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Monday, July 01, 2019

Schools should subsidize rural broadband?

As promised, I'm going to take a look at Commissioner O'Rielly's comments about overbuilding from his speech to the Hudson Institute.

First, kudos on "pernicious consequences."  That is just a delightful phrase.

While we're side-tracked onto my preoccupation with language, in the official transcript of the speech, the Commissioner capitalizes the "R" in "E-Rate."  Bravo!

Back to the pernicious overbuilding.  I've already given my views on overbuilding, but let me take a look at the Commissioner's statements in this speech.

OK, first off, in my-speak (as opposed to "Orwellian-speak"), allowing service from someone other than the incumbent provider doesn't just "promote 'greater competition'"; it "allows competition."  Allowing bids from service providers who do not have existing fiber does not "enable artificial competition"; it creates a level playing field where existing providers must compete for business, instead of being given a monopoly.

Here are the Commissioners objections to allowing competition:
  1. it does not help consumers
  2. it does not promote long-term competition
  3. it undermines private incentives to invest in and upgrade broadband networks
  4. it distorts competitive outcomes
  5. it makes it more expensive to connect Americans living in the most remote areas
 To which I say:
  1. It helps the schools and libraries who are able to get service at a lower cost.
  2. So having two providers with fiber in an area does not promote long-term competition?  Restricting fiber to a single provider is somehow better for competition?  I don't think so.
  3. What incentive does a monopoly have to invest in and upgrade networks?  Meanwhile, a new service provider will have to invest more than an existing provider, so in the big picture, we get more investment when we don't protect the existing provider.
  4. It doesn't "distort" competitive outcomes, it "allows" competitive outcomes.  You can't have a competitive outcome if you restrict the ability of competitors to enter the market.
  5. Connecting private individuals is not the goal or the responsibility of the E-Rate.  The High Cost program needs to take care of that.
"Due to a loophole in the E-Rate rules, school district consortia had manipulated the competitive bidding process to ensure that funding went to build new wide area networks covering entire school regions...."  I have long been saying that consortia do not necessarily lower costs, but calling consortia a "loophole" is ridiculous.  The original FCC Order implementing the Universal Service provisions of the Telecommunication Act of 1996 says, "we should encourage schools and libraries to aggregate their demand with others to create a consortium with sufficient demand to attract competitors and thereby negotiate lower rates or at least secure efficiencies, particularly in lower density regions." (paragraph 476). More recently, the FCC took steps to favor consortia in the Seventh Report and Order (paragraphs 168-182)

"Given the large geographic scope of the projects and the short window to respond with a bid,small rate-of-return carriers didn’t stand a chance."  Actually, we'll never know if they stood a chance, because they chose not to bid.  They could have banded together and produced a bid.  Or they could have bid on part of the network (which was allowed under the RFP).

"any dollar that a rate-of-return provider loses to an overbuilder will inevitably be recouped from the High Cost program."  Is that how the High Cost program works?  It guarantees revenue?  Is that program under cap?

I've spent a little time trying to understand the rules for rate-of-return carriers, but the resources go from overly simple ("The Rate-of-Return Reform Order released by the FCC at the end of March 2016 aims to bring broadband to the parts of rural America that still lack access.") to opaquely jargon-filled ("Q: If a rate-of-return carrier currently has no broadband-only lines and elects ACAM model-based support, must it refile its Special Access tariff to move the relevant costs into the new service category?  A: Yes, carriers are required to move these costs from the Special Access service category to the new Consumer Broadband-Only Loop category. Rate-of-return carriers then have the option of tariffing a consumer broadband-only loop charge for this service.")

In any case, which fund should support incumbent carriers that cannot compete with competitive carriers?  Seems to me that's the job of the High Cost fund, not the E-Rate. 

So it's possible that an applicant selecting a lower-cost offering from a competitive carrier might force  the High Cost program to pay the (more expensive) incumbent carrier more.  Will the savings to the E-Rate be greater than the cost to the High Cost program?  I'm confident no one can calculate that. 

But in any case, it seems absurd to force schools and libraries to subsidize carriers.  That would be the result if the FCC created rules to protect incumbent carriers' monopolies by forcing E-Rate applicants to use existing networks.

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