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A Review of the South Carolina Universal Service Fund
February 2005

FOLLOW-UP (PDF)     REPORT (PDF)     SUMMARY (PDF)

Members of the General Assembly requested the Legislative Audit Council (LAC ) to conduct an audit of the South Carolina universal service fund (USF) administered by the Public Service Commission (PSC). The requesters asked the LAC to review the need for the fund. Because the state’s interim LEC fund is closely connected to the universal service fund, we also assessed the need for this fund. We also reviewed the PSC’s administration of the USF.

Need for the USF
The goal of universal service is to ensure the widespread availability of affordable local exchange telephone service. The S.C. universal service fund establishes a complex system by which consumers pay a surcharge on their telephone bills to support local telephone companies. The fund amounts to $51 million for fund year 2004-2005. We concluded that the fund does not need to be continued in its present form and should be scaled down. This conclusion is based on several factors.

  • Telephone companies receive support from the federal universal service fund. South Carolina companies received $126 million in 2003. Support from the federal fund would continue in the absence of the state fund.
  • The goals of universal service have largely been met. Ninety-three percent of S.C. households have telephone service, which is substantially at the national average.
  • None of the eight other states in BellSouth’s service area has a USF comparable to South Carolina’s, and their basic telephone rates are equivalent to South Carolina’s rates.
  • The telecommunications market is rapidly changing. The number of wireless subscribers has increased dramatically. It is not an appropriate long-term policy to strongly regulate and subsidize one part of the market ("landline" providers of basic service) when an increasing part of the market (cellular and Internet-based providers) is unregulated and unsubsidized by the state.
  • The state USF focuses on replacing companies’ revenue rather than providing support to areas with high costs for local phone service. The companies do not have to provide evidence of revenue losses or use the funds provided to support basic local service.

The state USF should be scaled back to continue supplements for low-income subscribers and support for those lines for which companies can provide evidence that costs are excessive.

Interim LEC Fund
The interim LEC fund was established in 1996 to replace revenues lost when participating local exchange companies (LECs) reduced the access charges paid by long distance companies. The statutory purpose of this fund has been accomplished, and it should be phased out or transitioned into the universal service fund for those companies that demonstrate a need. Other issues related to the interim LEC fund include:

  • The companies receive payments based on the number of minutes that long distance companies used their networks in 1996, with increases for growth. However, when companies have fewer customers and fewer minutes of use, their payments from the fund are not decreased.
  • Although the law requires the interim LEC fund to transition into the USF, further statutory change is necessary to accomplish this transition.

Administration of the Universal Service Fund
The Public Service Commission administered the state USF and interim LEC funds through 2004. Beginning in 2005, the newly-created Office of Regulatory Staff has assumed this responsibility. We found that the PSC did not implement adequate controls over the management of the state USF. Our findings about fund administration are listed below.

  • The PSC has not ensured that companies receiving distributions from the USF comply with requirements for receiving the funds or have an ongoing need for them. The PSC does not review USF distributions to determine if promised rate reductions occurred or whether companies’ projected revenue losses were actually realized.
  • No financial audits of the universal service fund by an independent third party have been done. Both the guidelines and administrative procedures adopted by the PSC for the USF require annual financial audits of the fund, which has been operating since 2001.
  • The Public Service Commission did not have adequate policies and procedures to administer the state USF. Policies are needed to ensure appropriate controls. For example, policies would help fund managers ensure that contributors are identified and contribute as required, and that standard billing and collection procedures are implemented.
  • The PSC did not establish an adequate system to audit information provided by USF participants. The PSC did not conduct any audits of funds distributed to recipients and audited just 15 (8%) of the approximately 190 companies that contribute to the fund.
  • The PSC used inadequate computer systems to administer the state USF and did not have appropriate data entry controls. The software program the commission used since 2003 does not calculate late payment charges, and the PSC has not charged late payment fees since October 2003.
  • Until 2003 the state USF was administered by the PSC’s audit department even though the audit department had responsibilities to audit as well as manage the fund. It is not appropriate for auditors to be responsible for reviewing activities they have managed.
  • It could be beneficial for the Office of Regulatory Staff to hire an independent and experienced outside administrator to manage the USF. Most other states that have universal service funds use an independent fund administrator rather than administering the fund within a state agency.