Subsidized Rural Telephony and the Public Interest: A Case Study in Cooperative Federalism and its Pitfalls

Abstract:     
The United States lags behind many other countries in wireless telephony despite its wealth and relatively high rural population. The answer to this conundrum may lie in the United States' commitment to cooperative federalism in the administration of subsidies for rural telephone service.

The federal universal service program for rural and high-cost areas relies on a cooperative scheme of joint federal and state regulation. State regulators must administer the program without discriminatory regard to carriers' incumbency status or their technological platforms. When state regulators determine the public interest to be served by competitive entry into rural and high-cost markets, competitive neutrality and consumer choice should be paramount. Yet incumbent carriers have tried to persuade state regulators to inject an affirmatively unlawful factor: the impact of competitive entry on the solvency of the Universal Service Fund. Insofar as most competitive rural carriers deploy wireless infrastructure in whole or in part, it is worth noting that federal law preempts state-law regulation of rates or entry in the market for commercial mobile radio services.

Federal mechanisms for subsidizing rural telephony demonstrate the irreconcilable conflict between decentralization and deregulation. Insofar as state regulators are not prepared to complete the transition from traditional public utility regulation, they deserve no deference. Indeed, this article argues that there should be no deference whatsoever to interpretations of law and other exercises of discretion undertaken by state regulators charged with implementing federal telecommunications law.

Keywords: federalism, telecommunications, wireless, rural, regulation, states, FCC, Federal Communications Commission, competition, subsidies, universal service, Universal Service Fund

JEL Classifications: H32, H54, H71, H77, L51, L96

Accepted Paper Series