November 23, 1998

Nearly nine months ago, many States requested that the Federal Communications Commission refer several issues related to universal service in rural America to the Federal-State Joint Board on Universal Service. After several months of reflection, the Federal Communications Commission did refer several issues to the Joint Board, in part to better understand State perceptions of universal service in high-cost, rural America. The recommendations today are in response to that referral.

All of the Members of the Joint Board have had the very best of intentions. The staff has worked very hard. We have worked together; we have made progress together; and if efforts and intentions always led to good results, we would have the perfect document.

I have had two modest objectives in this proceeding: to find some aspect of this decision that I can embrace and support; and to keep a good sense of humor about it. At least I have been partially successful. Sadly, I must write a separate statement of dissent from this item.

It had long been a fond hope of mine to be part of a unanimous or majority recommendation to the Commission on universal service. I have reviewed a series of draft items from the Common Carrier Bureau, and I have gone to great lengths to suggest edits. I have tried mightily to find common ground. It has, however, become increasingly difficult, and in the end, there is little that I can comfortably support in this recommendation. Indeed, there is much that causes me great discomfort as an economist, as a Federal Commissioner, as a former Congressional staffer who worked on universal service, and as a mere citizen who has listened to many of the universal service concerns of rural America.

Background

In the old days of telecommunications regulation, micromanagement prevailed; government, not consumers were thought to be omniscient and omnipotent. Market outcomes were determined by government,often using models. Efficiency concerns -- the government with its models could do better than the consumers or the market. Equity concerns -- again the government knows best. In such a system, the government -- not consumers -- was sovereign in telecommunications markets.

In such an environment, prices reflected costs only coincidentally because all prices were set by government. Every time a consumer paid more for a service than a business would have been willing to provide it absent regulation, consumers lost -- and lost -- and lost.

The costs in terms of efficiency for such a system were enormous. When it comes to efficiency, it is folly to believe that governments can do anything other than get in the way. When a government says that a model can do as well as a market in terms of efficiency, the government is engaged in self-deception. The deception ends not with a better model but with a market.

There were and are legitimate governmental concerns about equity and distribution. There are efficient means to collect revenues for distribution concerns, to construct proper incentives for its use, and to monitor its use, but there are no efficient means to decide the equity issue of who should receive support.

Deciding to have children is an equity issue, not an efficiency issue. If all issues were decided based on an efficiency model, no one would have any children at all. As the father of 6 children, let me assure that there is no efficiency at all to having children. But some issues are not decided based on economic models. Universal service should also be one of those decisions.

The Telecommunications Act of 1996

The Telecommunications Act of 1996 was landmark legislation. It was intended to end the period of micromanaged regulation of the telecommunications industry.

-- No longer would government tell consumers from whom they could purchase services. Consumers would decide.

-- No longer would government tell businesses to whom they could sell services. Businesses would decide.

Under the Act, markets, not governments, would find the means of getting to more competition and efficiency to the benefit of all consumers. In the area of competition and efficiency, Congress is clearly looking for revolutionary and deregulatory changes in telecommunications markets.

Under the Act, however, consideration of universal service is special. It is the government's continuing concern for equity issues. In that regard, Congress determined that the universal service program was to be "preserved," not radically altered. And make no mistake, Congress's primary concern with universal service was rural America.

When Congress passed the Telecommunications Act of 1996 nearly three years ago, the hope and the aspiration of many Members from rural states was that competition and innovation in telecommunications markets would come for the entire Nation and that universal service mechanisms would continue to help ensure service in rural America. At the time, rural America was nervous about deregulation of telecommunications. There was a popular perception that deregulation in other industries had primarily benefitted other areas of America and had left rural areas behind. I do not agree with that assessment of deregulation, but I cannot deny the palpable fear which many rural Members of Congress greeted deregulation of telecommunications services.

The purpose of Section 254 was largely to allay those fears. Fears of uncertainty. Fears that deregulation would be harmful to rural America. Section 254 was one of the great compromises of the Act: deregulation for all Americans; continuation of universal service for rural America. If federal universal service support were to grow after the Act, it is unimaginable that that growth was not intended primarily for rural America.

But what has happened since? Federal universal service support has nearly doubled in size since passage of the Act. Amazingly, most of that growth has not been for rural States. Instead, growth of universal service has been for other programs largely in other areas of the country.

Joint-Board Recommendation

It is under the umbrella of universal service for high-cost support for non-rural companies that this Joint Board has met. Our job should have been to ensure no radical changes, nothing to further raise the level of uncertainty in America, particularly in rural America.

Yet we have come to recommend the use of a model to allocate high-cost universal support, a radical departure. More uncertainty.

It is a model that few people understand today, and it may yet change tomorrow. More uncertainty.

Should rural States continue to receive the federal support they receive today? The majority says yes to explicit support, and no to implicit support. But, the vast majority of support to rural America is implicit. This is supposed to reduce uncertainty in rural America? Hardly.

And, we have no numbers. We have no numbers. Just theories. And algorithms. And hope. And more uncertainty. It is the same sort of theories that formed parts of the foundation for micromanagement of telecommunications markets in the past. Ultimately, it is based on the premise that government agencies, through clever models, can make efficient decisions better than markets; we simply transplant that reasoning to the allocation of universal service.

Finally, will small companies be exempted from the model? We never say "no." More uncertainty.

Yet we endorse the model.

And we trample on States at the same time. Should the federal government tax revenues outside our jurisdiction? Not according to basic concepts of federalism. But according to the majority today, it is all right. Go ahead.

Should the dispersement of universal support be micromanaged from Washington, or should some decisions be left to States through a form of block grant? Washington wins, according to the majority.

Should States be forced to set up intrastate universal support funds? Not "required," but we will assume that states adopt an intrastate fund with "contributions" of at least 3 percent of all revenues, according to the majority.

Should truth-in-billing issues be left to states with clear legal authority, or sent to Washington with less clear legal authority? The recommendation is again disappointing.

Conclusion

I cannot support the recommended decision, and I dissent from it. It is a reflection of some progress that has been made on universal service, much of it I fear in the wrong direction. The decision is also a representation of how much more work we have to do. Unfortunately, the problems of universal service have not been solved.