Ellig Rural Universal Service August 2008
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Ellig Rural Universal Service August 2008






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Ellig Rural Universal Service August 2008 Presentation Transcript

  • 1. Rural Universal Service Jerry Ellig Senior Research Fellow [email_address]
  • 2. Outline
    • How’s it work?
    • How’d we get here?
    • Outcomes and costs
    • Major issues on the table
  • 3. 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
  • 4.  
  • 5.  
  • 6.  
  • 7.  
  • 8. 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
  • 9. 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
  • 10.  
  • 11.  
  • 12.  
  • 13.  
  • 14. 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.”
  • 15. 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
  • 16. 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.”
  • 17. 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
  • 18. 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
  • 19. 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
  • 20. 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
  • 21. 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
  • 22. 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
  • 23. 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
  • 24. 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
  • 25. 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
  • 26. 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
  • 27. Interim cap and “identical support”
  • 28. 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)
  • 29. 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
  • 30. 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
  • 31. Intercarrier compensation
  • 32. 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
  • 33. 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
  • 34. 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.
  • 35. 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
  • 36. 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
  • 37. 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