The feds crush telco competition

The U.S. health care debate and the continuing examination of the finance and auto industry bailouts show that government intervention in private industry is a treatment to be offered rarely and with great consideration. Regulation messes with capitalism, which some economists still consider infallibly self-righting over the long term. Even those who believe that’s true will allow that nothing messes with the market like monopolies. All the money that the feds are doling out comes with strings attached that protect competition. Even in discussions about health care, where it’s reasonable to argue that life and limb should never be weighed against profit margin, competition is considered key to maintaining the quality of service and creating incentives to reduce costs.

With competition being the watchword in Washington lately, why is the United States still subsidizing telecommunications monopolies? Government protections in the form of regional exclusives (ownership of local telephone/cable service) were meant to provide incentives and revenue protection for telco and cable providers as they developed nationwide, utility-grade communications infrastructure. Before the century’s turn, the necessary technology, labor, and land could only be brought together at a pace matching population growth through government/industry partnership, with trade regulations tilted more toward infrastructure investment protection than enriched competition. The up-front cost of bringing new phone service to a previously unserved area might exceed the profit that could be derived from subscribers in the first year or two. To make sure that everyone got wired, the government stepped in, underwriting installation charges and subsidizing the monthly cost/profit gap in areas that were unduly expensive to serve.

That’s what it took to get Universal Service dial tone to every address in the country. At some point, we have to consider most of that work done and the cost covered. We should be seeing prices drop as smarter providers and newcomers leverage integration, automation, and partnership to bring operating costs down and squeeze more subscribers onto existing infrastructure. Instead, telecommunications rates remain inflated by law, with the FCC blunting rather than encouraging the entrepreneurship, innovation, and competition that would bring our rates down and expand our choice in services.

What you pay for phone service is largely determined by the government. Even in this economy, with municipalities going broke and laying off teachers and police, the FCC’s Universal Service Fund E-Rate Program, fueled by a stiff levy on our monthly communications services fees, recently posted a billion-dollar surplus [PDF]. In other words, we’re paying so much more for landline and wireless phone service than it’s worth that schools, libraries, telcos, and the government couldn’t figure out how to spend it all.

E-Rate is only a portion of the much larger Universal Service Fund (USF), a revenue redistribution program that’s overdue for fresh and frank examination, and it’s only symbolic of the myriad problems inherent in dated and convoluted telecommunications law. It’s time to let the market work, to let parties negotiate pricing, to let players compete and let choice back into the game. Cities that are starved for revenue should be able to take over excess or orphaned copper and fiber running through public land and either auction it off or offer their own services.

And that extra billion in the USF’s E-Rate program? Overpaid taxes are supposed to be refunded. I’ll take a check.