Results tagged “USF Reform”

October 29, 2013 2:14 PM

Lifeline Part 4. The Solution: It Ain't That Deep

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 Wireless article 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?  

October 25, 2013 2:07 PM

Part 3. Lifeline Reform: How'sThat Working Out for You?

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?

Dr Phil.jpg 

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.

August 4, 2011 7:28 PM

What the Price Cap LECs Saw, and What They Need to See

Last Friday--after months of intense negotiation, compromise, and an exhaustive re-calculation of the Mayan Calendar--the six largest "price cap" LECs submitted a comprehensive USF/Intercarrier Compensation reform plan to the FCC ("the Plan").  [Note: you really only need to read "Attachment 1"--the rest just provides legal and economic support for the FCC to adopt the Plan.]  

Under the Plan, the only economic incentive to keep the PSTN alive will disappear on July 1, 2017.  On that date, the Plan--and the Prophecy--require that Price Cap LECs shall be required to make money just like any other business: by efficiently selling services to customers who voluntarily decide to purchase these services.  

This Plan, if adopted by the Commission, will serve to streamline intercarrier compensation, while more efficiently promoting the goal of universal access to broadband, as well as voice, services.  At first, all of this will sound kind of scary to many of you.  

Therefore, let me assure some of you that arbitrage will still be around for 6 more years, and the Plan only requires the end of subsidies as they currently exist.  The Plan is by no means a "Doomsday Prophecy", but merely a gateway to the implementation of simpler, more efficient, and more transparent, subsidy recovery mechanisms.  

Let's look at how the Plan would affect two large, PSTN-dependent industries, if adopted today:

VoIP Providers:

    1) Positive:  allows for recovery of all VoIP-originated or terminated "toll" calls at interstate access rates for the next two years!  That's a crazy incentive to upgrade to more efficient technology ASAP.  As a LEC, you don't have to maintain "big iron" to get big bucks.  There will also be a strong short term benefit to interconnected VoIP providers.  No more haggling with big LECs who only want to pay you $.0007/min, and there's a big difference between $.05 and $.0007.  For the next 6 years--albeit at descending rates--carriers serving end-users of VoIP service will be able to collect larger revenue streams than they are generally being paid today.

    2) Negative:  costs to over-the-top VoIP providers will increase, as may wholesale costs of transmission to interconnected VoIP providers (if purchased from a third party backbone operator--because as the costs collected from other carriers goes down, customer costs will increase; even in the wholesale world).

Wireless Carriers:  Stone cold positive.  No negatives here at all.  Wireless providers get a quick transition from intrastate access rates (which are usually much higher than interstate) to the much lower interstate rates, and decreasing rates over time.  It is notable that most of the Price Cap LECs in the Plan, DO NOT have wireless affiliates.

Regulatory "Underbrush" Grows on Both Sides of the Fence

All of the price cap LEC's supporting the Plan have waxed eloquent at one time or another about the need for the FCC to eliminate its outdated regulations a/k/a "regulatory underbrush."  The Price Cap LEC's Plan accomplishes a lot of these goals, but keep in mind, "regulatory underbrush" grew on both sides of the fence. 

The same byzantine, opaque, universal service system also resulted in cost recovery mechanisms in the form of "services" that are no where to be found in the modern, competitive services offered by cable companies, and wireless carriers.  For example, in a competitive market that didn't start as a regulated monopoly with the goal of keeping "basic" service rates low, would any of these things really emerge as "services" that customers would buy?    

    --"unlisted" phone numbers;

    --"foreign exchange" service (in wireless, you can port a NY number to a TX carrier, but LEC voice providers still make you pay to "port" your landline number a mile away);

    --"hunt groups" (say a customer has one number for its business, but the customer actually buys 10 lines to make sure calls are always answered--the automatic process of "hunting" (finding an open line attached to the main number)--is sold as a separate service);

    --phone handset "rentals":  there have got to be some people still renting that bakelite phone for 3 bucks a month;

    --inside wiring "protection";

    --selling common PSTN "vertical" switch features, like caller ID, a la carte;

    --charging extra for "touch tone" dialing (still happens).

Bottom Line:  The Price Cap LECs have a good plan to streamline regulations for "cost recovery."  But, allowing carriers to to recover costs by receiving explicit subsidies and charging a fair price for service may cause the FCC to wonder how much in costs is still recovered via distorted "services" that emerged from the antiquated regulatory regime in need of reform.  If you can think of any "cool" old, tariffed "services" that seem to have originated as a form of "cost recovery"--and are still being "sold"--please post in the comment section. 


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.  

March 10, 2011 3:29 PM

Lifeline Reform: The FCC's "Welfare Cadillac" ?

I recently saw an interesting program about the life of American music icon, and champion of the underdog, Johnny Cash.  Johnny Cash met and performed for every President, from Richard Nixon on.  When he agreed to perform requests for President Nixon, Cash felt two of the songs requested (neither of which were his) were unfair to the poor, or to the young (the "hippies"), and he refused to sing them.  The song that was unfair to the poor was called "Welfare Cadillac", and portrayed those on public assistance (which Cash's childhood home was built with) as scammers, based on a few anecdotes of people who had abused the system.
 
For some reason, I thought about this story while reading the FCC's Lifeline/Link Up NPRM, released Monday.  It goes without saying that in any government subsidy program, there are certainly going to be some that will use the plight of the poor as an excuse to rip off the program.  But, these few scammers don't justify the unbecoming way in which the FCC portrays the growth of the fund in order to limit, or reduce, its size--without any regard to what the true size of the fund should be at this moment in time.
 
So, let's look at what's unfair about the NPRM.  First, consider the "panic" about the growth of the low income fund.  While it's true that the low income fund is growing quickly, that fact alone means nothing.  The Commission seems to forget that--if the purpose of the low income fund is to make voice, or broadband, services affordable to America' poor--the fund should be growing as quickly as America's poor.  That's not just a fact, but it's a fact that the FCC ignore, choosing, instead, to demean the purpose of the fund through unfair innuendo.
 
If you look at Paragraph 27 of the NPRM, the FCC cites some pretty "alarming" growth statistics about the fund, but here is where the NPRM begins to mislead, by exaggerating the "problem."  The paragraph describes the increase in the fund through the years, noting that the fund dispersed an inflation-adjusted $817 million in 2002 (n. 48, p.12).  The fund now stands at an estimated $1.3 billion for 2010. 

The next sentence, though, inflames the fears the FCC seeks to instill in the public, stating that "in the last several years, a number of pre-paid wireless providers have become Lifeline-only ETCs, fiercely competing for the business of low-income customers by marketing 'free' phone service."  The Commission goes on to conclude that, while this "development" has expanded choices for consumers, "it has also led to significant growth in the fund." The paragraph ends with the haunting specter that "[p]re-paid wireless ETCs now account for one third of all Lifeline reimbursements."
 
Now, let's just "unpack" those "facts" and get a little perspective.  The low income fund is supposed to give a monthly, need-based, allowance to low income Americans to help defray the cost of phone service.  Before leaping to its "reefer madness" conclusion, did the FCC ever consider the possibility that--regardless of how, or from whom, eligible consumers are getting their service--the number of poor Americans may have a hand in the fund's growth?
  
In 2002, 34.6 million Americans lived in poverty.  By 2009, more than 9 million more Americans lived in poverty.  Low income fund disbursements in 2009 were $1 billion.  The "average" household in America consists of a little over 2.5 people (based on 2000 Census data at 4).  If we do the math, then we learn that there were about 3.5 million more poor households added between 2002 and 2009.  Keep in mind, also, that the eligibility requirements for Lifeline can be as high as 150% of the Federal Poverty Guidelines (for LIHEAP participation--a Lifeline-qualifying program), so these estimates are the minimum increases in Lifeline-eligible households.
 
What would you expect to happen even if only a third of the new households living in poverty were served by Lifeline?  Well, the fund disbursements would have been slightly less than $1 billion in 2009 (assuming Tribal participation at today's rate)--in other words, about right.  If all of the newly-poor households had participated (and no new ones were added in 2010), the low-income fund would have been well over $1billion in 2009--about what it is expected to be in 2010.  Hmm?  A "fact-driven" explanation for the growth?  That's no way to build panic and urgency. 
 
But wait!  Aren't there still all those blood-sucking, pre-paid wireless, Lifeline-only ETCs?  Well, there are really only two--TracFone Wireless and Virgin Mobile (now owned by Sprint).  What about all the other names listed in n. 50 of the NPRM?  The FCC found that it was in the public interest to allow those companies to provide more service choices for low income Americans, but the FCC has not yet granted these companies the further approvals that would allow them to actually participate in the Lifeline program.
 
Even if the FCC had awarded ETC certification to all those companies, though, what disgrace is that?  The Commission acknowledges that more than a quarter of Americans have "cut the cord" (para 25), so why should it be surprising if a slightly larger number of low income customers have done the same?  The Commission clearly wants more low-income Americans to be able to choose broadband as a means of communication; why not wireless?
 
It's good for the FCC to be concerned that fraud and duplication are limiting the efficiency of the low-income fund, and, I give the Commission credit for proposing a national validation/verification database.  Such an improvement would be a welcome reform to carriers, administrators, and recipients.
 
Nonetheless, the tone of the NPRM, its misleading characterizations of the causes of fund growth, and many of the recommendations it makes (though the FCC concedes Lifeline has helped the poor (para 26)) conveys at best a grudging compliance with the Act's requirement that the USF serve low income Americans.  At worst, though, a reasonable person could be forgiven for considering this NPRM the regulatory successor to "Welfare Cadillac."  It's too bad there's no Johnny Cash on the Commission . . . .

March 4, 2011 2:52 PM

Lifeline Disconnect: The Poor Get Poorer?

At the FCC's monthly meeting yesterday, the Commission adopted a Notice of Proposed Rulemaking ("NPRM") proposing reforms to the Commission's Lifeline/Link Up programs.  The Lifeline program provides up to a $10/month subsidy for eligible consumers ($25/month for Tribal Lands customers), and the Link Up program reimburses carriers for one-time charges associated with activating service.  The text of the NPRM was not yet available at the time of writing, but the Commission's news release, describing the FCC's proposed reforms was available.

The Commission's motivation in undertaking reform of the Lifeline fund was the Federal-State Joint Board's Recommended Decision from last November.  The Recommended Decision focused on expanding eligibility and participation in Lifeline, asking the Commission to explore more aggressive means to curtail waste, fraud, and abuse (for example, through the development of a national eligibility verification database), and drawing attention to the rapid growth of the low income fund in the period since the FCC first authorized TracFone to provide competitive, wireless Lifeline service in 2005.  

In adopting the Lifeline NPRM yesterday, the FCC predictably recommended that consumers be allowed to use Lifeline assistance toward the purchase of broadband service, and the FCC wisely announced its intention to create a national verification/eligibility database.  This solution has been proven to be successful at curtailing waste and fraud in states like CA and FL that have developed state databases.  However, the Commission's reaction to growth in the low income fund did not stop at simply targeting waste in the program.  

The Commission also seeks to "weed out" existing, qualifying recipients of Lifeline service that do not "use" their service for 60 days.  For "free" prepaid wireless carriers, this makes sense.  But, for every consumer actually paying for service, it makes no sense.  Considering the additional medical expenses of America's seniors, some in the government have suggested that 1 in 6 elderly Americans live in poverty.  Let's hope they don't ever require short-term care outside their homes--they might lose their wireline eligibility.  This recommendation, though misplaced, is not the most outrageous suggestion in the NPRM.

The "most bizarre" distinction goes to the FCC's decision to consider "capping" the low income fund.  Does the Commission also plan to "cap" the number of Americans living in poverty?  For the Commission to even consider such a notion only six months after the U.S. Census Bureau has reported that the highest recorded number of Americans (in the 51 years the Bureau has been collecting poverty data) are living in households with incomes at or below the poverty level, suggests that the Commission is out-of-touch with reality (at best) or simply uncharitable (at worst).  Notably, Commissioners Clyburn and Copps expressed concern over this suggestion.

Cutting waste and fraud only makes sense.  But, when 44 million Americans are living at or below the poverty level, and at least 50 million Americans live in households that are income-eligible for the Lifeline program (based on Medicare participants, which are subject to the same income qualification as the Lifeline program), it is alarming that the Commission is willing to "cap" the low income fund, because of its "alarming" growth.  The Commission's recommendation is not only disconcerting, but contrary to the purpose of the fund--given that the current rates of participation by Lifeline eligible consumers remain relatively low, despite the fund's growth.

Currently, the low income fund stands at $1.3 billion.  The part of the high cost fund that goes to "competitive" high-cost ETCs--which the FCC knows is highly duplicative--is slightly higher than the current size of the entire low income fund, so it is hard to understand the FCC's plans to evaluate capping the low income fund.  Rather than lighten the contribution base by an amount greater than any waste in the low income fund, the FCC has chosen to "repurpose" these wasted, duplicative funds to create the newly-proposed Connect America Fund. See High Cost Reform NPRM, Paras. 243-244.

That the FCC would consider capping low-income assistance is all the more disturbing in light of the NPRM the FCC released last month on "reforming" the high cost fund. Recipients of high cost subsidies are supposed to be reasonably efficient.  Yet, the Commission asks whether it might be appropriate--at some point--to "presumptively" cap existing high cost subsidies at $3,000/line/year (para. 210), however, carriers could always show that they really need more money.  Meanwhile, the FCC also proposes allowing these same carriers to receive existing subsidies, whether or not they decide to provide broadband service--and potentially get more subsidies from the newly-created CAF.  High Cost Reform NPRM, Para. 281.

What does the tale of two fund reforms tell us?  Check out this excellent paper by Scott Wallsten of the Technology Policy Institute, and I think you'll understand.  The paper shows that rural carriers spend 59 cents out of every "high cost" subsidy dollar received on "overhead" like lobbying expenses.  Sure, it's a waste of our money, but could you really say it's a "wasteful" expense to the rural LECs?    

February 23, 2011 12:16 PM

The Broadband Map . . . What an App!

When Congress allocated $350 million for a National Broadband Map ("the Map"),  as part of the Recovery Act (at p.14) I was skeptical, but optimistic.  After seeing the Map, when it was unveiled last Thursday (well, I really couldn't get in until Friday--there were that many hits), I think it actually exceeded my expectations. 

Larry Strickling, the head of NTIA, and Anne Neville, who headed the NTIA mapping team, (along with many others at NTIA and the states) are to be warmly congratulated for their efforts.  Is the Map perfect now?  Of course not; but the Map is a work in progress, and it's only going to get better and more useful.  

If you need some facts, here they are.  The actual cost of the Map turns out to be $200 million over 5 years.  The Map will be updated every 6 months, based on information from awardees of the NTIA's Broadband Technology Opportunity Program ("BTOP") grants, state information (the NTIA website also lists state broadband maps), and based on crowd-sourced information obtained from the public to update the Map (and correct inaccuracies). 

I'm confident that the Map will pay for itself in multiples, and--in any event--will come nowhere near being the second most expensive visual effect in history. (The first, of course, being the special effects needed to make it look like Chuck Norris lost a fight with Bruce Lee in "Way of the Dragon.")

So how is the Map going to pay for itself?  Well, aside from the obvious--which is in providing consumers information that allows them to learn about broadband availability/alternatives in their area--I see at least two big ways that the Map can increase consumer welfare: 1) by increasing broadband penetration, and 2) saving Americans money by imposing efficiency on the Universal Service Fund ("USF").

Increasing Broadband Penetration

The Map--because it is designed to be dynamic--serves as an excellent "ice breaker" between sources of supply and demand, and state mapping agencies/business development authorities.  Even now, middle mile and long-haul carriers can superimpose their own network maps on the Map and see areas that may be demand-starved.  Customers, and potential customers, can then approach state development agencies to inform them of latent demand--or even "invisible" demand.  

An example of invisible demand might be an area that is rich in cheap power, but broadband-poor.  Prior to the information-sharing that the Map will stimulate, it is possible that no one would have ever located data centers in that area.  But, with the potential for broadband, and high capacity backhaul, data centers, remote healthcare, and wireless broadband providers might become more interested.  One heretofore "invisible" anchor-tenant could be the catalyst to bring broadband to currently unserved areas. Similarly, state development agencies--with their own versions of the Map--are well situated to be a natural conduit for information between communities with latent/invisible demand and proximate middle mile/last mile carriers. Thus, the Map--for some areas--will become a catalyst in creating new broadband facilities/markets.

USF Reform

This is a really big "if", but if the FCC really wanted to get serious about bringing broadband to unserved areas in the cheapest way possible, the Map provides an excellent vehicle for reducing payments to areas where at least 2 providers already provide broadband.  You see, the Map has a feature that allows viewers to track broadband availability by USF study area.  Using this information, the FCC could better target funds to truly unserved areas.  

The FCC could also eliminate existing inefficiencies by using the Map to either eliminating funding in multiple-provider areas, or by combining multiple-provider study areas with adjacent study areas that are unserved, or served by only 1 provider, to maximize the value of "reverse auctions."  In this manner, "reverse auctions" would have meaning, because multiple bidders would be assured and consumers would get new infrastructure at the most efficient cost.  

Bottom Line: Consumers should ultimately reap plenty of rewards from the Map.  As an information-sharing device, the Map will stimulate markets in ways that cannot be predicted or quantified right now. Moreover, the Map could be used to promote efficient USF reform, but, unfortunately, the Map cannot overcome political cowardice--so maybe we shouldn't hold our breath on this one.   

February 18, 2011 4:12 PM

USF/ICC Reform: The Customer Can't Carry the Carrier

Maybe our relationship isn't as crazy as it seems
Maybe that's what happens when a tornado meets a volcano
All i know is i love you too much to walk away though

"Love the Way You Lie" Eminem (ft. Rihanna), 2010

Last week, the FCC released a Notice of Proposed Rulemaking ("NPRM") in yet another attempt to address its crazy relationship with the tremendously (perhaps, needlessly?) complex, and intertwined, issues of Universal Service Fund ("USF") and intercarrier compensation ("ICC") reform.  The NPRM is long, but well-written.  It does a good job of explaining why these two subsidy systems are in need of drastic reform, and it proposes some thoughtful ideas for reform in both the near term and longer term. 

Sadly, though, that's the "tell"--the "near term"/"longer term" goals, with no immediate action--even on the so-called "immediate reforms."  Yep. I hate to say it, but within a few paragraphs--you know the Commission loves these old relics (both the regimes and the many small, inefficient carriers they make everyone else subsidize) way too much to walk away.  Before you even get to the Executive Summary--though the words are lovely--you can't help but think, "Love the Way You Lie."

Don't get me wrong, it's not just this Commission. These regulatory structures have been crumbling--quite publicly--for some time now, and no FCC has done anything about it (including this FCC--for its first year and a half and counting).  But, because of this tendency towards delay, there is no longer a "longer term", and the FCC cannot save, or reform, the USF without "sudden changes" or "flash cuts" that the FCC "intends to avoid." NPRM, ¶12.  Sudden changes are inevitable, and rate of return carriers can either act quickly to participate in a version of reform that guarantees them a chance, but no guarantee, of surviving, or the rate of return carriers can resist reality and the time it takes for the FCC to adopt reforms will be there only transition period.

Why do I say this?  Because "near" term was 4-5 years ago, and "long" term is just as fast as the Commission can act--probably 1 ½ -2 years at the soonest.  Let's consider the notions of "near term" and "long term" in the historical contexts of the need for USF/ICC reform.

The NPRM cites a few factors that make the reform of the USF/ICC regulations so urgent.  Prominent among these factors are observations about the market, and observations by politicians about the state of the USF.  First, the FCC points to the trend of the acceleration of the deterioration of the PSTN, once supported by its now-antiquated, and always-artificial, LEC (intrastate) and IXC (interstate) distinctions. NPRM ¶8.  The PSTN, so rapidly in decline, contains both the purpose of, and presumption for, the USF/ICC models we have today.  The NPRM also notes the observations of Congressman Lee Terry and former Congressman Rick Boucher that "the Universal Service Fund is broken." NPRM, ¶9.  But, here's the thing: neither of these precipitating factors is new. 

A Long Time Coming

As early as 2002, barely upon completion of the USF reforms of the 1996 Act, the FCC's Common Carrier Bureau ("CCB") Chief testified before the Senate that the USF structures just put in place a few years earlier would need to be evaluated and changed frequently.  Then CCB Chief Dorothy Attwood, explained that,

price competition, technological substitution, and development of new service bundles and new services--are precisely the kind of developments Congress sought to stimulate when it passed the 1996 Act. . . . Nonetheless, they strain traditional regulatory distinctions. They present challenges to our universal service framework.  They require us to consider difficult questions. Testimony at p. 4.
What about Representatives Terry and Boucher?  Well, Congressman Terry introduced his first USF reform bill, H.R. 1582 almost 8 years ago, in 2003.  Reps. Terry and Boucher were working together on universal service reform at least as early as 2005.  So the observation by Reps. Terry and Boucher that the USF is broken is hardly new information. 

The NPRM also notes the importance of clarifying the regulatory treatment of VoIP for intercarrier compensation purposes.  Is this a new problem?  Nope, been there, done that (as far as asking the questions go). The FCC just celebrated its 7th anniversary of adopting its first VoIP classification NPRM.

Transition? Maybe When We Had Time

Finally, let's go back to the fundamentals.  Paragraph 8 of the NPRM says it all with just a few statistics,

traditional wireline telephone (switched access) minutes plummeted from 567 billion in 2000 to 316 billion in 2008.  From 2008 to 2009, interconnected Voice over Internet Protocol (VoIP) subscriptions increased by 22 percent, while switched access lines decreased by 10 percent.
  
By 2008, the number of switched access minutes were almost half of what they were in 2000.  By 2010, the number is almost certainly half (or less) of the number of switched minutes in 2000.  The Commission's recent Local Competition Report ("LCR") provides additional evidence of the trend away from the PSTN.  Between 1999 and 2009, ILEC switched access lines (including CLECs using ILEC lines) had declined from around 189 million in 1999 (LCR, Table 1) to about 116 million in 2009 (LCR, Fig. 4 + Fig. 8).  Interestingly, the total Universal Service Fund size in 2000 ($4.4 billion) was about the same as the size of the high cost fund alone today ($4.3 billion).

Add to this the information in the figure 6, ¶165 of the NPRM, which notes that at the end of 2010, rate of return carriers collected $2.0 billion to serve 5.8 million access lines.   If current trends hold (10% line loss/year), these same carriers will be serving 2 million less lines by the end of 2014.  If the President's $5 billion plan to bring wireless broadband to unserved areas  is successful, then line losses will be much more drastic around the time the FCC adopts comprehensive reform.

Unless reforms are equally drastic, the "have nots"--and thanks to the National Broadband Map, you now know who you are--will (one hopes) grow weary of paying a higher and higher USF "tax" on their phone bill (currently 15.5%) to subsidize the increasingly irrelevant "haves."  Contribution reform (another long-ignored concern) is not yet in discussion.  So, by the time comprehensive USF reforms are adopted, it's a safe bet that unless something changes the inefficient rate of return LECs won't have enough customers/lines to make a transition plan even worth the candle.  If these carriers choose to cling to antiquated entitlements, they will be choosing to accept the fate of the entitlements they love.

However, there is a message of hope for rate of return LECs.  They have a (very) little time left which they can use to work with the Commission to modernize USF in a way that allows them an opportunity (but no guarantee) of remaining relevant.  They also have the outside chance of getting efficient on their own.  Either way, a transition will be unnecessary. 

June 19, 2009 3:32 PM

Are You There Gov? It's Me, USF Contributor (a/k/a "Taxpayer")

[Disclosure Note:  As I've mentioned previously, AT&T is a client of mine, and they share my views (and those of every other rational observer) on the urgent need for universal service reform--both on the contribution and distribution sides.  Unfortunately, for you (the reader), Bob Quinn (of AT&T) already came out with a quick, clever, and succinct statement on the health of the USF earlier in the week when he pronounced that the Fund was in a "death spiral"--meaning that the Fund's precarious status of quickly losing contributors would exacerbate the "per customer" pain caused by the fact that the Fund continues to grow on the distribution side, and so on, and so on . . . .  Regretably, for the reader, I dithered with a contribution factor post, and then opted for the relatively repetitious "fact, fact, fact" format.  Hang in there, though, it's got a great ending;-)]
 
Fact: Earlier this week, the FCC announced that the "contribution factor" for the federal Universal Service Fund (a federally-created subsidy pool designed to support telecommunications services to high-cost areas, low-income consumers, schools and libraries, and rural health care facilities), will reach an all-time high of almost 13% for the third quarter.  This means that the FCC has authorized telecom providers to add a surcharge to the phone bills of most Americans amounting to about 13% of the interstate telecommunications portion of their wireless or wireline services bill.  The surcharge is up from about 10% in the first quarter of this year.

Fact: The Universal Service Fund, in the past year alone, disbursed as much money as the total dollar amount of funds appropriated under the "broadband stimulus" provisions of the American Recovery and Reinvestment Act--about $7.2 billion.

Fact:  In a report to Congress earlier this month, the FCC listed the top ten highest per-line USF beneficiaries.  It's an interesting read, notable for two facts that seem counterintuitive.  First, in all but two cases (where year over year data were available), the highest per line recipients either retained or increased the number of access lines served, while subsidies per line also increased.  In other words, the subsidy trends tend to buck commonly-accepted notions of telecommunications being a high fixed-cost, low variable cost industry.  Thus, as line counts increase, one would intuitively expect the necessary subsidies per line to decrease, not increase.

Second, the highest per line subsidy recipients were generally located in service territories surrounded by large LECs (maybe "high cost" but "non-rural") that managed to provide service to what would appear to be similarly-situated territories, but at drastically lower per line subsidy contributions.

The report noted that one rural carrier received almost $17,000 per access line in 2008. House Energy and Commerce Committee Ranking Member, Congressman Joe Barton (R-TX) reacted with this statement:  "It is unreasonable to expect subscribers to pay more than 11 percent of their long-distance phone bills to subsidize scores of telephone providers in each geographic market, especially when other providers are serving the same markets without a penny of support."  Congressman Barton said this before he knew the contribution factor would be well above 11%.

 


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