Top Economists Decry ‘Waste, Fraud, and Mismanagement’ of the Universal Service Fund’s High Cost Fund

by Latoya Livingston on October 16, 2013

Telephone off the HookOver the decades, many organizations, including the Minority Media and Telecommunications Council, have long touted and still believe in the benefits of the Universal Service Fund (USF) as a beacon of hope for millions of low-income and rural Americans in need of telephonic and broadband connectivity.  However, in their recently released paper titled “Unrepentant Policy Failure: Universal Service Subsidies Invoice and Broadband” (USF paper), Thomas W. Hazlett and Scott J. Wallsten outlined their case that the current structure of the Universal Service Fund, particularly in regard to the High Cost Fund allocation, is wrought with waste, fraud, and mismanagement.

Since 1998, there have been $110 billion in USF expenditures, of which $64 billion went to telephone carrier subsidies to extend services out to one-half of one percent of U.S. households.  In federal carrier subsidies alone, about 600,000 homes received service at a cost of $106,000 per home.  In fact, some carriers receive more than $10,000 per line per year to support voice services.  The USF paper pointed out that:

FCC data show[s] that mobile voice service is available to 99.9 percent of households and wireless broadband service to over 99.5 percent of the U.S. population, including 97.8 percent of rural residences.  In addition, satellite systems supply voice and data services to households virtually everywhere people live in the United States, using networks built without subsidies.  Even with subsidized lines, subscribers typically pay $400 a year or more just for voice service.  While some USF dollars help low-income subscribers pay their bills, 80% of poor households receive no subsidies and yet pay the USF tax.

The USF paper also pointed out that despite the Government Accountability Office’s (GAO) acknowledgment that there was rampant fraud, waste, and abuse within the High Cost Fund, the FCC only ordered a $3,000 per line per year cap on subsidies in its 2011 Order – in spite of the fact that “satellite voice-and-broadband service is offered to virtually every U.S. household for $600 a year.”  Regardless of this, the FCC reform’s initial effects were to increase the High Cost Fund by about $400 million.

Although the FCC’s 2011 Order was supposed to address many of the problems set forth by the GAO, the paper points out several flaws. According to the authors, the Order:

  • largely retains the cost-plus accounting framework,
  • adopts a per-line “cap” that will have virtually no effect on the size of the fund,
  • sets a “budget” whose binding constraint appears to be a floor on spending rather than a ceiling,
  • includes no mechanism that will allow regulators to determine whether the subsidies have any effect in increasing rural broadband access, and
  • reduces the effectiveness of some of the FCC’s otherwise positive reforms.

The authors contend that in an effort to combat the waste, fraud, and abuse outlined in the GAO Report, the Order mandated that the FCC use competitive bidding to provide subsidies in currently “unserved” areas, but only if the incumbent provider refuses to offer service at subsidies based on cost models.  The authors of the USF paper contend that instead of resolving the problems set forth in the GAO Report, the Order extended subsidies from voice to broadband and mandated increases in payments to carriers.

The paper went on to suggest that the push to modernize the High Cost Fund by switching from funding narrowband (voice) to subsidizing broadband (data) will not address what the authors view as the primary problem with the Fund: USF’s flawed structure that provides “new justifications for old regulations.”

The authors also questioned “why broadband carriers required massive subsidies as unsubsidized markets have already made mobile broadband service available to 99.5 percent of U.S. households, cable TV systems (virtually all of which provide broadband connections) pass more than 99.3 percent of households, and phone companies offer digital subscriber line (DSL) service in 97 percent of rural areas.”  The authors explained that for those rural areas not covered, households had access to multiple satellite systems, which blanket the entire nation without the use of subsidies.

So, as the authors contend, the parties actually reaping the benefits of the High Cost Fund are: “(a) the owners of the high-cost rural telephone companies, encouraged to operate with excessive cost structures – too many private jets, overpaid managers, gold-plated offices, etc.  –and (b) landowners in areas where service is available due to the subsidies,” which is paid for by customers – rich and poor alike.  In fact, the authors point out that low-income consumers face an inequitable burden since they spend a relatively large proportion of their income on international calls and are disconnected from the network for non-payment of heavily-taxed long-distance services.

While the FCC is reforming how carriers’ costs are defined, how subsidies are awarded, and how progress is monitored, the authors purport that there is little chance that, when actual results are registered and regulatory measures are implemented, there will be positive change.  When all is said and done, the authors contend that the over $88.5 billion in subsidies paid through USF have a weak impact at best on extending voice services; in addition, the marginal positive impact has been offset by the tax burden placed on domestic and international long-distance phone calls and wireless voice services.

Put concisely, the paper states that “the FCC provides a new rationale for subsidies – substituting ‘broadband’ for ‘voice’ – breathing renewed political life into a failed government initiative that taxes urban phone users, most heavily poor households who use wireless phones and make long-distance (including international) calls, in order to subsidize phone companies and property owners in rural markets.” It goes on to state, “Administrative failure, market competition, and technological evolution have rendered the USF system obsolete.”

In the end, the authors suggest that an agency, such as the Government Accountability Office, the Congressional Budget Office, or the Office of Management and Budget conduct an independent investigation on whether the program is effective and establish the “dramatic expense and regressive” consequences of the USF tax.

While MMTC strongly disagrees that the Universal Service Fund, its E-Rate Program, its Lifeline-Linkup Program, and its High Cost Fund are no longer needed, we do agree that the system does have some waste, fraud, and abuse, and that additional steps are needed to resolve these issues.  As we progress further into the Digital Age, it is vital that everyone is connected, and that those with access are not placing undue burdens on low-income Americans.

  • Latoya LivingstonLatoya Livingston is a Washington-D.C.-based attorney with years of legal experience working in the private and public sector. Currently, Attorney Livingston serves as a Senior Attorney and the Earle K. Moore Fellow at MMTC.
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