Over Half of USF High-Cost Fund used for “General Expenses”

Over Half of USF High-Cost Fund used for “General Expenses”

Wallsten Urges “Radical Overhaul” before extending to Broadband

Contact: Amy Smorodin
(202) 828-4405

February 23, 2011 – Over half of subsidies, or $.59 of every dollar, paid through the High-Cost Universal Service Fund go to general expenses of firms, not to directly providing support to high-cost lines, finds Scott Wallsten in “The Universal Service Fund: What Do High-Cost Subsides Subsidize?,” released today by the Technology Policy Institute. This research underscores the inefficiency in the current universal service subsidies program and, in particular, the high-cost fund. Policymakers should use the push to include broadband as part of USF to implement radical reforms.

For the study, Wallsten, TPI Senior Fellow and Vice President for Research, analyzed data submitted by 1400 recipients of high-cost subsidies from 1998 to 2008. “This analysis suggests that on average $0.59 of every dollar in high-cost subsidies given to recipient ILECs goes to inflated overhead expenses,” the author states. “That result holds even controlling for firm size and firm fixed effects. That is, more than half of all high-cost funds end up paying for goods and services that are unrelated to the goals of the program.”

While Wallsten suggests that the most useful reform would be to focus more on low-income assistance instead of high-cost areas, he offers for suggestion to how to make high-cost subsidies more efficient:

  • The program should explicitly consider the use and cost-effectiveness of satellite broadband, especially considering that the soon-to-be-available next generation of satellites will offer download speeds of between 5 and 25 Mbps.
  • The universal service program should be reformed so it does not rely on cost-based, rate-of-return regulation, which eliminates the incentive for firms to operate efficiently and creates incentives to inflate reported costs.
  • To the extent that the Fund will subsidize multiple providers in an area, it should set the subsidy amount to be equal to that necessary for the lowest-cost provider, not to whatever the incumbent already receives.
  • The Commission should consider using auctions to define the level and distribution of subsidies. While auctions would have to be designed to address such issues as what to do in cases where the “provider of last resort”does not win the auction, the worst outcome of a well-designed process would be the status quo.

“The current universal service system is broken,” Wallsten concludes. “The widespread belief among policymakers that it should evolve from subsidizing voice to subsidizing broadband presents an unprecedented opportunity for reform. We should not let this opportunity pass us by.”

The Universal Service Fund: What Do High-Cost Subsides Subsidize?” is available on the TPI website.

The Technology Policy Institute

The Technology Policy Institute is a non-profit research and educational organization that focuses on the economics of innovation, technological change, and related regulation in the United States and around the world. More information is available at https://techpolicyinstitute.org/.

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