FCC Bashed for USF 'Wasting' Taxpayer Money

By Craig Galbraith Comments
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A new study says the Federal Communications Commission is wasting up to $24,000 per line, per year on phone subsidies going to high-income areas around the U.S. – money that is supposed to go to remote, rural areas.

The study was conducted by Thomas Hazlett, a former chief economist at the FCC and professor at George Mason University; and Scott Wallsten, former economics director for the FCC's National Broadband Plan and now vice president for research and senior fellow at the Technology Policy Institute.

The research results were detailed in a news release this week by the Alliance for Generational Equity (AGE), which calls itself a nonprofit and nonpartisan group "committed to protecting each generation from abusive public policies and other practices that erode their quality of life and rob them of their hard-earned wages."

The report purports to show large problems in the FCC's Universal Service Fund, particularly the $4.5 billion dedicated to the USF Connect America Fund – previously known as the "High-Cost Fund" (HCF) – intended for remote rural areas. The research says some of the money is being spent in places like Maui; the Breckenridge, Colo., resort area; and gated golf communities near Scottsdale, Ariz.

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 16 percent tax on users of land lines, cell phones, and VoIP communications – goes to the High Cost Fund, AGE said.

"Implementation of the USF, launched by the 1996 Telecommunications Act, has been abysmal," said Hazlett. "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."   

"Accounting for half of the USF pot, the High Cost Fund has largely operated without a budget constraint," added Wallsten. "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."

More specifically, the report says 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.

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