I don’t have to tell you that times are changing. There is no place where that is more apparent than in the way we communicate with one another. Change is inevitable and desirable, but it can bring about difficulties during transition phases. Competition and technological advances in communications have brought lower prices, remarkable innovations, and a knitting together of the world in a way that we wouldn’t have imagined a few years ago.
The evolution in telecom is now necessitating updating of the regulations to govern the industry, and Texas lawmakers are facing notable decisions in the years to come to help restructure the state’s regulatory framework to fit the dynamic markets of today.
Markets, which essentially are a mechanism to allocate resources, are extremely powerful and achieve incredible things in a seemingly invisible and effortless manner. They are not perfect, of course, but if left unfettered, they operate most efficiently. Efficiency is not always the one-and-only goal, however.
Some of the shortcomings of markets pertain to the fact that they do not honor social policies and priorities beyond efficiency, and they do not capture social benefits or costs that extend beyond private transactions. In 1776, Adam Smith penned The Wealth of Nations in which he fully exposited the structure of a market economy. In this seminal work, he noted these phenomena and suggested various situations in which intervention was necessary—and justified.
When markets are regulated, various subsidies frequently surface. Sometimes it’s a matter of conscious choice; on other occasions, implicit subsidies arise because there is simply no mechanism to prevent it. A couple of examples in this regard might be helpful.
During the era when banking was highly constrained, loan revenues commonly funded a variety of other services, while commercial accounts subsidized checking account costs for households. Similarly, when trucking was subject to extensive rate controls, heavily traveled routes were used to subsidize more remote areas.
After competition was introduced into these sectors, market forces compelled the fees for each type of service to be indicative of their cost. Not surprisingly, this transition involved winners and losers. Commercial accounts and transportation on major routes cost less. But what about household accounts and freight rates to out-of-the-way places?
In the absence of any other considerations, competition tends to provide the outcomes that maximize economic well being. If a social priority is sufficiently compelling to outweigh the advantages of optimal efficiency (and it often is), it is within the power and responsibility of government to make appropriate adjustments. Such actions are a part of the social contract that underlies the philosophy giving rise to Western democracies.
By the 1930s, telecommunications was having a significant impact on the integration of the nation. Providing basic telephone service availability to everyone at affordable prices was considered a worthy national objective. Unfortunately, the rural and remote areas were at risk of being left out of future opportunities.
For universal service to be provided at affordable prices, an explicit subsidy was required. Thus, the regulation of telecommunications enabled service to these high-cost areas to be partially funded through the rates that were set for other, more densely population areas for long-distance calling. Once the market became more open to competition, such implicit subsidies were no longer possible.
However, the need to assure that everyone had a reasonable opportunity to communicate remained critical. It was particularly acute in Texas because of the state’s vast geographic territory and the wide dispersion of its population. So, to ensure the continuation of affordable service to all areas, Texas implemented a Universal Service Fund (USF).
Fees assessed on all basic telephone customers (explicitly listed in monthly billing statements) provide the financial resources necessary for the operation of the USF, thereby providing a mechanism to reduce charges in high-cost areas, as well as programs for low-income and hearing-impaired individuals.
According to an analysis conducted by the Public Utility Commission of Texas (PUC) a few years ago, the cost of providing basic service in some areas ranged as high as $400 per month. Similarly, the average cost in the regions designated as “high cost” were about 50% higher than the average for the state. Funds from the USF help compensate providers for these extra costs.
Payments from the USF are allocated and administered by the PUC. The subsidy remains with the customers should they switch to alternate providers and it is offset by reductions in charges for other services (one of the factors leading to dramatic reductions in long-distance rates).
Some constituencies are suggesting that the USF be curtailed or eliminated. Ironically, much of the pressure for major changes is coming from relatively new entrants to the telecommunications market that have chosen not to participate in high-cost areas. Many regions of the state are too sparsely populated or otherwise too high cost to be desirable business for some providers.
It should be noted that, while much of the USF flows to provide service to users in high-cost areas, the social benefits are observed across the entire Lone Star State. Given the complex and interrelated nature of economic activity, communications accessibility to customers and suppliers in all segments of the state yields “spillover” gains beyond the immediate areas receiving the subsidies. Such improvements, of course, will not be captured in a “pure” market.
To the extent that universal service at affordable prices continues to be a significant social priority, a mechanism such as USF remains an appropriate public policy initiative. Especially since this approach appears to be generally achieving the desired outcome in a reasonable and effective manner.
It is my understanding that the PUC is presently conducting a comprehensive study of the USF. Every fee, tax, subsidy, and other market variation is clearly worthy of examination now and then. In such a study, however, it should be kept in mind that adequate and affordable phone service is essential to economic progress.
While it’s true that telecommunications services and markets are clearly evolving, in the absence of some types of specific provisions, market forces will compel that all users pay the full amount of service, and affordable rates in many areas will be eliminated.
Thus, information obtained from the PUC study, along with the data provided by competent analysts, should be carefully considered before making any major policy decision that would eliminate or materially change the Universal Service Fund. The consequences of any decision could be substantial and far reaching.
With thorough analysis and input from key constituencies, the dramatic advances expected within the telecom industry in the future can be used to greatly enhance the state economy and the quality of life of all Texans.
Dr. Perryman is Founder and President of The Perryman Group (TPG), an economic and financial analysis firm and headquartered in Waco, Texas. He is widely regarded as one of the world’s most influential and innovative economists. His complex modeling systems form a basis for corporate and governmental planning around the globe.
A former research chair-holder, University Professor, and Economist-in-Residence at Baylor University and Business Economist-in-Residence at Southern Methodist University, Dr. Perryman has pioneered the use of timely and reliable economic information for a spectrum of strategic purposes. His studies have played a role in the creation and retention of hundreds of thousands of jobs.
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