The 1996 Telecommunications Act, which was intended to remove barriers to competition in local and long-distance telephone services, maintained universal service subsidies for high-cost areas. Assuming that the act’s requirements will remain in place, the challenge is to design a system for administering subsidies that does not give a special advantage to some competitors or some technologies.
Competitive bidding for subsidies is one answer; companies would bid against one another to serve an area at the lowest price—the lure is the subsidy and other benefits. But competitive bidding has anti-competitive effects, since it gives a special advantage to one company. Regulators should adopt a consumer choice system, under which any company would receive a set subsidy for each high-cost customer it served. If the customer moved to a competing carrier, the subsidy would move, too. This system would have fewer anti-competitive effects than competitive bidding and would allow subsidies to be phased down.