Robert Frieden
Cable Pioneers Chair and Professor
The College of Communications
Affiliate Professor of Information Sciences and Technology
Pennsylvania State University
rmf5 psu.edu
814-863-7996
www.psu.edu/dept/comm/faculty/profile/frieden.shtml
This paper examines the flaws, defects, and accommodations that exist in the current universal service funding process with an eye toward proposing a new workable system that can support broadband infrastructure development. Frieden argues that consumers deserve more from their sizeable investment in the universal service program. Because of its blanket approach, USF provides financial benefits to some consumers who are entirely capable of paying the full cost of their telecommunication services while at the same time imposing contribution obligations on consumers, including the working poor and others not well equipped to absorb the financial burden. He points out that the emphasis on promoting basic telephone penetration has a negative effect on broadband penetration. The current USF system creates several constituencies keen on maintaining the status quo regardless of its efficacy and efficiency and potentially thwarting broadband goals.
The USF regime in the United States suffers from systemic design problems that have a significant adverse impact on consumers and the carriers providing service:
- Marketplace Distortion: At the macro-level, the current USF system distorts the local and long-distance telephone service marketplace by creating artificial pricing signals.
- Poor Calibration of Benefits and Burdens:The current regime offers a poorly calibrated mechanism to implement the principal goal of USF, which is to improve telephone subscriptions and line penetration.
- Inflexibility: There has been little empirical research examining why people do not subscribe to basic telephone services and what strategies might create incentives for people to subscribe. Perhaps qualifying, but non-participating individuals, might prefer a telecommunications option other than basic dial-up voice service. With greater flexibility, a USF system might offer these non-users the option of applying the amount of the wireline voice service discount to a wireless, or high-speed data connection.
- Explicitness in the Burden Triggers Avoidance Strategies: Striking evidence of the amount of USF support paid monthly has created a type of “compassion fatigue” with a growing incentive, especially for heavy interstate long distance telephone callers, to pursue self-help options that reduce or eliminate their contributions.
- USF Primarily Supports Narrowband, Dial Up Service: The emphasis on promoting basic service line penetration has a negative effect on broadband market penetration.
In addition to macro-level design problems with USF in the United States, a number of specific, micro-level issues exacerbate the situation:
- The Status Quo Serves the Interests of Several Powerful Constituencies: At the micro-level, the current USF system creates several constituencies keen on maintaining the status quo regardless of its efficacy and efficiency.
- Accepts Costs With Few Auditing Safeguards: The USF system largely accepts as a given whatever costs carriers report regardless of whether carriers could operate more efficiently and whether new technologies might offer lower costs, possibly without significant recurring operational costs.
- System Prone to Abuse: The current USF regime creates opportunities for fraud and provides incentives for carriers and e-rate beneficiaries to ignore technological innovations that would reduce their dependency, or qualifications for subsidies.
- Emphasis on Service Subscriptions: Instead of promoting pure and applied research and development aimed at solving access problems, USF flows primarily to a small set of stakeholders who provide basic services and to constituencies receiving “tied aid” (i.e., funds tied to purchasing a narrow set of existing commercial services primarily from incumbents).
- Potential for Substantial Future Deficits in USF Funding: Collectively, technological innovations, conflicting FCC regulatory objectives, and a recent Supreme Court case jeopardize the financial viability of the current USF regime.
Nations other than the United States consistently have proven that more progress in promoting information and communications technology (“ICT”) literacy, teledensity, and innovative uses can occur with less money, a smaller bureaucracy, and reduced marketplace distortion. The best practices share the following characteristics:
- True technology neutrality coupled with a willingness to fund well articulated and community-supported projects rather than limit support to a fixed list of existing carrier services;
- Capping government project funding to a percentage of total cost, thereby requiring project advocates to seek financial support from other grantors, or from bank loans;
- Creating incentives for demand aggregation among government and private users, particularly for broadband and data services;
- Emphasizing one-time project funding rather than recurring discounts;
- Promoting innovation and creativity in projects, including technologies that provider greater efficiency and lower recurring costs;
- Encouraging competition among universal service providers by auctioning off subsidy access; and
- Blending government stewardship and vision with incentives for private stakeholders to pursue infrastructure investments.
Best practices in the broader goal of ICT development evidence a promotional role for government through partial funding of specific projects, while primarily emphasizing private enterprise and facilities-based competition.
- A Limited and Strategic Role for Government:Unlike the United States USF support structure, governments in other nations, such as Canada, Korea and Japan consider the need to blend efforts to develop skills in using ICT technology with financial support for procurement of ICT equipment and services. Rather than limit USF and ICT development funding to a closed and specific group of constituencies, these nations offer several types of financial support (e.g., loan guarantees, grants and tax credits) to any applicant that proposes effective, efficient, and innovative ways to stimulate ICT literacy and the provision of desirable services.
- Reshaping the Mission: In view of changing technologies and consumer expectations, the concepts of universal access and universal service remain in flux. The FCC should reexamine the concept of universal access, including how the Commission achieves the universal service mission articulated by the ’96 Act. Moreover, the FCC must propose an alternative to the current funding mechanism for universal service, because the status quo cannot work in an Internet-centric operating environment where carriers offer subscription-based, unlimited interstate voice traffic that may avoid any USF burden.
As a threshold matter, the FCC should consider its universal service mandate in terms of four inter-related components:
- Infrastructure: the scope and nature of networks that provide users with access to basic and advanced telecommunications and information services;
- Services: a revised determination of what constitutes basic “life-line” services and which other services, including broadband, the FCC should include in an expanded universal service goal;
- Cost: who should support universal service objectives and who could qualify for universal service subsidization of basic and advanced services; and
- Maintenance and Upgrades: which incentives regulators must create to ensure that universal service providers maintain and upgrade their networks, but do not object to innovations, including user-operated telecommunications networks, that achieve scale, efficiency, and cost savings.
With these four components in mind, Congress, the FCC, USAC, subsidy contributors, and subsidy recipients must confront an acute, short term problem: the potential for Internet-mediate telephone services and the expanding wingspan of the USF exempt information service classification to trigger a severe decline in telecommunications service revenues subject to the USF burden.