Monday, February 09, 2015

Strong Safeguards of Scarce Funds Should Govern FCC Broadband Experiments

The Federal Communications Commission has a paramount duty to protect consumers. In fulfilling that duty it must not squander Universal Service Fund “surcharges” imposed on consumers’ telephone bills that have the same economic effect as taxes. Like tax dollars, consumer surcharges must be used efficiently and not put at unnecessary risk.

But the FCC is considering whether to waive important financial safeguards of its rural broadband experiments program. Seven rural electrical co-operatives hand-picked by the FCC to become broadband service providers with the aid of federal subsidies want letters of credit rules watered down. Those subsidies are funded by de facto taxes on voice consumers. Just last year, the FCC deemed establishment of strong safeguards to protect against misuse of funds its “paramount objective.” The FCC should hold fast to that objective by maintaining strong letters of credit requirements.

The Rural Broadband Experiments program is one aspect of the Connect America Fund’s Phase II plan for bringing universal service into the broadband era. All universal service programs are ultimately funded by voice consumers. The 16.8% line-item surcharge on the long-distance portion of consumers’ monthly bills effectively operates like a tax. The FCC sets the surcharge rate and oversees use of the surcharges collected.

Through its Rural Broadband Experiments program the FCC is slated to give nearly $40 million dollars drawn from voice consumers to rural electrical co-operatives. The money is to fund the co-ops’ entry into the broadband business. 

Yet, as I explained in a prior blog post, the “FCC Should Not Use Scarce Universal Service Funds to Subsidize Unproven Start-Ups.” (Also see FSF President Randolph J. May’s follow-up blog.) That post drew upon a basic principle: it is not government’s job to create new businesses using consumers’ hard-earned dollars. Granting special favors to would-be business entrants distorts the role of government as a neutral enforcer of the law. Giving favored interests start-up money to move into new lines of business similarly undermines government impartiality.

In the time since my November blog post, the FCC decided to fund new co-op ventures in broadband. Now what’s done may be done. But another basic principle which that blog drew upon still holds: government must protect consumers by carefully using scarce funds. The FCC must steadfastly adhere to this principle in implementing its Rural Broadband Experiments program.

Right now the FCC is weighing whether it will significantly weaken financial safeguards for funds to be doled out for rural broadband experiments. An alliance of rural electrical co-ops is seeking a waiver from rules requiring letters of credit (LOCs) that were established by the FCC in its Rural Broadband Experiments Order (2014).

The Order sensibly required that recipients of funds for rural broadband experiments obtain letters of credit from banks. LOCs are intended to ensure that the full amount of disbursed funds will be returned to the FCC should the recipients fail to use those funds as pledged or otherwise fail to meet build-out and service obligations.

The FCC’s Order emphasized the financial responsibility and security reasons for its rules: 
LOCs are an effective means of securing our financial commitment to provide Connect America support. LOCs permit the Commission to protect the integrity of universal service funds that have been disbursed and immediately reclaim support that has been provided in the event that the recipient is not using those funds in accordance with the Commission’s rules and requirements to further the objectives of universal service. Moreover, LOCs have the added advantage of minimizing the possibility that the support becomes property of a recipient’s bankruptcy estate for an extended period of time, thereby preventing the funds from being used promptly to accomplish our goals. These concerns are relevant to both new entrants and established providers.
Our paramount objective is to establish strong safeguards to protect against misuse of the Connect America Fund. We conclude that requiring all entities to obtain a LOC is a necessary measure to ensure that we can recover support from any recipient that cannot meet the build-out obligations and public service obligations of the rural broadband experiments.
The FCC is now taking public comments on the waiver petition filed by the rural electrical co-ops. In their petition, the co-ops contend that banks are unwilling to extend them LOCs on terms required by the FCC. They also claim the FCC’s rules are too financially burdensome.

But the need to protect limited funds from risk should keep the FCC from cutting corners on financial safeguards. The FCC should keep its focus on its paramount objective of safeguarding scarce USF funds against misuse. That certainly means being mindful of the reasons for LOC requirements set out in the Rural Broadband Experiments Order.

Without fixating on specific dollar figures or timeframes that should govern LOC requirements, a few more considerations weigh against rolling back safeguards. First, keep in mind that the FCC is funding experiments. Typically, market investors and entrepreneurs bear the risk of financial mishaps and failures. Here, however, funds collected from consumers are devoted to entrants lacking business and technical experience in providing retail broadband Internet services. Rural electrical co-ops are rate-of-return monopoly service providers that have historically operated in a market environment and line of business quite different from broadband. The highly experimental nature of subsidizing co-op entry into broadband services requires protections against the heightened risk that carries.

Second, prior occasions in which federal agencies allocated limited resources to entities lacking adequate financial and technical capabilities resulted in costly problems. For instance, when the FCC selected certain “designated entities” for favored treatment in its PCS spectrum auction, valuable spectrum allocated to NextWave went unused for years as NextWave’s bankruptcy battle played out in the courts. More recently, the Rural Utility Service’s rural broadband loan program has come under scrutiny for inadequate safeguards. A May 2014 report by the Government Accountability Office, for example, ascertained that of 100 loans approved since 2002, “43 loans are no longer active, either because they have been rescinded or are in default.” The inactive loans constituted 54% of the approximately $2 billion dollars awarded by RUS up to that time. Both episodes serve as reminders of the need for safeguarding rural broadband experiment subsidies.

And third, any unwillingness by banks to provide financial security to rural electrical co-op broadband experiments through LOCs suggests unnecessary risk and lack of feasibility in such undertakings. If banks are unwilling to bear the financial risk of failure by co-op broadband experiments, why should voice consumers be made to take on that risk? When in doubt, safeguarding scarce funds for the benefit of consumers takes priority over inconvenience to subsidy recipients.

In administering the Rural Broadband Experiments program, the FCC must continue to ensure scarce funds collected from consumers are used efficiently and protected from unnecessary risk. The FCC should adhere to its stated “paramount objective” by maintaining strong safeguards to protect those funds against misuse. It should refuse to cut corners on its letters of credit rules.