Outcomes and Alternatives for Universal Telecommunications Service: A Case Study of Texas - Working Paper

The following article was recently published in the Texas Review of Law and Politics, Vol. 12, No. 1, Fall 2007 edition.  

The Study

Universal service programs for telecommunications satisfy their public interest objectives when they achieve the desired outcomes at the least possible sacrifice of overall consumer welfare. This study assesses the outcomes created by the largest universal service programs, the social costs of the funding mechanisms, and the impact of proposed reforms. We use the State of Texas as a case study, because Texas has moved aggressively to promote competition, deregulate rates, and reform universal service.

Our Findings

• The High-Cost subsidy programs, which subsidize phone service in rural areas, may have created rates that are unreasonably low.
• The only rural areas where the Texas universal service programs currently cause phone service to be available where it would not otherwise exist are those that would not have wireline, wireless or satellite phone service in the absence of subsidies.
• The Lifeline program, which subsidizes telephone service for low-income households, is much more cost-effective than the High-Cost programs at inducing additional households to get on the telephone network.
• The current funding mechanism, while more sustainable and less costly than the implicit subsidies it replaced in 2000, generates substantial social costs in addition to the direct cost from the amount of revenue raised. This occurs because the contributions are calculated as a percentage of revenues, which effectively imposes a usage-based fee on wireless and long-distance-services whose demand is very price-sensitive.

By the Numbers

• The High-Cost programs have increased telephone subscription by 50,000 - 125,000 subscribers (0.37 - 0.93 percent), at a cost of $4,000 - $10,000 per additional subscriber.
• The Texas Lifeline program has increased subscription by about 55,000 subscribers (0.4 percent), at a cost to Texans of $442 per additional subscriber.
• In 2005, universal service assessments generated $100 million - $176 million in social cost in addition to the $618 million of revenue raised.
• The social costs of raising the required revenues could be cut by 50 percent if the PUC substituted a numbers-based charge for assessments as a percent of revenues.

Conclusion

• Our analysis confirms the Texas Public Utility Commission's conclusion that the pre-2000 system of implicit subsidies was not sustainable.
• There are many options to reduce the size of the largest programs by allowing basic local rates to rise or adjusting subsidy amounts to reflect updated estimates of costs or revenues.
• Exempting low-income households on subsidized lines from rate increases, or increasing Lifeline funding to offset rate increases, would reduce the savings from reform by about 5 percent.
• The PUC has ample authority to make most of these changes on its own, without new legislation.