UNIVERSAL SERVICE FUND OUT OF CONTROL

From the Hastings Group:

Phone users are paying sky-high subsidies twice for thousands of rural phone lines under the �high-cost� portion of the federal �Universal Service Fund� that collects taxes from every American who makes long-distance phone calls, according to a warning today from The Seniors Coalition (TSC). TSC said that the �feeding trough is wide open and billions of dollars are being devoured� by phone companies that are collecting subsidies of sometimes $1,000 or more per phone line -- even after they lose customers!

Under the bizarre �ghost line� federal subsidy scheme, wireline phone companies providing service in a rural area get a USF subsidy for each customer line. If the phone company loses the customer, the total amount of subsidy they receive from the high-cost portion of the Universal Service Fund remains the SAME. This nonsensical �reward the loser� approach actually increases the wireline phone company�s per-line subsidy, since they now have fewer lines, but continue to receive the same amount of subsidy dollars.

It gets worse: Wireless competitors in the same market competing for the same customers are paid a federal subsidy based on the wireline carrier�s per-line subsidy -- not the wireless carrier�s actual cost to provide the service. Thus, every time a wireline carrier loses a line to a wireless competitor, they continue to receive the same amount of money from the USF and the competitor receives a higher per-line subsidy than it was being paid before stealing the wireline company�s customer. The result is a double payment in which the �loser� can�t lose the money and the �winner� can actually jack up how much of a per-line tax subsidy they get by stealing the maximum number of wireline phone company customers.

The Seniors Coalition National Spokesperson Flora �Grandma� Green said: �What we have here is a the federal tax equivalent of a broken casino slot machine that is paying out jackpots not once � but twice -- every time a phone company pulls the lever. This is among the most outrageous and jaw dropping wastes of taxpayer money that we have ever seen. It is an insane arrangement under which companies get paid even when they are no longer serving customers. On top of that, the competitor gets a subsidy based on the cost structure of the inefficient wireline carrier and the per line subsidy increases as the competitor takes more lines away from the incumbent carrier. Why is any subsidy needed at all, since many of these markets seem to have plenty of competition?�

�Grandma� Green added: �This system is badly broken and it is at the expense of you and me! We are calling on the FCC to take immediate action to cap the high-cost portion of the USF and to investigate the extent to which taxpayers have been systematically fleeced. American taxpayers need to insist on reining in the runaway Universal Service Fund, which should only help out those who really need it including low-income people who cannot afford to pay for phone service. The USF should be capped and then reviewed from top to bottom so that taxpayers can hang up on the billions of dollars of waste and fraud going on today.�

USF TAX BACKGROUND

According to a July 2006 study conducted for The Seniors Coalition by George Mason University Professor of Law and Economics Thomas Hazlett, the �gold-plated� waste and inefficiency under USF is so out of control that taxpayers actually could save at least $1 billion or more each year by simply giving away at full retail cost satellite or cellular phone service to the few remaining Americans who do not currently have access to wireline phone service. The Hazlett study notes that, rather than providing phone-service to low-income consumers in need, the bulk of USF taxpayer dollars are now part of a $3.7 billon wealth-transfer subsidy known as the �High-Cost Fund� that goes from unwary U.S. taxpayers to small, uneconomical private rural telephone companies that often have only a few hundred customers and are so engorged with tax dollars that they can afford to pay out more in dividends to shareholders than they actually charge for phone service.

The Universal Service Fund tax has surged to $7 billion, up from less than $4 billion in 1998. To pay for the Universal Service Fund, the tax rate applied to long distance revenues has skyrocketed from 2.1 percent to its current level of 9.1 percent. The primary cause of USF increases stem from rising payments to rural phone carriers, labeled �High-Cost Support,� where annual payments mushroomed from $1.7 billion in 1998 to $3.7 billion in 2005. These rising expenditures are, in turn, driven by increasingly expensive per-line payments to high cost rural phone carriers and by new payments to wireless phone carriers now qualifying as recipients of such funds.

According to the TSC report, USF should be capped and subjected to rigorous and focused competition. As Professor Hazlett notes: �� a pro-consumer approach would cap and then reduce USF subsidy payments. Owing to the stark ineffectiveness of current payment schemes, this option could be smartly executed without any loss in universal service outcomes. New technologies and emerging networks allow customers in what were once high-cost areas to be served by modern telecommunications systems at a fraction of the cost of the current regime ��

The full Hazlett study findings are available online at http://www.senior.org/USFstudy/.

ABOUT THE SENIORS COALITION

The Seniors Coalition (http://www.senior.org) is a non-profit, 501(c)(4), non-partisan, education and issue advocacy organization that represents the interests and concerns of America's senior citizens at both the state and federal levels. Its mission is to protect the quality of life and economic well-being that older Americans have earned while supporting common sense solutions to the challenges of the future. The Coalition was founded as a public advocacy group during the fight to repeal the Medicare Catastrophic Coverage Act in 1989. Since then, it has grown rapidly and expanded our advocacy to include a wide range of other important issues.

CONTACT: Ailis Aaron Wolf, (703) 276-3265 or aaaron@hastingsgroup.com.