Reforming Universal Service

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Richard Brooks
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1 Reforming Universal Service John W. Mayo Georgetown University 33 rd Annual PURC Conference University of Florida February 23, 2006

2 Universal Service: Overview 2006 expenditures 7.3 Billion High Cost $4.2 Billion Low Income 820 Million Rural Health Care 45 million Schools and Libraries $2.25 Billion

3 Universal Service Funding in Perspective Federal Government Programs Billions of dollars USF Public. housing FDA CDC FBI

4 Reforming Universal Service: From the Blanks Slate up Underlying rationale The evolving definition Funding and the emergence of interest groups Principles of an Efficient System The Current System Economic evidence on the effectiveness of the current system

5 Underlying Rationale Network Externality The societal value of subscription consists of both the value to the subscribing individual and the value of others created by that individual s s subscription. The subscription decision, however, depends exclusively on the subscriber s s benefits. The result: under-subscription if P=MC

6 The evolving definition Availability of telephone service Theodore Vail: one system, one policy, universal service Affordability of telephone service Universal availability of vertical features The 1996 Telecommunications Act QUALITY AND RATES ACCESS (including advanced services) IN RURAL AND HIGH COST AREAS reasonably comparable access and rates EQUITABLE AND NONDISCRIMINATORY CONTRIBUTIONS SPECIFIC AND PREDICTABLE SUPPORT MECHANISMS ACCESS TO ADVANCED TELECOMMUNICATIONS SERVICES FOR SCHOOLS, HEALTH CARE, AND LIBRARIES Universal Broadband (Pres. Bush, March 2004) a a national goal the spread of broadband technology universal, affordable access for broadband technology by the year r 2007, and then we ought to make sure as soon as possible thereafter, consumers have got plenty of choices

7 Funding and the Emergence of Interest Groups Pre-divestiture Internal subsidy in a monopoly environment Separations and settlements subsidy from LD to Local Post-divestiture Access charges preserve ability to residually price local services Post 1996 Telecom.. Act Subsidies made more explicit (HCF, Low Income; Schools and Libraries; Rural Health Care)

8 Principles of an Efficient System Subsidization of telephone subscribership should be explicit Collection of necessary subsidies should be broadly-based based Distribution of funds should be narrowly targeted to households that would, absent a subsidy drop off the network The collection and distribution of the subsidy should be competitively neutral Source: Kaserman and Mayo (1997)

9 Characteristics of the Current System Movement toward explicit subsidies but retention of implicit subsidies through maze of access charges that permit continuation of residual pricing Collection of Subsidy narrow (and shrinking) base [long distance and international] 16 percent of funds targeted to vulnerable households Not competitively neutral (e.g., exemption of cable modem)

10 Some Economic Evidence The Universal Service Fairy Tale Implicit subsidies failed to increase subscription but local rates respond to interest group pressures (Kaserman, Mayo, Flynn, JRE,, 1990) Targeted v. Untargeted Subsidies Examine HCF and Low Income program effectiveness Find that targeted subsidies are far more cost effective in promoting subscribership (Eriksson, Kaserman and Mayo, JLE 1996)

11 Low Income Assistance: A Closer Look Why Don t t Households pick up the Lifeline? [Burton and Mayo (2005)] Complement to Holt and Jamison (2006) 34% of eligible households subscribe to Life Line Lots of cross-sectional sectional variation: 11 States < 10% and 3 > 60% Prevailing explanation: Stigma [Moffitt (1983)]

12 $/MOU Why Don t t Households Pick up the Lifeline? The challenge of targeting CS CS3 HH2 CS1 CS2 CS3 P P LL CS2 CS1 MOU HH3 subscribes regardless (Lifeline is wasteful) HH1 doesn t subscribe (Lifeline is ineffective)

13 Participation in Lifeline Eligible population + Significant Benefits + marginal Restrictions + significant Bureaucratic costs + significant Portals + LIHEAP

14 Increasing Participation cost HH cost/ HH Change benefits $127.4m 360,000 $354 Lift restrictions 28.9m 226,000 $127.8 Easy participation $988.7m 7,700,000 $128.4 Increase Portals Not estimated insignificant

15 A Man for All Seasons Sir Thomas More: Well, take me home. Boatman: From Richmond to Chelsea, a penny halfpenny from from Chelsea to Richmond, a penny halfpenny. From Richmond to Chelsea, it s s a quiet float downstream. From Chelsea to Richmond, it s s a hard pull upstream. And it s s a penny halfpenny either way. Whoever makes the regulations doesn t t row a boat.

Universal Service Overview

Universal Service Overview The term Universal Service is usually first attributed to AT&T President Theodore Vail, from the company s Annual Report in 1907. Scholars like Milton Mueller would argue that