Out of Control

Here’s an excerpt from the Executive Summary:

Federally subsidized phone service costs taxpayers a large multiple of what the most efficient network solutions would. That is because “high-cost” subsidies are delivered not to low-income customers, but to rural phone companies, typically on a “cost-plus” basis. The more service costs, the more money the phone carrier receives – a clear incentive to avoid cost savings. This not only bloats administrative expenses, it undercuts market forces that would naturally lead consumers to abandon traditional fixed lines in favor of newer, cheaper, and functionally superior technologies.

Today, satellite telephone networks are available in Alaska, with retail subscriptions costing $120 per month that include 500 minutes of airtime. That is quite expensive compared to nationwide cellular calling plans, or even lower-cost satellite subscriptions, but it is a bargain compared to what is often spent in federal “universal service” programs. Traditional fixed-line service is provided to outlying areas, courtesy of federal taxpayers, with monthly per-line subsidies often exceeding $120 a month – customer charges additional. We could provide residents in such areas free phone service while reducing government expenditures, simply by buying satellite phones for households.

While Alaska features the highest level of per-capita federal subsidies, other states – such as Wyoming, North Dakota, South Dakota, Montana and Mississippi – also collect. subsidies several times the national average. And phone carriers in wealthy enclaves such as Jackson Hole, Wyoming, where the boast that “the billionaires are pushing out the millionaires” applies, garner extremely high – and highly inefficient – payments.With both income and net worth above the national averages, telephone carriers in Jackson Hole received over $282 per subscriber in subsidies from the High-Cost Fund in 2005.

Perhaps the most sensational example lies in the 50th state, where the Sandwich Isles Telephone Company collects some $13,345 a year per telephone line – almost ten times the high-cost satellite solution.

As a rule, poor people do not benefit from these lavish expenditures. To the extent that landline telephone rates are reduced below other alternatives, the price of land (as reflected in home prices and apartment rents) will rise by an offsetting amount, eliminating the gain to consumers. Money that would be spent on phone service is instead spent on rent.

Hazlett details the political and regulatory inertia that resists USF overhaul, but suggests that a good starting place would to cap and reduce the USF’s “High Cost Fund,” which disperses payments to rural companies to extend service to remote areas, yet, as noted, does so on a cost-plus basis. Another is the use of “reverse auctions” to assign universal service obligations, a plan endorsed by FCC Chairman Kevin Martin. Here, phone carriers compete to become the “provider of last resort” in areas where regulators deem local services insufficient, bidding a price, to be paid by the government, to supply such services. The lowest-cost bidder wins.

Download Thomas Hazlett’s “Universal Service” Telephone Subsidies: What does $7 Billion Buy? here.

See also Adam Thierer’s post at the PFF blog, which brought the report to my attention.