[The craziest thing happened to me a couple months ago. You've heard about this NSA spying thing, right? It has outraged consumers, governments, businesses across the globe, and yearns for us all to consider installing a pretty serious VPN/encryption lockdown. Anyway, based on what they've seen of my wildly eclectic interests/borderline insanity, the NSA claims that--from what they can tell about my disordered personality--I share online behavioral patterns that they have only seen with some of the world's most unstable/dangerous criminal minds and if they knew more about me they could get a better handle on where the bad guys are (online, anyway). So they made me a deal: I come clean about the full extent of my online interests/browsing behavior, and they give me the stuff they pull on all of you. "Stuff [They] Don't Want You to Know*" is an occasional blog series where I share some of this information with you.]
So, anyway--to answer your questions--I now know a lot of messed up things about a lot more people these days. Given the date, and the overall spookiness in the atmosphere today, I'm sure the more inquisitive of you want to know whether I know all about the AT&T-UFO connection. Well, as a matter of fact, I do. But trust me when I say this: you can't handle the truth. For now, that vault's just going to have to remain closed.
So let's pull back the curtain on something you can handle. I recently came into possession of a number of texts/emails between our regulation-happy friends at Free Press and all their regulation-happy friends in the policy world, like Susan Crawford and Tim Wu. Some of these were texts that seem to have been traded during hearings to take their minds off the inevitable IP transition, and others appear to be just how they were passing the time on long plane or car trips. And, yeah, you heard right. Apparently, they do use their phones on planes; and, no, they haven't taken the "it can wait" pledge not to text and drive.
Despite their private contempt for public safety on the highways, and the regulations of the Federal Aviation Administration, one thing's for sure: these guys do love themselves some regulation (as long as it doesn't, you know, cramp their style). How much do they dig regulation, you might ask? Well, they have a little game that they like to play, and I'm going to tell you about it, because it's actually been kind of funny to watch the results.
Here's the game: you take any movie and substitute the words "regulation," "regulator," or "regulate" for any one word in the title of the movie. So here's how it works, from some actual Free Press private communications:
Regulate Me to Hell (Drag Me to Hell) The Good, the Bad, and the Regulators The Silence of the Regulators 12 Angry Regulators Inherit the Regulation Regulations of Steel Fifty Shades of Regulation (DQ'd b/c not a movie yet) It Takes a Regulation Texas Chainsaw Regulation Planet of the Regulators Gone With the Regulation Regulators on a Plane T3: Rise of the Regulations The Regulations of Narnia Birth of a Regulation Triumph of the Regulation
I know; the last two surprised me, too--but, you have to admit, the titles work as films glorifying regulation. Pretty funny, huh? You could have knocked me over with a feather when I saw this stuff--I didn't even know those guys had a sense of humor.
Who knows? Maybe this game will catch on and we'll see Randy May and Scott Cleland trading their own regulation-game quips at the next Free State Foundation Conference . . .
*"Stuff [They] Don't Want You to Know" is a series of occasional blog posts that are entirely fictional and intended to poke gentle fun at figures within the telecom policy world. Nothing in this series should be mistaken for the truth.
One day several years ago, when I was still at COMPTEL, a friend of mine at one of our member companies was trying to convince me (for probably like the thousandth time) not to keep banging my head against a wall on an issue that I can't even remember. This time, though, he put it differently, and I still remember his advice. He said, "Why do you have to play the Yankees every day? Why can't you take a break sometimes. . . maybe play the Brewers every once in a while?"
Well, that is the best way to describe the advice I would like to have given the FCC if I had a chance to read their 2012 Lifeline Reform Order before they adopted it. Because, if you had the chance to change anything about the Lifeline program, wouldn't you at least want to get all the parties on your side?
Administering a huge, and growing, program like Lifeline is hard enough. Not questioning a prevailing retail price of $0/month leaves the FCC wrestling the "invisible hand" of the market--a Sisyphean proposition. Wouldn't you want to do everything you could to align the incentives of all the program participants with yours?
The Wireless Lifeline Business
The curious thing about the Lifeline Reform Order is that while prepaid wireless service is generally understood to be the primary cause of the fund's rapid growth--which precipitated the Lifeline NPRM--there is no evidence at all in the order that the FCC even tried to understand the prepaid wireless business. So, let's try to see if we can figure it out.
The typical prepaid wireless Lifeline "offer" goes something like this: the customer is promised 250 "free" minutes per month, as well as a "free" handset. If the customer wishes to use more than 250 minutes, they can purchase additional minutes at a fair, but profitable, price.
From a cost perspective, this 2009 Fierce Wirelessarticle references wholesale voice prices available to some MVNOs that are below 3 cents/minute. Four years later, it is probably a very safe, even conservative, assumption that most Lifeline MVNOs can get at least a 3.25 cents/minute wholesale rate.
So, if the prepaid wireless carrier is spending $8.125/month (250 mins * $0.0325/min) and only receiving $9.25 from the fund, how are they making money? Even at 3 cents/minute, the possibility of profit would still seem fairly remote ($9.25 - $7.50 = $1.75), because we are only looking at the direct costs of providing service (the amount owed to the wholesale carrier). Adding on an indirect cost (employees, cost of sales, overhead, etc.) of say $2/line (just a guesstimate) would still leave a carrier in the negative.
In reality, the typical customer will actually use something less than the 250 minutes. For purposes of our illustration, let's assume the average customer uses about 150 minutes. We can safely make this assumption, because the prepaid wireless Lifeline business--like every flat-rated pricing plan--is based on "breakage." This means that the average customer consumes less than they pay for. In the case of wireless Lifeline service, the "they" that is paying is you and I. Remember this point, because we'll come back to it.
Assuming a price of 3.25 cents/minute and an average use of 150 minutes/month, the average customer will have a direct wholesale cost of $4.875/month to serve. In return, the carrier receives $9.25 from the USAC. If we estimate indirect costs at around $2.00/line (say $1.875/line), we can see that it is not out of the question for a fairly typical wireless Lifeline provider to earn ($9.25-$6.75) around $2.50 per line served per month.
Reimbursement vs. Reward
Remember the part about the flat-rated plans relying on "underachievers" for carrier profitability? That's great for the carrier and the few "overachievers", but "we" are the ultimate consumer--the whole "buy" side of the market, if you will. And, we--under the law--are only allowed to "reimburse" prepaid wireless carriers, i.e., cover their $6.75/month in costs.
The relevant statutory provision that deals with Lifeline provider reimbursement is 47 U.S.C. Section 214(e), which says,
A carrier that receives such support shall use that support only for the provision, maintenance, and upgrading of facilities and services for which the support is intended. Any such support should be explicit and sufficient to achieve the purposes of this section.
(emphasis added). The plain language of the statute certainly seems to indicate that Congress didn't want the FCC to be deliberately spending more than was necessary for the provision of the relevant facilities/services.
How to Get Real Lifeline Savings?
Let's say there are 16 million Lifeline subscribers (close enough) and 80% use prepaid wireless service, then there are about 12.8 million wireless Lifeline subscribers. If the FCC should be reimbursing these subscribers' carriers $6.75/month instead of $9.25/month, then the fund could be paying $32 million less per month--for an annual savings of $384 million/year. Now, that beats the heck out of sweating USAC and the carriers to try to squeeze the limited savings that we might get from the existing "reform" rules, no?
But the savings don't stop here. Prepaid wireless Lifeline service adds a wonderful choice for low income consumers, and it's silly to think that if the FCC got the subsidy right, the service would go away. It wouldn't; but the wireless carriers would have to start charging a small positive monthly fee in order to stay profitable.
A minimal fee (say $5-$7/month) would not only give the service providers more money, which would not only allow them to offer more data, but it would also remove the incentive for "inefficient consumption" (to use a euphemism) that today's $0 price creates. Thus, if customer carelessness or dishonesty were responsible for any significant amount of program waste, the FCC could correct this more easily by realigning customer incentives than by placing more administrative burdens on carriers.
How Hard Is It?
In the Lifeline Reform Order, the Commission comes up with all sorts of excuses for why it couldn't do what we just did here. I won't rebut each one, though none of the excuses would stand up to any scrutiny. The most damning fact, though, is that the FCC could have quickly gotten an accurate subsidy amount simply by looking at average wholesale billing information from no more than 4 carriers. In fact, they could have gotten the whole story just from Sprint, who has a large wholesale and retail role in the Lifeline program.
If it's that easy--and it is (no OMB approval needed)--then what's the excuse for not just going to the source? The benefits of significant annual savings, ensuring customer cooperation, and sparing the vast majority of good customers the demeaning, uncivil debate currently raging seem like a prize worth a casual inquiry, don't they?
In the last post, we talked about the generally uncivil and unproductive tenor of current arguments over the Lifeline program. I've already mentioned that I would have liked the FCC to have taken a more holistic "once and for all" approach to modernizing the Lifeline program. The Commission's decision was a mistake for at least two reasons.
First, by deciding to ignore some of the seismic changes in the telecommunications market since the original Lifeline rules were adopted, including the shift from monopoly to competition and consumers' enthusiasm for wireless, the Commission left itself with very few options for "reform" and "modernization." In fact, by failing to undertake any reforms based on the structure of the modern telecommunications market, the Commission pretty much forfeited any claim to Lifeline "modernization."
The second reason the FCC made a mistake by not taking a comprehensive evaluation of the Lifeline program when crafting program reforms is that the FCC left itself with fewer chances to succeed. In other words, by focusing exclusively on reforming carrier and consumer practices in order to prevent duplicate and ineligible disbursements, the FCC "doubled down" on its theory that waste and fraud were the primary cause of the $1.3 billion increase in the Lifeline program between 2007-2012. Here at p. 2
So, did the FCC win the bet? Well, the Lifeline Reforms have been in effect for almost a year and a half, and yet the political acrimony over the size and administration of the fund has only escalated. What do you think?
The Lifeline Reform Rules
As we noted, the primary focus of the new Lifeline rules is to eliminate waste, fraud and duplication in the program. Unfortunately, this burden was transferred squarely to service providers. As a result of the new rules, carriers now have the responsibility to confirm eligibility of applicants, keep better records to help eliminate intra-company duplicates, and to educate applicants about the consumers' duties under the program. In other words, carriers got a lot more risk and no more resources to manage that risk.
One big change on the near horizon that could result in some measurable efficiency improvements to the fund is the duplicates database. As we saw with the NALs recently announced by the FCC, data entry and record-keeping errors can always result in some (relatively small) number of duplicate claims within the same company. However, the largest amount of duplicates result from the same customer getting service from multiple providers.
For example, let's say the customer has been receiving wireline Lifeline service for a long time from one carrier, then perhaps another member of the subscriber's household signs up for wireless Lifeline service from a different carrier. The error could be inadvertent, but today it doesn't get caught unless or until USAC goes through a study area with a lot of in-depth validation (IDV) audits and then compares subscriber lists between carriers.
When the database gets up and running, all of these duplicates will get identified and eliminated in every study area before they result in duplicate recovery from the fund--and without a lot of intensive audit work by USAC. This will reduce the size of the fund. But, what about the other reforms?
The most significant reform so far, in terms of controlling fund size, has been the requirement that Lifeline providers re-certify their entire customer bases each year. For 2012 the Lifeline fund disbursed $2,190 million. For 2013, the fund is expected to disburse $1,812. See here at p. 25. So, savings over the past year resulted in around $378 million.
Still, this year was the first year of mandatory re-certifications, and many customers had not had contact with their service provider in quite some time leading up to this year's re-certifications. It is doubtful that next year's re-certifications will remove anywhere near this number of customers from the fund. Without this significant one-off reduction in the size of the fund, how much has the fund benefited from the new rules?
While we've said that the total amount of duplicate reimbursements received by the five carriers in the NALs was a total of $73, 250, the total amount of overpayments received by these carriers was likely much higher. In fact, I would guess that the main reason the level of fines was so high, relative to the overpayments alleged, is because the carriers in the NALs chose not to settle. If these carriers had settled with the EB, they would have had to pay the fund back all of the overpayments received throughout the carriers' service territory for the previous 12 months.
If we make the wildly optimistic assumption that each firm with an NAL over-recovered $500,000--and had settled with the EB--the total amount the fund would have saved since the Lifeline Reform Rules went into effect would have been--at most--$3 million (the 5 NALs plus 2 settlements earlier this year). To be fair to the FCC, though, I know that USAC also engages in a lot of "ordinary" recovery through its frequent audits. However, I have not been able to find the amount of their audit recoveries. Thus, let's be super conservative, and estimate that the Lifeline Reform Rules (through USAC audits and FCC enforcement) save the fund about $10 million/year (out of a $1,812 million fund this year).
In our final installation of this series, we'll look at what the FCC should have done in its NPRM if it wanted to comprehensively reform Lifeline. We'll also look at the savings the fund could have reaped if the FCC had made even a tiny effort to holistically reform Lifeline.
In the last post we mentioned the letter from the 44 House Republicans, who with no sense of self-awareness, sent the FCC a letter during the shutdown where they referred to the Lifeline program as representing "everything wrong with Washington." Sure, it was wildly hyperbolic, but--admittedly--not completely baseless.
But before we get started in discussing the "state of the debate," it helps to know some history--because understanding the real facts--is necessary to fully appreciate the bedlam that characterizes the current state of the "conversation." The best piece I can recommend--which keeps with the theme of "why are we here?"--is this entertaining and informative blog by Harold Feld, explaining the ironies of Lifeline.
Where We Are: The "Uncivil" War
If you've paid any attention to Lifeline over the past few years, you'll also recognize that the House Republican letter is hardly the first time that the Lifeline program has been portrayed as some kind of political litmus test, implying that if you support Lifeline you are na´ve at best, and grossly irresponsible at worst. For a debate in which few, if any, of the program's opponents have any experience with the Lifeline program, the level of rancor in this "debate" is truly without equal.
Even worse, some "political activists" on the "anti-Lifeline" side try to generate opposition/hostility toward the program by associating the Lifeline program with the most appalling, frequently racial, stereotypes of poor people. For example, who can forget the "Obamaphone lady?" More recently, there was this deceptive video that circulated over the Summer from political activist (and pseudo-journalist) James O'Keefe.
What's notable about O'Keefe's video is that it features actors, acting out the worst stereotypes of low income people. People viewing the videos aren't reacting to anything that is actually being depicted in the video, rather they are being manipulated by a storyline created by the narratives of actors with a political agenda.
But there wouldn't be a rancorous debate unless both sides were participating. So, as dishonest and deplorable as the "kill Lifeline" side is, the advocacy of the "save Lifeline" side is as insipid as it is unpersuasive. The "save Lifeline" crowd has a website called Lifelineconnects.org. On the website, you can look through their news clippings on their advocacy activities. The group has done some advocacy at the Commission, and they have had advocates for the program testify before Congress. Do you know what their message is? Lifeline is good. Beyond anecdotes of how Lifeline is helping a few deserving people, there is very little of substance on the web site.
How We Got Here
The one uncontroverted fact about the state of the Lifeline program is that it has become wildly controversial over the last several years. But, how did it get to this? It didn't start that way; Lifeline started as a reasonable, bipartisan program to ensure that all Americans had access to basic communications services. The addition of wireless service to the program in 2005 was merely an evolution of the program's founding principle.
So, when it became necessary to update the program--only a few years ago--it was clear that the program needed changes. Starting in 2009--which, it should be noted, was a very bad year for the U.S. economy--the USF's low income fund began to grow dramatically.
In early March of 2011, the FCC released its Lifeline/Link Up NPRM to discuss changes to the Lifeline program that would help modernize the program and put it on a more stable foundation for the future. The NPRM identified the dramatic growth in the low income fund as the primary factor leading to the conclusion that the Lifeline rules needed to be revised.
While the growth in the fund was the real issue that needed to be addressed, rather than to try to understand the basis of this phenomenon and to deal with the larger implications of the growing low-income fund in a holistic way--addressing USF contribution reform along with reforms to the Lifeline program--the Commission took a short cut and assumed that most of the problem was the result of the influx of prepaid wireless "Lifeline-only" service providers, who must have been running amok. New rules on service providers, the Commission said, would surely solve the problem.
This one lazy assumption is what set the table for all of the successive, unproductive, rancorous debate over Lifeline's future. Because, after all, when you limit the possible explanations for fund growth to one--waste--then every service provider and every consumer participating in the program becomes part of the problem. Thus, the eventual result of the Commission's approach--that the future of the Lifeline program would be the victim of an unproductive war of political values--was hardly unforeseeable at the time, as I explained in this blog.
Given where we are, in terms of the level of the conversation about the future of Lifeline, does anyone honestly think that a solution to Lifeline's real problems is going to come out of this protracted "Sumo match" of opposing political values? Neither do I. But, if the Commission is to rescue Lifeline, they'll have to start understanding the relevant facts.
In the next installment in this series, we'll look at how the wireless Lifeline business works, and how the Lifeline Reform Rules are working. Finally, in our last installment, we'll talk about realities that the Commission must recognize, and the changes that must be made in order to stabilize the Lifeline fund.
Last week, I tried my hand at writing a satirical post, supporting Dr. Anna Marie Kovacs' excellent study for the Internet Innovation Alliance. I had "so-so" success, and--with what's been going on in Washington for the past few weeks--I can't blame anyone that mistakenly interpreted my post as a serious endorsement of government-imposed inefficient investment in order to prop up the economy. Dr. Kovacs' study deserved better, and if you'd like to see better, please read this excellent discussion of the study by Richard Bennett.
Among the if-you-didn't-know-better-you'd-swear-it-was-made-up news from last week, a group of Republican House members--after imposing a minimum of $160 million per day in costs to U.S. taxpayers (not counting long term credit cost affects) from shutting down the government for what Sen. John McCain described as a "fool's errand" based on an inability to understand how the government works--sent a letter to the FCC complaining about a program [Lifeline] that they contend "continues to symbolize everything that is wrong with Washington."
Did you get it? Republican House members shut down the government--at a minimum cost of $160 million a day--because they failed to understand that the U.S. system of government requires the majority of both houses of Congress, and the approval of the President, to not only enact a law, but also to repeal a law--in this case "Obamacare." Then, these same lovable rapscallions send a letter to the FCC (where no one is working at the time) to protest the "Obamaphone" program--because that program represents "everything that is wrong with Washington." Pot-Kettle-Black much, gang?
One of the many, subtly-hilarious parts of the movie "Willy Wonka and the Chocolate Factory" is when Willy, played by Gene Wilder, offers a nauseous parent a "rainbow drop" candy which will allow her to "spit in 7 different colors." "Violet Beauregard", a gum-chewing, bossy little girl offers the unsolicited comment (while digging her finger up one nostril) "spitting is a dirty habit." Willy looks at Violet, and responds, "I know a worse one." Here, take a look for yourselves.
In this vignette, the woman getting sick is the low-income consumer, Acting Chair Clyburn is like Willy Wonka, and the House Republicans are like Violet--we'll just call her "Marsha"
Aside from the fact that these Republican House members seem to erroneously believe that every law the President is charged with enforcing must be cited with the prefix "Obama", i.e., Obama-Constitution, Obama-Bill of Rights, etc., they are clearly taking aim at any government program that could even arguably threaten them for the crown of "biggest waste of taxpayer money." Nonetheless, even the broken clock is right twice a day, so let's consider the basis for their ill-timed concerns.
In addition to a steady cascade of (mostly-unsubstantiated) negative publicity, the FCC recently imposed notices of apparent liability (NALs) against 5 Lifeline providers for approximately $14 million for submitting inaccurate and duplicative requests for reimbursement. It should be noted, though, that the FCC is not alleging that the providers in question defrauded the Fund by this amount. However, we should take away the understanding that the FCC is very serious about making sure that carriers submit accurate reimbursement requests.
The amount of the alleged overpayments by the Lifeline Fund to the carriers is relatively small, compared to the amount of "fines and penalties"--which are punishment for the violations that led to the overpayments. In total, the 5 carriers received $73,250 in overpayments, resulting from duplicative claims for reimbursement from a total of 2,753 customers (out of over 19 million enrolled in Lifeline).
So, to be clear, these Republican House members are not outside their rights to raise questions about the Lifeline program and its administration. They were, however, outside their rights to assume their conclusion--that the Lifeline program is not worth, or not possible to repair--before they even asked their questions. Nonetheless, even if they weren't right about their conclusions or even most of their questions, they do seem to exhibit ever so slightly more intuition about how markets work than the Commission.
And, while this ever so slight recognition of market incentives isn't in itself going to change the direction of the Lifeline program, it is a start to figuring out how the Commission is--if it ever is--going to get the Lifeline program firmly on the road to reform that it started over 2 years ago, that will eventually include databases to check inter-company duplicates and to be able to perform eligibility verification online as additions to its arsenal of best practices to protect program integrity. So, be sure and check in next week to part 2 of this "very special" Telecomsense series, to hear me expound on something I am very familiar with.