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How’s it work?
How’d we get here?
Outcomes and costs
Major issues on the table
How’s it work?
Federal assessment on interstate telecommunications revenues Local Long-Distance Wireless VOIP
Expenditures High cost Low income Schools/libraries Rural health care
Interstate vs. Intrastate Revenues
0
50000
100000
150000
200000
250000
300000
350000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006Source: Universal Service Monitoring Report 2007, Table 1.1
$m
illio
ns
Interstate/Intl.Intrastate
Universal Service Contribution Factor
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
20
00
Q2
20
00
Q3
20
00
Q4
20
01
Q1
20
01
Q2
20
01
Q3
20
01
Q4
20
02
Q1
20
02
Q2
20
02
Q3
20
02
Q4
20
03
Q1
20
03
Q2
20
03
Q3
20
03
Q4
20
04
Q1
20
04
Q2
20
04
Q3
20
04
Q4
20
05
Q1
20
05
Q2
20
05
Q3
20
05
Q4
20
06
Q1
20
06
Q2
20
06
Q3
20
06
Q4
20
07
Q1
20
07
Q2
20
07
Q3
20
07
Q4
20
08
Q1
20
08
Q2
20
08
Q3
Source: www.fff.gov/omd/contribution-factor.html
As
se
ss
me
nt
pe
r d
olla
r o
f re
ve
nu
e
Universal Service Expenditures, 2007 (millions)
$4,287$823
$37
$1,808
Hi Cost
Low Income
Rural Health
Schools/libraries
Major High Cost Programs, 2007 ($millions)
$1,444
$346
$1,392
$645
$460
Hi-Cost LoopHi-Cost ModelCommon LineAccessSwitching
Who is eligible for what?
High cost loop: Rural carriers with costs > 115% of national average
High cost model: Nonrural carriers in states with average costs more than 131% of national average
Local switching: Rural carriers serving 50,000 or fewer lines
Interstate access: High cost price cap regulated carriers
Interstate common line: High cost carriers with rate-of-return regulation
“Eligible Telecommunications Carriers” (competitors) receive the same support per line that the incumbent receives
How’d we get here?
Internal subsidies by monopoly AT&T
1984 AT&T breakup and access charges
Telecom Act of 1996
Some high access charges remain
Interstate Long Distance Revenues and Access Charges, 1985-1993
0
5
10
15
20
25
30
35
1985 1986 1987 1988 1989 1990 1991 1992 1993Source: Crandall and Waverman (1996)
Ce
nts
/min
ute
Revenues
Access Charge
Rev-Access
Interstate Long Distance Revenues and Access Charges, 1995-2005
0
2
4
6
8
10
12
14
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005Source: FCC, Telecommunications Industry Revenues 2005, Table 10
Ce
nts
/min
ute
Revenues
Access charge
Rev-Access
Long Distance Access Charges and USF Contributions
0
1
2
3
4
5
6
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005Source: FCC, Telecommunications Industry Revenues (2005), Table 10
Ce
nts
/min
ute
Access charge
USF
Access+USF
Telecommunications Revenue Trends
0
50000
100000
150000
200000
250000
300000
350000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006Source: Universal Service Monitoring Report 2007, Table 1.1
$m
illio
ns
TollWirelessLocal
Outcomes
Goal of High Cost USF in 1996 Telecom Act
“access to telecommunications and information services … that are reasonably comparable to those services provided in urban areas and that are available at rates that are reasonably comparable to rates charged for similar services in urban areas.”
What do we know about outcomes? “Access” not defined/measured
“Reasonably comparable” not defined/measured
FCC measures subscribership in urban and rural areas
Effect of USF on subscribership is not measured by FCC
Data collected on # of beneficiaries, # of lines, # of requests for support, $ disbursed, support and disbursement processing time
GAO Report (June 2008)
“In the absence of performance goals and measures, the Congress and FCC are limited in their ability to make informed decisions about the future of the high-cost program.”
“Carriers serving similar rural areas can receive different levels of support.”
“[The program] creates an incentive for competition to exist where it might not otherwise occur.”
Texas PUC study 2007
Access not measured
Rural rates “reasonable”
Rural rates below urban rates and unchanged since 2000 (or in some cases, decades)
Settlement (April 2008): Allows higher rates in exchange for subsidy reduction; implies rates were unreasonably low
Independent economic research Local subscription not price-sensitive (1% change in
price 0.1-0.26% change in subscribership)
Loop support: $11,000 annually per subscription added
Switching: $5155 annually per subscription added
Texas USF: $8000-$18,000 annually per subscription added, 1/3 of 1% increase in subscription
Effects of the contribution mechanism Universal Service contributions are similar to
a tax and can be analyzed as such
Explicit costs: Revenue raised
Hidden costs: Benefits society gives up when people change their behavior in response to the price change
Hidden cost of contribution mechanism
“Deadweight loss”:
Value of service that consumers forego, plus operating profits that producers forego, because increased price reduces use of the service
When is the hidden cost large? Additional costs of providing additional
service are low
Value of the additional service to consumers exceeds these costs
Consumer decisions are sensitive to price
Effect of a 1% price change
Wireline subscription 0.01-0.026%
(0.05% for low-income)
Long-Distance minutes 0.7%
Wireless subscription 0.57%
Wireless minutes > 1.0%
Explicit + Hidden Costs
Source: Jerry Ellig, “Costs and Consequences of Federal Telecommunications Regulation,” 58 Federal Communications Law Journal 37 (Jan. 2006).
U Service
Revenue
Hidden Cost
(DW loss)
Total
Cost
Long Distance
2002
$2.7 billion $1.16 billion $3.86 billion
Wireless
2004
$1.76 billion $978 million $2.7 billion
Hidden Cost as a % of Revenues Raised
Source: Jerry Ellig, “Costs and Consequences of Federal Telecommunications Regulation,” 58 Federal Communications Law Journal 37 (Jan. 2006).
Long-Distance USF Contributions
43%
Wireless USF Contributions
56%
General Taxation 25-40%(OMB “rule of thumb” – 25%)
Costliest Federal Telecom Regulations
Source: Jerry Ellig, “Costs and Consequences of Federal Telecommunications Regulation,” 58 Federal Communications Law Journal 37 (Jan. 2006).
Annual Hidden Cost
1. Spectrum Allocation $30 billion
2. USF Contributions $2.14 billion
3. L-D Access Charges $1.5 billion
4. Wireless E-911 $693 million
5. Wireless number
portability
$568 million
Major issues
Cap on high cost fund
Eliminate “identical support” rule
Reverse auctions
Expanded list of services
Expanded funding base
Intercarrier compensation
Contribution mechanism reform
Accountability
Interim cap and “identical support”
Growth of High-Cost Fund
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
Source: Universal Service Monitoring Report 2007, Tables 3.1 and 3.2
$m
illio
ns
CompetitorsIncumbents.
Reverse auctions
Companies compete to offer designated type and quality of service in a designated area
Bidder offering to serve at lowest subsidy receives the subsidy
Subsidy level set by auction should be minimum subsidy needed to attract an efficient company to serve the market
Eliminates incentives for waste under rate-of-return regulation and inaccuracies when basing subsidy on cost models
FCC could auction subsidy for fractions of the market and have multiple winners (when competition yields the lowest cost)
Expanded list of services(FCC proposed Jan. 2008)
Mobility – focus on buildout of rural wireless networks
Broadband – focus on identifying where service is not available and subsidizing infrastructure
USF contributions from broadband Broadband demand highly price sensitive
1% change in price 1.5%-3.76% change in subscribership
10% USF assessment 20% drop in subscribership (about 20 million) $3 billion revenue raised But also $3 billion deadweight loss due to reduced
subscribership Slower deployment in areas not already served
Intercarrier compensation
Intercarrier compensation rates 2004
0
5
10
15
20
25
30
35
40
La
rge
incu
mb
en
t in
ters
tate
Sm
all
incu
mb
en
t in
ters
tate
La
rge
incu
mb
en
t in
tra
sta
te
Sm
all
incu
mb
en
t in
tra
sta
te
Co
mp
etit
or
inte
rsta
te
Co
mp
etit
or
intr
ast
ate
Mo
bile
to
incu
mb
en
t in
ter-
MT
A
Mo
bile
to
incu
mb
en
t in
tra
-M
TA
Ce
nts
/min
ute
Low
High
Effects of intercarrier compensation
Large deadweight loss due to per minute charges ($1.5 billion annually)
Gaming (because access charges exceed cost of switching calls)
Incentive for waste under rate-of-return regulation
Intercarrier compensation options Bill and keep
(See Feb. 2005 “staff analysis” appendix)
Reduce (eg, to interstate incumbent level)
Negotiate (and pass back to encourage competition) Allow company paying access charge to pass it back to customer
who initiated call
How to replace revenue? USF creates same DW loss as access charges Extending USF to broadband creates bigger DW loss Per number subscriber line charge minimizes DW loss
Numbers-based USF contribution
Source of last figure: Jerry Ellig & James N. Taylor, “The Irony of Transparency: Unintended Consequences of Wireless Truth-in-Billing,” Loyola Consumer Law Review 19:1 (2006), pp. 43-69.
Wireline access: Hidden costs approximately unchanged
Long-distance: Hidden costs fall to approximately zero
Wireless: Hidden costs fall by $530 million annually
Numbers-based charge can reduce hidden costs by $1.7 billion (or more) annually.
Hidden cost falls by 80 percent, from $2.14 billion to $440 million.
Caveats around the edges
Low-income demand for wireline access is 2-3 times more price sensitive than average household
Per number charge on additional “family plan” wireless lines would be a large % of the price
Per number charge on low-usage per-minute wireless plans would be a large % of the price
Accountability for outcomes
Define services
Define and measure availability (eg, homes passed)
Define and measure “reasonably comparable” (eg, ratio of rural to urban rates)
Set goals % of homes passed in rural areas within X% of homes passed in
urban areas Rural rates no more than X% higher than urban rates
Independent retrospective analysis to determine how much of the observed change in measures is attributable to USF
For more information …Mark Goldstein, “Telecommunications: FCC Needs to Improve
Performance Management and Strengthen Oversight of the High-Cost Program,” GAO Report 08-633 (June 2008).
Jerry Ellig, “Universal Service Reform: Start with Accountability,” Mercatus on Policy (July 2008) available at http://www.mercatus.org/repository/docLib/20080729_RSP_MOP22_web.pdf
Jerry Ellig and Andrew Perraut, “Public Interest Comment on High Cost Universal Service Support,” http://www.mercatus.org/Publications/pubID.4487,cfilter.0/pub_detail.asp
Jerry Ellig, “Costs and Consequences of Federal Telecommunications Regulation,” 58 Federal Communications Law Journal 37 (Jan. 2006), available at http://www.mercatus.org/Publications/pubID.1229/pub_detail.asp
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