple providers in an area, it should set the subsidy amount to be equal to that necessary for the lowest-cost provider, not to whatever the incumbent already receives.
- The Federal Communications Commission should consider using auctions to define the level and distribution of subsidies. While auctions would have to be designed to address such issues as what to do in cases where the “provider of last resort”does not win the auction, the worst outcome of a well-designed process would be the status quo.