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Defining the New Policy Conflicts

Failing to address and adapt to the new ratemaking realities could result in increased costs for the economy.

Fortnightly Magazine - July 2006

desire to protect small, rural telephone companies from the financial consequences of unregulated competition. It is impossible to achieve simultaneously all three of these aims because cost-oriented prices and the risk of financial failure are necessary for competitive-market forces to work. Key adaptive questions for policymakers include: Should customers in the subsidized areas give up the choices, innovations, and efficiencies that come from competition or give up some of the low prices that they have enjoyed in the past? What roles, if any, will traditional small telephone companies have in the future of telecommunications?

Adaptive challenges in jurisdiction contribute to the funding and design controversies. The FCC collects fees based on a shrinking pool of interstate revenues because states resist allowing the FCC to assess fees against intrastate revenues and the FCC lacks jurisdiction over non-telecommunications services. Absent decreases in the size of the universal service programs, the current funding mechanism will become unworkable as customers and companies continue to find ways to bypass the currently escalating assessment. Policymakers must ask themselves an adaptive question: How important is having the FCC fund the growing universal service programs relative to keeping state and non-telecommunications services free from the FCC’s jurisdiction?

The question of jurisdiction takes us to our final universal service issue, namely, the continuation of current low-income programs. Regulators and policymakers have become concerned about the low participation rate of low-income households in these programs: Less than one-third of low-income households participate. 14 Regulators have pressured telephone companies to sign up more low-income households and have launched national and local marketing efforts. What is the policy goal: High program participation or high numbers of low-income households with telecommunications service?

Studies at PURC have found that while only 12 percent of Florida’s eligible low-income households receive the Lifeline discounts, an additional 80 percent of low-income households purchase wireline or mobile telephone service even without participating in Lifeline. 15 Clearly the program is having little effect on low-income purchases of telecommunications. A key adaptive question for policymakers is: What is more important—“success” of the Lifeline program or success in helping low-income households participate in advanced telecommunications?

Achieving the latter aim probably would involve a decrease of federal oversight. PURC research has shown that optimal program design varies across states. 16

The Promise of the Recent Past

A major shift in thinking and policy took place in the electricity industry throughout the 1990s. Competition was to replace vertically integrated, regulated monopolies; end cost-of-service regulation for generation; improve efficiency; and lower consumer prices. Electricity generation was going to be far cleaner than in the past, whether existing facilities were retired or retrofitted with the latest pollution-abatement technologies, or fired by cleaner fuels.

Concurrent with this shift in thinking and policy was the general downward trend in electricity prices, and natural-gas prices that were lower and more stable than prices in the pre-Wellhead Decontrol period of the 1970s and 1980s. To meet these policy demands, the last decade saw unprecedented additions of natural-gas-fired generating capacity of more than 200 GWe. 17

It seemed we could have our