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Why can’t agricultural interests and web companies fund rural broadband deployment

Sections 214(e), and 254 provides that certain telecommunications companies contribute to a universal service pot from where certain eligible telecommunications carriers can recover the costs for providing services, deemed by Congress and the Federal Communications Commission as “universal.” Section 214(e) requires that only carriers designated as eligible telecommunications carriers receive funding to help deliver universal services, an, according to section 254, “evolving level of telecommunications services that the Commission shall establish periodically …. taking into account advances in telecommunications and information technologies and services.” These evolving services include access by schools and libraries; access by rural healthcare facilities. access by low income subscribers, and access to advanced services such as broadband.

The individuals that foot the bill for funding these pots are the end-users, the consumers, who may not be recipients or beneficiaries of the universal services. Not only is the State determining what services should be provided in order for a carrier to receive funding, but the State, using the carriers as licensed fee collectors, is requiring that consumers foot the bill. Broadband providers have long made the valid economic argument that servicing rural customers is a more expensive proposition due mainly to population and density and topography. By law the Commission is required to bring about an efficient, nationwide wire and radio communication service and brings this about by “regulating interstate and foreign commerce in communication by wire and radio ….” Since telecommunications carriers literally provide the channels through which commerce in communications flows, they are naturally the low hanging fruit that gets picked by the Commission.

But interstate and foreign commerce in communication by wire and radio has evolved since 1934. Commerce by wire and radio is no longer about charging a consumer for the privilege of sending and receiving voice calls no matter the content of the message. The commerce now takes the form of video, voice, texts, and graphics sent via wire and the use of various bands of spectrum. The commerce now takes the form of various content delivery entities storing data and information either for future distribution or data analysis by data mining companies or marketers. The commerce by interstate and foreign communication via wire or radio has morphed into an internet protocol eco-system that is home to internet service providers, broadband providers, content providers, and app providers. However, after eighty-two years, investors in telecommunications companies are the ones still holding the regulatory bag and shouldering the expense for getting broadband services to the underserved.

When we think of rural consumers, I wonder if we focus too much on the stereotypical family of eight living on a couple acres with a tractor riding mower in the yard. The chemicals-agricultural sector has operations in rural areas and with a $19.7 billion market cap has incentive to invest in getting broadband into its surrounding market areas. And Google and Facebook have not been shy about wanting to connect the underserved, particularly in India and on the African continent. Get the chemical-agricultural sector to pitch in and the United States could lessen the temptation to spread the costs over the entire population and allow those with the most skin in the game to bear the burden of funding access.

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Communications law’s imbalanced approach to the broadband market

If Congress and the Federal Communications Commission want to manipulate the broadband market, they should take a balanced approach. Balance is missing particularly when it comes to the universal service subsidies directed toward broadband carriers. That’s my take away from a study of broadband service competition conducted by Steven Titch, an independent communications policy consultant formerly of the Reason Foundation.

In his report, Mr. Titch studies the effect of wireless and satellite services on rural universal service policy. He concludes that these subsidies, which are fueled by universal service fees assessed on consumers of telecommunications services, are no longer needed. Innovation in broadband services made available by wireless and satellite providers has increased competition in the availability of data and voice services in rural areas. Citing data from the FCC, Mr. Titch notes that 99.9% of all Americans have access to some form of broadband with download speeds exceeding 3 Mbps and that for rural consumers with no access to cable or FiOS, broadband services can be obtained from digital subscriber line services via existing copper lines.

What would be the effect of continued subsidization of wired broadband deployment from universal service programs such as the Connect America Fund? According to Mr. Titch broadband providers in rural areas would have little if any incentive to invest in infrastructure which eventually leads to fewer people being able to access high-speed Internet services.

Of the four areas where subsidies are directed, low-income support; schools and libraries support; rural health providers support; and high-cost support, Mr. Titch is most concerned about high-cost support. While admitting that lower density of buildings and businesses increase the cost of broadband deployment in rural areas, the idea that rural services cannot be delivered at a profit is pretty outdated, says Mr. Titch. Satellite and wireless providers may be able to provide broadband services to rural consumers at lower capital costs, providers that the FCC’s universal service policies ignore. Inefficiencies arise when costlier broadband delivery platforms are subsidized versus consumers using less costly, at least in terms of capital outlay, services provided by wireless and satellite providers.

Addressing the problem with high-cost support being directed to inefficient broadband delivery platforms may lie in an imbalanced approach that policy takes the communications market overall. If the broadband eco-system, like the overall economy, is truly consumer driven, why should the fourth leg of universal service policy direct any funds to providers at all?

The overall policy underlying the Communications Act is to make available “so far as possible, to all the people of the United States” a nationwide communications network. Even the Act recognizes that there will be limits to getting communications or advanced communications to all Americans, but the emphasis in Section 151 of the Communications Act was on consumer access to a network.

This focus is continued in the policy rationale for universal service as spelled out in Section 254 of the Communications Act. Low-income support (Lifeline); rural health care support; and schools and libraries support are representative of consumers of communications services. Low-income consumers, rural health care providers, and schools and libraries receive direct or indirect support from universal service programs so that they may access and consume services. While you can argue that unless broadband providers are subsidized so that there are services available for consumption, the counter to that, based on Mr. Titch’s analysis, is that lower capital cost alternatives such as wireless and satellite services, remove the need for subsidies as a result of the innovation these alternative providers bring to the market.

Congress should consider, at a minimum, removing high-cost support from universal support resulting in the FCC getting rid of the Connect America Fund geared toward broadband. In an eco-system where high-cost support no longer exists, wired providers will be forced to develop delivery platforms requiring lower capital costs in order to compete with encroaching wireless and satellite providers with consumers benefiting from lower communications bills.

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Dig deeper into this order and uncertainty abounds

Upon receiving an invite from an associate to spend the evening in the Bedouin’s tent with a lady of his choice, James Bond quipped, “When in Egypt, one must dig deeply into her treasures.” Next to Goldfinger telling Bond he expected the British agent to die, I don’t remember to many lines from the movie series, but the Egypt line stood out when I read this latest Federal Communications Commission order released earlier today.

The FCC clarified that price capped local exchange companies (phone companies not subject to rate-based regulation) must use a portion of their frozen high-cost support either to recover the cost of past network upgrades to extend broadband-capable networks in areas substantially unserved by an unsubsidized competitor or to maintain and operate existing networks in such areas, or a combination of the two.

I’ve always thought of price capped carriers as the big brothers that went off to college or the Army while the little brother rate-based carriers were left at home to sulk. Price capped carriers received their designations during that period where competition was thought to be right over the horizon. Given shrinking market shares and the argument that an alternative regulatory scheme was needed to unleash completion in the local markets, price capped regulation was given a try.

It seems this time that big brother prefers keep the gloves on and the FCC is willing to acquiesce. The FCC is willing to let these price cap companies maintain two networks; a broadband network and whatever legacy network existed before that was being used to serve rural customers.

For example, FairPoint, one of the original petitioners that spawned the issue addressed in the order, serves mostly rural customers. The company did not want to allocate one-third of frozen universal support to broadband deployment. That position flew smack in the face of the FCC’s plan to connect rural households to the high-speed broadband. But with this order, FairPoint gets to have it both ways.

Either market intervention via universal service doesn’t appear to bring about the broadband social policy goals the FCC wants or the FCC may have to be firmly restate that it promotes an IP transition. The FCC acknowledges the costs of maintaining two networks in this order. It should move to have all carriers pursue that goal. The treasures of an IP transition demand it.

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A number of rural carriers say no to FCC’s rate of return analysis

A number of rural telecommunications carrier associations yesterday filed joint reply comments in a Federal Communications Commission proceeding where the FCC is considering reducing authorized rate of return on a rural carrier’s assets from the current 11.25% to a rates of return range of 7.39% to 8.79%.

Needless to say the rural carriers are a bit miffed. The rate of return is used to determine how much revenue a carrier can generate on assets put into use to provide telecommunications services. When the revenue is determined, the FCC determines the appropriate rates for interstate special access services and common carrier line rates, as well as the appropriate amount of universal service contribution a rural carrier may receive. The higher the rates of return, the greater the rates a carrier may charge to recover these revenues.

The carriers argue that lowering the ROR means there will be less funds available for reinvesting in the deployment of broadband facilities. The FCC argues that since 1990, the last year the ROR was determined, changes in technology warrant a change in these rates and initially found that the appropriate rate should be around 9%.

But could that be the FCC’s approach from the beginning? Regulators reason that the higher the rate of return, the less the incentive to invest in innovation. I don’t think that is necessarily true. For example, if a carrier has aging assets in its rate base, they will remove them, either on their own or as a result of a rate review. As technologies change and carriers find themselves facing competitive pressures brought on by cord cutting and cable companies able to bundle in on-demand services, these carriers will want to keep up, but they will need the revenues necessary for purchasing and deploying the facilities necessary for deploying new facilities and services. It’s during this period that ROR should be remain at the same level or even increased.

The FCC’s logic seems to be centered on keeping rural carriers captive to the updated, new and improved universal service fund. We’ll keep your interstate rates low and force you to come to the trough and drink even if you feel your customers are better served if you fund broadband deployment on your own dime. The FCC believes that there is market failure sufficient enough to keep rural providers from meeting voice and broadband needs of consumers. If that is the case, then the FCC is ensuring that market failure by decreasing the ROR rural carriers should earn.

It’s truly ironic given the FCC’s policy goal of basing inter-carrier compensation received by rural carriers on a free market framework, but I see nothing free market about forcing rural carriers to stay on a universal service funding scheme premised on fake innovation.

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Using broadband to create? Then you need to live in an urban or suburban area

The U.S. Department of Commerce yesterday put out a report documenting gaps in access to broadband between rural and urban communities as well as the variation in access to broadband within these two communities. The major conclusions of the report was that urban areas had greater access to both wireline and wireless broadband versus their neighbors in rural areas. Also, while population density played a role in which areas have higher access to broadband, locating closer to central cities may be of more significance in broadband adoption.

For example, according to the report, residents living in the exurbs, where population density is around 37 residents per square mile, have greater access to higher-speed wireline services than their counterparts in small towns, where population density is approximately 1,447 residents per square mile. Keep in mind that exurbs are considered as part of the rural community while small towns are urban areas. Exurbs, however, are part of metropolitan statistical areas (MSA) where central cities are the core of their populations. The study concludes that this proximity of exurbs to central cities may play a role in why a smaller density jurisdictions like an exurb may have greater access to higher speed services versus a small town which is not located in an MSA.

As I do here as well as on my other blog at Alton Drew, I place a lot of emphasis on accumulating and using capital, whether financial, or natural as in spectrum. Broadband is capital in the hands of creatives. Whether writers, designers, or app developers, access to broadband is key and if location to central cities increases the chances of quality broadband availability, people like me will be staying in Atlanta and other MSAs.

But what should this say about public policy? Should the Federal Communications Commission create more interventionist policies in order to bring some balance to the variations between and within the urban and rural communities? You can’t order carriers to provide the same speeds to rural and urban areas and universal service funding is far from guaranteeing a provider will enter rural markets to provide higher speed services. Evidence shows, especially where municipals provide broadband services, that new entrants are entering markets where incumbent services already exist.

The best policy would be to allow consumers to signal to market players that they are willing to pay the premium for services that are more costly to provide because of the low population densities. This is the best incentive for attracting broadband providers.