The Universal Service Fund: What Do High-Cost Subsidies Subsidize?

Abstract

The universal service program in the United States currently transfers about $7.5 billion per year from telephone subscribers to certain telephone companies. Those funds are intended to help achieve particular policy goals, such as subsidizing telephone service in rural areas and making phone service more affordable to low-income people. The bulk of the funds, about $4.5 billion per year, subsidizes firms operating in high-cost areas. A large literature documents the inefficiency and ineffectiveness of these subsidies, raising the question of where the money goes. This paper uses data submitted by about 1,400 recipients of high-cost subsidies from 1998-2008 to explore this question. The analysis reveals that of each dollar distributed to recipient firms, about $0.59 goes to “general and administrative expenses” - overhead such as planning, government relations, and personnel - rather than to making telephone service more affordable. These results, consistent with a large body of economics literature, suggest that the Universal Service Fund’s method for subsidizing service in high-cost areas should be radically overhauled as a key component of the current desire to shift USF support from voice to broadband.