Killing With Kindness: Fatal Flaws in the $5.7 Billion Universal Service Funding Mission and What Should be Done to Narrow the Digital Divide

Frieden, Rob, "Killing With Kindness: Fatal Flaws in the $5.7 Billion Universal Service Funding Mission and What Should be Done to Narrow the Digital Divide" (July 2005).

Abstract:

Annually the FCC requires consumers to pay over $5.7 billion dollars to subsidize service by local exchange carriers operating in high cost areas, and the rates paid by residents in rural areas and Indian reservations, the poor, schools, libraries, rural hospitals and clinics. Despite this significant sum, the universal service mission remains unsolved even though new technologies and strategies could make parts of the task achievable. On the other hand, the scope of the universal service mission has become more extensive and costly as Congress identified new beneficiaries in the Telecommunications Act of 1996, including some broadband applications such as the transmission of ex-rays from a rural clinic to experts located in major urban hospitals and the installation of internal wiring in schools and libraries. Additionally the stakes have risen as a Digital Divide separates people with cheap and plentiful broadband access and those without.

The FCC and its state public utility counterparts must balance the wants, needs and desires of numerous stakeholders including ones with significant political clout. Historically the universal service mission has served such ulterior motives as preserving the Bell System monopoly, transferring funds from urban to rural carriers, subsidizing service even for consumers quite able to afford the full price and making it possible for regulators to showcase extraordinarily cheap local calling rates. Now that small and large volume consumers alike have readily available ways to evade some universal service funding burdens, the FCC and state regulators cannot ignore the inefficiencies and inequities in the system.

Technological innovations such as Voice Over the Internet Protocol and marketing strategies that attempt to make calling card long distance an enhanced, information service show that carriers and consumers alike have resorted to self help. Because universal service funding largely relies on long distance telephone service minutes of use, carriers and consumers have devised ways to exempt such traffic thereby increasing the burden on others. Universal service funding avoidance, coupled with an increasing financial burden makes the existing regime unsustainable.

This paper will examine the flaws, defects and political accommodations existing in the current universal service funding process with an eye toward proposing a new workable system. The paper will propose a system that spreads the financial burden among all users of networks that offer services that access the public switched telephone network. Additionally the paper will identify ways to make funds work better, including equipment grants that have much lower recurring costs than annual switched service discounts. Lastly the paper will address what compromises and tradeoffs that Congress must impose on incumbent universal service beneficiaries, such as local exchange carriers.

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