Jonathan Lee pointed out the new congressional report on the worst 10 worst abusers of the Universal Service Fund (USF) in the nation.  Reading the report should make just about any American’s blood boil unless you’re the company being paid $16,834 a year for each phone line you provide to a few “rural” homes, many of which aren’t so rural and certainly not poor.  It’s long been known among telecom experts that the Universal Service Fund (USF) wastes a lot of money on the “High Cost” fund, but few could imagine the magnitude of waste and sheer stupidity of the entire USF High Cost fund.  An FCC audit last year pointed out that close to $1 billion paid out for the USF High Cost was “erroneous”.  Even if that audit overestimated the erroneous amount and even if there were zero erroneous payments, the High Cost fund is a horrendous waste of money and a poster child for government waste.

The USF is a cross subscriber subsidy that taxes all traditional circuit switched wired and wireless phone subscribers at 13% and soon rising to 14% next quarter.  Those who could afford broadband service can largely avoid the USF tax if they are using packet switched telephony service i.e., Voice over IP (VoIP).  USF collected a total of $7.1 billion in 2008 and $4.48 billion goes to the High Cost fund, $1.8 billion goes to schools and libraries, and $819 million goes to several million Low Income households.

The High Cost fund which services the fewest homes wastes the most amount of money and much of the money goes to very wealthy people who set up these small telephone companies to collect USF money.  The worst example of USF abuse is Beaver Creek Timberline shown in Figure 1 below.  Beaver Creek Timberline for example collected $454,524 to provide phone service to just 27 homes.

Figure 1: Worst USF High Cost fund abuser Beaver Creek Timberline

Sandwich Isles Communications is another worst 10 offender costing the USF fund $13,408 per phone line in a few tiny pockets in Oahu and Maui where Hawaii Telecom already offers full cellular phone coverage as shown in figure 3 below.

Figure 2: USF High Cost fund abuser Sandwich Isles

Figure 3: Hawaii Telecom wireless coverage extends to sea

I understand the concept behind bring telephony service to rural areas, but where is the logic in subsidizing more than $26 million per year for 2000 homes when we could simply give those 2000 homes cell phone service at a total cost of $80,000 a year (assuming $40 per cellular account)?  I know this may sound blasphemous, but how about those people living in Maui and Oahu buy their own cellular phone service like the rest of us?  Where is the sense in spending enough money to pay their rent?

Some might complain that we’re benefiting the big incumbent telephone operator at the expense of the “little guy” if we paid them $80,000.  But is that worst than paying the “little guy” $26 million a year instead?  I’m all for the little guy, but he should earn his living without bilking Americans to the tune of $26 million a year.

The problem with the USF High Cost fund runs even deeper.  XIT Rural Telephone Cooperative in Texas for example pays their subscribers more in dividends than the home owners pay in their telephone service.  This is essentially a blatant kickback system that pays people every year to have a free phone line run to their home.

The billions of USF dollars wasted on the high cost each year could easily go to support to low income Americans.  Less than a billion dollars a year could give 7 million low income families a $10/month broadband subsidy a year.  $1.15 billion could give a $165 coupon to 7 million low income families so that they can pay just another $165 to get a fairly nice notebook or all-in-one computer these days.  And since most non broadband subscribers have access to broadband but choose not to buy it, this would probably boost broadband penetration significantly, shrink the broadband gap, and stimulate the economy.  It’s certainly a lot better than giving millions of dollars to a few millionaires who set themselves up to bilk the system.  Even if we added subsidies low income Americans, we could probably still cut USF spending by eliminating High Cost waste and lower the USF tax.

Update 6:34PM – For more information on this, Thomas Hazlett did a very good study on USF High Cost waste in 2006.