Blair Levin Delivers Insightful Remarks on USF Reform

by Guest Contributor on September 13, 2011

This Monday, Aspen Institute Fellow Blair Levin, who led the FCC team that wrote the National Broadband Plan, joined us at a special MMTC/Broadband & Social Justice Institute Public Forum to discuss Universal Service Fund reform. His remarks follow.

A few months ago, on the one-year anniversary of the National Broadband Plan, I gave several speeches, including on the Plan’s universal service recommendations.

I haven’t spoken of it since, instead turning all my attention to a project aimed at accelerating the deployment of next generation networks and services—a mission I believe critical for our country.

But I am back to again discuss the Universal Service Fund because, to be honest, David asked me, and I want to honor his work, and the work of the coalitions he works with; also critical to the country.

And because in light of the current USF debate, there are two big points that we are ignoring at our peril.

First, the context.

Universal service is about getting everyone on a network. That has two parts; getting networks everywhere and getting everyone on.

In the phone world of the last century, networks were the lions’ share of the problem. It did not take much—just a little subsidy—to get folks using phones once the networks were ubiquitous.

The number who could not afford phones or the service was roughly the same as those living in areas that required a subsidy, and the personal subsidy was a lot less than the network subsidy.

The USF dollars roughly reflected this: about a 4:1 network to person subsidy ratio.

In a broadband world, the challenge is different. On the network side, we have about a 5% problem—about 5% live in areas that require a subsidy. The adoption problem is much bigger; about 33%. The adoption subsidy required is greater and the hurdles to adoption are not just about money, but require money to address.

So missing big point number one is how do the change in facts change our priorities?

If we really believe what we claim—that broadband is no longer a luxury, that we as a society benefit if all are on, that all must have access to the news, information, educational, health, job training resources, among other things, found on the Internet—then as a matter of math, that 4:1 ratio should be changed to reflect a higher amount spent on adoption. That doesn’t mean it should be 5:33, but a notion that the ratio in a broadband world, should be the same as it was in the voice world, or even more on the network side, defies logic.

To be fair, some, as a matter of principle, don’t believe we should have universal broadband.

I have no idea what Governor Perry, for example, thinks about universal service but using his phrase, if one wanted to make the federal government as inconsequential as possible, it would be logical to eliminate all universal service.

I think that is a bad policy but I deeply respect those who have that view and credit them with being both logical and principled.

What is illogical and unprincipled is to argue that we have to spend money subsidizing networks for those persons for whom the cost of a market based build-out would create a prohibitive barrier, but we are supposed to ignore persons for whom cost or other factors create prohibitive barriers.

After all, it is the same issue; there is either a value to society in getting everyone on—up to some reasonable point of expenditure—or there isn’t.

So let’s put aside the principled position of getting rid of all universal service—and focus on the current effort in reform—American’s Broadband Connectivity Plan, or the ABC Plan.

There is much to commend in it. Its drafters worked hard to come up a difficult compromise. I think they had the best of intentions in being fair to all.

And I like a lot of it. It deals, for example, with intercarrier compensation reform.

The current system provides an implicit subsidy that causes all kinds of inefficient behavior.

It’s time to end it.

And while there are other things I like, I am struck by the second big point—which is it fails to grabble with the 33% problem and instead spends even more money on the 5% problem.

To be fair, the drafters did not perceive that as their mission. They were focused on the high-cost fund.

But how they addressed the high-cost problem has some troubling elements that end up providing more resources for the 5% problem and undercutting resources available for the 33% problem.

It creates a right of first refusal for incumbent carriers, which violates principles of technological and competitive neutrality.

It retains a rate of return system that, as I have talked about in a series of debates in front of rural telephone conventions, violates a principle that government should not guarantee the permanent profitability of a private company or give false incentives to gold-plate investment.

It allocates the wireless dividend—the $1.3 billion of Competitive Eligible Telecommunications Carrier spending for which there is a consensus that changed market conditions no longer make it necessary—to a small group of carriers instead of where new priorities, such as funding innovations and tests to address the 33% problem.

As a result the Plan suggests we spend around $50 billion over the next decade to solve this 5% problem. I know rural costs more but Verizon spent $20 billion to connect 15 million homes to fiber. Do we as a country need to spend twice that to connect less than half the homes to a cheaper technology?

I’m not a purist. While I have problems with these proposals, if the overall direction were right, one could live with a few compromises. But in light of not addressing the big 33% issue, I just have to ask, are we really moving in the right direction?

I have to concede that while the ABC Plan over indexes for the deployment problem, it does not do so as much, or as problematically, as other advocates for subsidies to rural carriers.

I am not in the habit of publicly criticizing an executive department for its policy suggestions. But as an American citizen I feel it is my duty to object to the implications of a recent filing by Department of Agriculture.

While it is complicated, the clear import is that the FCC should, in practice, guarantee the Department’s RUS loans through USF assessments on consumers.

I am a liberal, as I understand the term. I do not have a principled objection to government action. I believe it is appropriate to spend large sums to assure broadband networks everywhere. I even believe in the mission of the RUS and think they have done much good with their loan program.

But did we not learn anything from the last decade?

Did we not learn what happens when lenders believe their lending carries no risk? When borrowers believe the government will cover their bets? If the RUS proposal were adopted, why wouldn’t a private phone company ask for twice what they need? And why wouldn’t the RUS give it to them? Does anyone connected with that filing understand the principle of moral hazard?

I watched the sub-prime crises from a job with Wall St., but like most Americans, I had no idea what a CDO or other weapons of mass financial destruction were.

But when I started to understand how these instruments tried to eliminate a lender’s risk of a bad loan, I was outraged so few—among the accountants, lawyers and ratings agencies—had spoken up.

So I can’t sit quiet while a similar idea is proposed for a program that I think has the potential to do good, if we don’t burden it with an incentive structure that will inevitably lead to an unhappy ending.

But we should not blame the Department of Agriculture. If a banker, even one in the guise of the government, believes he can off load his risk to someone else, we misunderstand human nature if we blame them for trying. Just as we should not blame the authors of the ABC plan who were not told that an adoption piece was part of the puzzle the FCC wanted them to solve.

We should, however, hold the FCC accountable, for rejecting this idea, and instead of being vague about what they seek in USF reform, require them to be adamant that the USF proceeding will not be a vehicle for more false incentives, more excess spending, more misprioritization of spending government money.

And we should hold the FCC accountable for focusing attention on the 33% problem.

We wrote a chapter about that problem in the Plan. It was good, but it was not good enough.

I thought more about it and gave a speech on the one-year anniversary that suggested a new way forward. It was better. But it was not better enough.

Comcast, God bless them, building on the A+ proposal in the Broadband Plan, is offering an essentials program to low-income school kids across the country. It is great. We should all praise it and hope it succeeds—and by the way, it is risky and it may fail. And for taking on that risk they deserve even more praise.

But let’s not kid ourselves. It will not be enough.

We cannot outsource this problem to volunteer efforts and expect success. If I were to suggest we spend billions on adoption but that we leave the deployment problem to the kindness of companies, the rural phone companies would call for me to be tarred and feathered. And this time—as opposed to other times they have suggested it—they would be right to do so.

If we actually believe in universal service as a goal, and not just a vehicle for subsidizing private companies, if we truly want all on the network, then we need a government plan that commits real resources, creates effective incentives, and through a process of trial and error, gets the job done.

We don’t need a lot of money—we certainly don’t need $50 billion—but we need more than nothing.

We also need—and this was the subject of my speech on the one-year anniversary at the Joint Center—to make a full and honest appraisal of the Lifeline/Linkup program. That program has done a lot of good, but we are kidding ourselves if we believe that it is a model foundation for a broadband adoption program.

I have to return to my commitments to my colleagues at Gig.U but I want to wish you the best, and wish the best to all my former colleagues at the FCC, particularly the staff, who I know have the public interest at heart and are grappling with the problem as best as they can.

You should challenge them but also work with them in the days ahead. They care, as you care, that we make universal broadband a reality, just as universal telephone service was—a program that not only gets networks everywhere but also gets everyone on board.

Thank you.

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  • txpatriot

    Mr. Levin rightly praises Comcast’s low-income broadband access plan, but he fails to mention that Comcast offered that plan as a “voluntary” condition for FCC approval of the Comcast-NBCU merger. 

    I doubt if the FCC gave any consideration at all as to whether the proposal might fail.  They simply saw it as one more pound of flesh to extract as a way to “protect the public interest”.

  • JCraigDC

    Blair Levin is like the EF Hutton of broadband policy.  When he speaks on the subject, people should listen and carefully weigh his suggestions.  More often that not, he is on point, as he is here, stressing that we have an adoption issue, not a deployment problem.

  • txpatriot

    Maybe Levin should design a government program to get everyone a car — I mean, isn’t basic transportation as, or even more, necessary than access to Facebook?

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