Universal Service Subsidies Cost Consumers $17.5 Billion -- 2

[David Farber <farber () central cis upenn edu>]

Posted-Date: Tue, 7 Feb 1995 16:39:59 -0500
From: gnu () toad com


[This is retyped from a `Citizens for a Sound Economy Foundation'
 briefing.  I have a more detailed paper for folks who are interested.
 It opened the eyes of even this libertarian.  I was surprised that
 the subsidies are 3/4 of the average price of home telephone service.
 Yes, I realize that prices won't drop by 3/4 if this changes;
 instead, people who want more expensive services will pay more for
 them, while e.g. urban long-distance callers will pay less because
 they're cheapest to serve.  -John]


If the 104th Congress does nothing to change the way federal subsidies
are handed out to telephone companies, American consumers will be out
approximately $17.5 billion, according to a new study by Citizens for
a Sound Economy (CSE) Foundation.


Wayne Leighton, an adjunct scholar at CSE Foundation and the author of
the study, urges Congress to carefully re-examine the need for
universal service subsidies.  "Rather than expand these subsidies,
Congress should look for ways to better target them to those actually
in financial need," says Leighton.


Leighton cites the privately-held telephone company serving Bretton
Woods, a small but affluent resort community in New Hampshire, that
last year received $22,153 from a special taxpayer-funded program that
underwrites companies with high per-line service costs.  "For a
telephone operation with only 269 lines, most of which serve hotels
and vacation homes, the Bretton Woods allocation amounts to a subsidy
of $82 per subscriber," says Leighton.


The funds given to the Bretton Woods phone company are the tip of the
subsidy iceberg.  By far the largest flows of money come from hidden
cross-subsidies imposed by state public utility commissions and the
Federal Communications Commission.  Through these subsidies,
residential customers, rural customers, and local callers pay lower
prices at the expense of business customers, urban customers, and
long-distance callers.


"High-cost is not the same as high-need," argues Leighton.  "Indeed,
poor inner-city residents rarely benefit from these programs, since
their telephone companies spread costs over a great many users and
thus fail to meet the qualifications for being "high-cost" on a
per-person basis.  The result is subsidies that often help middle- and
upper-class subscribers lower their monthly phone bills."


In his study, Leighton shows that urban-to-rural,
business-to-residential, and long-distance-to-local transfer charges
total $15.3 billion.  Combining this sum with payments and loans made
by the FCC, the Rural Electrification Administration, the Rural
Telephone Bank, and the National Exchange Carriers Association service
pool increases the total amount of telecommunications subsidies to
approximately $17.5 billion.  "All of this says nothing about the
potential cost saving that might accompany alternative market
structures," says Leighton.  "In fact, at least one study has
concluded that competition at the regional operating level would
create about $20 billion in consumer savings every year."


Leighton calculates that at about 13 percent of total industry
revenue, the total amount of subsidies in the telecommunications
market equals more than $180 per year for every U.S. family, or more
than three-quarters of the cost of providing basic telephone service.
"To put this in context, the total is over 10 times greater than the
FCC's entire 1994 budget, and larger than the total amount paid out in
salaries and wages by all seven of the regional Bell operating
carriers," Leighton says.


In addition to re-examining universal service subsidies, Leighton says
Congress should restructure the system so that any subsidies are
imposed in an explicit fashion so as to increase accountability for
the costs -- and in a way that does not distort or prevent
competition.  "Ideally, any subsidies should be provided by Congress
through on-budget appropriations.  Short of that, assessments could be
imposed on providers of telecommunications services in a proportional
fashion, to be paid in to specific funds established for that
purpose," says Leighton.


CSE Foundation is a nonpartisan research and educational organization
formed in 1984 to study and develop market-based solutions to public
policy problems.


Media contact:  Brent Bahler, +1 202 783 3870.




Here's a few of the tables from the full paper:


                Business-to-Residential Subsidy
          (residential and business prices per line)


                        Residential     Business        Net Transfer
        Current            $231           $560           $4.2 billion
        Undistorted        $320           $487               $0


                      Urban-to-Rural Subsidy
  (Average total payments per line, with and without rate-averaging)


                        Rural Rate      Urban Rate      Net Transfer
        Rate-averaged      $643           $664           $9.3 billion
        Not rate-averaged  $980           $582              $0


                    Long Distance To Local Subsidy
(Estimated long distance charges under two different arrangements, in 1993 $)


                        Price/Minute    Net Transfer
        Current            $.195          $2.3 billion
        Undistorted        $.165              $0


Explicit subsidies:


        Universal Service Fund                  $725 million/year
        Rural Electrification Administration    $204 million/year
        Rural Telephone Bank                    $177 million/year
        National Exchange Carriers Association
                service pool                    $892 million/year




From: Gerald Faulhaber <faulhabe () wharton upenn edu>
Subject: Re: comments
To: farber () central cis upenn edu (David Farber)
Date: Tue, 7 Feb 1995 17:12:14 -0500 (EST)


Dave--


Yes, the extent of telephone subsidies are enormous.  However, they are
much smaller today than they were pre-1985, as the FCC has been slowly
working the biggest ones down.


Two points: the numbers here are too big.  $17.5 B is way overestimated;
but $5 B is certainly within the ballpark.


This money is not "going to the telephone companies;"  it is being used
to reduce rates for favored political groups.


Another point: these subsidies at the Federal level persist at the
insistence of Congress.  The FCC has been trying to get rid of them for a
decade, and Congress always yanks their chain if they move too fast.  At
the state level, local PUCs love to keep access rates low at the expense
of long distance, and their constituents want it just that way.  You need
to recall that the demanders of subsidies are (you guessed it!) telephone
customers, not "corporate America."


I hope Congress does decide to get outraged about its own behavior and
eliminate these subsidies.  Fat chance, in my view.


--Gerry