March 16, 2011 7:53 PM

The Best Role for States on Broadband and USF Reform

Today is the one year anniversary of the National Broadband Plan.  The Broadband Plan recommends, as a catalyst for broadband deployment, that the FCC undertake long-needed reform of its Universal Service Fund ("USF") and intercarrier compensation regimes.  Last month, the FCC released a Notice of Proposed Rulemaking ("NPRM"), proposing to reform both programs.  Noticeably absent in either the National Broadband Plan or the USF/ICC NPRM is any defined ongoing role for the states in either the national goal of spurring broadband deployment, or under a reformed USF/ICC regime.
 
There is an important role for the states in a new, broadband-centric, regulatory system.  But, to get there, the FCC has to put consumers at the forefront, considering that the purposes of its proposed reforms are to make high cost support more efficient, and further extend broadband into high cost areas.  It is possible to accomplish both objectives, while giving the states a meaningful role.
 
The communications visionary (and "patron saint" of Wired Magazine) Marshall McLuhan, observed, "[m]ost of our assumptions have outlived their uselessness."  The assumption that the FCC should distribute money to carriers, based on the carrier's optimal utility, in order to satisfy consumer demand is an assumption that has outlived its uselessness.

How would a better plan work?  First, get rid of the notion that state participation should be accomplished through state regulators.  They, too, are trapped by assumptions that have outlived their uselessness.  And, to be sure, the assumptions underlying the distribution of High Cost subsidies are useless--the FCC makes that case quite persuasively in its NPRM.

Consider this statement of Indiana Commissioner Larry Landis, on reforming the low income fund, "[t]oo little attention has been paid to the financial health of the RLECs (and mid-size companies) and the importance of existing High Cost support." Jt Bd Refferal Order, Sep. Stmt. of Commissioner Larry Landis.  This sentiment is antagonistic to nation's technological goals, and offers no solutions. 

While, concern for the welfare of the rural consumer is important, rural consumers' rights are a part of the law, and not up for debate.  On the other hand, no carrier has a right to be inefficient and still be in business.  So what's the answer?

I outline the long form here:Abstract_Managed Broadband Markets.doc.  The short answer, though, is to involve those parts of the state that are responsible to the NTIA for spending the states' broadband mapping/BTOP money.  Accountability and efficiency are built into their directives, plus they already have to report on their success.  But these state agencies can contribute more.

There are no real "markets" for rural consumers in high cost parts of a state, but the state BTOP point-of-contact is a natural market maker.  These agencies could function in the role of broadband development authorities.  They already know where open access local and backhaul networks exist, and they could work with rural broadband providers (including ILEC, cable, wireless, and satellite providers) to put together efficiently sized demand RFPs and match them with bidding (or reverse-bidding) supply consortia.

But, what about the "financial health" of the rural carrier?  Some, funded with the almost $40 billion or so in High Cost support since 1998 (Jt. Bd. 2010 Monitoring Rept., Chart 3-1) will, no doubt, be efficient parts of any bidding consortium.  If not, why must consumers care?

Much greater sums of competitive fiber investment--arguably more important to the health of a broadband economy--were not protected from market risk.  During the "telecom bust" of the early 2000's, an estimated $2 trillion in stock market wealth was destroyed as a result of over-investment.  Is it foolish to think that RLECs, too, may have "over-invested"?  It would be shocking if they didn't when, since the modern High Cost fund began dispersing subsidies, the "prime rate" for borrowing has been comfortably below the RLECs government-protected rate of return of 11.25%.  Why should the privately-owned, publicly-subsidized, rural LECs fare any differently from their privately-funded brethren?

States have an important role to play in the reform of the USF and stimulating broadband deployment.  However, the FCC should update its assumptions about what state agencies they find most helpful to accomplishing the Commission's goals.  The NTIA points of contact for broadband mapping/grant purposes are ideal.  By playing the intermediary between "suppliers" of high-cap backhaul, and the most efficient aggregations of local demand, the state agencies could--using "real" markets--determine the most efficient way to bring the best broadband/voice service to the most consumers.  

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