Connected Research

Union policy research in the 21st century

The ‘Final Third’ Fund: some early thoughts on the US experience

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According to a report on totaltele.com (limited viewing time without subscription), citing a Federal Communications Commission press release, the FCC (the regulatory authority in the US) has said that the subsidy fund to provide telephony services to outlying, hard-to-reach areas needs to increase to 12.9% of US inter-state and international revenues from 9.5% at the start of the year.

In the US, universal service is provided on the basis of a consumer levy raised from telephone bills (under a separate line on the bill headed ‘universal service’) and then allocated on a needs basis to companies supplying telephony services on a universal basis. The fund pays out around $8bn annually (£4.9bn at today’s exchange rates) and the increase in the revenues required to meet the universal service provision is likely to mean an increase in the consumer levy which is reported to run to a ‘few dollars per month’.

Fixed-line, wireless and internet-based phone subscribers all pay the levy, albeit at different rates, with internet telephony and wireless subscribers paying a lower fee. According to the report, there is an element of substitution under which fixed-line subscribers are switching to other services with cheaper contribution rates, leading to an increasing burden on remaining fixed-line subscribers in a situation where the size of the fund required is increasing (while the exclusion of local and broadband revenues from the calculation of the levy brings its own problems).

In the context of the publication yesterday of the Digital Britain White Paper, which has proposed a 50p levy on fixed-line consumer bills to meet the costs of building out high-speed broadband beyond the market, this is an interesting news story.

Firstly, the UK’s 50p levy is proposed to be on fixed-line consumers only, so the possibility of increased fixed-mobile substitution (i.e. outside that which has already been going on for some years) as a result of the levy would seem to exist. The proposed levy is not large in overall terms, but it may well make a difference around the margins, especially in the light of the US experience that there is some substitution effects on the basis of the levy on mobile subscribers being lower in the US, compared to there being none at all proposed for mobile subscribers in the UK for the ‘Final Third’ Fund.

Secondly, the proposed UK levy would seem to be lower than its counterpart in the US (bearing in mind that the two funds have slightly different purposes). It’s lower in absolute terms (50p compared to a ‘few dollars’) and it is likely to represent a small proportion of overall fixed-line telephony bills: for example, BT’s average annual revenue per consumer currently stands at £287 (so the levy would represent just 2.1% of current BT per consumer revenues). No comparative information is readily available for the US so it is not possible to say whether the proposed sum in the UK is also relatively lower.

Thirdly, the FCC capped in 2008 the amount operators could recoup from the fund, as a means of limiting its growth. There are further pressures for reform from both Republican and Democratic senators, as well as from telephone companies. In the UK, the Fund has only just been proposed, so it is a little premature to be considering how its future growth might be stemmed – although it is entirely legitimate to consider whether the levy should be envisaged as increasing in the future, and whether there should be a differentiation in the levy between better-off and poorer-off consumers (Digital Britain envisages a single exemption, on the grounds of those accessing social telephony schemes).

Nevertheless, the amounts to be raised by the UK 50p levy are small: c. £150-£175m per year. Digital Britain wondered aloud whether this might raise enough to have met the ‘final third’ provision by its 2017 target: in seven years, a total ‘pot’ of £1-£1.3bn seems unlikely to have been enough by that point without any increase in the levy, given that BT is to spend £1.5bn by 2012 on providing fibre to the first 40% of households (roll-out costs are evidently likely to rise over time as a result of inflation and also because there is a step change in incremental roll-out costs once a figure of 60-70% of homes is reached).

Nigel Stanley posts today on Touchstone regarding whether the levy is the right way to meet the ‘extremely sensible’ policy aim of extending broadband on a universal basis, given its ‘utterly unprogressive’ nature in taxation terms. It’s a fair point and one that does need to be taken into account as the shape of the Fund is debated. In the light of the event of the likely shortfall in the Fund, it is entirely possible that a somewhat less regressive regime might be implemented over time – although that doesn’t of course prevent this from being built also into its initial design.

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Written by Calvin

17/06/2009 at 1:41 pm

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