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CONTACT: Andrea Knutsen
October 18, 2004
(202) 289-8928
Universal Service: Is it Doomed?
Gifford Paints Stark Picture, Urges Reform

WASHINGTON D.C. - The Universal Service program - that age-old system of taxation and implicit subsidization to make communications services affordable in rural and high-cost urban areas - makes little economic sense, but we are stuck with it, and should rebuild it and hope for better results. That is the view of a former state regulator who, in a tell-all-truths paper dealing with one of the sacred cows of politics, puts forth a tentative plan for action.

What ails Universal Service - that program known for years to have made basic phone service 'affordable'? According to the paper's author, Progress & Freedom Foundation President Raymond L. Gifford, technology and competition make "regulatory escape" possible, where consumers have alternatives not subject to many of the fees or taxes that feed the universal service program. The advent of Internet-protocol voice only makes things worse.

"Voice-over-Internet-Protocol (VoIP) is today the clearest manifestation of regulatory escape," writes Gifford. "If it achieves interstate status, it escapes a portion of the universal service system; if it achieves information service status, then it escapes almost completely. The end of the universal service system is encapsulated in this challenge: regulate Skype!"

What is needed is a "rebuilding effort" that will "do as little damage to the market and technological innovation as possible, while - if we are lucky - serving a positive social goal of attaining greater societal connectivity." According to Gifford, action is "an imperative because without it one of two things will happen: the escape will be sufficient to topple the current system altogether, or the current system will attempt by its internal logic to impede and capture the new technologies into its web of taxation."

Gifford suggests a closer look at reverse auctions, an idea he raised earlier during testimony before the U.S. Senate and in a previous study. If designed properly, he says they "hold promise as a way to minimize cost and bring competitive innovation to USF distribution and rural markets."

"Ultimately, all that's implicit will have to be made explicit," he writes. "It will have to be a transparent, non-bypassable tax where the net contributors will be able to trace their compelled largess to the net beneficiaries. This will hopefully create a political dynamic where there is pressure to minimize the absolute level of taxation through distribution means that avoid traditional regulatory rate-setting perils and that, I hope, brings some competitive innovation to communications service in rural areas."

The Progress & Freedom Foundation is a market-oriented think tank that studies the digital revolution and its implications for public policy. It is a 501(c)(3) research & educational organization.



The Progress & Freedom Foundation