USDA report on rural broadband

This report form the US Dept of Ag. seems as though it will be worth reading. I suspect that the timing of the report is no accident, coming as it does as the FCC is in the midst of developing a broadband policy for the US. From the report summary:

Analysis suggests that rural economies benefi t generally from broadband availability. In comparing counties that had broadband access relatively early (by 2000) with similarly situated counties that had little or no broadband access as of 2000, employment growth was higher and nonfarm private earnings greater in counties with a longer history of broadband availability.

By 2007, most households (82 percent) with in-home Internet access had a broadband connection. A marked difference exists, however, between urban and rural broadband use—only 70 percent of rural households with in-home Internet access had a broadband connection in 2007, compared with 84 percent of urban households. The rural-urban difference in in-home broadband adoption among households with similar income levels reflects the more limited availability of broadband in rural settings.

Areas with low population size, locations that have experienced persistent population loss and an aging population, or places where population is widely dispersed over demanding terrain generally have diffi culty attracting broadband service providers. These characteristics can make the fixed cost of providing broadband access too high, or limit potential demand, thus depressing the profitability of providing service. Clusters of lower service exist in sparsely populated areas, such as the Dakotas, eastern Montana, northern Minnesota, and eastern Oregon. Other low-service areas, such as the Missouri-Iowa border and Appalachia, have aging and declining numbers of residents. Nonetheless, rural areas in some States (such as Nebraska, Kansas, and Vermont) have higher-than expected broadband service, given their population characteristics, suggesting that policy, economic, and social factors can overcome common barriers to broadband expansion.

Network economics and universal service

I found this item over at CircleID interesting. In it, the author discusses the penalty of non-inclusion (see the graph below) and uses it to make an argument in favor of universal service.



This brought to mind some of Eli Noam's seminal work (this article, for example), in which Noam outlines the incentives people have to leave a universal network (see the graph below, from the paper). We are thus left with conflicting incentives, which serve to underscore the difficulties in achieving universal service.

Audit of US "High Cost" Universal Service program

This item, the report of an audit of the US "High Cost Support" program, is a bit obscure and technical, but nonetheless points out some of the problems with centrally funded and managed universal service programs. In the executive summary, the document reports the following:

To assess compliance and risk, a stratified random sample of 390 service area providers (represented by unique Study Area Codes, or "SACs") was drawn and compliance attestation examinations/audits were completed. Audit data were provided for 384 auditees. Under IPIA standards, a program is "at risk" if the erroneous payment rate exceeds 2.5% and the amount of erroneous payments exceeds $10 million. The estimated erroneous payment rate for this HC audit cycle was 23.3% and the margin of error was 2.3% at the 90% level of confidence. The statistical estimate of erroneous HC payments during FY 2006 is $970.3 million. The rate of overpayment out of total disbursements was 22.8% with a margin of error of 2.3% at the 90% confidence level. As a consequence, statistical results from this sample indicate that the HCF USF program is "at risk" as defined by the IPIA.

Elsewhere in the report (p. 21), this was elaborated further:

The rate of improper over payment is 22.8%, and the proportion of improper over payments out of total improper payments in 98.2%.

So, basically, when there was an improper payment, it almost always was an over payment (Are you surprised?). We (users of the telephone network) paid almost 23% more than we needed to. Put another way, almost 1/4 of the collected funds (approximately $4.4 billion in FY07) were over payments!

The US Inspector General, in their report to Congress, noted

The results from Round 1 and the preliminary results from Round 2 have not lessened our concern about the possibilities for fraud, waste, and abuse in the Commission's USF programs as administered by USAC.

Thus, this is an ongoing problem that hasn't (apparently) gotten any better since the last audit!

Universal services and eligible services

The three major issues in a universal service program are determining the funding mechanisms, identifying which carriers are eligible to receive support (for centrally funded programs) and identifying the services to be included in the "universal service" definition. The US FCC has recently defined eligible services for one of its universal services programs -- the schools and libraries program (see this for the details).

GAO Report on High Cost Universal Service Program

You might find this report of interest. The short story is:

The high-cost program’s structure has resulted in the inconsistent distribution of support and availability of services across rural America. The program provides support to carriers in all states. However, small carriers receive more support than large carriers. As a result, carriers serving similar rural areas can receive different levels of support. Currently, the high-cost program provides support for the provision of basic telephone service, which is widely available and subscribed to in the nation. But, the program also indirectly supports broadband service, including high-speed Internet, in some rural areas, particularly those areas served by small carriers. The program provides support to both incumbents and competitors; as a result, it creates an incentive for competition to exist where it might not otherwise occur.

There is a clearly established purpose for the high-cost program, but FCC has not established performance goals or measures. GAO was unable to identify performance goals or measures for the program. While FCC has begun preliminary efforts to address these shortcomings, the efforts do not align with practices that GAO has identified as useful for developing successful performance goals and measures. For example, FCC has not created performance goals and measures for intermediate and multiyear periods. In the absence of performance goals and measures, the Congress and FCC are limited in their ability to make informed decisions about the future of the high-cost program.

This report is highly critical of the FCC and its management of these monies. There is no statement on the FCC Website (that I have been able to find, anyway).

FCC FSJB recommends funding broadband from the USF

Speaking of broadband, there is some interesting news on this front. The Federal-State Joint Board released this report recently. This group advises the FCC, in this case, on universal service policy. Thus, this report outlines recommended decisions that the FCC may or may not adopt. Responding to criticisms of the USF, the joint board recommended several actions:

• Change funding structure to reduce burden on consumers
  
• Change high cost program in several ways, including the introduction of three "funds": Broadband, Mobility and Provider of Last Resort (POLR)
  
• Explore the use of reverse auctions to distribute funds
  

In doing this, the board is arguing that access to basic mobile voice and access to "broadband" is part of the universal service definition that should be funded.
They recommend that the broadband fund be approximately US$300 Million per year. They stop short of defining what they mean by "broadband" (which is not a trivial omission, since it affects cost in a significant way).

NGN in New Zealand

Last week, New Zealand's Ministry of Economic Development released this document, which, basically, is an investigation into how universal service will be provided in that country.

According to this article this investigation was prompted because

... the PSTN network and so-called plain old telephone service (POTS) will be discontinued came in a document from the country's Ministry of Economic Development released last Thursday. Ostensibly, the document does no more than request comments about what the effect of the NGN plans will be on Telecom New Zealand's (TNZ) so-called "Kiwi Share Obligations" (KSO) - the requirement that the carrier provide basic phone service to all residents of the country, more formally called the Telecommunications Service Obligations (TSO). The KSO, the Ministry notes, was of "crucial importance" when TNZ was privatized in 1990.

The issue now is how TNZ will fulfil the KSO once its planned NGN is in place, and in order to discuss that - public comments are being solicited until Sept. 28 - it was obviously necessary to outline the issues. The biggest issue is turning out to be that, once TNZ converts over to an all-NGN, line-powered telephones won't work any more using power from the phone line because NGNs don't dish up the voltage that's standard on POTS.

Are we facing the same debate in the US as Verizon and AT&T's efforts to replace the copper local loop with fiber? Will New Zealand once again be leaders in telecom policy?

Universal service funding

While the objectives of "universal service" are often hard to argue with, implementation is often problematic. The approach taken by the US is to create a Universal Service Fund (USF) from taxes paid on certain telecommunications services, and then to distribute these funds to "eligible" carriers. This story illustrates how problematic this approach is:

Over the past four years, there has been nearly a tenfold increase in government-ordered subsidies paid to a few "competitive" providers - cellular phone companies paid by the fund to offer service in rural areas where an existing carrier already receives a subsidy.

-- snip --

Critics say the cellular companies are enjoying a windfall because their networks are much cheaper to build and maintain than miles of wires and telephone poles. They say logic dictates the subsidy should be based on actual cost.

Making the system more expensive, companies are compensated on a per-subscriber basis. Each time a cell phone company signs up a new customer, it collects a subsidy.

If the customer keeps his land line, the fund pays a subsidy to both carriers. If the customer opts to drop his land line and keep his cellular phone (the goal of competition), the per-subscriber subsidy for the land line carrier actually goes up, keeping the overall subsidy unchanged. In some high-cost areas, the subsidy can amount to several hundred dollars per customer per month.

Since the cellular competitor's rates are based on the incumbent's per-customer subsidy, the cell company gets more money, too. And so does every other cellular competitor that does business in the area. In some places there are two, three or more.

Do you think that this approach is viable, with corrections? If so, what should the corrections be? What alternatives to a USF do you think are better?