Universal Service

Universal service subsidies are costing consumers dearly.

“Universal service” policies are intended to make telephone service available to all households at uniformly low rates. Thus, higher rates are applied across the board to cover the added costs of providing telephone service to rural areas, as well as to provide discounted services to low-income households. While the goal of universal service is well-intentioned, the system of fees and subsidies is threatening to collapse.

The FCC first formalized a universal service policy in the 1950s. This became the “Ozark Plan,” under which prices for long-distance telephone service were inflated to subsidize artificially low prices for local phone service. States had their own systems of “rate averaging,” some of which predate the federal system.

Today, there exist two methods of financing universal service. There are implicit charges — that is, hidden charges — built into regulated rates. This cost-shifting is a legacy of the Ozark Plan and primarily persists at the state level.

At the federal level, the Telecommunications Act of 1996 restructured universal service subsidies as explicit charges levied on telecom companies’ interstate telephone revenues. This funding stream is administered by the Federal Communications Commission, with the advice of the states.

The states determine which areas carriers must serve and their eligibility for payments from the Universal Service Fund. Nationwide, in 2002 the subsidies for carriers serving high-cost (often rural) areas reached $3 billion. Additional subsidy pools exist for advanced services to schools and libraries ($1.6 to 2.2 billion per year); rural health facilities ($16.5 million); and programs targeted to low-income telephone subscribers ($673 million).[26]

The 1996 act allows states to administer “explicit” universal service funds for intrastate service, as long as the state programs do not conflict with the federal system. Most states have programs for low-income residents; roughly half impose explicit charges on ratepayers to subsidize high-cost or small local phone companies.

The move to an explicit system for universal service was largely prompted by increased competition in long-distance and business phone services. The advent of competition made it much harder for service providers to artificially inflate rates. Consequently, there was less revenue collected to subsidize universal service programs.

Congress standardized the payments in the 1996 act by effectively imposing a universal service tax on ratepayers.

Universal service as a regulatory imperative has largely been rendered obsolete by the range of affordable services spawned by competition. For example, satellites and other wireless technologies can provide service to rural areas at much less cost than the traditional wireline network.

As it is, new technologies are penetrating the nation at an accelerating rate. Whereas it took 35 years for traditional telephone service to reach one-quarter of the population, and 26 years for television, it took only 16 years for personal computers and 13 years for cell phones.[27]

Continuing to subsidize higher-cost services will only undermine technological innovation by reducing demand for alternatives. And continuing to expand the eligibility for subsidies will needlessly burden families’ budgets. Ironically, then, a policy intended to ensure affordable service is costing consumers dearly.