Universal service in the United States: a focus on mobile communications.

• Author: Parsons, Steve G.

1. INTRODUCTION II. THE HISTORY OF UNIVERSAL SERVICE REGULATION III. RECENT FEDERAL ACTIONS IMPORTANT TO MOBILE AND THE USF A. The Joint Board Recommendation B. The January 29, 2008, FCC Notice of Proposed Rulemaking (NPRM) C. The FCC Order for an Interim Cap for CETCs D. The November 5, 2008, FCC Order on Remand Report and Order, and Further Notice of Proposed Rulemaking (FNPRM) IV. IS MARKET INTERVENTION FOR UNIVERSAL SERVICE ECONOMICALLY RATIONAL? A. The Test for Market Intervention B. Network Effects, a Rationale for Market Intervention? C. Nonmeans-Based Mechanisms for Voice Communications Fail the Test D. A Rationale for Rural Subsidization? E. It Is Critical to Avoid Distorting the Competitive Process V. U.S. HISTORY AND PAST POLICIES HAVE FAVORED LANDLINE OVER MOBILE TECHNOLOGY A. Previously, Mobile Providers Could Not Obtain High-Cost Funding B. Wireless Providers Do Not Receive Landline Switched-Access Charges C. Wireless Carriers Make Significant Contributions to Spectrum Auctions D. Wireless Services Are Taxed More Heavily Than Wireline Services E. The U.S. Mobile-Party-Pays Regulatory Regime Disadvantages U.S. Mobile Providers F. Wireless Service Must Compete with Low Landline Subscription Prices G. The FCC's May 2008 Order to Cap Payments to Competitive but Not Incumbent ETCs Is Neither Symmetric Nor Competitively Neutral H. The FCC's November 5, 2008, NPRM Appendices Are Neither Symmetric Nor Competitively Neutral I. Implications for USF Policy VI. ELIMINATING THE IDENTICAL SUPPORT RULE? A. A Higher Proportion of Displaced Landlines Would not Have Reduced Universal Service Payments Under the Current System B. Unequal Subsidy Payments Are Antithetical to the Competitive Process C. Unequal Subsidy Payments Are Inconsistent with the FCC's Rationale in Reflecting the Costs of the Most Efficient Provider D. A Symmetrically Applied Individual Cap Would Be Rational and Competitively Neutral E. The FCC Must Decide on the Application of a Symmetric Cap Prior to Obtaining Cost Data VII. CONCLUSION I. INTRODUCTION

   One definition of universal service is the provision of a baseline level of telecommunications services to every resident of a country at a reasonable charge. (1) Such a definition, of course, begs the questions of what constitutes a baseline level and what is included in telecommunications services. In the United States, the concept of universal service slowly developed over time. Recent regulatory decisions and technological changes are driving changes in the concept of, and the regulatory mechanisms designed to achieve, universal service. One of the critical changes in universal-service concepts (and customer demands) is toward greater reliance and value derived from mobile communications and broadband Internet connections. (2)

   The current interstate universal-service mechanism designed by the FCC provides approximately $4.3 billion annually to high-cost telecommunications providers alone (i.e., not including funding for low-income consumers, schools, and healthcare facilities). (3) Federal universal service support in total requires an 11.4 percent tax on interstate telecommunications end-user services. (4) One concern expressed by the FCC is that "[c]ompetitive ETC [eligible telecommunications carrier] support, in the six years from 2001 through 2007, has grown from under $17 million to $1.18 billion--an annual growth rate of over 100 percent." (5)

   Early in its history, the FCC (created in 1934) was primarily concerned with reducing interstate long-distance charges. (6) A system to help keep the prices of local (especially residential) services low by transferring significant funds from interstate long-distance carriers developed only slowly from 1952 until 1970. (7) This revenue/cost pattern was so well established by the mid-1970s that the seminal formal work in economics on cross-subsidies began in the telecommunications industry. (8)

   Given the historical growth of landline (9) telecommunications infrastructure, the concept of interconnecting citizens had the practical implication of seeking to place landline infrastructure to interconnect locations where citizens spent most of their time: homes and businesses. While the essence of virtually all universal-service concepts is that citizens be interconnected to a communications network, ideas regarding the method of connection have changed over time.

   The 1934 Communications Act has been altered only once--by the Telecommunications Act of 1996. (10) With respect to universal service, the Telecommunications Act (11) (1) established a process to define supported services via a Federal-State joint board and FCC proceeding; (12) (2) established principles for universal service; (13) (3) noted that "[u]niversal service is an evolving level of telecommunications services"; (14) and (4) required that "interstate telecommunications services shall contribute [to universal service] on an equitable and non-discriminatory basis" (although it provided no new mechanism for funding). (15)

   Notably, since 1997, the FCC has explicitly permitted federal funding for the achievement of universal service to be portable to other technologies; (16) in particular, this has meant that wireless carriers may be eligible to receive universal-service funding. However, long-standing federal policy and recent FCC regulatory actions have consistently favored landline over wireless technology in a manner that artificially disadvantages wireless technology and hampers the achievement of both the stated goals of universal service legislation and the more general goal of greater connectivity of people to telecommunications networks.

   In Section II, we discuss the history and the logistics of federal support for universal service as well as portions of four important recent regulatory documents that impact the distribution of the Universal Service Fund to wireline versus wireless technology. In Section III, we examine whether market intervention promoting universal service is economically rational. This Section describes network effects and considers whether they are likely sufficient to provide an economic rationale for market intervention. Section IV discusses those historical and public-policy factors that we believe have favored landline over mobile technologies, particularly in areas served by small wireline incumbent local exchange carriers (ILECs). Section V considers the implications of the FCC eliminating the so-called equal-support rule (the rule in which qualified providers in the same area receive the same funding regardless of technology and costs). (17) Section VI summarizes our findings and conclusions.

2. THE HISTORY OF UNIVERSAL SERVICE REGULATION

   The notion of universal service was arguably first advanced by Theodore Vail in a 1907 speech, in which he envisioned "one system, one policy, universal service." (18) However, Vail's call for universal service stated a commercial goal (the one system would be owned by AT&T), rather than a desire for new government policy. After Alexander Graham Bell's patent on the telephone device itself lapsed in 1894, AT&T faced a massive proliferation of competition from new local exchange telephone companies. (19) Many of these companies sought to exploit AT&T's focus on providing telephone service to business customers in major cities by providing service to residential customers in smaller cities and rural towns. (20) Vail and AT&T generally refused to permit interconnection between its network and the new, local exchange companies where the new companies' facilities geographically overlapped with those of AT&T; (21) the result was a morass of different, incompatible telephone company networks in which a customer on one provider's network could not necessarily call a customer on another network. (22) As such, Vail's call for universal service can more properly be seen as advocating a single telephone network (AT&T's), rather than an expansion of connectivity to more people. (23)

   The federal government's first implicit universal-service policy came in the form of favorable federal legislation and regulatory action as AT&T persued its vision of universal service in the form of monopoly. (24) Insofar as AT&T sought government action promoting its vision of universal service, it was in the form of government permission (or lack of proscription) for AT&T's continued acquisition of rival telephone companies in contravention of antitrust laws. (25) While the federal government was initially indifferent to AT&T's efforts, AT&T's continued campaign of acquisition eventually attracted the attention of the Department of Justice's Antitrust Division. (26) In response, AT&T and the Attorney General agreed on several limitations to AT&T's business activity, formally known as the Kingsbury Commitment. (27) The Kingsbury Commitment was ostensibly a victory for the government, as AT&T agreed to divest itself of Western Union, provide long-distance services to independent exchanges under certain conditions, and refrain from acquisitions of independent telephone companies if the Interstate Commerce Commission (ICC) objected. (28) However, the agreement actually favored the continued expansion of AT&T and consolidation in some markets; not only did it stave off the federal takeover of AT&T that many expected, but it also permitted AT&T to continue to acquire other telephone companies so long as it sold off an equal number of companies to independent buyers. (29) Independent telephone companies were able to maintain significant market share until 1921, when Congress passed the Willis-Graham Act, (30) which exempted telephone companies from stringent antitrust oversight and gave official sanction to AT&T's goal of universal service via monopoly. (31) As Lloyd noted, "[b]y 1924, the ICC had approved AT&T's acquisition of 223 of the 234 independent telephone companies." (32)

   The year 1934 was a watershed year in the industry because of...