Lifeline Costs Up Sharply in Final Quarter of FY 2011

The $525 million would equate to annualized spending of $2.1 billion, or a $400 million increase over the $1.7 billion cost of the program in FY2010. The number has not been made public by the agency. FCC staff is looking closely at the numbers, an official said. Even with the increase in Q4, Lifeline likely cost about the same in FY2011 as it did the previous year.

A key component of Genachowski’s plan is a trigger that requires the FCC to quickly address increases if the program exceeds the budget, similar to a trigger for the Connect America Fund in the USF reform order the FCC approved in October, a senior FCC official said. At the same time, the FCC would recognize that the size of the program must be tied to the state of the economy.

"You're seeing continuing growth and you would expect that if the program’s growing the fourth quarter would be bigger than, say the first quarter,” a senior official said. “The program is growing and this order is the first serious attempt to deal with that issue.”

Growth appears to be tied to a number of dynamics, officials said. Among them is that millions more people qualify because the unemployment rate almost doubled between 2006 and 2011. There has also been more competition among eligible telecommunications carriers to attract customers. Initially, Lifeline was the province of just wireline carriers, but then, first TracFone, and now other wireless carriers, have jumped in in a big way, officials said. And they are offering more-attractive packages. The initial wireless Lifeline package gave a consumer just 60 minutes a month. Now, consumers get 250 minutes or more and some of the tribal carriers offer up to 600 minutes a month.

But waste has also added to the costs, with some subscribers double dipping, often without understanding that they are violating program rules, and the order addresses abuse beyond steps already taken by the commission, the senior official said.

Genachowski said in a Jan. 9 speech (http://xrl.us/bmo93y), his proposal focuses on “cost controls” for Lifeline and Link-Up, with a focus on identifying duplicate claims in addition to some 200,000 already identified and building a database to prevent future “waste.” Other FCC officials expect Genachowski to circulate a second draft of the order making some of the changes sought by carriers and others in meetings at the commission since the order circulated earlier this month. In December, Genachowski sent state commissioners a letter urging them to increase efforts to fight waste, fraud and abuse in the program (http://xrl.us/bmpc9x).

The vote on the Lifeline order will be the first major vote by the three-member commission, now constituted without former Commissioner Michael Copps.

Less Government organization President Seton Motley was harshly critical of the latest numbers from the FCC and what they imply about the growth in the Lifeline program. “The Genachowski FCC is serially straining the credulity of the commission’s alleged independence from the Obama White House,” Motley said. “From its illegal imposition of net neutrality, to its anti-free market assault on mergers, this FCC is singing from the Obama ... songbook. Now we get word that the avalanche of Obama federal spending emanated from the commission as well.”

Minority Media and Telecommunications Council founder David Honig said civil rights and consumer organizations agree that capping the fund would be a mistake. “Only 32 percent of those who are eligible have signed up,” Honig said Thursday. “Thus, the focus should be on how to make sure that everyone who needs to be telephonically connected to the rest of America is connected. Universal connections is a public good having enormous value -- and we're nowhere close, especially in poor neighborhoods and among Native Americans. And while public-private partnerships are part of the solution, and we are very happy with the FCC’s initiatives in that regard, Lifeline/Link-Up will remain, for some time, by far the primary vehicle by which the nation could achieve universal connections among all of its people."

"It’s important to control the size of the fund and the growth of the fund, but not to do that by imposing an artificial cap when we already have very low participation rates,” said Free Press Policy Director Matt Wood. “The commission’s item that started out this proceeding set the participation rates at about 33 percent nationwide. ...While it’s important to combat fraud, waste and abuse, that can’t fall on the backs of prople who are in need of support to get online or even to have basic telephone service.”

The main reason for the increase is that in a slumping economy more people are participating in the program, said Wayne Jortner, board member of the Universal Service Administrative Company, which administers the programs, and a member of the NASUCA telecom committee. Most of the increase is a result of “aggressive” marketing by wireless eligible telecommunications carriers, said Jortner, also a senior counsel with Maine’s consumer advocate’s office. Jortner worries the rush to enter the Lifeline business by “so many firms” means many are being paid universal service support that “far exceeds” their costs. That’s why consumers advocates urged the FCC to consider a low-income discount that’s tied to the cost of service rather than a uniform discount to all carriers, he said. There are also still major legal issues because the current statutory scheme doesn’t seem to authorize universal service support for broadband, he said. However, consumer advocates support the eventual development of a low-income broadband support mechanism, he said.

The cost increase is also a result of people getting wireless phones under Lifeline who already have wireline phones, a state regulatory analyst said. The increase is also a result of waste, fraud and abuse, she said. The increase in the fund might force the FCC to rethink the need for additional controls, she said. “I wouldn’t be surprised if there’s another draft before the [FCC’s] open meeting,” she said. Additionally, “$400 million is more than a sign of more people needing help in the bad economy,” she said, citing companies that have “figured out” selling Lifeline-supported service can be profitable.

States have repeatedly expressed concerns that allowing users to self certify that they are eligible for the Lifeline program, especially prepaid wireless customers, can lead to “duplicative support” abuse, a state official said. It remains unclear if the Lifeline order will “constructively and conclusively” address this issue, the official said. States like California, Florida and Texas have implemented their own programs at state expense to control abuse of the “duplicative support” rule for Lifeline-supported services, he noted. Carriers must actively commit to fight the abuse of duplicative support, he said.