Move Over "Obama Phone": FCC Wastes Up To $24,000 Per Line A Year On Phone Subsidies Going Into High-Income Areas Around U.S.

"Poster Child for Federal Waste":  Amidst General Concern About Federal Phone Subsidies, Epic Waste Seen in Universal Service Fund's Connect America Fund, (Previously the Aptly Named "High-Cost Fund"):  Worst Abuses Seen in AK, AZ, CO, HI, MI, OK, TX, and WA.

WASHINGTON, July 10, 2013 /PRNewswire-USNewswire/ -- Even as substantial media attention focuses on expenditures on the so-called "Obama phone" for eligible low-income Americans, a new report shows far bigger problems in the Federal Communication Commission's Universal Service Fund (USF), particularly the $4.5 billion now being lavished on the USF Connect America Fund – previously known as the "High-Cost Fund" (HCF) -- intended for remote rural areas, but actually spending up to nearly $24,000 per line per year for phone service in such areas as the Hawaiian island of Maui, the Breckenridge, CO. resort area, and mansion-lined gated golf communities outside of Scottsdale, AZ.

The new study, "Unrepentant Policy Failure: Universal Service Subsidies in Voice & Broadband," is the work of George Mason University Professor Thomas Hazlett, a former chief economist at the FCC, and Scott J. Wallsten, former economics director for the FCC's National Broadband Plan and now vice president for research and senior fellow, Technology Policy Institute, and senior fellow, Georgetown University Center for Business and Public Policy. 

While the Hazlett-Wallsten report also examines the track record of the E-rate programs (for libraries and schools) and Lifeline wireless (for low-income Americans), by far the largest pot of USF money – half of the $9 billion projected to be raised in 2013 by a steep 16 percent tax on users of land lines, cell phones, and VoIP communications – goes to the High Cost Fund.

The new study found:

• The amount of the worst USF waste is growing.  "A 2006 study of how the High Cost Fund actually distributed its subsidies revealed startling statistics. ...  [T]wo companies were receiving more than $12,000 per line annually, with eight others receiving more than $3,000 per line annually. Five years later, the Federal Communications Commission itself reviewed the situation. Remarkably, the Commission found that the problem had worsened; by then some 10 companies were getting more than $5,000 per line per year in federal tax subsidies – double the number in 2005. One company received $23,000 per line per year in federal payments, or 75 percent more than the top recipient in the previous study." 
• The FCC could bring service to everyone without phone service for less than 1/20th the current cost. "... in August 2010, FCC data indicate that 99.8% of the U.S. population – all but about 600,000 Americans – lived in the coverage area of a mobile telephone operator. Supplying each of those residents, in about 230,000 households, free unlimited domestic telephone service via satellite would cost no more than $173 million per year using the retail prices stated by one satellite provider offering a recent low-cost unlimited service plan. This puts the $4.5 billion annual cost of the HCF into perspective." 

Thomas Hazlett, professor of Law & Economics, George Mason University, managing director, Arlington Economics LLC, and former chief economist of the Federal Communications Commission, said: "Implementation of the USF, launched by the 1996 Telecommunications Act, has been abysmal.  A consensus among expert economists is that instead of improving network coverage or benefiting telecommunications users, the subsidies have been wasted, padding the costs of rural phone companies and delivering only pennies on the dollar, if that, in social value."   

Scott J. Wallsten, vice president for research and senior fellow, Technology Policy Institute and senior fellow, Georgetown University Center for Business and Public Policy, said: "Accounting for half of the USF pot, the High Cost Fund has largely operated without a budget constraint. With limited exceptions, high-cost fund recipients report how much money they 'need' and regulators provide it by adjusting tax rates. As a result, neither the recipients nor the administrators of the fund face any inherent incentives other than angry legislators or net payers into the fund to improve efficiency. This is a textbook example of how not to run a government subsidy program."

Dave Herman, vice president for policy, Alliance for Generational Equity, said: "The High Cost Fund of the Universal Service Fund is the poster child for government waste. How could the government ever justify spending $24,000 per line per year to extend a voice telephone network when alternative services are available for a tiny fraction of the price?  No earnest policy maker would intentionally design a system that squandered such vast resources while delivering little if anything of real value."

According to the new report, 10 telephone carriers in Alaska, Arizona, Colorado, Hawaii, Michigan, Oklahoma, Texas, and Washington were paid the highest subsidies in 2010 (the most recent year for data), including one company in Washington State that raked in nearly $24,000 per line in federal subsidies for 16 telephone lines in and around a resort lake town. 

Here are the 10 worst USF abuses:

1. Washington State -- Westgate Communications LLC d/b/a Weavtel – # of phone lines: 16; total subsidy:  $375,858; and cost per line:  $23,491.
2. Alaska -- Adak Tel Utility – # of phones lines: 165; total subsidy: $2,784,558; and cost per phone line: $16,876.
3. Washington State -- Beaver Creek Telephone Company – number of phone lines: 28; total subsidy: $465,690; and cost per phone line: $16,632;
4. Texas -- Border To Border – number of phone lines: 135; total subsidy: $1,828,017; and cost per phone line: $13,541.
5. Hawaii -- Sandwich Isles Comm. – number of phone lines: 2,068; total subsidy: $25,583,457; and cost per phone line: $12,371.
6. Michigan -- Allband Communications Cooperative – number of phone lines: 96; total subsidy: $1,030,962; and cost per phone line: $10,739.
7. Arizona -- Accipiter Comm. - # of phone lines: 360; total subsidy: $3,340,878; and cost per phone line: $9,280.
8. Oklahoma -- Terral Tel. Co. - # of phone lines: 250; total subsidy: $2,060,376: and cost per phone line: $8,242.
9. Colorado – South Park Tel. Co. - # of phone lines: 180; total subsidy: $1,126,056; and cost per phone line: $6,256.
10. Texas -- Dell Tel. Co-Op.  - # of phone lines: 769; total subsidy: $4,480,362; and cost per phone line: $5,826.

Other key Hazlett-Wallsten findings include the following:

• USF waste is taking place on an epic scale. The federal government has spent "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."
• At least two USF programs no longer have any justification for remaining in existence. "FCC data show that mobile voice service is already available to 99.9 percent of households and wireless broadband service to over 99.5 percent of the U.S. population, including 97.8 percent of rural residences. In addition, satellite systems supply voice and data services to households virtually everywhere people live in the United States, using networks built without subsidies … the premises of the two largest components of the USF – the High Cost Fund, the Schools and Libraries Program (E-Rate, capped at $2.25 billion per year) -- have vanished. In essence, these programs have run out of things to subsidize."   
• FCC "reform" efforts for the High Cost Fund are "laughable."  "Emblematic of the new rules is a measure to limit subsidies to rural carriers to $3,000 per line per year.  [The so-called 'cap' will hem in only about 2 percent of total disbursements under the USF program.] This laughably spacious ceiling – in a day when satellite voice-and-broadband service is offered to virtually every U.S. household for $600 a year -- will fail to remedy the endemic waste in the USF.  Instead, it targets the 'headline risk' policy makers now face when grotesquely profligate industry payments are made public. Most critically, the FCC provides a new rationale for subsidies – substituting 'broadband' for 'voice' – breathing renewed political life into a failed government initiative that taxes urban phone users, most heavily poor households who use wireless phones and make long-distance (including international) calls, in order to subsidize phone companies and property owners in rural markets. Indeed, the reform's first effects were to increase the High Cost Fund by about $400 million."

ABOUT AGE

The nonprofit and nonpartisan Alliance for Generational Equity (http://www.ageadvocacy.org) is committed to protecting each generation from abusive public policies and other practices that erode their quality of life, rob them of their hard-earned wages.  AGE is dedicated to formulating and advocating public policies and other practices that protect the economic security and quality of life of each generation. AGE seeks to find solutions outside of political parties and ideological partisanship.

EDITOR'S NOTE:  A streaming audio recording of the news event will be available on the Web as of 6 p.m. EDT on July 10, 2013 at http://www.ageadvocacy.org.

SOURCE Alliance for Generational Equity, Washington, DC