Universal Service

I agree with Seth Cooper that FCC Chairman Julius Genachowski deserves credit for implementing USF reforms, even if I would have gone further. Hope he sticks with them in the face of pressure.

Universal Service Reforms Must Continue To Be Implemented

In the 1996 Telecommunications Act Congress charged the FCC to administer the Universal Service Fund (USF) in a fiscally responsible manner. But the multi-billion dollar subsidy program is oversized and inefficient. And for consumers, the program is a costly burden. The system's heavy tab is stuck to consumers in the form of USF surcharges or de facto taxes tacked onto their monthly phone bills.

To its credit, the FCC, under Chairman Julius Genachowski's leadership, finally set about reforming things in its November 2011 USF Reform Order. The agency's comprehensive reform plans are intended to modernize USF and to inject some fiscal responsibility into the subsidy program. These new reforms offer a path forward for imposing limits on the program's size, curbing its waste and inefficiencies, and relieving consumers from burdensome surcharges or taxes.

The FCC's USF reforms deserve support and must be allowed to continue their course. This means resisting anti-reformer efforts to roadblock changes to the system. In order to have any hope of limiting subsidy spending, curbing waste, and giving financial relief to consumers, it is critical that these reforms be implemented without delay.

Over the years USF subsidies have snowballed, with annual subsidy distributions now surpassing $8 billion annually. As FCC Commissioner Robert McDowell has pointed out, "USF is larger than the annual revenues of Major League Baseball." Subsidies directed to carriers serving high-cost areas have increased in size from $2.6 billion in 2001 and to $4.5 billion in 2011.

In many cases, USF subsidies to rural carriers lack accountability. For instance, subsidies have been directed to multiple carriers serving the same geographic area. Studies indicate that dollars distributed to carriers for purposes of network upgrades, investment, and rate reduction have instead been directed to administrative expenses. And subsidies reimbursing capital and operating costs have failed to incentivize carriers to control capital expenditures or operate more efficiently. Despite these problems, snowballing subsidy dollars continue to roll to carriers with little discernible benefits for consumers.

But consumers are the ones facing the avalanche of USF surcharges that are, in effect, USF taxes. As I explained in a September 2011 blog post, "New USF Tax Hike Adds Urgency to Reform Effort," the rise in USF subsidy distributions corresponds with the rise in forced USF contributions from consumers. Consumers' monthly phone bills contain a USF surcharge or tax line item amount. And that amount has grown over the years. The surcharge or tax rate based on the long-distance portion of consumers' bills, for example, has risen from just over 6% in 2001 to nearly 16% today. (See chart below.) This growing USF surcharge or tax burden suggests that the system lost sight of those consumers who it ultimately intended to serve.

Finally, after years of kicking the can down the road, the FCC's 2011 USF Reform Order adopted a framework for modernizing and disciplining the system. Those reforms include a first-time budget to govern USF's "high-cost" fund and keep costs under control. The agency eliminated its identical support rule to stop duplicate subsidies to carriers serving the same areas. The FCC also established new rules regarding rate-of-return carriers serving high-cost areas, including a $250-per-line subsidy limit. And in transitioning to a broadband-centric world, the FCC is turning to market mechanisms. It plans to conduct reverse auctions for allocating support for service to certain high-cost areas. Many of these reforms will be phased in over time. And the FCC set up a waiver process to accommodate carriers demonstrating special hardship under the new rules.

These reform efforts are now being attacked from those bent on preserving the status quo. This shouldn't be surprising, but it is nevertheless disappointing. Huge amounts of money are at stake for carriers that have become reliant on annual subsidies. For example, the USF Reform Order points out that "[r]ate-of-return carriers’ total support from the high-cost fund is approaching $2 billion annually." In proposing its reforms, the FCC observed that USF subsidy mechanisms often gave carriers little to no incentive to improve operating efficiencies. Similarly, we should expect that carriers will have little to no incentive to see their subsidy amounts limited through reforms.

Moreover, attacks on USF reforms are far from compelling when those reforms are put into proper perspective. On the whole, the FCC's USF reforms are decidedly moderate. However important the nature of the FCC's USF reforms and however comprehensive their scope, the reforms stress stability and continuity. The FCC's USF Reform Order is not a slash-and-burn operation. The framework it sets out is primarily directed to sustaining existing levels of support while repurposing that support to reflect the technological and marketplace realities of wireless and broadband. In its USF Reform Order the FCC even stated that "[w]e expect rate-of-return carriers will receive approximately $2 billion per year in total high-cost universal service support under our budget through 2017." And as mentioned, many of the FCC's reforms are phased in.

At the Free State Foundation, we have advocated a more sweeping overhaul of USF. This includes placing hard caps on its high-cost fund and lowering those caps each year to ensure serious reductions in the size of the fund. In addition, we believe the FCC should establish a date-certain timeframe for sunsetting all high-cost subsidies to carriers. In our view, the FCC should transition USF to a model that provides subsidies directly to consumers most in need, not carriers. The Lifeline program for low-income consumers offers an example of how subsidies can be targeted to intended beneficiaries.

Instead of being attacked for destabilizing an overgrown, inefficient, and financially costly subsidy system, the FCC's USF reforms can be more justly criticized for not being reform-minded enough. Even so, the modest reforms that the FCC is advancing should provide a vantage point for reassessing USF's future direction as those reforms are implemented.

However far the FCC's USF reforms may be from the ideal world, the changes that the FCC has adopted deserve credit in the real world. Amidst enormous lobbying pressures, the agency has made significant strides in the direction of improving the USF regime. The USF Reform Order and the FCC's efforts to implement it are worth defending. And to ensure the ultimate success of USF reform, Congress and the FCC must see this current reform process through without interruption or delay.

Maryland Leads in Job Losses

Maryland has lost more jobs - over 10,000 - this year than any other state, according to federal government statistics. The Washington Times has the story here and the new Washington Free Beacon has a piece here.

Sadly, until Maryland changes course and adopts less taxing, less regulatory policies more in tune with those states that are growing jobs, including neighboring Virginia, Maryland will remain atop the leader board.

And this particular leader board - counting job losses - is not one a state wants to be on top of.

FCC Commits Double Fault in Tennis Channel Ruling

On July 25, 2012, Free State Foundation President Randolph May issued the following statement concerning the FCC's ruling that Comcast discriminated against the Tennis Channel with respect to its channel placement on Comcast's cable systems: 

"The FCC's action finding that Comcast discriminated against the Tennis Channel is just one more example of the agency's failure to conform to rule of law norms as it continues to engage in regulatory overreach. In this case, the FCC finds 'discrimination' even though Comcast carried the Tennis Channel when many other multiple channel programing distributors chose not to carry the channel at all. And Comcast distributed the Tennis Channel consistent with the way most other major MVPDs distributed it when they did choose to carry it.

The FCC's decision uses the cover of the malleable 'discrimination' standard to reach an arbitrary decision that, in its unpredictability, appears capricious. And, it does this in the context of a competitive video marketplace in which such micro-management of an MVPDs' programming decisions cannot be justified consistent with the First Amendment's protection of the free speech rights of the MVPD. By acting arbitrarily and capriciously in applying the 'discrimination' standard and by violating the First Amendment, the agency's regulatory double fault is no laughing matter. Rather, it is another example of the FCC's flouting rule of law norms in its decision-making."

FCC's Lifeline Reforms Should Keep Low-Income Consumers Connected

by Deborah Taylor Tate

The FCC is seeking public comment on TracFone's petition requesting that the FCC adopt a three-year Lifeline document retention requirement. The requirement would be added to the FCC's "full certification" mandate for ensuring low-income consumer eligibility for voice services through Lifeline. Concerns have been raised that full certification would be an ineffective check on fraud, waste, or abuse absent retention of records for inspection.

But a deeper set of concerns already surrounds full certification. The FCC's mandate may do more to keep many otherwise eligible low-income consumers from receiving Lifeline service than it does to combat misuse and abuse. Implementing a record retention requirement, however necessary to administer full certification, would simply add compliance costs to the already problematic full certification mandate.

This overlooked aspect to implementing full certification raised by TracFone provides yet another reason for the FCC to rethink its approach. The FCC should rescind full certification in favor of a simpler approach that better ensures low-income consumers most in need obtain and retain service. Or at least the agency should opt for postponement until full certification can be better implemented using a nationwide database.

In its February 2012 Lifeline Report & Order, the FCC adopted full certification as a measure to cut fraud, waste, and abuse in the Lifeline program. This essentially involves eligible telecommunications carriers (ETCs) corroborating a Lifeline subscriber's enrollment in other public assistance programs in order to qualify for Lifeline service. The FCC's Report & Order adopted a requirement that ETCs enrolling low-income consumers in the Lifeline program for voice services must access available state or federal social services databases to verify eligibility. Otherwise, ETCs must review would-be subscribers' documentation to verify their eligibility.

In blog posts from earlier this year, FSF President Randolph May and I explained why a full certification mandate for Lifeline eligibility will more likely result in otherwise eligible persons not signing up for service than in cutting waste, fraud, or abuse.

To briefly restate that case: Many states do not have accessible databases or workable arrangements in place with carriers to conduct such verification. In May and June, the FCC granted several temporary waivers from its full certification mandate on account of the incapability of many states and ETCs to comply with the agency's mandate. And many low-income consumers do not possess the documentation or means of transmitting such documentation to ETCs in order to enroll in Lifeline. In states that have previously taken a full certification approach to Lifeline there is evidence that low-income consumers who are intended beneficiaries of the Lifeline program never complete the process. This has meant denial of enrollment or halted service even where consumers have disclosed their name, address, date of birth, and part of their social security number.

Full certification will likely have the unintended consequence of keeping otherwise eligible low-income consumers from subscribing to Lifeline. The harm would be felt most by those who should be the focus of any universal service program. To this extent, full certification works at cross-purposes with what should be the future course for USF.

Lifeline should be the model for the future of the USF program. By targeting subsidies directly to those in financial need, Lifeline offers a more efficient approach to ensuring universal service than other, indirect subsidies. This targeted approach should eventually replace the billions of dollars in the high-cost fund and other USF subsidies now distributed to carriers. After all, there is little accountability or way of ensuring that those indirect USF subsidies to carriers are actually keeping the price of voice services down.

And those USF subsidies hit consumers hard. USF subsidies are funded by so-called surcharges – functionally the same thing as taxes – that voice subscribers pay as a part of their monthly bills. The current USF surcharge or "tax" rate that consumers are now assessed on the long-distance portion of their monthly bills is 15.7%. Reforms for cutting fraud, waste, and abuse in the Lifeline program are important. But implementation of the FCC's November 2011 USF Reform Order and forthcoming USF contribution reforms should be the agency's priority when it comes to cutting universal service costs and spelling relief for taxpayers.

In its May 30 petition, TracFone points out why mandating eligible telecommunications carriers (ETCs) to provide full certification without retaining documents necessary to ascertain consumer eligibility makes little sense. Absent document retention, a Lifeline full certification mandate amounts to an honor system approach as to whether ETCs check consumer documentation to verify eligibility. With only ETCs’ say-so to go on, the Universal Service Administrative Company (USAC) would be unable to conduct inspections to ensure that ETCs are actually complying with full certification. 

From an administrative standpoint, postponing full certification until a document retention requirement is added would better ensure that full certification serves its intended purpose. But there is a downside. ETCs would face additional costs in retaining such documentation, ensuring that consumer privacy is maintained, and making such documentation accessible for subsequent inspection. Those additional costs may be necessary for a functioning full certification process. But they add to the cumulative case against a full certification mandate for Lifeline service eligibility.

The FCC also has before it an April petition for reconsideration of its full certification mandate. The agency should rescind that mandate. Instead, the FCC can simply require that ETCs establish the Lifeline eligibility of low-income consumers by checking name, address, date of birth, and the last four digits of the social security number. At the very least the FCC can postpone full certification until a national database can be established to allow for a more efficient and streamlined method for verifying Lifeline eligibility.

New Competition, Old Rules, and the Unfree Marketplace

The Senate Committee on Commerce, Science, and Transportation will hold a hearing July 24 titled “The Cable Act at 20.” According to the press notice, "the Committee will consider the impact of the Cable Television and Consumer Protection Act of 1992 on the television marketplace and consumers twenty years after its passage."

This is all well and good. Hearings are fine.

But if you want to know how much the video marketplace has changed since the Cable Act was enacted 20 years ago, you could just take a walk with me around my neighborhood. You would see both DirecTV and Dish satellite antennas perched on many rooftops, and, on almost any day, there is a good chance you would see either, or both, Comcast or Verizon FiOS trucks as well. Both FiOS and high-speed cable services are available, and I know neighbors that have switched back and forth. And, of course, if you were invited inside a home or two, or sat down at the neighborhood Starbucks, you might catch a glimpse of the latest TV episodes online on all the iPads or other tablets, and even on what we use to call "cell phones." Or you might see Starbucksters streaming videos from the gazillions available on YouTube and other online sites.

If you prefer not to take a stroll in my neighborhood, you can review the FCC's Fourteenth Video Competition Report, just released this past Friday. I have only had a chance to read the executive summary and introduction at this point, but this much is clear. The report documents that marketplace has changed radically since the Cable Act was adopted in 1992. Then, the focus was on preventing cable operators from abusing what was seen as their dominant market power in what we call the multi-channel video programming distribution ("MVPD") market.

Whereas in 1992, the cable operator often was the only MVPD choice a consumer had available, the FCC reports that, at the end of 2010, 65.7% of American homes had access to three MVPDs, and 32.8% had access to at least four different MVPDs. In other words, over 98% of American homes had access to at least three or more MVPDs, each offering hundreds of channels.

Simply put, this is a far cry from the marketplace environment that existed when the Cable Act was adopted 20 years ago.

I'm sure the hearing will feature much back-and-forth regarding the must carry/retransmission consent regime which was an important element of the 1992 Cable Act, probably with rhetoric from both broadcasters and MVPDs concerning who is to blame for certain recent blackouts during which consumers were denied access to certain programs.

I don't want to rehash here my own views on this subject, except to say this: I find the broadcasters' oft-repeated claim that retransmission consent negotiations take place in a "free marketplace," or that these are "free market" negotiations, highly problematic. The truth is the negotiations take place in a context with a decades-old regulatory overlay that obviously impacts the bargaining that otherwise would take place in a truly free market.

In advance of tomorrow's hearing, I am happy to refer you to a blog, "A Truly Free Market TV Marketplace," I published in March of this year which I have pasted in below. And the blog has a link to a still earlier Perspectives piece, "Broadcast Retransmission Negotiations and Free Markets," I published in October 2010.

In closing, two closely related points worth emphasizing: I am not suggesting that more FCC regulation is needed to remedy whatever problems may exist with respect to the present must carry/retransmission consent regime. Quite the contrary. What is needed, as explained below, is for Congress to adopt legislation along the lines of the  the deregulatory "Next Generation Television Marketplace Act" introduced in the Senate by Sen. Jim DeMint and in the House of Representatives by Rep. Steve Scalise.

The DeMint/Scalise bill woud get rid of all the protectionist video regulations enacted during a now bygone era. Whatever consumer protection justification these regulations may have had when adopted no longer exists. Indeed, consumers would be far better served by allowing the now demonstrably competitive video marketplace to function without government intervention.


This is the direction that ought to be the focus of the Congress. 

Friday, March 30, 2012

A Truly Free Market TV Marketplace

The American Conservative Union is perfectly free, of course, to take whatever public policy positions it wishes to take. But it should not feel free to suggest a marketplace is free when, in fact, it is heavily regulated. That is what the ACU has done in a letter opposing the deregulatory "Next Generation Television Marketplace Act" introduced in the Senate by Sen. Jim DeMint and in the House of Representatives by Rep. Steve Scalise.

As I said in a blog shortly after its introduction, the Next Generation Act would "eliminate the obsolete regulatory regime in which the government requires that multichannel video operators 'must carry' certain kinds of channels with particular kinds of program content, restricts the number and kinds of media outlets that may be commonly owned, and establishes a compulsory license regarding retransmission of certain kinds programming by cable operators, all the while offending free market and free speech principles."

Indeed, the DeMint-Scalise bill, premised on the fact that the video marketplace now is indisputably competitive, is so consistent with free market principles that the blog in which I singled it out for special mention was lovingly entitled: "Hayek, Liberty, and the Communications Policy Reform Agenda."

The ACU objects to the fact that the Next Generation Act would eliminate the "retransmission consent" regime in which cable companies and broadcasters negotiate over the right of the pay-TV providers to use the local broadcaster's signal – assuming the broadcaster has not exercised its statutory "must carry" right to elect to have the cable operator carry its signal without compensation. It is true that there is an element of a market negotiation in the current retransmission consent regime, which is why, I suppose, that the ACU calls it a "marketplace." But in light of all the various legacy laws and regulations that together overlay the video marketplace – must carry, network non-duplication and syndicated exclusivity, compulsory licensing, and others -- the retransmission regime operates in the overall context of an "unfree" market.

I explained all this back in October 2010 in a Perspectives piece entitled, "Broadcast Retransmission Negotiations and Free Markets," and the Mercatus Center's Adam Thierer also did a very nice job of doing so in his blog posted yesterday.

One statement in the ACU letter bears particular mention because it gets to the heart of the matter. The ACU says, "[b]y stripping away the right to compensation for the use of the signal the government would be tipping the scales heavily to the side of the pay-tv companies." This is not true, of course. If the Next Generation Act were to be adopted, all of the legacy – and, now, hopelessly outdated – regulations, including the compulsory license that benefits cable companies, would be eliminated. Broadcasters and pay-TV providers then would negotiate for carriage rights in a true free marketplace. Broadcasters would, of course, continue to be paid for carriage of their signals – unless they choose to withhold the carriage rights because they don't like the amount of compensation offered.

In my October 2010 Perspectives piece I said this:

"At the Free State Foundation, we aspire to play second-fiddle to no one in favoring unfettered bargaining between private parties in a true competitive, free market context. Private bargaining, in which the parties know their own interests, and can contract freely to place a market value on their interests, benefits consumers more than a regime in which government substitutes its judgment for that of the private parties and handicaps the negotiations. But, at FSF, we know a free market when we see one. And under the existing legal and regulatory regime, retransmission consent negotiations simply don't take place in a free market setting."

Because I know a free market when I see one, I commend Senator DeMint and Rep. Scalise for introducing the "Next Generation Television Marketplace Act." The bill certainly represents the direction in which policy needs to go.

Off to a Good Start, Speechwise

FCC Commissioner Ajit Pai gave his first significant speech today in Pittsburgh at Carnegie Mellon University, and there is much in this maiden address to like. The title, "Unlocking Investment and Innovation in the Digital Age: The Path to a 21st Century FCC" sounds the right note, and the address itself contains some good substantive ideas that deserve serious attention. I encourage you to read the speech, and especially to consider the sections concerning removal of barriers to infrastructure investment and expediting the process of repurposing spectrum for mobile broadband.

In my view, there is much more that needs to be done, of course, to reform our nation's communications laws and policies -- and to reform the FCC itself -- than what Commissioner Pai tackles in his maiden speech. But Rome wasn't built in a day, and the FCC won't be reformed overnight on the basis of a good speech. The real work is in the follow-up and tough votes.

But, congratulations to Commissioner Pai in getting off to a nice start in traveling down the reform road.

Maryland Must Make Its Business Climate More Competitive

In Volume 2 of his Law, Legislation and Liberty trilogy, economist Friedrich Hayek explained that the everyday term "economy" doesn't adequately encapsulate the dynamics of functioning free markets. Hayek described "the order brought about by the mutual adjustment of many individual economies in a market." And he used word "catallaxy" to define this order of competing economies.

"Catallaxy" never captured public consciousness, of course. But the idea that economic competition takes place not only within particular regions or markets but also between different markets surely resonates with us. Living, as we do, in a Union of 50 states, we recognize that states compete with one another for opportunity, jobs, and business enterprise. A state's quality of life depends on its maintaining an economy that can effectively compete with the other 49 states, with a state's economic competitiveness vis-à-vis its immediate neighbors an imperative.

Now a special report just issued by CNBC offers Maryland a timely reminder about the state's pressing need to boost its business-friendliness and overall economic climate. In "America’s Top States for Business 2012," CNBC placed Maryland at #42 in "Cost of Business." Maryland also ranks #43 in "Cost of Living," making it the 8th most expensive state to live in. 

CNBC ranks Maryland higher according to some other important indicators. But for business start-ups or existing enterprises looking to grow, bottom-line business costs are a critical determinate of where to locate or migrate operations. Moreover, where Maryland's score fares better, neighboring Virginia scores better still. Maryland's #24 ranking in "Business Friendliness" pales next to Virginia's #3 ranking.

CNBC's Special Report should clue Maryland policymakers to the work they have cut out for them. As we've blogged about previously, steps for Maryland to improve its economic climate and attract new jobs and business opportunities include: getting its continuing budget deficit and public pension liability problems under control, reducing its business tax rate to more competitive levels, avoiding new taxes and regulations that punish technology and entrepreneurship. Otherwise, the best economic opportunities will take place outside of Maryland's borders.

"Special Access" Is Not A Dirty Word

by Deborah Taylor Tate

Interesting how some phrases gain a negative connotation. "Special access," a telecommunications pricing structure which dates back to the original 1984 AT&T divestiture, is one of those phrases. The fact that special access – essentially dedicated private lines – was devised a quarter century ago during one of the largest divestitures in history is probably an indication that the legacy service shouldn’t be so controversial in today's multi-platform, innovation rich, technological age. However, "special access" has been hijacked by some pro-consumer groups seeking to impose government regulation even in the midst of this competitive explosion.

Just take a look at what special access really is used for – almost three decades later – and I bet you will agree the service is not only positive but critical to our communications infrastructure and sometimes even our lives.

As telecommunications moved from the original monopoly environment (think Ma Bell) to a much more competitive arena, communications services began to be provided by various types of entities and players. Originally, new competitors secured market entry by hand-picking lucrative business customers. Soon, a myriad of government-developed regulatory machinations sprung up around special access.  From allowing competitors to use monopoly lines and facilities at discounted prices to allowing mere "reselling" of services with an authorized profit, baffling rules and regulations were later developed to assist in meeting the goal of "competition" in the "new" Telecommunications Act of 1996.

As we all know, competition can and frequently does result in lower prices. Competition can also mean a choice of goods that are priced differentially, with consumers making decisions based on their particular needs and various price points. For the simplest example, look at automobiles. You can buy a Prius and save money on gas but not necessarily on the sticker price. You can buy an older used car or a brand new state of the art luxury vehicle. In each example, the consumer weighs the benefits and the price and makes the buying decision, not the government.

With the explosion of the digital age, suddenly consumers had more abundant choices in their telephony services.  As communications became more critical and more industry sectors relied more heavily on new and innovative communications services, businesses required more personal attention and security. Inevitably, some businesses demanded dedicated lines.

Think about how the healthcare sector has progressed, due in large part to the innovations in information and communications technologies. A huge institution doing global research, such as Vanderbilt University, wants to contract for specific bandwidth, data speeds and extremely secure lines. This might be used for IP-protected research among faculty, shared medical research with other institutions, or even storage for huge volumes of patient information. Not to mention the requirements for robust video in performing remote surgery or remote imaging review by specialists from another state, or another country. Each of these services requires, and the customer – Vanderbilt – demands, high levels of stability, safety and security. None of us wants latency to occur during a surgical procedure or a diagnosis to be impossible due to a nebulous image.

Thus, the phrase "special access" grew in import. Certainly, it grew in significance for healthcare providers, but also for many other industries, from financial institutions to auto makers. Most of us would agree this was a very positive turn of events and a phrase that merely reflected its definition: providing certain access in special circumstances.

However, some competitors used this phrase as a way to exact even more government intervention and attempts to "regulate" what and how private enterprises like telecommunications companies could contract with large businesses with specific communications needs.

At the same time, these competitors refused to provide information concerning customer locations served and number of customers served, or their own pricing or tariffs. And the government thus far has not required them to do so. Again, in many cases, these competitors were merely "riding" on the same wires that the phone company had built, adding little or no facility investment of their own.

Now, even in this digital age of striking innovation and substantial investment by broadband companies – well over  $300 billion investment in the last ten years – new and innovative technologies across wireless platforms, and even satellite delivery mechanisms, these same tired decades-old arguments from the 80's are resurfacing. And government interference and regulation continue to raise costs, which are ultimately passed on to the consumer.

And, if incumbents’ prices are forced down by such interference and regulation, the development of further competition in markets which already support competition to some extent could be forestalled.

I don't know about you, but I think that the Vanderbilts out there, as well as our nation's small business owners, are smart enough to make their own decisions about their communications needs and services, without government bureaucrats in the middle.

And, whether you are a doctor, a patient, or a world-class researcher, special access sounds like a pretty good thing to me.