Universal Service: How Much Is Enough?
Loube, Robert, Journal of Economic Issues
The Telecommunications Act of 1996 dramatically altered the regulatory environment of the telecommunications industry. The purpose of the act was to exchange regulatory pricing principles for market prices. Regulators would no longer establish just and reasonable rates for retail customers. Instead, they would promote competition and reduce regulation. The competitive marketplace would ensure lower prices, higher quality services, and the rapid deployment of new technologies.(1)
Conventional wisdom held that pressure from the newly released market forces would destroy existing cross subsidies among ratepayers that supported universal service prior to the passage of the act (FCC 1999, 10). Anticipating these events, the act expanded the Federal Communications Commission's role in preserving and advancing universal service. The act required the Universal Service fund to be explicit and sufficient. (2) Since the passage of the act, the FCC has significantly increased universal service funding. (See table 1.) However, it is still not clear if the current funding is sufficient. The purpose of this paper is to review the definition of sufficiency and to use the definition to determine sufficient expenditure levels. Three dimensions of sufficiency will be addressed. First, programs associated with ensuring that households can afford telephone service will be investigated. Second, the types of services that are supported will be examined. Finally, the funding for large carriers serving rural and high-cost areas will be reviewed.
Programs for Households
Universal service occurs when telephone service is provided to all households independent of income, race, and other demographic factors. In the context of this definition, universal service is measured by the telephone penetration rate, which measures the percentage of households with telephone service. A sufficient amount of support would ensure that the goal of serving all households is met. A lesser but still significant goal would be to raise the low-income household penetration rate to the national average rate.
The national average penetration rate in the United States has increased from 91.8 percent in 1984 to 94.5 percent in 2001. The low-income penetration rate increased from 80.1 percent to 876, while the penetration rate for medium and high-income consumers remained constant. Even with this change, the low-income rate lags far behind the rate for other income groups. (See table 2.) To achieve the goal of raising the low-income penetration rate would require providing telephone service to an additional L6 million low-income households (Belinfante 2002, tables 5 and 6).
Federal Communications Commission efforts to increase the low-income penetration rate began in 1985. Under the Lifeline program, the FCC waived the subscriber line charge if a state agreed to match that reduction with a lower monthly state rate (FCC 1985, 6). In 1998, the Link-up program was initiated. Link-up helps low-income consumers begin telephone service by paying half of the connection charge but not more than $30 per household (FCC 1987, 17).
The 1998 Universal Order (FCC 1997) enhanced the Lifeline program. Federal support for low-income consumers was increased from $3.50 to $5.25 without state matching funds, and if states match the federal subsidy, a qualifying customer can receive up to $7.00 in federal aid and $3.50 in state aid for payment of the monthly local telephone bill and the subscriber line charge. In addition, all companies wishing to participate in federal universal service programs must offer a low-income program (FCC 1997, 341-363). Following the CALLS Order, the Lifeline program was revamped so that the available support would increase with the scheduled increases in the subscriber line charge (FCC 2000, 95-96). Currently an eligible consumer can receive up to a $13 monthly subsidy for telephone service. At that rate, bringing service to the additional 1. …