(excerpt from Federal Communications Commission, Preparing for Addressing Universal Service Issues: A Review of Current Interstate Support Mechanisms. 1996. Deborah DuPont, Universal Service Task Force Leader.)
Lifeline Assistance and Link Up America promote universal service by reducing the monthly rate or initial connection charge for elderly or low-income telephone subscribers. The programs are managed by the states, and are funded through charges ultimately paid by interstate ratepayers.
I. Description
II. History
III. Funding
IV. Targeting
V. Competitive Effect
VI. Critique of the Subsidy
VII. Sources
VIII. Background SourcesI. Description
Lifeline: States may choose to participate in either of two Lifeline plans. Plan 1 provides for a reduction in a subscriber's monthly telephone bill equal to the $3.50 federal SLC. Half the reduction comes from a fifty percent waiver of the charge; the other half from the participating state, which matches the federal contribution by an equal reduction in the local rate. Assistance is available for a single telephone line to the principal residence of subscribers who satisfy a state-determined means test. Of the thirty-six states participating in Lifeline, only California still offers a Lifeline program under Plan 1.
Under Plan 2, which expanded Plan 1 to provide for waiver of the entire SLC (up to the amount matched by the state), a subscriber's bill may be reduced by twice the SLC (or more, if the state more than matches the federal waiver). The state contribution may come from any intrastate source, including state assistance for basic local telephone service, connection charges, or customer deposit requirements. Companies in thirty-five states or territories reported subscribers receiving Plan 2 Lifeline assistance as of April, 1995. In 1994, about 4.4 million households received $123 million in Lifeline assistance through full or partial waiver of the SLC.
Link Up: The Link Up America program helps low-income subscribers begin telephone service by paying half of the first $60 of connection charges. Where a LEC has a deferred payment plan, Link Up will also pay the interest on any balance, up to $200, for payment plans lasting up to one year. To be eligible, subscribers must meet a stateestablished means test, and may not, unless over sixty years old, be a dependent for federal income tax purposes. Link Up is available in all but two states (California and Delaware). Roughly 840,000 households received $19 million in Link Up assistance in 1994.
II. History
In conjunction with the divestiture of AT&T, the Commission adopted rules for the recovery of the fixed, non-traffic sensitive costs of the local telephone network. A major portion of these costs was to be collected directly from local ratepayers in a monthly flat-rate SLC. The Commission was concerned that this increase in subscribers' fixed monthly rates might drive low-income subscribers to cancel service, and asked the Federal-State Joint Board to prepare recommendations concerning the issue. On December 12, 1984, the Joint Board recommended the adoption of the first Lifeline plan: a fifty percent reduction in the SLC for subscribers satisfying a state-determined means test.
On December 9, 1985, the Joint Board recommended expanding the Lifeline program. By then, however, Commission and Census Bureau studies indicated subscribership levels had not declined in response to implementation of the SLC, and were not likely to do so. (The SLC was then $ 1.00 per loop for residential subscribers, with an increase to $2.00 to become effective June 1, 1986.) Local telephone companies also reported stable subscribership despite significant local rate increases. The Joint Board nevertheless recommended expansion of the Lifeline program "to promote telephone subscribership among low income households." The focus of the Lifeline program had changed, and from then on, the Joint Board and the Commission emphasized active expansion, rather than mere preservation, of telephone service among low-income households. Under the new plan, which the Commission adopted December 10, 1985, qualifying subscribers could be eligible for a reduction of up to twice the SLC ($7.00 per month at present). By requiring participating states to obtain certification from the Commission before implementing the program, the new plan also strengthened the requirement to base assistance on a verifiable means test.
On July 2, 1986, the Commission requested that the Joint Board examine the effects of the SLC and the Lifeline program. The Joint Board concluded that Lifeline was a sound response to concerns about low subscribership levels among low-income groups. But while endorsing the existing program, the Joint Board also recommended that the Commission "directly address the problem of high non-recurring charges for low income households that are not presently on the network, thereby not only preserving, but also increasing, universal telephone service." Specifically, the Joint Board recommended the Link Up America program: offsetting half the charge for initiating service (with a $30 cap), and paying the interest on deferred payment schedules (on up to $200, for schedules up to a year).
On April 16, 1987, the Commission adopted the Link Up America plan, noting that " [w]hile we do not ordinarily propose or support subsidy programs . . . [w]e believe that this program is an appropriate means to achieve our universal service goal." To be eligible for the assistance, an applicant (i) had to live at an address that had been without service for the last three months; (ii) could not have received Link Up assistance within the last two years; (iii) could not be a dependent for federal income tax purposes (unless over age sixty), and (iv) had to meet a state-established means test. As in Lifeline Plan 2, Commission precertification was required. On February 27, 1989, with unanimous support from commenters, the Commission dropped the three-month residency and two-year limitation rules.
III. Funding
Like the much larger Universal Service Fund ("USF"), Lifeline and Link Up are funded through NECA, which disburses the subsidy to compensate local exchange carriers for SLCs not collected from end-users. NECA administers separate USF and Lifeline/Link Up pools, and IXCs contribute to each pool separately, on a flat-rate, per-line basis. At the outset of the Lifeline program, NECA assessed two categories of IXCs: those having 1 percent of all presubscribed lines nationwide; and those having 5 percent of the presubscribed lines in any given study area (with a 1,000 line minimum). These criteria produced anomalous results, however, with certain smaller IXCs concentrated in a single study area being assessed, while more diffuse, medium-sized IXCs were not. To avoid unreasonably harsh effects on small, concentrated IXCs, USF and Lifeline/Link Up assistance is now funded by the few dozen IXCs having .05 percent or more of presubscribed lines nationwide.
IV. Targeting
Lifeline was initially conceived to shield low-income subscribers already on the network from the effects of implementing the SLC. It developed, however, the broader purpose of expanding service to previously unserved low-income households, and Link Up America explicitly targets the unserved--those unable to afford the one-time cost of telephone connection. Both Lifeline and Link Up require state-determined means testing, and Link Up, which is available to dependents only if over age sixty, targets the elderly.
Within that broad framework, the states determine eligibility. While states typically extend benefits to recipients of other social welfare services such as Food Stamps or Medicaid, some specifically target the elderly (Colorado, Hawaii, Minnesota, West Virginia); some target the disabled (Colorado, Hawaii, Idaho, Nebraska, New Hampshire); and some use a poverty level benchmark (Michigan: income at or below 130 percent of poverty; Oregon: 135 percent; California and Arizona: 150 percent).
In his 1991 study, Thomas J. Makarewicz estimated how well Lifeline targets intended beneficiaries by measuring what recipients spent on the discretionary portion (long-distance calls, non-basic services) of their bills. If discretionary spending exceeded twice the Lifeline benefit, he suggested the recipient was probably a "free rider" who would maintain service even without the subsidy. Using this analysis, 80 percent of Lifeline recipients depend on the subsidy to afford telephone service, making Lifeline a narrowly targeted universal service subsidy. By contrast, studies estimate that only 8 percent to 20 percent of subscribers who benefit from USF assistance would be unable to afford the full cost of service. The discretionary spending curve of Link Up recipients closely tracks that of Lifeline recipients.
V. Competitive Effect
Regarding the interexchange market, Lifeline and Link Up by themselves may not cost enough to affect competition significantly; concerns about competitive distortions are more often directed at Lifeline/Link Up and USF combined. If, however, the level of support for these programs were to increase, IXCs could have a significant incentive to create subsidiaries (or small and otherwise nonviable IXCs might form) to avoid assessment. To eliminate this marketplace distortion, Ameritech has suggested bulk billing all IXCs according to market share. In the local exchange market, Lifeline and Link Up appear competitively neutral, because eligibility for the subsidy depends on characteristics of the end user, rather than on characteristics of the LEC itself. This appearance, however, may be deceptive because, under the current rules, Lifeline reimburses incumbent LECs but not competitive access providers for waiving SLCs for qualified customers, and Link Up is available for connection to wireline service only.
One commenter has proposed assessing the interstate operations of LECs as well as IXCs. In response, LECs argued that an unfair double-counting of some lines would result, because exchange carriers in local access and transport areas ("LATAs") that cross state boundaries would have to contribute, while those in entirely intrastate LATAs would not. More recently, numerous parties to the Commission's USF proceeding have suggested that all carriers should contribute to funding for the Commission's assistance programs, as is currently the case with the Telecommunications Relay Services program.
VI. Critique of the Subsidy
Studies support a conclusion that the Lifeline Assistance and Link Up America programs are well-targeted, effective methods of expanding universal service. The combination of both programs has proven more effective than either program alone, and far more effective than Link Up alone. But some areas have been identified for improvement:
Some parties have proposed eliminating eligibility requirements that favor the elderly. A 1991 study revealed that Missouri's rules, which required that applicants be over sixty-five, targeted a population with a 95 percent subscribership level, compared to a statewide level of 91 percent. If the criterion had been that applicants receive some sort of income assistance, the subscribership among those eligible would have been 78 percent. Texas, with a similar age rule, showed similar results: 91 percent of the targeted group (age sixty-five and over) already subscribed, compared to 89 percent statewide and 71 percent if the criterion had been income assistance. By contrast, heads of household between sixteen and twenty-four have the lowest subscription rate, and are most likely to discontinue service.
Others express concern regarding the correlation between the receipt of Link Up assistance and uncollectible revenues. A rough correlation exists between Link Up subscribers and non-payment of long-distance bills. The correlation is especially marked in states with a deposit waiver program. Companies in those states had approximately ten times as many written-off accounts as companies in states that require a deposit. Blocking long-distance calls on lines with payment in arrears (as opposed to discontinuing service altogether) suggests itself as a possible solution to the "disconnect-reconnect" cycle.
Low participation is another concern. A 1991 study found that only approximately 10 percent of eligible households in Texas and Arkansas received assistance; in Missouri, 60 percent of eligible households received assistance. The disparity might reflect differences in the targeted populations, including how widely it is known that assistance is available, or may reflect general variances in state social service systems.
VII. Sources
47 C.F.R. 36.701-36.741, 69.104(j)-(l), 69.116, 69.117, 69.203(f)-(g).
Amendment of Part 69 of the Commission's Rules Relating to the Assessment of Charges for the Universal Service Fund and Lifeline Assistance, Memorandum Opinion and Order, 4 FCC Rcd 6134 (1989).
MTS and WATS Market Structure LINK UP AMERICA, and Amendment of Part 36 of the Commission's Rules and Establishment of a Joint Board, Decision and Order, 4 FCC Rcd 3634 (1989).
MTS and WATS Market Structure; Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Report and Order, 2 FCC Rcd 2953 (1987).
MTS and WATS Market Structure; Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Further Notice of Proposed Rulemaking in CC Dkt. Nos. 7872, 80-286, FCC 86-305 (July 2, 1986) (summarized in 51 Fed. Reg. 27,426 (1986)).
MTS and WATS Market Structure; Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Decision and Order, 51 Fed. Reg. 1371 (1986).
MTS and WATS Market Structure; Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Decision and Order, 50 Fed. Reg. 939 (1985)].
MTS and WATS Market Structure Phase IV, Further Report on the Effects of Federal Decisions on Universal Service in CC Dkt. No. 78-72, FCC 84-636 (Jan. 4, 1985).
Petition of the State of Michigan Concerning the Effects of Certain Federal Decisions on Local Telephone Service, Order, 96 FCC 2d 491 (1983).
MTS and WATS Market Structure, Third Report and Order, 93 FCC 2d 241, modified on recon., Memorandum Opinion and Order, 97 FCC 2d 682 (1983), modified on further recon., Memorandum Opinion and Order, 97 FCC 2d 834, aff'd in principal part and remanded in part sub nom. National Ass'n of Regulatory Util. Comm'rs v. FCC, 737 F.2d 1095 (D.C. Cir. 1984), cert. denied, 469 U.S. 1227 (1985).
MTS and WATS Market Structure LINK UP AMERICA, and Amendment of Part 36 of the Commission's Rules and Establishment of a Joint Board, Recommended Decision and Order, 4 FCC Rcd 1219 (Joint Bd. 1989).
MTS and WATS Market Structure; Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Recommended Decision and Order, 2 FCC Rcd 2324 (Joint Bd. 1987).
MTS and WATS Market Structure; Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Recommended Decision and Order, 50 Fed. Reg. 52,964 (Joint Bd. 1985).
MTS and WATS Market Structure; Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Recommended Decision and Order, 49 Fed. Reg. 48,325 (Joint Bd. 1984).
Comments of Ameritech, MCI, NYNEX, Rochester Tel. Corp., and Sprint, to the Notice of Inquiry in CC Dkt. No. 80-286 (responding to Amendment of Part 36 of the Commission's Rules and Establishment of a Joint Board, Notice of Inquiry, 9 FCC Rcd 7404 (1994)).
FEDERAL-STATE JOINT BOARD STAFF IN CC DKT. NO. 80-286, MONITORING REPORT MAY 1995 CC DKT. NO. 87-339 (1995).
FEDERAL-STATE JOINT BOARD STAFF IN CC DKT. NO. 80-286, MONITORING REPORT MAY 1994 CC DKT. NO. 87-339 (1994).
Herbert S. Dordick & Marilyn Diane Fife, Universal Service in Post-Divestiture USA, 15 TELECOMM. POL'Y 119 (1991).
Thomas J. Makarewicz, The Effectiveness of Low-Income Telephone Assistance Programmes: Southwestern Bell's Experience, 15 TELECOMM. POL'Y 223 (1991).
J.L. Walter, Assessing the Effectiveness of Residential Rate Assistance Programs in Furthering the Goal of Universal Service, in PROCEEDINGS OF THE EIGHTH BIENNIAL REGULATORY INFORMATION CONFERENCE 171 (1992).
Organization for the Protection & Advancement of Small Tel. Cos., Keeping Rural America Connected: Costs and Rates in the Competitive Era (1994) (available from OPASTCO, 21 Dupont Circle, N.W., Suite 700, Washington, D.C. 20036).
Carol Weinhaus et al., Telecommunications Indus. Analysis Project, What Is the Price of Universal Service? Impact of Deaveraging Nationwide Urban/Rural Rates (1993) (available from Telecommunications Industries Analysis Project, Meeting House Offices, 121 Mount Vernon St., Boston, MA 02108).
VIII. Background Sources
MTS and WATS Market Structure; Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Memorandum Opinion and Order on Reconsideration and Order Inviting Comments, 3 FCC Rcd 4543 (1988).
National Telecomm. & Info. Admin., U.S. Dep't of Commerce, Inquiry on Universal Service and Open Access Issues, Notice of Inquiry in Dkt. No. 940955-4255, 59 Fed. Reg. 48,112 (1994).
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