An old adage goes: “You get what you pay for.” The anonymous author of this phrase obviously never closely examined an American phone bill. For some services we pay more than we will ever get while other valuable services we literally receive without charge, and for still other services the FCC won’t let carriers tell their customers how much they are actually paying. I believe some of the irrationality of the current system could be resolved by a simple yet elegant policy change: charging a recurring universal-service fee for the use of each telephone number.
For most services, the relationship between cost incurred and price paid is only approximate. Still, for any viable business, when a customer incurs additional costs, prices increase accordingly. Ultimately, a competitive business must expect to profit-or at least not to lose money-from each additional customer and from each additional service.
Wireline telecommunications in the United States has a regulatory history that is the antithesis of competition: prices unreflective of increasing costs, valuable assets given away for free, and large classes of customers and services for which there is every expectation of losing money. Regulated monopolists can withstand heaps of economic abuse and still, absent competition, have revenues exceed costs. So-called regulated competitors cannot.
The wireless industry has flourished with little price regulation. And yet it too is retarded by some of the regulatory residue common to all telecommunications carriers. Consider two examples. At the FCC we give away valuable telephone numbers for free. Also we have a tax for universal service that discourages telephone usage and can only be described as punitive to consumers. Both of these practices are artifacts of monopoly regulation that have harmed wireless consumers. We can solve both problems in one fell swoop: charge a universal-service fee for phone numbers. Hoarding and depletion of the numbering resources would end. Universal-service support would be stable and predictable. Consumers, no longer punished for phone usage, would be substantially better off.
Depletion of numbers
The federal government is not in the habit of giving away unlimited amounts of valuable resources. Anyone who suggested going to Fort Knox and asking not just for one gold bar, but more gold bars than anyone could imagine, would be thought twice foolish. But the same person can go to the federal government and receive, without paying a dime, more phone numbers than a company or individual could possibly use.
Phone numbers are less weighty than gold bars, but both are scarce and valuable. For several years, Congress has considered proposals to permit the FCC to auction certain phone numbers. The legislative proposals have never gotten very far despite the value of numbers.
The recent rapid growth in the telecommunications industry has meant that telephone numbers have become an increasingly valuable resource. The family that continues to rely on a single home phone number is becoming an anachronism. It is not unusual for a family today to use five or more telephone numbers-for wireless phones, home fax machines, DSL lines, as well as second line for children, other family members, or home offices. Businesses are also using more numbers than ever before.
The increased demand for numbers is reflected in the startling rate at which new area codes are being created. For example, from 1984 to 1994, only nine new area codes were activated within the North American Numbering Plan (the basic numbering scheme for telecommunications networks located in the United States, Canada, and a number of island communities). In comparison, from 1996 to 1999, 89 new codes were activated. California had 13 area codes in 1992; by the end of 2002, it predicts that it will have 41.
The FCC has described the rate at which numbers are being consumed as a “near crisis.” Some industry groups have predicted that, at the current rate of expansion, the North American Numbering Plan will exhaust between 2006 and 2016. The irony is that the actual utilization of numbers is quite low, even for those area codes that are nearing depletion. That is, carriers are assigned numbers that they do not use, and many carriers are sitting on vast stockpiles of unassigned numbers. Some carriers have subscribers for as few as 6 percent of the total numbers they have been allocated, and a carrier that has assigned only 50 percent of the numbers that it controls is, comparatively speaking, among the most efficient users of numbering resources.
So far, the commission’s response to this crisis has been to tighten regulations for the way that numbers are assigned. In an order issued nearly a year ago, the commission ruled that, to obtain additional numbers, carriers must show a need for numbers, as well as make a showing that they have efficiently used the numbers that they have already been allocated. In addition, the commission adopted a policy of “thousands block number pooling,” under which, when the policy is fully implemented, carriers will receive only 1,000 numbers at a time, instead of 10,000 numbers as they have in the past. The commission also instituted various rules for reclaiming numbers that carriers have not used.
But tighter regulations are not the answer to numbering problems. Last December, the commission took an encouraging step when it sought comment on market-based approaches to numbering allocation. The commission correctly recognized that, so long as carriers can obtain free numbers, they have little incentive to use the numbers they have efficiently. If carriers had to pay for the numbers they receive, however, there would be a cost associated with hoarding or stockpiling numbers, and carriers would have incentives to take only as many numbers as they actually need.
The commission could set a simple fee for each number assigned to a carrier. Recognizing that some phone numbers-for example, those in different geographic areas-may be more or less valuable than a single fee assigned by administrative fiat, the commission also asked for comment on how an auction methodology for selling numbers could be designed. It also asked how the secondary market for numbers could be organized-that is, whether carriers should negotiate unrestricted deals for numbers among themselves or deal through a clearinghouse that sets uniform trading requirements.
Providing economic rationality to the assignment of phone numbers, rather than giving them away for free, would be a substantial policy change for the FCC. There are doubtlessly many legal issues that the commission must resolve before taking such a step, but I am confident that such changes can be made under current law. The commission is on the right track in taking steps to examine a market-based approach to numbering allocation. Consumers, carriers, and everyone involved can be made better off with a more rational policy.
Universal service
The Telecommunications Act of 1996 placed in statute a system of universal service that had evolved by regulation over a number of years to support telephone service in remote, high-cost areas of the country. What began in 1996 as a program with little more than $2 billion annually largely targeted at small rural companies has grown today under FCC supervision to more than $5 billion largely targeted at schools and libraries, low-income programs, and large carriers. (The program has grown substantially but not to support telecommunications services in rural America as Congress intended, but that is the topic of a different essay.)
How has the commission funded this massive increase in the size of universal service? Funds for universal-service programs are collected from fees assessed on interstate and international service revenues, including a significant portion of wireless revenues. For every additional dollar in interstate or international services a consumer spends,
he or she is taxed 6.7 cents just for universal service. This 6.7
– percent tax rate is one of the highest federal fees or taxes on a specific service. It is paid in addition to other local, state, and federal charges, such as the infamous 3-percent excise tax.
Practically all economic studies of the issue, such as those conducted by Jerry Hausman of MIT, find the universal-service fee one of the most inefficient taxes in the federal tax system. Consumer usage of long-distance services is extremely price sensitive, which means that a rational government would not collect fees based on such usage. Economic rationality and telecommunications policy have been strangers for too long. Consumers would be far better off paying for universal service by practically any other means than the current fee on interstate services. It would be difficult to design a fee structure that punishes consumers more than the current system.
Not only is the fee structure unfair, but carriers have been discouraged from accurately reporting to consumers exactly how the fees are collected and where the money goes. In its mistitled “Truth-in-Billing” order, the commission dictated to carriers exactly what was the permissible truth to tell consumers about universal service. The unfortunate result is that consumers are thrice harmed: they pay a punishing and inefficient tax; they are not candidly apprised of what they are paying; and the funds go to support programs that have developed in directions unintended by Congress.
Killing two birds with one stone
The commission should seriously consider shifting the collection of universal-service fees away from usage-sensitive charges on interstate telecommunications to fixed charges on phone numbers. Current universal-service programs could be funded if each carrier responsible for a phone number contributed substantially less for that number than the average residential consumer pays in-often hidden-universal-service fees.
Charging for numbers would alleviate the current hoarding and depletion of numbers, the clear result of an irrational system of giving a valuable resource away. Moreover, fixed charges on numbers would not discourage use of telecommunications services, either local or long-distance, wireline or wireless. Fixed charges on phone numbers would shift universal-service fee collection from one of the most punishing fees in the federal arsenal to one of its most consumer-friendly. It would provide a more predictable and sufficient basis for universal service support than the current system. And it would move the commission toward what is too often missing in Washington: regulatory consolidation and economic rationality.
