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MENDOZA IN THE NEWS

Indiana's aging telecom law due for an overhaul

Why do we subsidize Aunt Em's phone line when it's cheaper for Dorothy to use her cell?

by Barry Keating
Publication: South Bend Tribune

November 28, 2005

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Societies perpetuate myths to convey ideals across generations. On occasion, politicians perpetrate myths to idealize their actions. While the feats and foibles of mythical beings illuminate truths, political myths typically conceal them.

Such is the case with the pervasive cyber-mythology surrounding "universal service," which holds that our collective well-being is only a mouse-click away. We need only subsidize the wiring of every school, library, tenement and farmhouse to alleviate poverty, illiteracy and urban sprawl.

In reality, the $30 billion in cross-subsidies funneled annually into an expanding array of telecommunications services actually inhibits telecom innovation, network investment and consumer choice. Such unintended consequences are particularly problematic for Indiana and other largely rural states that would benefit most from new telecom deployment.

The concept of universal service might seem sensible at first glance. Are we not better off with telecom services universally available at regulated rates? After all, civic and economic engagement requires a telephone and Internet access, at the very least.

A majority in Congress certainly thought so in 1996, when lawmakers significantly expanded telecommunications entitlements. The Telecommunications Act of 1996 granted schools, libraries and rural health care facilities new telecom discounts ranging from 20 percent to 90 percent, with the biggest breaks for the poorest schools and those in higher-cost areas (largely rural). In addition to subsidized services, the law provided funding for wiring, routers, servers and computers -- with little regard for whether teachers could actually utilize the equipment in classroom instruction.

This wasn't the first time that politicians seized on technology as an educational breakthrough. In the 1920s, for example, radio was celebrated as a means to elevate student achievement. Schools everywhere were allocated free radio spectrum, along with a trove of equipment necessary to produce "educational" programming.

Most school-run stations went silent long ago -- although my South Bend Community Schools continues to broadcast board meetings twice-monthly. But recognizing a higher use for the spectrum, the Federal Communications Commission last year began reviewing proposals from schools and universities to sell their radio licenses for commercial use.

Prior to passage of the 1996 act, universal service subsidies were limited to basic local wireline service for low-income households and rural service providers (whose higher costs are largely a consequence of their low-density market). The lion's share of universal service funds originally was generated by artificially raising long-distance rates. But the advent of competition in the 1980s dramatically reduced long-distance rates, thereby squeezing the Universal Service Fund. A richer revenue stream was needed.

In a marked departure from past practice, the 1996 act expanded universal service eligibility to include "advanced" telecommunications services such as Internet access, and imposed new "fees" to fund the subsidies. Absent statutory reform, the subsidies may well be applied to all manner of new technologies in the future. Simply put, the original goal of a telephone in every home has evolved into an entitlement for advanced Internet services.

Ironically, this expansion of universal service threatens to undermine the very market forces that spur innovation, and which have dramatically increased affordable telecom options. By mandating "affordable rates" for all, the federal statute and similar state laws actually stymie the ability of telecom firms to launch new services and enter new markets. Simply put, the higher rates consumers must pay to cover universal service costs crimp their disposable income and thus reduce service providers' opportunities for profit.

Today¹s cyber-mythology is rooted in the mistaken belief that telephone penetration across America would not have transpired without government-mandated universal service subsidies. In fact, universal service was the brainchild of Theodore Newton Vail, who, as president of AT&T, struck a brilliant deal with the feds in 1913 to provide universal service in exchange for a government-sanctioned monopoly. Up until then, hundreds of rival telephone firms were wiring the nation.

But public officials, eager to regulate the nascent industry, embraced Vail¹s motto: "One Policy, One System, Universal Service."

Telecommunications is hardly the only service to be judged as too essential to avoid government control. Railroads, trucking and airlines, for example, all have been regulated as common carriers. But it is noteworthy that deregulation of these same services has benefited consumers and the economy far more than government control ever did.

Universal service as a regulatory imperative has largely been rendered obsolete by the range of affordable services spawned by new technologies. Thus, it is economically irrational to continue subsidies for costly wireline services for which there now exist more cost-effective substitutes. Wireless technologies, for example, can service rural areas at much lower cost.

In an unfettered telecom market, entrepreneurs would meet demand by deploying the most cost-effective technologies rather than maintain less efficient networks for the sake of generating revenue through universal service subsidies.

The universal service myth brings to mind The Wizard of Oz. Poor Dorothy, so meek and mild, was utterly convinced that only the great and powerful Oz could possibly fulfill her wish to return home.

Yet once the wizard's trickery was exposed, Dorothy realized her own power. We, too, need to pull back the curtain and recognize that universal service will not make our dreams come true. And that's a fact.

Barry Keating, Ph.D., of South Bend, an economics professor at the University of Notre Dame, is an adjunct scholar of the Indiana Policy Review Foundation.
Contact him at bkeating@inpolicy.org.