The idea of universal service has been around almost as long as the telephone. Theodore Vail, who became president of AT&T in 1907, coined the term. In essence, it espoused the notion that all Americans should be interconnected via the phone system.
But the concept became more formalized after passage of the Communications Act of 1934. The law allowed the AT&T phone monopoly to charge higher fees in areas where supplying phone service was relatively inexpensive, such as a big city. That provided the phone company with the funds needed to subsidize service in rural areas and other places where building a telephone network was costlier, but people couldn't afford high fees.
But the breakup of the phone monopoly in 1984 altered the arrangement that had subsidized universal service for 50 years. Under Federal Communications Commission (FCC) and state guidance, a new system evolved, spreading the costs among the seven regional Bells and the new long-distance companies. Low-cost phone service would continue to subsidize service in high-cost areas. But, in addition, long-distance companies like AT&T, MCI and others would indirectly subsidize local phone service by paying significant access charges for the right to route their customers' calls through the Bell networks. This made long-distance service much more expensive but kept local phone bills lower.
“The idea, of course, was that local service was more important,” says Robert Crandall, a senior fellow in economic studies at the Brookings Institution.
The Telecommunications Act of 1996 once again changed the rules governing universal service. The idea that the Bells should continue to be responsible for universal service seemed anachronistic to Congress, since the new law aimed to open local phone markets to competition. According to FCC Commissioner Susan Ness, the current system “was fine so long as you didn't have competition.” The danger, Ness adds, “is that competitors will take away low-cost business because they don't have to subsidize high-cost services” associated with universal service.
The new law aims to avoid such pitfalls. To begin with, it created a Universal Service Fund, to help subsidize high-cost service. The new fund would be financed by a broad range of telecommunications companies, including the Bells, long-distance firms and wireless providers. It would furnish money to help low-income residents pay for phone service. In addition, part of the fund would be directed to rural areas to subsidize phone connections in out-of-the-way places. Money was also provided for schools and libraries to help them pay for Internet service.
In the three years since the passage of the act, outlays from the Universal Service Fund have grown from $1 billion in fiscal 1997 to $7.1 billion. In fiscal 2000, outlays are expected to reach $10.3 billion.
In addition to the Universal Service Fund, the law charged the FCC with replacing the implicit subsidies for universal service contained in the access fees paid by long-distance providers with a more explicit subsidy. In other words, the access charge could no longer be used as a de facto means of subsidizing local service.
But while the FCC was supposed to propose new rules on access fees by 1997, the agency has yet to come up with a new scheme to replace the current system. Indeed, but for a slight reduction in access fees in the last few years, nothing has changed since the act was passed in 1996.
To long-distance providers, who pay the access charges, the slow pace of change is frustrating. “We feel very strongly that the access-charge regime has been badly abused” by the Bells,“ says Jim Cicconi, AT&T's general counsel. According to Cicconi, 30-40 percent of his company's expenses in providing long distance goes to the Bells in the form of access fees. And while he acknowledges that his company and others should pay the legitimate cost of using the Bell networks, he estimates that long-distance providers are being overcharged to the tune of $10 billion a year.
Tom Tauke, senior vice president for government relations at Bell Atlantic, agrees that the current system is “not sustainable.” But that doesn't mean that local providers like Bell Atlantic should be left paying the cost of service to hard-to-serve areas, he says. “If we get rid of the current system, what are we going to replace it with?” he asks.
Tauke says the answer is to make universal-service subsidies available to anyone willing to serve high-cost areas. “These subsidies need to be made explicit and available to anyone who wants to serve the customer, be it a cable company, wireless company or a local phone company,” he says. He even envisions a system where the government would auction off subsidies to the provider who offered to serve a high-cost area for the lowest price.
But others argue that subsidies, whether through the Universal Service Fund or access fees, should be done away with entirely. According to Solveig Singleton, director of information studies at the Cato Institute, subsidies will deny new technologies to poor and rural areas since innovators will be unable to compete with the company receiving government money to provide telephone service.
“In the long run,” she says, “customers in these areas will be better served if no one has a monopoly on the right to serve them and other companies can come up with new ways, say satellite or wireless, of providing phone service at an affordable cost.”