I don’t have to tell you that times are changing. There is no place where that is more apparent than in the way we communicate with one another. It seems as if my kids are constantly finding something new to do with their cell phones, laptops, or other gadgets; with any luck, I catch up a few months later. Competition has brought lower prices, remarkable innovations, and a knitting together of the world in a way that we wouldn’t have imagined a few years ago. In the midst of all of this progress, however, we can’t lose sight of the basics.
That brings me to the Universal Service Fund (USF), a topic which has recently surfaced as a subject of increasingly intense scrutiny and debate. You might recognize the USF as it generates a line item on your phone bill every month. Some individuals are currently arguing that the USF should be scrapped or restructured. It never hurts to try to make something better; however, it’s essential that any change in the workings of the USF be approached with extreme caution.
The topic is complex and really goes to the very heart of market economics and effective public policy. Let me begin by providing something of a “big picture” framework. Then, we’ll cut to the specifics.
As I have frequently said in print and testimony to various legislative, regulatory, and congressional bodies, markets are extremely powerful and achieve incredible things in a seemingly invisible and effortless manner; but they are not perfect. Markets are, in essence, a mechanism to allocate resources. If left unfettered, they do so with great efficiency. They do not, however, honor social policies and priorities beyond efficiency, and they do not capture social benefits or costs that extend beyond private transactions. These facts have long been recognized. Even in The Wealth of Nations, Adam Smith’s seminal work in 1776 which first fully exposited the structure of a market economy, he noted these phenomena and suggested numerous situations in which intervention was necessary and justified.
When markets are regulated, it is not at all uncommon for various subsidies to surface, often as a matter of conscious choice or because there is simply no mechanism to prevent it. For example, during the era when banking was highly constrained, loan revenues commonly funded a variety of other services, while commercial accounts subsidized checking account costs for households. When trucking was subject to extensive rate controls, heavily traveled routes were used to subsidize more remote areas. Once competition entered these sectors, market forces compelled the fees for each type of service to be indicative of their cost. In the absence of any other considerations, competition tends to provide the outcomes which maximize economic wellbeing. If a social priority is sufficiently compelling to outweigh the advantages of optimal efficiency (and it often is), it is within the power and responsibility of government to make appropriate adjustments. Such actions are a part of the social contract which underlies the philosophy giving rise to Western democracies.
In the case of communications, it became a widely accepted priority at least by the 1930s that providing basic telephone service availability to everyone at affordable rates was a worthy national goal. This view emerged because of the impact that telecommunications was having on the integration of the country and the risk of rural and remote areas being left out of future opportunities. During the long period of telephone regulation, service to high-cost areas was partially funded through the rates that were set for other, more densely populated areas and for long-distance calling. Once the market became more open to competition, such implicit subsidies were no longer possible. Thus, in order for universal service to be maintained at affordable prices, an explicit subsidy was required.
If anything, the need to assure that everyone has a reasonable opportunity to communicate is more critical than ever. Moreover, this situation is particularly acute in Texas because of its vast geographic territory and wide dispersion of population. According to an analysis conducted by the Public Utility Commission of Texas (PUC) a few years ago, the cost of providing basic service in some areas ranges as high as $400 per month. Similarly, the average cost in the regions designated as “high cost” were about 50% higher than the average for the state. In order to assure the continuation of affordable service in these areas, Texas implemented a Universal Service Fund. This program is funded by a fee that is assessed on all basic telephone customers which is explicitly listed in monthly billing statements. The USF provides a mechanism to reduce charges in high-cost areas, as well as programs for low-income and hearing-impaired individuals. The payments from the fund are allocated and administered by the PUC. The subsidy remains with the customers if they switch to alternate providers and it is offset by reductions in charges for other services (one of the factors leading to dramatic reductions in long-distance rates).
While some constituencies now maintain that the USF should be curtailed or eliminated, any alterations in the system should only be made cautiously and after very careful consideration of the consequences. Ironically, much of the pressure for major changes is coming from relatively new entrants to the telecommunications market who have chosen not to participate in high-cost areas. It should be noted that, while much of the USF flows to provide service to users in high-cost areas, the social benefits are observed across the entire state.
Given the complex and interrelated nature of economic activity, accessibility to customers and suppliers in all segments of the state yields “spillover” gains beyond the immediate areas receiving the subsidies. Such improvements will not be captured in a “pure” market. To the extent that universal service at affordable prices remains a significant social priority, a mechanism such as USF remains an appropriate public policy initiative. In the absence of some types of specific provisions, market forces will compel that all users pay the full amount of service, and affordable rates in many areas will be eliminated.
It is my understanding that the PUC is presently conducting a comprehensive study of the USF. This information and that from other competent analysts should be carefully evaluated before making any major policy changes. Telecommunications services and markets are clearly evolving, but that fact does not in any way negate the traditional public policy priorities. The consequences could be substantial, and the existing approach appears to be generally achieving the desired outcome in a reasonable and effective manner.
Adequate and affordable phone service is essential to economic progress. However, many areas of the state are too sparsely populated or otherwise too high cost to be desirable business for some providers. Every fee, tax, subsidy, and other market variation is worthy of examination now and then. But when it comes to eliminating or materially changing the Universal Service Fund, we had better be very careful about what we ask for.