What would happen if the US Department of Energy decided to help low-income households afford solar power by giving money to companies that report that they lease solar panels to these households? In all likelihood, fraud would be a difficult and costly problem, and solar companies would benefit more than the households.
Despite the obvious flaws of a system in which companies receive money based on their service claims, this is essentially how the Federal Communications Commission’s (FCC) Lifeline program works: Telecommunications companies receive money based on how many households they claim as Lifeline customers. There is a better way — a direct subsidy would be more beneficial to low-income households.
Why does the Lifeline program exist?
The conventional wisdom is that Lifeline was developed to help low-income households afford telephone service. That’s only partially correct.
The 1984 breakup of AT&T and the growing competition in long-distance telephone service at the time made it hard for the FCC to continue the complex processes called “separations and settlements,” which used interstate long-distance dollars to financially support local telephone companies. The agency’s solution was to institute subscriber line charges that effectively increased what customers paid for local telephone service.
State telephone regulators objected. They saw the FCC’s action as an encroachment on states’ authority over local telephone prices, and they voiced concerns for universal service. As a result, the FCC reached a compromise with the state regulators that included waiving these charges for low-income households. This was called Lifeline, and by 1997 all but eight states (0) participated in the program.
Does Lifeline help low-income households afford service?
Not really. In 1984, 80 percent of all households (3) with annual incomes of less than $10,000 had phone service. By 2016, this figure was 93 percent (4). Lifeline probably helped with this growth, but in an inefficient way. Two types of evidence support this conclusion.
Econometric studies have demonstrated (5) that Lifeline does little (6) to make service more affordable for low-income households. For example, seven out of eight low-income households would have mobile service even without the subsidy. As a result, increasing mobile service via Lifeline costs (7) somewhere between $1,151 and $3,093 annually per household.
Research at the University of Florida’s Public Utility Research Center (PURC) confirms these results. Using surveys (8) of Floridians, PURC found (9) that households signing up for Lifeline almost always had telecommunications service already.
Are the Lifeline subsidies valuable?
Yes, but because participation in effect provides households with additional disposable income. The PURC studies found that Lifeline participants bought more unsubsidized services, such as cable television, than did nonparticipating households. Anecdotally, people I know who have received the subsidy stated that it gave them additional money that they used for food, housing, education, etc.
But telecommunication companies may be the largest beneficiaries. The program has been subject to substantial fraud (10), and the FCC has spent considerable resources building validation systems that are costly for the agency, companies, and customers alike. Payments are heavily skewed to a few companies. One company receives 30 (11) percent of all Lifeline payments, and the next five largest beneficiaries receive the next 40 percent. This isn’t to cast suspicion on these companies, as perhaps they are simply above average at attracting low-income customers or at least at enrolling for the subsidies.
Is there a better way to benefit low-income households?
Probably. The Lifeline program was designed to address a 1984 pricing issue when phone companies were regulated monopolies. The pricing issue turned out to be largely nonconsequential and policing the program has proved complex. Also, households qualify for the subsidy by participating in other public assistance programs, such as Supplemental Security Income (SSI), Section 8 housing, and the Supplemental Nutrition Assistance Program (SNAP). Why not simply give low-income households more money through one of these programs?
Lifeline costs about $1.5 billion (12) annually at the federal level, or $121 for each of the about 12.5 million households (13) reported to participate. (States often provide additional subsidies.) If the federal money were spread across the 18 million households (14) with annual incomes below $15,000, each would receive about $84 annually. If it were targeted to the 58 million households (15) on SSI, each would receive about $26 annually. The 4.8 million households (16) benefiting from Section 8 housing would receive $314 annually or the approximately 22.4 million households (17) benefiting from SNAP would receive $67 annually.
If the Lifeline program ended at the federal level, states would likely need to change their systems as well. That would be complicated, but it is time to get telephone companies and telephone regulators out of the business of public assistance and leave it to government agencies that are designed to be experts in that field.