The Federal Communications Commission pushes its universal service program the way a drug dealer pushes cocaine. To keep carriers in check, it has devised a system that some carriers believe they have to depend on, while the FCC sells them on the need to keep doing lines because it will give the carrier the confidence it needs to go out and serve unserved areas of the country. It’s time for carriers to break the dependency and free themselves from this regulatory crossfire. The carriers are not the bad guys when it comes to broadband adoption and I would go further and argue that they should not be responsible for financing its expansion. That responsibility should lie with online content producers, including companies that publish news, movies, and blogs.

Content providers, not broadband providers, are the primary beneficiaries of broadband adoption by the remaining 100 million households the FCC targeted in its national broadband plan. If a land developer wants to ensure people come to its development, buy houses, and live in the development, the land developer is going to build roads, lay conduits for communications and water, and maybe throw in a school building. Google, Amazon, and Netflix are not doing that with broadband, even though it’s broadband that brings them the eyeballs for their content.

Content providers are not doing that with broadband networks. With the help of the FCC, they have dumped the negative externality of adoption costs unto broadband providers. Net neutrality is famously their prime mechanism for doing so; by requiring that traffic from all content providers be given first class treatment on a broadband provider’s network. The other instrument, universal service via the moniker Connect America Fund, while reimbursing broadband providers for the cost of deploying facilities where their business models dare not tread, really takes final payment of this subsidy out of the wallets of the end using consumer.

The Connect America Fund had about $185 million left on the table for broadband providers to apply for and use to help with the cost of getting broadband to Farmer Smith and Dr. Jones so that they can deliver services to an increasingly demanding broadband consumer. These funds are also meant to help people access the Internet at high-speed so that they can take advantage of news,information, goods, and services provided by larger e-commerce entities including Amazon, Ebay, Walmart, and Google.

If these companies, who need the Internet like humans need air, want to reach their potential customers that bad, why don’t they invest the cash sitting on their books to subsidize broadband adoption? For example, Google, with four dollars of current assets with one dollar of current liabilities, has enough cash on hand to kick in and incentivize broadband adoption. And let’s not forget Facebook, with 1.1 billion subscribers, some of whom are connecting via wired and wireline broadband, has ten dollars in current assets for every dollar of current liability has enough liquidity and cash to kick in some direct funding for broadband adoption.

Carriers are just middlemen, unless they are endowed with content properties like Comcast. Being in the middle makes you a target for regulation, including the onerous requirements of a universal broadband service fund, but equity calls for the incidence of broadband adoption initiatives to fall on the entities with the most to gain, and those entities are the content providers and e-commerce companies selling goods and services.

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.

AT&T filed a request with the Federal Communications Commission asking the regulatory body to waive a requirement under section 214 of the Communications Act for a carrier to obtain a certificate of public convenience and necessity any time the carrier discontinues a service. Specifically, a wireless carrier that abandons a time-division multiplex wired network and transitions to an Internet Protocol enabled network would have to get a CPCN every time it does no. This requirement would entail a delay in moving to digital services, a policy the FCC has given lip service to.

AT&T is concerned, and rightfully so, that the 214 requirement will keep the company and other incumbent local exchange companies tethered to an old legacy network that does not provide the innovative services provided by an IP network. In addition, as more consumers leave the old public switched network choosing to have voice services provided by cable digital networks, voice over Internet protocol, or wireless networks, the average costs for serving consumers still stuck on the PSTN goes up. Combine that with universal support moving from the PSTN to wireless networks, and ILECs find themselves with fewer resources to innovate with.

I can understand requiring a certificate to provide service be obtained by a new entrant, but it is not reasonable to require an incumbent to get a new certificate to provide services when it has not even left a market. The FCC should approve AT&T’s petition.

The United States Court of Appeals for the 11th Circuit held yesterday that a federal district court had no jurisdiction to review an action of the Federal Communications Commission. Only the court of appeals has exclusive jurisdiction to enjoin, set aside, suspend, or determine the validity of all final orders of the FCC. District courts cannot determine the validity of FCC orders.

The ruling came on appeal of a federal district court decision that the court had no jurisdiction to rule on a decision by the FCC to apply, on a prospective basis, an order that required universal service funds be calculated based on a carrier’s interstate and international revenues. Prior to the FCC’s order on recalculating universal service contributions, the FCC had calculated universal service support for rural healthcare providers, and schools and libraries based partially on a carrier’s intrastate revenues.

A 1998 ruling from the United States Court of Appeals-Fifth Circuit had determined that federal universal service support could not be based on intrastate rates. To implement the court’s holding, the FCC issued an order that starting November 1, 1999, universal service support would not be based on intrastate revenues.

Citing the ruling in the Fifth Circuit, an individual plaintiff brought an action in federal district court seeking refunds retroactively of pass through charges she had been assessed for universal service support. The district court found that pursuant to the Communications Act it had no jurisdiction to rule on the validity of the FCC’s prospective order on universal service support. The court of appeals concurred with the district court’s ruling.

Investors should be mindful that neither the 5th or 11th circuits addressed the issue of refunds of universal service contributions made between January 1, 1998 and October 31, 1999. The total amount of contributions made during this period was $1.6 billion. An action could still be brought to recover this amount in refunds. I do not believe that the FCC or the industry would endorse initiatives to identify who these refunds would go to because of the administrative burden that would be imposed. The cost to the FCC and the industry to identify potential recipients and distribute these funds may well exceed $1.6 billion.

Martha Self v. BellSouth Mobility, No. 11-13998, United States Court of Appeals, 11th Circuit

The Federal Communications Commission announced today that its Connect America Fund is now ready to dole out subsidies to as many as 500 rural carriers. The carriers will hopefully be able to roll out broadband and voice services to an initial 400,000 households, businesses, and anchor institutions.

CAF is a modification of the old Universal Service Program which subsidized carriers facing higher costs for deploying services in less densely populated areas such as rural and insular areas. Just like the old USF, CAF will be funded by assessments on carriers who will assess the bills of their subscribers an amount that covers carrier contribution.

Shorter answer, we pay for it.

In addition, while participation is voluntary, if a carrier wants funds, they will have to provide both voice and broadband services to their subscribers.

Is this good social policy? It probably is. Let’s face it. This was the policy used to help deploy plain old telephone service (POTS) back before we started deploying all this pretty amazing new stuff (PANS). Since Congress and the FCC have taken the position that we want to get advanced services in as many households as possible, why abandon a mechanism that worked fairly well.

It is kind of touchy, touchy. Fellow citizens, unbeknownst to them, are helping someone, via an assessment on their bills, get phone and broadband services below cost.

On the flip side, I don’t see where this type of subsidy leads to innovation. It takes away the incentive to come up with a new technology that can be used to serve those without broadband access. The desire for affordability is a constraint on innovation that we must contend with, I suppose.