Hazlett-Wallsten Report Blasts High Line Subsidies Ended by FCC Reform

That FCC order capped subsidies at $250 per line per month, and the agency has denied requests to waive that cap in recent cases, including one from Sandwich Isles (CD May 13 p13). The November 2011 USF order “while promoted as rationalizing the program in reality preserves it, pre-empting emergent technologies and punishing consumers,” said the report: Unrepentant Policy Failure (http://bit.ly/12rpOmu). “Administrative failure, market competition, and technological evolution have rendered the USF system obsolete.” Federal subsidies amount to a cost-per-home of $106,000 in the report’s calculation, looking over the years: “USF expenditures -- about $110 billion (in 2013 dollars) since 1998, of which $64 billion went for telephone carrier subsidies -- extending voice services to, at most, one-half of one percent of U.S. households.” The report outlined companies receiving the highest of high-cost subsidies, with a Washington state company receiving more than $23,000 per line annually.

Those numbers all come from 2010 and the report said the high amounts are “outliers.” It said some companies receive as much as $10,000 per line annually, which is $7,000 more than companies are now authorized to receive under the 2011 reform cap that’s being phased in. The report acknowledged that $250 cap and called the move “steps in the right direction” but not sufficient. “Subsidies anywhere near that level are impossible to justify via a realistic cost-benefit test,” it said of $3,000 annual subsidies cap. To call such a cap good raises the question of what a boondoggle looks like, the authors said. “We took the latest available data,” Hazlett said on a Wednesday call with reporters. He hesitated to judge the caps because they're still being phased in, calling even their eventual implementation only “a Pyrrhic victory for the taxpayer.” The authors portrayed the subsidies as benefiting “such wealthy enclaves as the Hawaiian island of Maui, the ski resort area of Breckenridge, CO., and gated golf course communities outside of Scottsdale, AZ,” a news release said (http://bit.ly/189kw85). It targeted the high line subsidies prominently, with a headline that said “Meet the $24,000 Phone Line Federal Subsidy,” a number eight times higher than what the FCC now allows. The reform was intended to protect the FCC from “dramatic stories,” said Wallsten on the call.

"The FCC’s historic” USF reform order “took unprecedented steps to end waste, fraud and abuse, while adopting measures to connect millions of currently un-served Americans to broadband,” said a commission spokesman. “The reforms include capping subsidies at a maximum of $250 a line per month and limiting corporate overhead expenses. These and other reforms protect the businesses and consumers who pay for the program through universal service fees, and free up resources to expand broadband connectivity to all of rural America without growing the size of the universal service fund.” The FCC order said it envisioned “a gradual phasedown to that cap over a three-year period commencing July 1, 2012” (http://fcc.us/1abteQz).

"It’s old data, old arguments,” Western Telecom Alliance Vice President of Government Affairs Derrick Owens told us. “We're building networks, not just lines to a particular house or houses.” He questioned the accuracy of the report’s arguments as well as the claims for how satellite might be used. The transition to broadband is a critical part of what’s been happening, he said, emphasizing the importance of wired networks. The FCC reform has cost his alliance’s rate-of-return carriers close to $1 billion, he said, considering the USF’s size.

The authors’ claims “rely upon tired, old canards about the program and paint a distorted picture of the rural telecommunications marketplace,” said NTCA Senior Vice President Michael Romano in a statement. “With respect to the specific operations and effectiveness of the high-cost program, the authors miss the mark in too many respects to count. For example, the authors ignore the fact that small rural carriers have leveraged universal service support to deploy networks that enable not only affordable telephone services, but also at least basic levels of DSL-speed broadband for more than 92 percent of customers in sparsely populated rural areas.”

"$3,000 a year is still laughable,” Hazlett said of the reform caps. “The real problem is what the total expenditures are.” The 2011 order “applies band-aids where tourniquets are needed,” said Wallsten, explaining that the FCC order established the fund at $4.5 billion, ostensibly based on its 2011 size. But the fund was $4 billion in 2011 and trending downward then, he said. “There’s no real adult supervision,” Hazlett said, pointing to the history of the fund, with the high per-line subsidies from 2010 what he called a “symptom” of that. “Entrenched interests make the program exceedingly difficult to change,” he said, emphasizing the rural phone companies that benefit from the program. The report acknowledged that the reforms also shift the fund from voice to broadband but questioned whether they are warranted or will be effective. Wallsten encouraged looking at the hundreds of companies not affected by the caps. The $50 billion the FCC spent since 1998 “had little or no effect on telephone service availability,” the report added. It lamented the subsidies spent on landlines as wireless coverage grew enormously.

The Alliance for Generational Equity commissioned the report due to “so little awareness” of what it deemed this waste, said Vice President-Policy Dave Herman on the media call. The nonprofit’s leaders were “stunned” when the 2012 Lifeline-focused “Obama Phone” scandal broke out due to what Herman judged its small size compared to what was happening with the USF overall, he said. “Keep in mind the high-cost fund really adds nothing."

The report conformed its analysis to its desired results, Romano said, blasting data he regarded as dated. “The federal universal service program has been and remains essential in the deployment of networks and the availability of affordable, reasonably comparable services in such [challenging] areas,” Romano said. “A thoughtful, data-driven debate about repositioning all aspects of the Universal Service Fund -- high-cost, low-income, schools and libraries, and rural health care -- for a broadband-capable, IP-enabled world is important, but this paper unfortunately does little, if anything, to advance that kind of informed discussion.”