BestandWorstPracticesinUniversalServiceFunding--AUnitedStatesCaseStudyAPresentationattheInternationalTelecommunicationsUnionTelecomWorld2006HongKong,China4-8December2006RobFrieden,PioneersChairandProfessorofTelecommunicationsPennStateUniversityrmf5@psu.eduweb::AFlawed$6.5BillionAnnualMissionUSFintheU.S.subsidizesspecifiedservicesoflocalexchangecarriersoperatinginhighcostareas,andtheratespaidbyresidentsinruralareasandIndianreservations,thepoor,schools,libraries,ruralhospitalsandclinics.TheUSFmissionhasincludedsuchulteriormotivesaspreservingtheBellSystemmonopoly,transferringfundsfromurbantoruralcarriersandfromlongdistancecallerstolocalservicesubscribers,subsidizingserviceevenforconsumersquiteabletoaffordthefullprice,andmakingitpossibleforregulatorstoshowcaseextraordinarilycheaplocalcallingrates.USFavoidancetechnologiesandstrategies,e.g.,VoIPandcallingcards,coupledwithconsumerdiscontentwitha10.5%“tax”threatenthesustainabilityofthecurrentregime.Regulatorydecisions,withsomejudicialapproval,createaneverexpandinginformationprocessing“safeharbor”exemptfromUSFliability.USFFailuresThemissionasstructuredwillneverachieveitscoregoals,ortheexpandedmissionestablishedbytheTelecommunicationsActof1996.TheUSFmechanismbenefitspoliticiansandcarriersfirstandconsumerslast.SubsidymechanismsdistortmarketforcesandtheUSFmechanismprovidesunnecessarybenefitstosomepeoplewhileimposingexcessiveburdensonothers.Shouldmonthly“lifeline”PlainOldTelephoneService(“POTS”)costlessthanacaseofbeer,or2packsofcigarettes?USFemphasizescarrier-specifiedcostsandrecurringservicechargeswithlittleregardfornewtechnologicaloptions,theneedtopromotecomputer/digitalliteracyandtheimportanceofadvancedbroadbandaccessinlieuofPOTS.TheUSFmechanismcreatesanunwieldybureaucracyandprocesspronetoabuseandgaming.Macro-LevelProblemsWiththeCurrentSystemMarketplaceDistortion—USFcreatesartificialpricingsignalsbyunder-andover-pricingservice;telcosoperatinginhighcostareasbenefitwithoutregardtowhethertheirsubscribersneedsubsidies;compassionfatigueleadstoUSFavoidancestrategies.PoorCalibrationofBenefitsandBurdens--Thecurrent10.5%surchargepaidbyalldialuplongdistancetelephoneusersplacesacomparativelyhigherburdenonheavyusers,includingindividualswithincomesjustabovethelocalservicesubsidyqualifyinglevel.Inflexibility—USFappliestospecified(primarilynarrowbandPOTS)carrierserviceswithnooptionfortargetingqualifyingnon-subscriberswithalternatives.Micro-LevelProblemsWiththeCurrentSystemStatusQuoServestheInterestsofSeveralPowerfulConstituencies--Electedofficialsperceiveabenefitinhelpingtomaintainbelowcosttelephoneserviceforsomeconstituents.TheUniversalServiceAdministrativeCompany(“USAC”)haseveryincentivetomakeitselfindispensableeventhoughitsprimarydutyliesintheseeminglystraightforwardtaskofcollectinganddispensingUSFfunds.AcottageindustryofUSFconsultantshelpschoolsmaneuveraninscrutablemaze.AcceptsCostsWithFewAuditingSafeguards—theFCChasconductedfewauditsandonlyrecentlydiscoveredmassivefraudandabuse.EmphasisonServiceSubscriptions—USFprimarilysubsidizesrecurringcarriercostsandservicesratherthanpartiallyunderwriteequipmentpurchaseshavinglittlerecurringcosts.PotentialforSubstantialFutureDeficitsinUSFFunding—migratingtelecomtoinformationserviceincreasestheburdenon“lateadopter,”dialupcustomerswhodon’tpursueorcallingplanorVoiceovertheInternetProtocol(“VoIP”)options.ApplicantspostrequestsforservicestoSLDwebsite(29thcalendardayafter470isposted).Applicantssubmit471torequestdiscountstoSLDduring471window.SLD’sPIATeamreviewseveryapplicationandcallsapplicantsforverifications.SLDmailsapplicantandserviceprovideraBEARapprovalletter.Applicantssubmit486toSLDforeachfundingrequestto“turn-onfunding”andcertifyCIPAcompliance,normallybyOct.28Copyalsoismailedtoserviceproviderslistedon471.SLDmailsapplicantsandserviceprovidersfundingcommitmentletters(FCDL)thatindicateapproval/denialofrequests.Ifapplicantdisagreeswithafundingdecision,theyappealtotheSLDorFCCwithin60daysofdateonFCDL.ReimbursementMethodApplicantspaybillsinfullandsubmitForm472BEARquarterly,semi-annually,orannuallytoSLD.DiscountedBillsApplicantsbeginreceivingdiscountedbills.SLDmailsapplicants470ReceiptNotificationLetter.SLDmailsapplicantsReceiptAcknowledgementLetterforeach471received.ApplicantssubmitForm500toreleaseanyunusedfunds.SLDmailsapplicantandserviceprovidera486approvalletter.E-rateFlowchartSource:MichiganDeptofEducation,Truetechnologyneutralitycoupledwithawillingnesstofundwellarticulatedandcommunity-supportedprojectsratherthanlimitsupporttoafixedlistofexistingcarrierservices;Cappinggovernmentprojectfundingtoapercentageoftotalcosttherebyrequiringprojectadvocatestoseekfinancialsupportfromothergrantors,orfrombankloans;Creatingincentivesfordemandaggre