The Regulation

The Federal Communications Commission (FCC) seeks comments in its Biennial Review of regulations promulgated under the Telecommunications Act of 1996. One set of regulations established “universal service” programs that subsidize rural telephone companies, telephone service for low-income households, Internet service for schools and libraries, and telecommunications service for rural health care facilities. This comment provides general suggestions on the manner in which commission staff should go about evaluating universal service regulations and also provides citations to significant scholarly research on the costs and outcomes of the universal service programs.

Our Findings

• It is impossible to determine whether these programs have accomplished their goals, because the FCC has never defined or measured the outcomes the programs are supposed to achieve.
• Telecommunications companies make mandatory “contributions” to fund the universal service programs, and these costs are passed on to consumers on their phone bills. But these contributions measure only part of the cost of the programs.  Universal service contributions increase the price of telecommunications services, which in turn may induce consumers to use less of these services. The value consumers forego by using less service, plus the operating profits companies lose on the service consumers don’t buy, is part of the total social cost of the universal service programs.

By the Numbers

A 2006 Mercatus Center study estimated that $2.7 billion in universal service charges on interstate long-distance in 2002 cost producers and consumers $1.16 billion in forgone welfare. The charges generated a welfare loss of $978 million for wireless users. Clearly, the magnitude of these losses suggests that they deserve careful consideration in the biennial review.

Recommendations

The biennial review should:

• Assess whether the universal service programs have achieved specific outcome-based performance goals.

• Examine all applicable studies and data to observe whether the regulations are actually causing the observed results.

• Evaluate all social costs associated with universal service programs, not just the obvious accounting costs.

• Modify or repeal aspects of the universal service programs that do not achieve the intended results at an acceptable cost.