Subsidizing monopolies

All the FCC Commissioners testified before Congress yesterday.  No, I didn't listen to it.  But I am scanning their statements to see if there's anything important.

First, of course, the most important question: Did they capitalize the "R" in "E-Rate"?  Well, it turns out only Commissioner O'Rielly used the word.  He did capitalize!

So what did they say about the E-Rate?  Not much obviously.  Is that a bad thing?  Part of me just wants Congress to forget all about our little program.

Chairman Pai:  While the Chairman did talk about the Universal Service Fund, and said the digital divide was a top priority, he focused on on the Connect America Fund and mentioned the Rural Health Care Program.  The only statement I found that concerns the E-Rate:  "...we developed a reorganization plan to create a Fraud Division within the Enforcement Bureau...to combat USF fraud...."  Good.  Stay focused on fraud.  Because most improper payments are the result on unwitting applicants getting snared by the huge, secret, nebulous and ever-shifting rules of this program, and don't benefit anyone personally.  Better to focus on people intentionally taking improper payments for self-enrichment.

Commissioner O'Rielly: Anybody want to guess?  Yup, overbuilding.  This time, he takes his complaint further: "providers serving hard to reach areas can face serious financial difficulties if a new government-subsidized provider 'competes' to serve existing customers—or worse—takes only the most highly profitable customers.... It recently came to my attention that new E-Rate-subsidized fiber networks were overbuilding local USF-funded Texas broadband providers and stealing their core anchor customers. By manipulating the contracting process to favor the bids of particular providers or self-provisioned service, some local school districts have been actively undermining local USF-supported providers’ existing investments, and as a result, making it even more difficult to serve surrounding communities where some households may lack any Internet access at all."  Wow.  Let's unpack that.

" a new government-subsidized provider": Yes, the new provider benefits from the E-Rate subsidy, but the existing provider benefits from the E-Rate subsidy and the CAF subsidy.  So it's a government-subsidized provider winning a bid over a doubly-government-subsidized provider.

" 'competes' to serve existing customers": Yup, competes.  The Form 470 process does increase prices and reduce flexibility for applicants, but it can create competition.  And clearly this whining is coming from someone who lost a competition.

"takes only the most highly profitable customers": I think of this as Ma Bell's Lament.  My dad worked for Ma Bell, and when they lost their monopoly, he said that since competitors would skim the profitable business (long distance and business local), Ma Bell would have to raise rates on residential local service.  He wasn't wrong, but....  Sucks when your monopoly gets taken away.

Wait a minute, though.  Take a step back.  "most highly profitable"?!  Shouldn't LCP (Lowest Corresponding Price) guarantee that school districts are the least profitable customers?  I know LCP isn't enforced, but should a Commissioner be admitting that to Congress?  And LCP aside, I object to the idea that the cost of bringing service to remote areas should be funded by overcharging school districts.  Why are you trying to make the E-Rate fund that service?  That's the job of the High Cost Fund.  And why aren't Connect America Fund projects required to serve surrounding communities?

"manipulating the contracting process to favor the bids of particular providers": If the Commissioner has evidence that an applicant's procurement has not been fair and open, he should Code 9 that applicant. [Whistleblower calls used to be called "Code 9" calls, because if you called in and said "Code 9," you could be anonymous.  Alas, the Client Service Bureau has no sense of tradition, so if you want to report a program violation today, you press 3.]  Except, you know what?  Self-provisioned fiber FRNs are essentially pre-Code-9ed; the procurement process is scrutinized more closely than it would be under a typical Selective Review or Audit.  If, on the other hand, the Commissioner only has a complaint by a telecom company with no evidence of malfeasance, he should not say such things to Congress.

"favor the bids of ... self-provisioned service": Has the Commissioner seen what applicants have to go through to get approval for self-provisioned service?  The system is set up to favor lit fiber over leased dark fiber, which is favored over self-provisioned.  And why would an applicant want to favor self-provisioned?  E-Rate unpleasantness aside, self-provisioning projects are a tremendous pain in the filament.  The only reason to go through the hassle of laying your own fiber is to save money.

"some local school districts have been actively undermining local USF-supported providers’ existing investments":  Does the Commissioner have evidence that districts are trying to undermine someone's investment?  What possible motivation could they have for actively undermining a telecom company?  I'll grant that the provider with existing fiber may have been counting on charging a lot of money to the school district, but the district is not seeking out lower prices because it wants to undermine anyone.

"making it even more difficult to serve surrounding communities where some households may lack any Internet access at all": So taking away one customer makes it more difficult to serve other customers?  Hmm.

Perhaps the Commissioner is right and an unscrupulous school district (or, based on the questions in his letter to USAC on the subject, more likely a consortium of districts) has colluded with a service provider to fix a procurement and wastefully install more fiber on poles where fiber already exists.  If that's true, the Commissioner should give it to the local Attorney General, not complain to Congress about it.

Or perhaps a service provider got CAF funding to lay some fiber in a remote area, with a business plan based on monopoly pricing, and another company came in and undercut them.  Speaking as a small business owner, I completely agree that competition sucks, and it makes it much harder for me to bring E-Rate to all applicants.  Speaking as a taxpayer, though, I'm glad that no one has a monopoly on E-Rate consulting.  (OK, if I had a monopoly, I would be a beneficent overlord and the program would be much improved, but that's an exceptional case.)

Or perhaps the applicant consortium was larger than the footprint of the already-subsidized existing carrier's monopoly, which again messed with the business plan.  I have certainly pointed out in the past that large consortia can limit competition., and suggested that applicants "take a close look at whether that consortium is really going to save you money."

Whatever the case, it's not an issue for Congress.

And it doesn't strengthen the Commissioner's "humble request ... that Congress consider the FCC’s Universal Service Fund (USF) as a primary means to distribute new funding" in order to avoid "wasteful and duplicative spending and adverse consequences...."  I mean, even if his example were valid, he's basically saying: "We need to keep all the funding in the USF so that we don't see the kind of duplicative and wasteful spending that we're currently seeing in the USF."

But the Commissioner did get the most important thing right: the big "R" in "E-Rate."