The FCC May Disrupt the ‘Obamaphone’ Program. Critics Are Crying Foul
FCC Proposal to Cut Fraud Seen Gutting `Obamaphone' Supply Chain
(Bloomberg) -- Thomas Howard lives alone in Baltimore and relies on Social Security and an occasional meal at the Viva House, a soup kitchen where he once met a man offering mobile phones paid for by the federal government.
Howard, a 66-year-old veteran, now uses the phone to keep in touch with family, friends and emergency services.
“If I have a threat in my house, I can’t go out and get help,” Howard said. “But I can call for it.”
He owes his phone service to Lifeline, a federal program that is sometimes known as “Obamaphone” but actually dates to the Reagan administration. It disbursed $1.3 billion to about 10 million households last year for wireless phone and broadband service.
In order to qualify to participate in the program, subscribers must have income that is at or below 135 percent of the federal poverty mark or participate in certain social-welfare programs such as Medicaid or food stamps. Lifeline then provides a monthly subsidy to the wireless service provider.
Republicans dubbed the program Obamaphone after its subsidies were expanded to mobile devices and costs swelled to as much as $2.2 billion for 17.2 million beneficiaries in 2012. The numbers dropped after FCC moved to tighten spending, for instance by ensuring each participating household has only one subscriber.
The U.S. Federal Communications Commission has proposed restructuring the program, saying it wants to combat fraud after reports of fake accounts at homeless shelters, or dead people signed up for service. In one case, more than 10,000 people were listed at a single address.
FCC Chairman Ajit Pai, who has railed against waste in the program for years, says it would be foolish to continue without change. “We have to learn from past mistakes and set the program on the right course,” he told Congress last year.
A 2017 audit of more than 3.5 million subscribers by the Government Accountability Office found that almost a third didn’t participate in a qualifying benefit program as stated on their Lifeline enrollment application.
Pai’s reforms would limit Lifeline subsidies to providers with established cell towers and networks, set a cap on the program’s budget and establish a maximum discount level for Lifeline-supported services.
Limiting the carriers to large and established companies that have their own infrastructure would cut out resellers who pay companies such as AT&T Inc., Verizon Communications Inc., Sprint Corp. and T-Mobile US Inc. to use their equipment. The arrangement allows the big carriers to generate revenue from unused capacity while the resellers are able to keep costs low by avoiding their own investment in towers, lines and other equipment.
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Pai says targeting resellers is justified by research.
Pai’s formal proposal cites the GAO audit as demonstrating that “a vast majority of Commission actions revealing waste, fraud, and abuse in the Lifeline program over the past five years have been against resellers, not facilities-based providers.” It also asserts that there is a connection between “the proliferation of Lifeline resellers in 2009” and “a tremendous increase in households receiving multiple subsidies under the Lifeline program” that year.
But 70 percent of Lifeline subscribers get their service through resellers, which typically get $9.25 a month from the FCC for each subscriber enrolled, according to the agency. Customers in tribal areas receive a subsidy of as much as $34.25. Customers must pay more for usage that exceeds a maximum level.
Carlos Slim
One of the biggest discount carriers is billionaire Carlos Slim’s TracFone Wireless Inc. TracFone’s SafeLink brand served 3.69 million wireless subscribers at the end of the first quarter in 2018, and Lifeline subscribers make up around 17 percent of TracFone’s customer base.
In a filing to the FCC on the Lifeline proposal, TracFone wrote that “the commission has chosen a blunt instrument that would deny more than 8 million households their preferred Lifeline services without meaningfully reducing the opportunities for waste and fraud.”
The company also criticizes the FCC for failing to conduct a cost-benefit analysis of the disruptions the proposed reforms would have, writing it “will forever undermine the utility of the Lifeline program for more than two out of every three existing Lifeline subscribers and render it inaccessible or impractical for still millions more.”
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Pai’s reform plan has advanced on a preliminary vote with Republican support but he hasn’t scheduled a second vote needed to pass the proposal. Many Democrats oppose Pai’s plan, and much of the mobile industry has defended the role played by carriers such as TracFone.
“Pai’s plan disproportionately robs service from many of the communities who rely on Lifeline the most,” said Representative Anna Eshoo, a California Democrat. “If the chairman truly wants to close the digital divide, the last thing he should be doing is rolling back policies that have brought connectivity to millions of Americans.”
The National Association of Regulatory Utility Commissioners warned that the largest two wireless carriers -- AT&T and Verizon -- “only offer Lifeline services in a small minority of states.”
If the reforms are enacted, Sprint could be the sole Lifeline service provider available in some areas. Sprint’s retail Lifeline brand, Assurance Wireless, serves 2.9 million subscribers in 42 jurisdictions and the company receives $2.49 million from the FCC for its participation.
Puerto Rico
At an oversight hearing with the House Energy and Commerce Committee, FCC Commissioner Jessica Rosenworcel said it is evident the agency has “proposed reforms that undermine our Lifeline program -- and the populations that rely on it, including those served by domestic violence shelters, military veterans, homeless youth and residents of Puerto Rico who are still recovering from a harrowing storm and grave humanitarian crisis.”
Lifeline was set up to help poor people stay connected through phone and broadband services and Pai’s proposal “eviscerates” the program for those in need, former FCC Commissioner Gloria Tristani said in an interview.
The FCC is “lashing out at those who can’t protect themselves and there is really no good reason,” she said.
Spur Investment
Additional criticism arose from groups including the Michigan Public Service Commission, which in an FCC filing said the proposed deal “could harm a significant portion of the Lifeline customers in Michigan” as 68 percent of Lifeline recipients in the state receive service from resellers.
Free Press, a media advocacy group, found that if Pai’s reforms were implemented, Lifeline service would only be available in 38 percent of Kansas, his home state.
But Pai said restricting payment to companies that actually build and operate networks will help spur investment in areas without service.
Pai’s plan has received little support from industry. CTIA, a wireless industry trade group whose members include Verizon, Sprint and T-Mobile, says in a filing that the proposal would hurt the market’s structure and investment in the program.
Infrastructure Investment
Sprint filed a comment warning the FCC against the “significant adverse repercussions to eliminating Lifeline support” for resellers, citing disruption to the market and service.
Sprint said there’s not enough money in the program to warrant infrastructure investment. “The modest per-person Lifeline subsidy, whose receipt is not guaranteed, is not an appropriate basis on which to make capital-intensive network deployment decisions,” according to its filing.
Jessica Gonzalez, a Free Press spokeswoman, said she signed up for Lifeline after she was laid off from her teaching job in 2004 and was applying to law school and new jobs.
“It was a huge burden struggling to make sure you’re making rent and eat,” she said. “It was a pathway out of the situation I was in.”
--With assistance from Todd Shields.
To contact the reporter on this story: Alexa Green in Washington at agreen168@bloomberg.net
To contact the editors responsible for this story: Jon Morgan at jmorgan97@bloomberg.net, Elizabeth Wasserman
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