Highlights

The Regulation

The FCC collects mandatory "contributions" from providers of interstate telecommunications services to subsidize rural telephone companies, phone service for low-income households, communications services for rural health care facilities, and Internet access for schools and libraries. The FCC has sought comment on reforming the method of fee assessment, in particular asking whether the fees should be assessed based on individual telephone numbers rather than as a percentage surcharge on interstate and international telecommunications revenues.

Our Findings

Assessing universal service fees based on long-distance and wireless usage causes consumers to use less of these services, leaving them less well off. While a numbers-based assessment also causes some consumer welfare loss, numerous studies indicate that the loss is substantially lower than under the current contribution regime. Shifting to a numbers-based assessment would allow the FCC to fund the Universal Service Program at substantially less cost to consumers and the economy.

By the Numbers

A 2006 Mercatus Center study found that the $2.7 billion in federal universal service charges on interstate long-distance in 2002 cost producers and consumers $1.16 billion in lost welfare (43 percent of revenue raised). For wireless, federal universal service charges generated a welfare loss of $978 million (56 percent of revenue raised). Using 2004 data, Ellig and Taylor estimated that the welfare loss associated with wireless universal service charges totaled $994 million, equal to 56 percent of the $1.77 billion in revenues raised. Switching the USF fee to a numbers-based charge would cut the deadweight loss by $529 million. In one of the first studies of the effects of universal service assessments on consumer welfare, MIT economist Jerry Hausman estimated that the social welfare loss associated with universal service assessments on long-distance averaged between 65 and 79 cents for every dollar raised by the assessment. Hausman estimated that every dollar raised by USF assessments on wireless reduced producer and consumer welfare by 53 cents on average.

Recommendation

The FCC should adopt a numbers-based method of collection to fund the universal service programs.