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Study: Tiny Rural Telephone Companies Charging U.S. Up to $13,000 for Taxpayer-Subsidized Phone Lines Under Fast-Rising 'Universal Service' Fund Subsidy

Posted on: Wednesday, 19 July 2006, 15:00 CDT

WASHINGTON, July 19 /PRNewswire/ -- U.S. taxpayers are getting stuck with the tab for up to $13,345 per telephone line per year for federally subsidized phone service under the $7-billion "Universal Service Fund" tax on long- distance service, according to a new study conducted for The Seniors Coalition by George Mason University Professor of Law and Economics Thomas Hazlett. The "gold-plated" waste and inefficiency under USF is so out of control that taxpayers actually could save at least $1 billion or more each year by simply giving away at full retail cost satellite or cellular phone service to the few remaining Americans who do not currently have access to wireline phone service, according to the study.

The Hazlett study notes that, rather than providing phone-service to low- income consumers in need, the bulk of USF taxpayer dollars are now part of a $3.7 billon wealth-transfer subsidy known as the "High-Cost Fund" that goes from unwary U.S. taxpayers to small, uneconomical private rural telephone companies that often have only a few hundred customers and are so engorged with tax dollars that they can afford to pay out more in dividends to shareholders than they actually charge for phone service. The Hazlett study identifies 20 companies in Alaska, Arizona, Arkansas, Colorado, Hawaii, Kansas, Mississippi, Nebraska, Nevada, New Mexico, Oklahoma, Texas, Utah and Wyoming that that have one or both of the following characteristics: (1) one of the 12 worst companies in terms of the cost to taxpayers per USF-subsidized line per year; and (2) overhead costs charged to taxpayers per customer of $1,000 or more.

Entitled "'Universal Service' Telephone Subsidies: What Does $7 Billion Buy," the Hazlett report for The Seniors Coalition notes: "The 'universal service' regime ostensibly extends local phone service to consumers who could not otherwise afford it ... Yet, benefits are largely distributed to shareholders of rural telephone companies, not consumers, and fail (on net) to extend network access. Rather, the incentives created by these subsidies encourage widespread inefficiency and block adoption of advanced technologies -- such as wireless, satellite, and Internet-based services -- that could provide superior voice and data links at a fraction of the cost of traditional fixed-line networks. Ironically, subsidy payments are rising even as fixed- line phone subscribership falls, and as the emergence of competitive wireless and broadband networks make traditional universal service concepts obsolete. Unless policies are reformed to reflect current market realities, tax increases will continue to undermine the very goals 'universal service' is said to advance."

"Grandma" Flora Green, national spokesperson, The Seniors Coalition said: "America's seniors and other taxpayers are getting a real wake-up call today: The Universal Service Fund is such a costly mess that it makes those bills we all paid for Pentagon hammers and toilet seats look like a downright bargain! American taxpayers need to insist on reining in the runaway Universal Service Fund, which should only help out those who really need it. The Fund should be capped and then reviewed from top to bottom to squeeze out all the billions of dollars of waste and fraud going on today. We think FCC Chairman Kevin Martin is correct in calling for a reverse-auction system to make sure that those Americans who really need USF help get it with the best available technology and at the lowest possible cost to taxpayers."

The Universal Service Fund tax has surged to $7 billion, up from less than $4 billion in 1998. To pay for the Universal Service Fund, the tax rate applied to long distance revenues has skyrocketed five-fold from 2.1 percent to its current level of 10.5 percent. The primary cause of USF increases stem from rising payments to rural phone carriers, labeled "High-Cost Support," where annual payments mushroomed from $1.7 billion in 1998 to $3.7 billion in 2005. These rising expenditures are, in turn, driven by increasingly expensive per-line payments to high cost rural phone carriers and by new payments to wireless phone carriers now qualifying as recipients of such funds.

KEY STUDY FINDINGS * Huge taxpayer subsidies to rural telephone companies of up to $13,000 per line per year. "High-Cost Fund payments are distributed in a manner that encourages rural phone carriers (RLECs) to be inefficiently small. RLECs tend, as a result, to be extremely expensive to operate, even as they are highly profitable. HCF subsidies are as much as $13,000 per year per line, a remarkable outcome given that retail satellite phone service is available nationwide for about $800 annually ... Sending $3.7 billion annually to inefficient, high-cost RLECs succeeds in transferring income from telephone users to phone company stockholders, but it does almost nothing -- even under favorable assumptions -- to expand access to telephone networks." (See http://www.thehastingsgroup.com/biggestHCFsubsidies/ for the full list of the highest annual per-line subsidies paid by U.S. taxpayers, including the $13,345 paid per telephone line to the Sandwich Isles Telephone Company in Maui, Hawaii.) * Gouging of taxpayers for excessive overhead charges by rural telephone companies of up to $3,000 per phone line per year. "Scores of RLECs incur over $500 per line in annual administrative expense (costs unrelated to the higher capital expenditures often required in sparsely populated areas), more than what a typical U.S. mobile phone customer pays in total annual charges." More than 20 companies pass along inflated overhead charges to U.S. taxpayers in the range of $1,000- $3,000 per line per year. (See http://www.thehastingsgroup.com/biggestHCFsubsidies/ for the full list of the highest overhead charges subsidized by U.S. taxpayers, including the $3,926 paid per telephone line to Border to Border Communications in Kerrville, Texas.) * Pentagon-style accounting under USF encourages waste and abuse by rural telephone companies. "Federally subsidized phone service costs taxpayers a large multiple of what the most efficient network solutions would. That is because 'high-cost' subsidies are delivered not to low- income customers, but to rural phone companies, typically on a 'cost- plus' basis. The more service costs, the more money the phone carrier receives -- a clear incentive to avoid cost savings. This not only bloats administrative expenses, it undercuts market forces that would naturally lead consumers to abandon traditional fixed lines in favor of newer, cheaper, and functionally superior technologies." * Taxpayers could save at least $1 billion annually by simply giving away retail cellular or satellite phone service to those who need it instead of continuing to enrich rural telephone companies under USF. "The upshot is that the entire system of annual HCF payments could be replaced with a one-time allocation for cellular repeaters and satellite phone units, distributed to households where no other local phone service is available ... The majority of the annual $3.7 billion High- Cost Fund could be eliminated by simply identifying the one, two, or three million households not reached by cable TV or mobile wireless networks and paying residents to install enhanced antennae, cellular repeaters, or satellite phones." * Rural telephone companies exploiting the Universal Service Fund are in business to rake in USF subsidies -- not to make money from customers. "...30 percent of the average RLEC revenue stream is from federal and state subsidies, with another 26 percent contributed by access charges (set by regulators so as to subsidize local phone service). In other words, more than half of the average RLEC sales dollar is attributable to government subsidies, and only 27 cents by telephone customers..." * Few (if any) low-income consumers are aided by USF subsidies for rural telephone companies. "Current annual payments of nearly four billion HCF dollars to rural telephone companies increase RLEC shareholder wealth, but do not help consumers, low income or otherwise. To the extent that local telephone service in high-cost areas is offered to customers at reduced retail prices, other costs -- most notably, residential rents -- rise by an offsetting amount. Property owners may gain, but consumers are excluded...phone carriers in wealthy enclaves such as Jackson Hole, Wyoming, where the boast that 'the billionaires are pushing out the millionaires' applies, garner extremely high -- and highly inefficient -- payments. With both income and net worth above the national averages, telephone carriers in Jackson Hole received over $282 per subscriber in subsidies from the High-Cost Fund in 2005." * So few new lines are actually added under USF that the incremental cost for each new phone line is about $5,000 per line. "The conservative estimates produced herein suggest that each incremental subscriber line added via High-Cost Fund subsidies costs from $4,500 to $5,500 annually, an extraordinary sum that is at least five times the cost of retail satellite phone subscriptions that include local minutes, free domestic long distance, and free text messaging. This is the predictable outcome of a system that clings to existing technologies and rewards incumbent carriers for inefficiency, increasing payments as costs rise." * New, high-tech alternatives to USF-subsidized landlines exist across the U.S. -- making the current subsidies for rural telephone companies outmoded. "That telephone networks are improved via subsidies for traditional fixed-line coverage is an idea eclipsed by history. Competitive alternatives, including wireless and broadband, are today available to more than 95 percent of U.S. households -- the threshold level of coverage achieved by decades of universal service subsidies. Targeting universal service subsidies to those few households lacking access to communications networks would produce substantial social savings, as would be expected from a system that spends more than an estimated $5,000 per year for each incremental phone connection." * The E-Rate program for schools results in "gold-plated systems and fraud.""The E-Rate program generously funds computers and computer network connections in educational institutions, using about $2.2 billion of the USF annually. Much of this spending would likely take place without the program, especially in higher income areas, and lax oversight results in gold-plated systems and fraud." The report notes that such wealthy enclaves as Beverly Hills and Fairfax County in Virginia receive E-Rate payments, even though they clearly have the capacity to raise such funds on their own. What is the solution to the USF mess?

According to the TSC report, USF should be capped and subjected to rigorous and focused competition. As Professor Hazlett notes: "...a pro- consumer approach would cap and then reduce USF subsidy payments. Owing to the stark ineffectiveness of current payment schemes, this option could be smartly executed without any loss in universal service outcomes. New technologies and emerging networks allow customers in what were once high-cost areas to be served by modern telecommunications systems at a fraction of the cost of the current regime ... One encouraging sign is that many policy makers, including FCC Chairman Kevin Martin, are considering the use of 'reverse auctions' to assign universal service obligations. Here, phone carriers compete to become the 'provider of last resort' in areas where regulators deem local services (without subsidies) insufficient, bidding a price (paid by the government) to supply such services."

The full Hazlett study findings are available online at http://www.senior.org/USFstudy/.

On April 4, 2006, The Seniors Coalition released an Opinion Research Corporation (ORC) survey of 860 seniors showing that two out of three older Americans think it would be "unfair" to switch the federal USF tax from the current "pay-for-what-you-use basis" on long-distance calls that are actually made to "a flat charge for every phone line you have..." Half of seniors said that it would be "very unfair" to change the USF in this manner. Fewer than one in four seniors (23 percent) think that the line-based approach to USF is "fair." More than four out of five seniors (83 percent) oppose changing the USF fee on phone bills to "start paying for broadband access in rural areas" if the change was to be "funded by shifting more of the burden of the 'universal service fund' fee onto the shoulders of senior citizens and low- income individuals who make few or even no long-distance phone calls." Significantly, only 9 percent of seniors in rural (non-metro) areas would support using USF to pay for rural broadband if seniors and low-income individuals had to pay more.

ABOUT THE SENIORS COALITION

The Seniors Coalition (http://www.senior.org/) is a non-profit, 501c(4), non-partisan, education and issue advocacy organization that represents the interests and concerns of America's senior citizens at both the state and federal levels. The Coalition's mission is to protect the quality of life and economic well-being that older Americans have earned while supporting common- sense solutions to the challenges of the future. TSC was founded as a public advocacy group during the fight to repeal the Medicare Catastrophic Coverage Act in 1989. Since then, it has grown rapidly and expanded its advocacy to include a wide range of other important issues.

The Seniors Coalition, Washington, D.C.

CONTACT: Ailis Aaron Wolf, +1-703-276-3265, aaaron@hastingsgroup.com,for The Seniors Coalition

Web site: http://www.senior.org/http://www.thehastingsgroup.com/biggestHCFsubsidies

Source: PRNewswire

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