Universal service in voice telephony is generally taken for granted in the United States. Once a policy for extending the monopoly network to include all citizens, modifications continue to be made to achieve the goal of full penetration in a competitive environment. The debate on universal service policy reform has included discussions of general versus targeted subsidies, support for high-cost areas versus low-income households, and source of contributions. Universality of voice telephone service seemed to have benefited from the combination of the end of a ubiquitous monopolist and the corresponding universal service policies. Penetration increased from 91.4% in 1983 to 95.5% in March 2003. More recently, however, telephone penetration has dropped significantly. Recent data from the FCC shows a significant decline in the number of U.S. households that have a telephone of any kind (including mobile), with telephone penetration down to 92.9% in November 2005 (FCC 2006). This decline is both statistically significant and meaningful, as approximately 2.6% of US households that could reach 911 for emergencies in 2003 no longer can. Since the current census questionnaire asks the respondent if they are using a wireline, wireless, or other type of telephone, the decline is not due to substitution away from wireline. While most states show overall declines in telephone penetration, several states experienced either gains or statistically insignificant declines. The trends are not highly correlated with which RBOC is serving the state. What has changed in this period to cause this reduction in telephone penetration? In this paper we explore the policies and conditions of the different states to determine what is driving this decline in universal service. Using regression analysis of state-level data, we determine the extent to which recent changes in penetration are due to changes in economic and demographic conditions or in policies to promote targeted programs such as Lifeline and Link-Up, and consumer protection policies. Previous studies have established that monthly price is a poor indicator of penetration, as price elasticity is very low. The cost of connection and the predictability of charges are more important to household subscription and disconnection. Based on these previous findings, low income households are more likely to disconnect when pay-for-use services with unpredictable charges are used, resulting in unpaid bills. Without strong consumer protection rules, such households confront service disconnection and significant obstacles to reconnection, even through targeted assistance programs like Lifeline and Link-Up. For this reason we emphasize the role of consumer protection laws as determinants of penetration changes. The writing of these rules are especially challenging today because consumers can run up debt using nonregulated services and this can lead to termination of their regulated service. We find that the recent decline in universal service in the U.S. is driven by an increase black and recent immigrant populations, telephone service provider marketing and sales practices, inadequate consumer protection laws, and increases in wireless telephones per capita. Lifeline effectiveness does not appear to mitigate the decline in penetration, while Link-Up effectiveness may have a limited effect
