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July 1, 2016

End Telephone Welfare

Recently, Congress voted on the FCC’s decision to expand Lifeline program to broadband services. By all means, Congress should question whether the FCC is ensuring that essential telecommunications services are affordable, whether free cell phone service is necessary, whether $9.25 per month is sufficient for low-income families to purchase broadband. While it’s at it, Congress should be questioning the FCC’s much larger Universal Service program – the rural, high-cost program.

A few months ago, the FCC released an order promising certain telephone companies over $20 billion to provide substandard service over the next ten years in rural areas. That $20 billion is in addition to $9 billion given last fall to the nation’s largest telephone companies for similar substandard service. Seldom, if ever, has such a small group of government officials squandered so much of the public’s money.

The level of service required for nearly $30 billion? In the broadband age, the FCC bargained for service that is decidedly not broadband: 10 Mbps downstream and 1 Mbps upstream. Not the FCC’s definition of broadband in 2016, and certainly not anyone’s definition of broadband in ten year’s time. Recently, one of the FCC Commissioners spoke about rural America not needing Lamborghinis (read: fiber optic networks), only Chevys (read: satellite internet service). His confusion is understandable. For the next ten years, the FCC will be paying for Lamborghinis and taking delivery of Soviet-era Ladas. The FCC’s spending is inconsistent with the law, technology, economics, and common sense. Only one explanation serves: politics. The politics of incumbency support.

I have worked in and out of government for nearly thirty years, and anyone who has worked with me knows that I have consistently proposed that the telephone welfare program, known as Universal Service, be ended. A system of perpetual subsidies that props up inefficient companies and produces sub-par results is a bad use of public money and a bad deal for rural America.

While I was at the FCC, I proposed to end telephone welfare by taking a non-regulatory approach to the difficulty of building networks in areas of low population density: one that is based on capital investment in long-term infrastructure. One-time infrastructure support, high standards, and competitive bidding. Needless to say, the FCC thought differently. The telephone companies have long opposed proposals to end their subsidies, and in the case of my proposals, went so far as to suggest that I favored government-run networks. That would have been odd coming from me, a libertarian.

No. I believe the system of telephone welfare should be turned into an auction for investment in fiber optic networks or their equivalent (cable DOCSIS 3.0 and higher). And then ended altogether. The economic modeling shows that after such an auction, no further government support is necessary. Furthermore, the amount of money necessary to build fiber-to-the-home networks is less than the FCC is already spending for 10/1 Mbps service.

If you don’t believe me, look to rural Missouri where Co-Mo Connect built a fiber-to-the-home network with no government subsidies. Co-Mo overbuilt the government-supported networks of AT&T and CenturyLink.

Look to rural Arkansas, 48th in the nation in broadband after years of federal and state support. To address that deficiency, Ozarks Electric Cooperative is building a fiber-to-the-home network. With no government subsidies. Incidentally, state and federal subsidies given to telephone companies over the past 15 years in Arkansas amount to billions of dollars, enough to have already built advanced fiber optic networks in all of rural Arkansas. The telephone companies are, understandably, opposed to Ozarks’ plans, petitioned their state Commission and visited their state government officials in a bid to stop Ozarks.

Look to Midwest Energy Cooperative in Michigan and BARC Electric Cooperative in Virginia, both recipients of small amounts of funding from the FCC’s Rural Broadband Experiment auction – a fraction of what would have been given the telephone companies in their territories – and both building fiber-to-the-home networks.

Look to the state of New York, where the state is conducting an auction for broadband infrastructure. High standards, one-time capex, and competitive bidding. You will see that companies are bidding for the capital to build fiber optic networks, and are bidding for amounts that are less than the FCC spends for 10/1 Mbps service. In fact, in the same geographic areas where the FCC already committed money for Frontier and Fairpoint to build 10/1, state money will result in others building fiber-to-the-home networks. For less money. What a great use of state funds, and a terrible waste of federal funds.

More to the point of how government allocates public money: what do consumers choose, those that have a choice? The substantial majority of consumers, given the choice, subscribe to cable and fiber-to-the-home broadband services. And not just some minimal level of broadband, certainly not 10/1 service. Verizon has announced that 60% of its new FiOS customers choose 100 Mbps or higher. In rural America, where fiber-to-the-home exists, the numbers are similar. Two-thirds of Co-Mo’s subscribers choose plans of 100 Mbps or higher. That’s the subscribership today. Imagine what consumers will choose in ten years’ time. For the FCC to continue to support 10/1 Mbps brings to my mind Michael Gerson’s wonderful phrase: “the soft bigotry of low expectations.”

Finally, a personal aside. Last fall, much was made by some telephone companies and their allies of my remarks that the $100 million budget for the FCC’s Rural Broadband Experiment was a “tiny amount of money.” It was suggested I lack humility. I was comparing a 10-year budget of $10 million per year to the $45 billion that will be spent from the high-cost fund in the same time period. My language was intentionally florid, but my point was one of basic arithmetic, one that my rising fifth-grader understands: two-tenths of one percent is tiny. In fact, the expenditures for the Rural Broadband Experiment concluded at $5 million per year, or $50 million over the coming ten years, which is about half the money per geographic area than was offered the large telephone companies. Half the money for twice the speed. A good deal for the public any way you look at it. The experiment saved about $50 million for the public. That is a tiny amount in comparison to what could be saved if the government moved from a model of ongoing subsidies to one of competitively-based capital investment.

I was also criticized for supporting community broadband networks, by which I mean private membership cooperatives. My use of the term “community” must puzzle some who refer to municipal, government networks as “community broadband.” As a general matter, I think municipal government broadband networks are a bad idea. At the same time, I believe that local governments should be able to spend local taxpayer funds without interference from state governments and the federal government. I am a small government, local community conservative.

But when industries feel threatened, they often raise that old “government-takeover” bogeyman. It disappointed me that my proposals to end telephone welfare were opposed by conservatives. Granted, conservatives are not immune to the lure of money in politics. When politicians and pundits receive money from large companies, like AT&T, it shouldn’t surprise anyone that even Tea Party conservatives fall in love with welfare. AT&T, after all, has long been the biggest welfare recipient in the country.

So, is it too late – has the money all been spent? The FCC is still considering an auction for funds in those areas of the country rejected by telephone companies, a “scraps from the table auction” for about five percent of rural America. State governments could look to the New York auction, and consider similar statewide broadband auctions. And, of course, a new president in his/her first year will have the opportunity to choose a new FCC Chairman and one or two new commissioners. There’s still a chance to make rural America great again.

 

Conexon Blog
About Jonathan Chambers
Jonathan has worked for over thirty years at start-up telecommunications companies and in the U.S. Government. Prior to joining Conexon, Jonathan served as Chief of the Office of Strategic Planning for the Federal Communications Commission. Jonathan was part of the senior leadership at the FCC that reformed $12 billion in annual federal spending, including the rural and high cost fund, e-rate, telecommunications relay services and the lifeline programs. For the majority of his career, Jonathan has worked with companies building broadband networks. Jonathan left the FCC to help electric cooperatives bring fiber-to-the-home (FTTH) broadband to rural areas throughout the country.

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