Ellig Rural Universal Service August 2008

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Ellig Rural Universal Service August 2008

  1. 1. Rural Universal Service Jerry Ellig Senior Research Fellow [email_address]
  2. 2. Outline <ul><li>How’s it work? </li></ul><ul><li>How’d we get here? </li></ul><ul><li>Outcomes and costs </li></ul><ul><li>Major issues on the table </li></ul>
  3. 3. How’s it work? <ul><li>Federal assessment on interstate telecommunications revenues </li></ul><ul><ul><li>Local </li></ul></ul><ul><ul><li>Long-Distance </li></ul></ul><ul><ul><li>Wireless </li></ul></ul><ul><ul><li>VOIP </li></ul></ul><ul><li>Expenditures </li></ul><ul><ul><li>High cost </li></ul></ul><ul><ul><li>Low income </li></ul></ul><ul><ul><li>Schools/libraries </li></ul></ul><ul><ul><li>Rural health care </li></ul></ul>
  4. 8. Who is eligible for what? <ul><li>High cost loop: Rural carriers with costs > 115% of national average </li></ul><ul><li>High cost model: Nonrural carriers in states with average costs more than 131% of national average </li></ul><ul><li>Local switching: Rural carriers serving 50,000 or fewer lines </li></ul><ul><li>Interstate access: High cost price cap regulated carriers </li></ul><ul><li>Interstate common line: High cost carriers with rate-of-return regulation </li></ul><ul><li>“ Eligible Telecommunications Carriers” (competitors) receive the same support per line that the incumbent receives </li></ul>
  5. 9. How’d we get here? <ul><li>Internal subsidies by monopoly AT&T </li></ul><ul><li>1984 AT&T breakup and access charges </li></ul><ul><li>Telecom Act of 1996 </li></ul><ul><li>Some high access charges remain </li></ul>
  6. 14. Outcomes <ul><li>Goal of High Cost USF in 1996 Telecom Act </li></ul><ul><li>“ 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.” </li></ul>
  7. 15. What do we know about outcomes? <ul><li>“ Access” not defined/measured </li></ul><ul><li>“ Reasonably comparable” not defined/measured </li></ul><ul><li>FCC measures subscribership in urban and rural areas </li></ul><ul><li>Effect of USF on subscribership is not measured by FCC </li></ul><ul><li>Data collected on # of beneficiaries, # of lines, # of requests for support, $ disbursed, support and disbursement processing time </li></ul>
  8. 16. GAO Report (June 2008) <ul><li>“ 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.” </li></ul><ul><li>“ Carriers serving similar rural areas can receive different levels of support.” </li></ul><ul><li>“ [The program] creates an incentive for competition to exist where it might not otherwise occur.” </li></ul>
  9. 17. Texas PUC study 2007 <ul><li>Access not measured </li></ul><ul><li>Rural rates “reasonable” </li></ul><ul><li>Rural rates below urban rates and unchanged since 2000 (or in some cases, decades) </li></ul><ul><li>Settlement (April 2008): Allows higher rates in exchange for subsidy reduction; implies rates were unreasonably low </li></ul>
  10. 18. Independent economic research <ul><li>Local subscription not price-sensitive (1% change in price  0.1-0.26% change in subscribership) </li></ul><ul><li>Loop support: $11,000 annually per subscription added </li></ul><ul><li>Switching: $5155 annually per subscription added </li></ul><ul><li>Texas USF: $8000-$18,000 annually per subscription added, 1/3 of 1% increase in subscription </li></ul>
  11. 19. Effects of the contribution mechanism <ul><li>Universal Service contributions are similar to a tax and can be analyzed as such </li></ul><ul><li>Explicit costs: Revenue raised </li></ul><ul><li>Hidden costs: Benefits society gives up when people change their behavior in response to the price change </li></ul>
  12. 20. Hidden cost of contribution mechanism <ul><li>“Deadweight loss”: </li></ul><ul><li>Value of service that consumers forego, plus operating profits that producers forego, because increased price reduces use of the service </li></ul>
  13. 21. When is the hidden cost large? <ul><li>Additional costs of providing additional service are low </li></ul><ul><li>Value of the additional service to consumers exceeds these costs </li></ul><ul><li>Consumer decisions are sensitive to price </li></ul>
  14. 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
  15. 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
  16. 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
  17. 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
  18. 26. Major issues <ul><li>Cap on high cost fund </li></ul><ul><li>Eliminate “identical support” rule </li></ul><ul><li>Reverse auctions </li></ul><ul><li>Expanded list of services </li></ul><ul><li>Expanded funding base </li></ul><ul><li>Intercarrier compensation </li></ul><ul><li>Contribution mechanism reform </li></ul><ul><li>Accountability </li></ul>
  19. 27. Interim cap and “identical support”
  20. 28. Reverse auctions <ul><li>Companies compete to offer designated type and quality of service in a designated area </li></ul><ul><li>Bidder offering to serve at lowest subsidy receives the subsidy </li></ul><ul><li>Subsidy level set by auction should be minimum subsidy needed to attract an efficient company to serve the market </li></ul><ul><li>Eliminates incentives for waste under rate-of-return regulation and inaccuracies when basing subsidy on cost models </li></ul><ul><li>FCC could auction subsidy for fractions of the market and have multiple winners (when competition yields the lowest cost) </li></ul>
  21. 29. Expanded list of services (FCC proposed Jan. 2008) <ul><li>Mobility – focus on buildout of rural wireless networks </li></ul><ul><li>Broadband – focus on identifying where service is not available and subsidizing infrastructure </li></ul>
  22. 30. USF contributions from broadband <ul><li>Broadband demand highly price sensitive </li></ul><ul><li>1% change in price  1.5%-3.76% change in subscribership </li></ul><ul><li>10% USF assessment </li></ul><ul><ul><li>20% drop in subscribership (about 20 million) </li></ul></ul><ul><ul><li>$3 billion revenue raised </li></ul></ul><ul><ul><li>But also $3 billion deadweight loss due to reduced subscribership </li></ul></ul><ul><ul><li>Slower deployment in areas not already served </li></ul></ul>
  23. 31. Intercarrier compensation
  24. 32. Effects of intercarrier compensation <ul><li>Large deadweight loss due to per minute charges ($1.5 billion annually) </li></ul><ul><li>Gaming (because access charges exceed cost of switching calls) </li></ul><ul><li>Incentive for waste under rate-of-return regulation </li></ul>
  25. 33. Intercarrier compensation options <ul><li>Bill and keep </li></ul><ul><ul><li>(See Feb. 2005 “staff analysis” appendix) </li></ul></ul><ul><li>Reduce </li></ul><ul><ul><li>(eg, to interstate incumbent level) </li></ul></ul><ul><li>Negotiate (and pass back to encourage competition) </li></ul><ul><ul><li>Allow company paying access charge to pass it back to customer who initiated call </li></ul></ul><ul><li>How to replace revenue? </li></ul><ul><ul><li>USF creates same DW loss as access charges </li></ul></ul><ul><ul><li>Extending USF to broadband creates bigger DW loss </li></ul></ul><ul><ul><li>Per number subscriber line charge minimizes DW loss </li></ul></ul>
  26. 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. <ul><li>Wireline access: Hidden costs approximately unchanged </li></ul><ul><li>Long-distance: Hidden costs fall to approximately zero </li></ul><ul><li>Wireless: Hidden costs fall by $530 million annually </li></ul><ul><li>Numbers-based charge can reduce hidden costs by $1.7 billion (or more) annually. </li></ul><ul><li>Hidden cost falls by 80 percent, from $2.14 billion to $440 million. </li></ul>
  27. 35. Caveats around the edges <ul><li>Low-income demand for wireline access is 2-3 times more price sensitive than average household </li></ul><ul><li>Per number charge on additional “family plan” wireless lines would be a large % of the price </li></ul><ul><li>Per number charge on low-usage per-minute wireless plans would be a large % of the price </li></ul>
  28. 36. Accountability for outcomes <ul><li>Define services </li></ul><ul><li>Define and measure availability (eg, homes passed) </li></ul><ul><li>Define and measure “reasonably comparable” (eg, ratio of rural to urban rates) </li></ul><ul><li>Set goals </li></ul><ul><ul><li>% of homes passed in rural areas within X% of homes passed in urban areas </li></ul></ul><ul><ul><li>Rural rates no more than X% higher than urban rates </li></ul></ul><ul><li>Independent retrospective analysis to determine how much of the observed change in measures is attributable to USF </li></ul>
  29. 37. For more information … <ul><li>Mark Goldstein, “Telecommunications: FCC Needs to Improve Performance Management and Strengthen Oversight of the High-Cost Program,” GAO Report 08-633 (June 2008). </li></ul><ul><li>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 </li></ul><ul><li>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 </li></ul><ul><li>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 </li></ul>

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