Highways, airports, roads, bridges, harbors. All are part of the conduit that moves American commerce, getting goods and services from consumer to producer. They are part of the commonwealth, owned by municipalities, states, and the federal government. When commenters talk about building or renovating America’s infrastructure, these are typically the components they are referring to.

The financing of these components is usually done with tax revenue or revenue or bond issues paid back with tax revenues. Accounting wise, a municipality may have a specific fund established which accounts for the revenues dedicated to and expenditures resulting from an infrastructure project.

Broadband facilities tend to be mentioned in the same breath as the infrastructure components mentioned above. Broadband facilities, the “information superhighway”, carry digitized voice and data between our cell phones, lap tops, and tablets. Broadband facilities are described as the on ramp to electronic commerce, much like the on ramp to Interstate 20 at Joseph E. Lowery and Oak Street in the West End of Atlanta.

That’s about where the similarities end.

Unlike airports, highways, bridges and toll roads, the vast majority of broadband facilities are owned by private entities; Comcast, Verizon, Time Warner, and AT&T, to name a few. The vast majority of the capital used to build and deploy central offices, nodes, other packet switches, and cable is provided either from equity shareholders or creditors. Broadband providers go into the markets to buy the capital needed to meet the demand for facilities. The private versus public ownership of these facilities creates a dependence on the private sector for the financing. Price paid for capital, not government mandate, determines whether capital will be available to meet the consumer demand for broadband facilities.

Sometimes the consumer demand comes from geographical areas that make a business model very expensive to finance; specifically rural and insular areas. Terrain and climate raise challenges to broadband providers because in addition to the physical deployment of facilities, a business case must be made about the probability that consumers in rural and insular areas will be able to pay the higher than average cost of receiving broadband services. The price mechanism may preclude broadband providers from buying the investment capital needed to make the investment. The rational investor or underwriter may not buy into a rural or insular broadband business model.

Enter the irrational. Enter the Federal Communications Commission.

Driven by its interpretation of universal service as provided in the Communications Act, the FCC has over the past few decades implemented a universal service and inter-carrier compensation scheme designed to subsidize delivery of telecommunications services to the poor, underserved rural markets, and health care providers in underserved areas. Business customers were basically overcharged in order to subsidize residential customers. Interexchange companies paid originating and terminating fees to local exchange companies with these funds placed into a pot where LECs would receive a cut after certifying the expenses claimed were for providing telecommunications services.

The FCC, threw its Connect America Fund, has essentially modified the model so that funds go to broadband services versus the legacy plain old telephone service network prior universal service finds financed. To date, the FCC is still trying to get broadband companies to bite on the remaining $180 million in subsidies available during the first phase of CAF. Broadband providers leaving money on the table should be a red flag that something is wrong with this model.

What’s wrong with this model is that it does not take into account that the infrastructure belongs to private entities, entities that could borrow at near zero rates, but who do not finance infrastructure projects in unserved, rural, or insular areas because a strong business case cannot be made for it. The FCC and the Congress throw money at them anyway, hoping that the initiative will get broadband to the homes. In a free market, capitalist society where the method of production and delivery is held in private hands, this 1930s view of stimulation cannot work. What is needed is something more direct especially if government is to participate in stimulating broadband demand.

While it is good to see Mr. Genachowski and his Gang of Four act like supply-siders, what is needed for broadband deployment is a combination of demand stimulation and a “private equity” mindset on the part of government, in this case, the FCC.

First, Congress should get rid of language describing the methods of implementing universal service. Rather than extorting money from IXCs to fund universal service, Congress, via the FCC, should issue poor consumers vouchers to be used with the broadband provider of their choice. This voucher could reflect the difference between the average monthly amount paid for broadband in the consumer’s market area and what they pay for telephone service.

Second, Congress should establish a broadband infrastructure bank to be administered by the U.S. Department of Commerce. The infrastructure bank would be funded from general tax revenues and would lend funds to broadband providers who present innovative business plans for providing service in insular, rural, and urban unserved and under-served areas. Funds would be paid back to the infrastructure bank at some rate below prime. The infrastructure bank could also issue debt giving investors another avenue for hedging other investments. Profits would either be returned to the Treasury, reinvested in the voucher program, or go on to support broadband in schools and libraries.

The current universal service program is open to abuse, such as skewing most funding toward carriers that do not need the funds. It introduces additional government regulation for the purpose of financing broadband deployment by private actors when those actors could go into the markets and get financing themselves; financing based on the showing of a good business model. By requiring the showing of a good business model, broadband providers would be required to develop innovative technologies to provide service. Innovation will beget financing which begets the value added to a service, value that consumers will identify and demand.

Section 706 of the Telecommunications Act puts the Federal Communications Commission in a peculiar bind. The statute requires that the FCC determine whether Americans have access to high-speed, switched, broadband telecommunications capability that enables users to originate and receive high quality voice, data, graphics, and video telecommunications technology.

The FCC concluded that broadband was not being deployed in a timely manner. Factors such as broadband costs, quality of service, and adoption by consumers were hindering deployment.

Can you blame the industry? I say no, not after investing, according to the FCC, approximately $41 billion a year in network deployment. You can’t really fault the federal government, particularly after Congress allotted and the NTIA and RUS spent $7 billion to incentivize the design, construction, and deployment of broadband facilities in unserved and underserved communities.

But with 19 million Americans not having access to broadband, and 14.5 million of them living in rural areas, what more should the FCC do? As a promoter of commerce, the FCC has done a good job encouraging infrastructure deployment, but should it be responsible for encouraging broadband adoption?

Broadband adoption is a market reaction. By that I mean it’s up to consumers to determine the value of buying broadband access and it’s up to producers to create the demand. I got uncomfortable seeing FCC Chairman Julius Genachowski standing in front of a Best Buy talking about the fun apps and gadgets that could run on broadband networks. Fine and dandy, but once the FCC has met its duty to promote commerce by encouraging the deployment of networks, it’s time for the market players, consumers and producers, to do the rest.

Rural residents made a decision to live in rural areas. They should pick up the cost of building their own networks; pick up the cost of accessing current broadband networks, or investigate the alternative technologies that can provide them with access to broadband. Subsidies in the end mean some consumers are paying more than they have to in order for others to get service. Producers will have to rely on controversial cost models to approximate cost information that the market could more easily provide.

To limit the FCC’s interference in the broadband market, Congress could start by eliminating Section 706. By repealing this mandate, the FCC could better focus on ensuring the deployment of a ubiquitous network while the market could focus on sending and receiving more accurate supply and demand information.

The Denver Business Journal yesterday reported that the Colorado legislature is considering a bill that would regulate voice-over-Internet providers.  They would be required to put money into the rural phone service subsidy pot.

On the flip side, according to the article, the bill would also call for phasing out the rural subsidy over the next twenty years and reducing intrastate inter-carrier compensation rates.

Without rural subsidies, expanding broadband to underserved areas will be tricky.

The inter-carrier compensation issue has been dormant for too long. Nothing significant has been proffered since former FCC chairman Kevin Martin’s “glide path” concept for equating local and interstate access charges over two years ago. A little more certainty in the markets would result if the FCC moved ahead more vigorously.