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.
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.