The Universal Service Fund, the $8 billion government subsidy program that helps bring telephone lines to hard-to-reach rural communities, has a lot of problems. It’s inefficient, it’s costly, it’s easily scammed by phone companies that pocket the program’s money.
“For example, the fund pays almost $2,000 per month — more than $20,000 a year — for some households to have phone service,” admitted Federal Communications Commission Chairman Julius Genachowski this week. In some parts of the country, the program pays for as many as four phone companies to serve the same rural area. And rules designed to encourage those companies to invest instead perversely reward them for losing customers.
But none of that even gets at the program’s truly big flaw — rural Americans don’t need old-fashioned copper-wire telephone lines any more. They need broadband.
“If you’re doing the wrong job, it doesn’t really matter whether you’re doing it well or not,” said Richard Bennett, a senior research fellow with the Information Technology and Innovation Foundation.
The Universal Service Fund, with all its convoluted incentives, has been trying to solve the wrong problem for several years now. This week the FCC finally announced long-awaited plans to revamp it, with the goal of one day funneling all of its resources toward broadband instead of phone lines.
“While the world has changed around it, USF — in too many ways — has stood still, and even moved backwards,” Genachowski said in previewing the plans in a speech at the ITIF Monday. Without a better system, he said, we have a “rural-rural divide” in the country today, “where some parts of rural America are fully connected — sometimes with state-of-the-art broadband faster than anything available in many urban areas — while other parts of rural America are entirely left behind.”
The FCC, however, can’t just go into the program tomorrow and scratch out all the references to “telephony” and replace them with “broadband.” Federal telephone subsidies, originally created during the Depression (and financed today through a surcharge on everyone’s long-distance phone bill), have spawned a number of companies that have built their entire business model around USF funds. They won’t want to give up that money. And many rural Americans who don’t yet have the option of digital phone service, or voice-over-IP, still rely on the program.
“The hardest part of it is the transition. If you’re starting out with a blank piece of paper, and your mission was to develop a subsidy plan that provided 100 percent of Americans with some sort of access to broadband service, it wouldn’t be that hard to come up with a system of subsidies,” Bennett said. “The challenge that the FCC has is that they’re not starting with a blank piece of paper. What they have to do is to figure out how to build this new system, then transition to it without wrecking telephone service for the rural folks in the process.”
Ultimately, those rural families may get on Skype instead of a landline. But transitioning them there requires changes to physical telecommunications infrastructure, in addition to changes to the USF fine print and philosophy. And the U.S. has been shifting to the new technology slower than many other countries.
One ITIF study, cited Monday by Genachowski for its “scary” findings, ranked the U.S. sixth out of 40 industrial nations or regions in the world in innovation and competitiveness (as a measure of combined indicators like human capital, innovation capacity and IT infrastructure). But the study also found that all 39 of the other countries or regions have lately been making faster progress than the U.S. toward the “new knowledge-based innovation economy.”
“Moving forward slowly is moving backwards,” Genachowski warned, “when other countries are moving faster.”
Ideally, Bennett says, the FCC could aggressively try to transform the USF within five years.
“But I have absolutely no faith that it will be done in a completely streamlined and painless and utterly rational way,” he said. “It’s pretty much a sure bet that any government-regulated enterprise of this magnitude, there are going to be warts in it. But it’s just absolutely essential. It’s inexcusable to be spending the kind of taxpayer and rate-payer dollars that we are to support what’s basically an obsolete technology.”
More realistically, this may take 10 to 15 years — by which time, theoretically, broadband could be the new obsolete technology.
“We probably will be” looking at something new by then, Bennett conceded. “But there’s a pretty good bet that it won’t be the traditional phone network.”