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Ellig Rural Universal Service August 2008

Ellig Rural Universal Service August 2008






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    Ellig Rural Universal Service August 2008 Ellig Rural Universal Service August 2008 Presentation Transcript

    • Rural Universal Service Jerry Ellig Senior Research Fellow [email_address]
    • Outline
      • How’s it work?
      • How’d we get here?
      • Outcomes and costs
      • Major issues on the table
    • How’s it work?
      • Federal assessment on interstate telecommunications revenues
        • Local
        • Long-Distance
        • Wireless
        • VOIP
      • Expenditures
        • High cost
        • Low income
        • Schools/libraries
        • Rural health care
    • Who is eligible for what?
      • High cost loop: Rural carriers with costs > 115% of national average
      • High cost model: Nonrural carriers in states with average costs more than 131% of national average
      • Local switching: Rural carriers serving 50,000 or fewer lines
      • Interstate access: High cost price cap regulated carriers
      • Interstate common line: High cost carriers with rate-of-return regulation
      • “ Eligible Telecommunications Carriers” (competitors) receive the same support per line that the incumbent receives
    • How’d we get here?
      • Internal subsidies by monopoly AT&T
      • 1984 AT&T breakup and access charges
      • Telecom Act of 1996
      • Some high access charges remain
    • Outcomes
      • Goal of High Cost USF in 1996 Telecom Act
      • “ access to telecommunications and information services … that are reasonably comparable to those services provided in urban areas and that are available at rates that are reasonably comparable to rates charged for similar services in urban areas.”
    • What do we know about outcomes?
      • “ Access” not defined/measured
      • “ Reasonably comparable” not defined/measured
      • FCC measures subscribership in urban and rural areas
      • Effect of USF on subscribership is not measured by FCC
      • Data collected on # of beneficiaries, # of lines, # of requests for support, $ disbursed, support and disbursement processing time
    • GAO Report (June 2008)
      • “ In the absence of performance goals and measures, the Congress and FCC are limited in their ability to make informed decisions about the future of the high-cost program.”
      • “ Carriers serving similar rural areas can receive different levels of support.”
      • “ [The program] creates an incentive for competition to exist where it might not otherwise occur.”
    • Texas PUC study 2007
      • Access not measured
      • Rural rates “reasonable”
      • Rural rates below urban rates and unchanged since 2000 (or in some cases, decades)
      • Settlement (April 2008): Allows higher rates in exchange for subsidy reduction; implies rates were unreasonably low
    • Independent economic research
      • Local subscription not price-sensitive (1% change in price  0.1-0.26% change in subscribership)
      • Loop support: $11,000 annually per subscription added
      • Switching: $5155 annually per subscription added
      • Texas USF: $8000-$18,000 annually per subscription added, 1/3 of 1% increase in subscription
    • Effects of the contribution mechanism
      • Universal Service contributions are similar to a tax and can be analyzed as such
      • Explicit costs: Revenue raised
      • Hidden costs: Benefits society gives up when people change their behavior in response to the price change
    • Hidden cost of contribution mechanism
      • “Deadweight loss”:
      • Value of service that consumers forego, plus operating profits that producers forego, because increased price reduces use of the service
    • When is the hidden cost large?
      • Additional costs of providing additional service are low
      • Value of the additional service to consumers exceeds these costs
      • Consumer decisions are sensitive to price
    • Effect of a 1% price change > 1.0% Wireless minutes 0.57% Wireless subscription 0.7% Long-Distance minutes 0.01-0.026% (0.05% for low-income) Wireline subscription
    • Explicit + Hidden Costs Source: Jerry Ellig, “Costs and Consequences of Federal Telecommunications Regulation,” 58 Federal Communications Law Journal 37 (Jan. 2006). $2.7 billion $978 million $1.76 billion Wireless 2004 $3.86 billion $1.16 billion $2.7 billion Long Distance 2002 Total Cost Hidden Cost (DW loss) U Service Revenue
    • Hidden Cost as a % of Revenues Raised Source: Jerry Ellig, “Costs and Consequences of Federal Telecommunications Regulation,” 58 Federal Communications Law Journal 37 (Jan. 2006). 25-40% (OMB “rule of thumb” – 25%) General Taxation 56% Wireless USF Contributions 43% Long-Distance USF Contributions
    • Costliest Federal Telecom Regulations Source: Jerry Ellig, “Costs and Consequences of Federal Telecommunications Regulation,” 58 Federal Communications Law Journal 37 (Jan. 2006). $568 million 5. Wireless number portability $693 million 4. Wireless E-911 $1.5 billion 3. L-D Access Charges $2.14 billion 2. USF Contributions $30 billion 1. Spectrum Allocation Annual Hidden Cost
    • Major issues
      • Cap on high cost fund
      • Eliminate “identical support” rule
      • Reverse auctions
      • Expanded list of services
      • Expanded funding base
      • Intercarrier compensation
      • Contribution mechanism reform
      • Accountability
    • Interim cap and “identical support”
    • Reverse auctions
      • Companies compete to offer designated type and quality of service in a designated area
      • Bidder offering to serve at lowest subsidy receives the subsidy
      • Subsidy level set by auction should be minimum subsidy needed to attract an efficient company to serve the market
      • Eliminates incentives for waste under rate-of-return regulation and inaccuracies when basing subsidy on cost models
      • FCC could auction subsidy for fractions of the market and have multiple winners (when competition yields the lowest cost)
    • Expanded list of services (FCC proposed Jan. 2008)
      • Mobility – focus on buildout of rural wireless networks
      • Broadband – focus on identifying where service is not available and subsidizing infrastructure
    • USF contributions from broadband
      • Broadband demand highly price sensitive
      • 1% change in price  1.5%-3.76% change in subscribership
      • 10% USF assessment
        • 20% drop in subscribership (about 20 million)
        • $3 billion revenue raised
        • But also $3 billion deadweight loss due to reduced subscribership
        • Slower deployment in areas not already served
    • Intercarrier compensation
    • Effects of intercarrier compensation
      • Large deadweight loss due to per minute charges ($1.5 billion annually)
      • Gaming (because access charges exceed cost of switching calls)
      • Incentive for waste under rate-of-return regulation
    • Intercarrier compensation options
      • Bill and keep
        • (See Feb. 2005 “staff analysis” appendix)
      • Reduce
        • (eg, to interstate incumbent level)
      • Negotiate (and pass back to encourage competition)
        • Allow company paying access charge to pass it back to customer who initiated call
      • How to replace revenue?
        • USF creates same DW loss as access charges
        • Extending USF to broadband creates bigger DW loss
        • Per number subscriber line charge minimizes DW loss
    • Numbers-based USF contribution Source of last figure: Jerry Ellig & James N. Taylor, “The Irony of Transparency: Unintended Consequences of Wireless Truth-in-Billing,” Loyola Consumer Law Review 19:1 (2006), pp. 43-69.
      • Wireline access: Hidden costs approximately unchanged
      • Long-distance: Hidden costs fall to approximately zero
      • Wireless: Hidden costs fall by $530 million annually
      • Numbers-based charge can reduce hidden costs by $1.7 billion (or more) annually.
      • Hidden cost falls by 80 percent, from $2.14 billion to $440 million.
    • Caveats around the edges
      • Low-income demand for wireline access is 2-3 times more price sensitive than average household
      • Per number charge on additional “family plan” wireless lines would be a large % of the price
      • Per number charge on low-usage per-minute wireless plans would be a large % of the price
    • Accountability for outcomes
      • Define services
      • Define and measure availability (eg, homes passed)
      • Define and measure “reasonably comparable” (eg, ratio of rural to urban rates)
      • Set goals
        • % of homes passed in rural areas within X% of homes passed in urban areas
        • Rural rates no more than X% higher than urban rates
      • Independent retrospective analysis to determine how much of the observed change in measures is attributable to USF
    • For more information …
      • Mark Goldstein, “Telecommunications: FCC Needs to Improve Performance Management and Strengthen Oversight of the High-Cost Program,” GAO Report 08-633 (June 2008).
      • Jerry Ellig, “Universal Service Reform: Start with Accountability,” Mercatus on Policy (July 2008) available at http://www.mercatus.org/repository/docLib/20080729_RSP_MOP22_web.pdf
      • Jerry Ellig and Andrew Perraut, “Public Interest Comment on High Cost Universal Service Support,” http://www.mercatus.org/Publications/pubID.4487,cfilter.0/pub_detail.asp
      • Jerry Ellig, “Costs and Consequences of Federal Telecommunications Regulation,” 58 Federal Communications Law Journal 37 (Jan. 2006), available at http://www.mercatus.org/Publications/pubID.1229/pub_detail.asp