Robert W. Crandall and Leonard Waverman
Brookings Institution Press, 2000
Started 7/17/02
Completed 7/22/02
pp 1-21 universal service is threatened by competition. concept of Universal service has changed over time, partly as way for AT&T to exclude competition.
US subsidizes residential and rural service with implicit and explicit mechanisms on business, high density residential and long distance service. Direct subsidies from LD total $2.2B in 1998. There is possibility US could mandate universal service of advanced services. other countries also have universal service mandates.
Recent studies indicate local service is price inelastic and long distance is price elastic, so universal service does not really increase penetration.
pg 23-44 The rational for universal service subsidies is based on the presence of externalities (benefits that accrue to society from the action of an individual. the benefit that accrues to the individual is less than his cost, so underinvestment results) However many other goods and services (refrigerators, cable TV, radio) can generate externalties but are not subject to universal service claims but have penetration rates at or above phones. In addition, phone service claims a very small portion of the consumer budget, less than 2% of the low-income consumer and 50 bp for the high-income consumer. Adding long distance expenditures makes these percentages go to 3.3% and 1.5% respectively.
So Phone service doesnt' cost much, isn't much different philosophically than other services that generate externalities and has penetration at or below these unsubsidized services.
pt 45-68 The average phone bill in the US is about $50/mo. 1/2 local service, 1/2 long distance. However, high income consumers pay about $60/mo (35 LD) and low-income about $40/mo (15LD). rural and urban phone bills are about the same. Long distance service is overpriced to subsidize local service, if this subsidy were eliminated there would be a net welfare gain, but high-income consumers would benefit more since there long-distance charges would come down more than their local bills rise.
pg 69-88 Other regulated "utilities" like electricity, natural gas, cable TV are not subject to universal service, so why phone?
pg 89-104 What drives the demand for telephone service? there is little evidence to show low rates do. The authors show that low installation charges, not low service charges increase penetration.
pg 105-128 What are the costs and benefits, and who pays and benefits, from traditional universal service policies? If cost-based pricing were used the key question is what model of costs should be used. Not surprisingly, long distance companies believe local rates are too high and local exchange companies believe local rates are too low, relative to costs. Although it is never stated, I believe they are looking at costs in an economic sense, that is including a "fair" return on investment, or a "reasonable" profit. Cost-based re-pricing would result in changes in the local bill from a $4.36/mo. reduction to a $27.70/mo increase depending on the model used and whether the consumer is in an urban or rural locale. Obivously the consumer welfare gain depends on the same factors, but high-income, heavy long-distance users would benefit most and low-income low long-distance users would benefit least and/or pay more. This just looks at residential rates and the welfare benefits would be larger for a reduction in business rates.
pg. 129-140 The USF policies of the FCC is going to be very difficult with the Telecommunications Act of 1996 since competitors in the local loop will go after high-priced business users, making it more difficult for the ILECs to tap those users as a source of funds for residential and rural consumers.
pg 141-164 Authors claim universal service for Internet presents unique issues including should PC purchase be subsidized as well as the connection to the Internet. Current FCC subsidy programs for schools cost about $2B/yr.
pg 165- 172 Current universal service policies are a drain on the economy and should be scrapped.