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Setting the Right Incentives for Investment in Rural Broadband

by: Julie Veach, Chief, Wireline Competition Bureau

May 16, 2013 - 02:41 PM

Today, the Wireline Bureau is seeking comment on a number of issues relating to broadband funding for smaller rural carriers, known as rate-of-return carriers.

One of the problematic results of the Commission’s old Universal Service System was what we called the rural-rural divide: because the system failed to target support where it was needed and provided little accountability, some rural communities received world-leading broadband, while others, often right next door, were left behind.  In part, this problem arose because of the different systems governing smaller, rate-of-return carriers, and larger companies, known as price cap carriers.

About two-thirds of all universal service support for landline service went to rate-of-return carriers, although they serve about 20-30% of the expensive rural areas where no other provider is offering voice and broadband, the areas where support is most likely needed.  In many cases, disparities arose because these smaller carriers serve some of the very hardest areas to reach or because they have been aggressively extending broadband where it wouldn’t otherwise reach.  But to a significant extent, the disparity simply had to do with regulatory distinctions, or arose because the old rules lacked safeguards or accountability. 

In order to help ensure all Americans get access to broadband while increasing efficiency and accountability -- no matter what kind of company serves an area -- we overhauled universal service and created the Connect America Fund.  These reforms required making support for all types of carriers more efficient and accountable. 

These reforms left the basic rate-of-return system in place, and preserved funding for smaller carriers at $2 billion overall, while improving safeguards against abuse and increasing accountability.  But we also provide rate-of-returns the option to migrate to the new, incentive-based Connect America Fund for larger carriers.  That framework is simpler, and sets strong incentives for efficient investment in broadband.  So today, we are seeking further comment on exactly how to structure the pathway for rate-of-return carriers that wish to migrate to the more market-based, incentive-driven Connect America Fund.

We’re looking at other ways to bring broadband to rural America too.  Some small carriers have suggested that they should be able to receive support for stand-alone broadband without voice, which their current rules don’t allow.  It’s an intriguing idea as consumers increasingly subscribe to fiber, DSL or cable broadband Internet access service and use a mobile phone to talk. So we’re soliciting specific proposals for carrying out this idea.  And we’d like comments on how to ensure that we stay within the $2 billion budget for support for small companies if we follow this path to facilitate expanded broadband service offerings.

Sticking to a budget while we expand broadband helps keeps the burden of universal service fees manageable for consumers and businesses who pay for the program on their phone bills.  That brings us to a third element of reforms for efficient rural broadband expansion:  taking a long-overdue look at the appropriate rate of return for the small carriers that don’t choose to migrate to the Connect America Fund.  As their name denotes, rate-of-return carriers get funding based on their expenses (now with certain caps, thanks to reform), plus a return on investment.  Included in the calculation is the cost of capital, such as interest on loans the carriers take out.  

A review is long overdue: the FCC set the current 11.25% rate of return nearly 25 years ago, in 1990. A full review has not been completed since then, despite huge changes in market conditions.  For example, the interest rate for a typical 30-year home loan in 1990 was over 10%; today, it’s less than 4%. That’s why the FCC’s Connect America Fund reforms directed the Wireline Competition Bureau to take a fresh look. A staff report released by the Bureau today suggests that this rate may have long overstated the actual financing needs of carriers. The staff report provides the facts, data and analysis needed for a constructive process that can determine, as soon as possible, the appropriate rate-of- return for small carriers.

Bringing the rate back in line with market realities has the potential to save the consumers and businesses that pay into the Universal Service Fund $50-$100 million a year.  That’s just 2%-to-5% of the overall funding for rate-of-return carriers, but significant to the consumers and businesses that support the Universal Service Fund, and critical to staying within the $2 billion rate-of-return budget and the overall budget of $4.5 billion for Connect America.  Resolving this long-standing issue quickly will help ensure that any uncertainty over a new rate won’t cloud investment decisions facing rate-of-return carriers.

Together, these three elements bring us closer to completing reforms of our outdated universal service programs, including reform of the rate-of-return system. We recognize the need for certainty and predictability, especially recognizing that this has been a period of transition for all carriers.  To that end, we hope to complete the major work on these and other outstanding issues for all carriers in the coming months. 

 

Updated: May 17, 2013 - 09:04 AM
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