Paris Hilton's cell phone...

May not work well in some rural areas - especially Downstate Illinois. And if landline companies have their way it may be some time before coverage gets better for the blond heiress.

The Universal Service Tax (Fund) has benefited rural citizens by helping to establish rural telephone companies. Because telephones provide a vital link to emergency services, to government services and to surrounding communities, it has been our nation’s policy to promote telephone service to all households since this service began in the 1930s. The USF helps to make phone service affordable and available to all Americans, including consumers with low incomes, those living in areas where the costs of providing telephone service is high, schools and libraries and rural health care providers. Congress has mandated that all telephone companies providing interstate service must contribute to the USF. Although not required to do so by the government, many carriers choose to pass their contribution costs on to their customers in the form of a line item, often called the “Federal Universal Service Fee” or “Universal Connectivity Fee”. [More]

But the fund has swollen to over $7B annually and is badly mismanaged. Sadly, this is a rural-on-rural problem.

Most people familiar with the universal service fund, including members of the FCC, agree that it has grown out of tune with the times. But reforming it has proven difficult because small wireline telephone companies have grown accustomed to collecting subsidies and lobbying their political representatives to keep the money flowing, said U.S. Cellular's Rooney. [More]

Those small wireline companies are typically rural phone coops whose business plans have always been financially distorted because a significant portion of their budget came from the USF - a permanent subsidy.

The basic problem is that the High-Cost Fund subsidizes small rural local exchange carriers (RLECs) on the basis of their reported costs of providing service. This cost-plus system provides no incentive to reduce costs or to provide service using the most efficient technology. On the contrary, it rewards inefficiency. As a result, according to a recent study by George Mason University economist Thomas Hazlett, subsidies can be as much as $13,000 per year per line. Hazlett estimates that yearly savings of $1 billion are easily achievable using standard mobile and satellite phone subscriptions to provide service to people in sparsely populated areas. [More]

Meanwhile, because IL cell phone companies have not been applying for USF funds to build towers downstate, the proposed cap means they won't be getting any in the future if they did try.

Bottom line, the pattern of some rural/farm constituents optimizing subsidies more shrewdly than others continues.

Recently, the USF has gained new attention as several Iowa-based companies have used USF subsidies to provide free, international calling.^[1] This practice, which began in late 2006, represents an unintended consequence of the USF. [More]

The secret seems to be to live in a state with 1 Senator for about every 1000 citizens, not Illinois.

One solution Paris and I favor is reverse auctions:

Another recommendation is the use of "reverse auctions" to assign universal service obligations, a plan endorsed by FCC Chairman Kevin Martin. Phone carriers would compete to become the "provider of last resort" in areas where regulators deem local services insufficient, bidding a price, to be paid by the government, to supply such services. The lowest-cost bidder wins. [More]

The political clout of rural telcos - the beneficiaries of these billions - will likely prevent this, unless the addition of wireless carriers changes the dynamics of the debate. Their argument of degraded communication consequences reminds me of predictions referring to commodity subsidy reform. Still cost-plus calculation to determine government support has seldom proven to be economically efficient. The process of learning competitive business practices would be difficult, but not impossible.

Paris and I will be following this closely. (She has a little time on her hands right now.)