St. Louis Post-Dispatch, March 1, 2006

Universal telephone service is one of those concepts that sounds good in principle but causes big problems in practice.

Back when phones actually rang instead of beeping or playing music, Ma Bell made a point of connecting remote towns and farms with her more-profitable, big-city networks. The universal service obligation was part of the price the company paid for maintaining a national monopoly.

After the breakup of the Bell System, the Federal Communications Commission created the Universal Service Fund to support rural areas. The Telecommunications Act of 1996 expanded the fund, and a group of small phone companies, schools, hospitals and libraries grew used to some very lucrative subsidies.

But the communications industry has changed dramatically in the last decade. Traditional long-distance companies, the biggest contributors to the fund, are losing ground to wireless companies, which pay in at a lower rate, and to Internet phone companies, which aren't required to pay anything.

Digital subscriber lines recently were exempted from the fund, because the FCC classified them as an information service, not interstate telecommunications.

In short, the Universal Service Fund's revenue model appears to be broken. FCC Chairman Kevin Martin has proposed replacing the current 10.2 percent fee with a flat charge of maybe $1 a month on every telephone number, whether it's used for a land-line, mobile or Internet phone.

The Keep USF Fair Coalition argues that Martin's plan is unfair to low-income people. "For a consumer who makes a handful of long-distance calls, the effective tax rate would soar by more than 1,000 percent,'' says Linda Sherry, director of national priorities for Consumer Action. "We oppose this approach of balancing the Universal Service Fund on the backs of consumers who use long-distance services the least.''

Harold Furchtgott-Roth, a former FCC commissioner who runs a consulting firm in Washington, says the current system is inefficient because it discourages people from making long-distance calls. He says it also encourages "regulatory gamesmanship" that favors some technologies over others.

But this debate needn't be about efficiency versus fairness. While the FCC tries to figure out how to raise the money, Congress should re-examine why we're spending so much on subsidies in the first place.

After all, it's not like we're living in the early 1900s and still trying to connect Aunt Tillie's farm to the grid.

Universal-service subsidies totaled $7 billion last year, up 50 percent since 1999. The percentage fee has roughly tripled since 1998. Sixty-four percent of the money goes to "high-cost" rural areas, and small companies capture most of that.

Vince Vasquez, a policy fellow at the Pacific Research Institute in San Francisco, says one Texas company got 95 percent of its revenue from the subsidy fund. Another tiny co-op got so much from the government that it paid its customers a dividend that exceeded what they spent on phone service.

This isn't universal service, it's corporate welfare. If these small firms weren't on the federal dole, they'd have to merge with larger companies, but that's a fact of modern life.

Vasquez suggests replacing the Universal Service Fund with a voucher system.

Some farmers and cabin dwellers might spend their handout on Internet, cellular or satellite service rather than a traditional land line. Then we'd have a subsidy that encourages progress instead of holding it back.

David Nicklaus can be reached at dnicklaus@post-dispatch.com | Phone: 314-340-8213.