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The FCC’s Universal Service Folly

Posted By Diane Katz On November 8, 2011 @ 2:00 pm In Economics | Comments Disabled

Are mobile phones and Internet access necessities that require taxpayers to foot the bill for the supposed “have-nots”? The Federal Communications Commission (FCC) evidently thinks so.

The FCC voted [1] unanimously to phase out subsidies for traditional telephone service and instead use $5 billion annually from the “Universal Service Fund” (USF) to equip residents of rural areas with mobile phones and Internet access.

With traditional telephone service now available everywhere, it’s predictable that the commission would concoct another scheme to keep its USF taxing power intact. But there’s little evidence that rural areas need telecom subsidies of any sort. According to the FCC’s own data [2], the gap between broadband services in urban and rural areas is narrowing rapidly. In 2007, 38.8 percent of rural households were equipped with high-speed Internet compared to 53.8 percent of urban households. Just two years later, the rural proportion increased to 54.1 percent compared to 65.9 percent of urban households.

Simply put, the deployment of broadband to rural communities lags that of urban areas by just two years—a small difference compared to the gaps of past technology deployment. That hardly justifies a whopping subsidy of $3,857 per rural household over six years, as estimated by the commission.

Not only are the subsidies unnecessary, but they are likely to undermine the very competition that is most likely to result in greater availability and affordability of services. Subsidies will go only to companies that offer high-tier services such as “distance learning, remote health monitoring, VoIP, and two-way high quality video conferencing,” thereby leaving lower-cost basic service providers unable to compete.

The one thing the commission seems to have done right is to commit to a price cap on the broadband subsidies. Rights to deploy the subsidized services will be awarded under a “reverse auction,” whereby firms will bid against a price ceiling. While this cap will help to contain the cost of subsidized services, there’s no guarantee that the commission won’t raise the cap in the future. Meanwhile, urban ratepayers will continue to pay artificially high prices to replenish the USF.

By subsidizing rural broadband, the FCC is attempting to offset the additional costs of deploying technology to communities with low population density. But those costs reflect the realities of rural life, and it is simply wrong to force city dwellers to pay for the choices made by rural residents.

Whether one chooses to live in a city or rural area, tradeoffs are inevitable. 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.

 


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URL to article: http://blog.heritage.org/2011/11/08/the-fcc%e2%80%99s-universal-service-folly/

URLs in this post:

[1] voted: http://transition.fcc.gov/Daily_Releases/Daily_Business/2011/db1027/DOC-310695A1.pdf

[2] FCC’s own data: http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-301823A1.pdf

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