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Do farmers need more subsidies?

Posted November 14th, 2013 in Broadband and tagged , , , by Alton Drew

Just had a lively debate with Noah Kai Cherry, an attorney and advocate for rural broadband at WTA. At the crux of the discussion was high cost support for rural broadband deployment. My position on the matter is that high-cost support for rural broadband providers is no longer necessary. Residents of rural areas decided to live in rural areas; they are not necessarily poor; and if they are willing to live in the boon docks, they should be willing to pay a premium for services considered on par with those provided in urban and sub-urban areas.

Does this position mean that we don’t care about farmers? Of course not, but not every rural resident is a farmer and not every rural resident is poor. While I have a preference for direct subsidies to consumers versus broadband providers, I’d like to know how well farmers are faring under subsidies they already receive from the federal government.

According to the Environmental Working Group, from 1995 to 2012, American farmers received $256 billion in farm, disaster, and crop insurance. Unfortunately, most federal agricultural farm subsidies do not flow to smaller farmers. For example in Georgia, the farmers in the bottom 80% of earnings received on average $473 a year between 1995 and 2012. That amount doesn’t make much room for buying a broadband connection in rural Georgia.

But what about the stimulus spending from the American Recovery and Reinvestment Act? That spending by-passed farmers, the anticipated end-users of broadband services. The Broadband Initiatives Program under the United States Department of Agriculture made 320 awards by the end of Fiscal Year 2009 with the intent of increasing broadband access. The awards totaled $3.529 billion with just over $3 billion going toward 285 last mile projects. Award recipients were in 45 states and one territory.

BIP should have made a supply-sider blush with the “build it and they will come” approach of the program. Almost three million households and 364,000 businesses were to benefit from the access to broadband BIP was supposed to enable, yet rural broadband advocates want to keep the public on the hook for more universal service subsidy spending.

We should be hearing that consumer adoption of broadband is increasing, after all this stimulus spending, but we are not. Why is that?

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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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Even the Brits admit the digital divide is getting wider

Posted August 7th, 2013 in Broadband and tagged , , , by Alton Drew

British telecommunications regulators provide more reason to take pause with the notion that public policy across the pond is leading to a closing of the digital divide between urban and rural areas. In this piece published in The Telegraph, the British telecom regulator Ofcom is cited as concluding that the difference between the high-speed broadband haves and have not would get worse before it got better.

According to the article, rural areas are experiencing average speeds of 9.9 Mbps while urban areas are seeing average speeds of 26.4 Mbps, a gap of 16.5 Mbps.

The average broadband speed in the United kingdom is 14.7 Mbps second compared with the United States which stood at 14.3 Mbps, according to the Federal Communications Commission.

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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.