Wednesday, November 12, 2014

FCC Should Not Use Scarce Universal Service Funds to Subsidize Unproven Start-Ups

The Federal Communications Commission is charged with promoting widespread broadband deployment across America. But it’s not the FCC’s job to create new competitors in the space for the sake of creating new competitors. It would be a distortion of agency authority to grant special favors to would-be entrants or to give them start-up money to move into the broadband business.
Right now the FCC is weighing whether to effectively grant local governments authority to become broadband Internet service providers by eliminating state laws that restrict such operations by local governments. In addition to promoting government-owned communications networks, the FCC is considering whether to grant funds to non-profit electric cooperatives through rural broadband experiments it will be conducting. The funds for such experiments are collected from consumers as Universal Service Fund surcharges imposed on their existing communications services. These surcharges already result in an additional 16% in fees added to the long-distance portion of consumers’ phone bills.

Differences aside, both proposals are problematic from the standpoint of government artificially inducing the creation of new marketplace competitors by virtue of regulatory favoritism or subsidies. It’s difficult to conceive of private investment and innovation thriving in any marketplace where governments either assume roles as competitors or finance new competitors. We shouldn’t expect it to be any different when it comes to the broadband services market. The FCC should instead keep sustainable marketplace investment and innovation as the focus of broadband policy.

In late July, the FCC launched a process for preempting state laws restricting local governments from owning and operating broadband Internet networks. Federalism principles establish states’ broad authority to define the powers of their political subdivisions. Yet FCC Chairman Tom Wheeler has insisted the FCC should eliminate approximately twenty states’ restrictions on government-owned networks. FCC preemption would effectively grant local governments a right to take on a new line of business as Internet providers.

FSF President Randolph May and I have firmly opposed FCC preemption of state law restrictions on government-owned networks. Through public comments to the FCC, op-eds, essays, and blog posts we have explained the constitutionally problematic aspects of FCC preemption. Moreover, undesirable inherent conflicts-of-interests and local taxpayer risks are also posed by federal agency encouragement of government-owned networks.   

Now it appears the FCC may want to grant to rural electric co-ops several million dollars in funds collected from consumers through universal service surcharges. The money would fund entry by rural electric co-ops into the broadband business. But in important respects, this constitutes another role-distorting proposal by the FCC. It is not the proper function of the FCC to create new competitors through subsidies or other artificial means. Capitalizing entities lacking any established operations or experience in the broadband market also risks wasting finite dollars collected from consumers.

As part of its universal service reform, the FCC has set aside $100 million for rural broadband experiments. The FCC is preparing trial auctions for prospective service providers to rural areas where incumbent local exchange carriers opt out of upgrading their systems to provide broadband services. Those trials will also inform future operations of the FCC’s new Connect American Fund (CAF).

The FCC’s Rural Broadband Experiments Order (2014) indicates that many rural electric co-ops have expressed interest in receiving funding in order to take on new lines of business as broadband providers. And in a speech posted in October, FCC Office of Strategic Planning Chief Jonathan Chambers appears to voice support for future FCC funding of broadband start-ups by electric co-ops.  
Rural electric co-ops are private, non-profit entities incorporated under state laws. They are owned by the electricity customers they serve. The National Electric Rural Cooperative Association indicates that its 905 co-ops serve some 42 million customers across 47 states. Apparently, many co-ops have middle mile fiber assets that are used to monitor their electric networks. It has been suggested by some that special funding could enable rural electric co-ops to build out new broadband networks, leverage their existing fiber assets, and thereby offer retail broadband services to rural consumers.
Rural electric co-ops aren’t government entities. However, as a structural matter, rural electric co-ops are rate-of-return monopoly providers of electricity. They are non-profit entities that typically receive subsidized loans from the federal government. And they typically have limited geographic footprints. The point here isn’t to criticize rural electric co-ops with respect to their electric service operations. Rather, the point is that rural electric co-ops operate for a specific purpose in a unique context. Competitive and regulatory dynamics facing the typically staid rural electric co-ops are materially different from those they would face in the dynamic broadband Internet services marketplace. They lack of business and operational experience in providing broadband Internet services. Extensive build-out would be needed to reach rural consumers with last-mile broadband service. These considerations should lead the FCC to think twice before capitalizing new and untried broadband ventures by rural electric co-ops.

For customers of rural electric co-ops, entry into the broadband services market involves significant investment and corresponding financial risk. If a subsidized rural electric co-op broadband venture fails, profound questions exist as to whether electric utility operations would be adversely impacted. Could a failed rural broadband experiment put a rural electric co-op on the ropes? Could electricity customers be saddled with higher charges to make up for shortfalls? Such has already happened in several high-profile government-owned broadband debacles.

For the FCC, the bigger fundamental question is about how best to ensure that finite dollars taken from consumers through USF surcharges – essentially taxes – are effectively allocated to help meet the goal of achieving universal broadband service. That money should be expended wisely to ensure cost-effective, sustainable broadband service. It stands to reason that a bigger bang for the buck would be achieved by directing CAF funds to existing providers of broadband who have both business knowledge and demonstrated competency in delivering broadband services in rural areas.

In sum, FCC policy should remain focused on fostering conditions for sustainable entrepreneurial investment and innovation in the broadband services marketplace. That means the agency should refrain from preempting state restrictions on municipal government provision of broadband services. And it also means the FCC should ensure that limited universal service funds are distributed only in a cost-effective manner to entities with demonstrated knowledge and ability to provide broadband services.