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My Valentine’s Day with Rural Telcos: Know Hope

It is no secret that rural phone companies are not fond of the Broadband Plan or me.  (The enmity is not mutual.  I have great respect for them but think the universal service system on which they have come to depend is problematic for the country.) Thus, it was felicitous that I spent Valentine’s Day at the National Telecommunications Cooperative Association Convention, participating in a two round debate.

The first round involved debating two rural Telco executives.  My primary message–more as a former analyst than as a Broadband team member—was the debate over USF/ICC reform will probably be resolved through an industry consensus or result in a stalemate, and that a stalemate hurts them because every significant market and political trend is weakening their position.  I asked them, if not now, when?

Their message for me was that rate of return regulation had worked well and ought to continue unchanged.  When I pointed out that it resulted in 7 million homes without broadband at the same time that we were spending $20,000 a year for a single home in some areas, they responded that it was only $17,000, while also saying that there should be no cap on how much the government should subsidize.  Both executives said we should be willing to pay the more than $50,000 a year per house that would be necessary to provide access to the last .2% of U.S. homes.  By way of contrast, the FCC NPRM proposes a cap of $3,000 a year.  I agree with the FCC proposal for many reasons, including what I think should be higher priorities, such as adoption and higher connectivity for anchor institutions.

Another argument was that government shouldn’t pick winners and losers.  I answered that I agreed and that the plan was technology neutral.  They asserted the plan was pro-wireless, as wireless would likely win a subsidy with such neutrality, as it is cheaper.  I’ll let you guess my response.  They did make a valid point that wireless does not future proof the network.  I think we have to be clear about trade-offs, which would lead most people to conclude, I think, that the costs of future proofing rural American networks far outweighs its benefits.  I don’t think this audience would come to the same conclusion.

They also focused on changing the contribution base.  I agree it ultimately will have to be changed but a bigger priority, in my view, is to stop spending in money in ways that do not advance public policy goals or do so in an inefficient manner.  Moreover, changing the base does not mean there is necessarily more money.  As I pointed out, while they sent a letter last summer advocating a larger USF fund, not a single Commissioner has endorsed that position and at least one—McDowell—explicitly called for the size of the fund to decrease.

I won’t go through each of the arguments. (The most amusing involved fervent calls for me to take responsibility for decisions made during the Powell, Martin, and then the Patrick FCC. I had to smile at the compliment.  Accusations of wielding power during a Republican era after my boss Reed Hundt left suggest the legendary powers of a Bob Strauss; the same accusation before Reed arrived suggests the magical powers of a Dumbledore.  Cool!)  Nothing they said caused me to rethink the Plan’s recommendations, but I am certain I did not move them from their positions.

In round two former FCC Commissioner Harold Furthcott Roth came to the stage and made two points: first, that everything starts with the law and the plan was not grounded in Section 254; and second, that there was a lot of fear in the room, and that government needed to understand that fear and not act in ways that made it difficult, for example, for the businesses to repay their loans.

I responded by noting that in my decade-plus friendship with Harold, he—a conservative economist—had often lectured me on statutory interpretation to great affect.  In this case, however, he had not made a sale.  The Plan is completely consistent with Section 254 (which does not in anyway require rate of return regulation.)  I went on to say that for the first time I would get to return the favor by lecturing Harold on economics.  I acknowledged the fear in room, noted that many industries are afraid of the implications of broadband for their business, but asserted it is bad economics for the government to think it is its job to remove fear from the market, to try to hold companies harmless from changes in the marketplace (I had earlier made a point I had often made while an analyst; that 4G would prove a bigger threat than changes to universal service) or to guarantee that businesses can repay their loans.  I don’t really know what Harold was thinking but knowing how strongly he holds his convictions, I have to believe his internal monologue was “I can’t believe I just got schooled in Schumpeter by a liberal Democrat in front of 2,000 people.”

I spent the evening in the hotel bar with an old friend from Dallas.   Given the nature of the debate one might have expected our drinks constantly interrupted with a reprise of the line from the bar in Star Wars: “he doesn’t like you…. I don’t like you either.”  To the contrary, while we were constantly interrupted, folks were completely gracious and appreciative of someone willing to be straight about a policy and business perspective that was clearly not designed to curry favor or hide the ball.  To a person, they all said that they understood that change was coming and that past policies would not work in this era.  Several had good ideas for benchmarking and other techniques for addressing some of the problems I had raised with rate of return regulation.  (I confess that I don’t really remember the details—benchmarking is not something one should discuss after several beers—but am hopeful the ideas will enter the conversation with FCC staff.)  The evening left me more optimistic than I have been in a long time that the environment is right to finally come to a resolution of universal service reform.  I missed a Valentine’s dinner with my wife (whose own “date” was with her hospice patient) but we both felt ‘twas a far, far better thing that we did.

Long ago, Reed instructed me that while anyone can speak to an audience about a policy the audience favors, we had to be willing to speak to an audience about a policy they don’t favor.  My valentine’s date with the rural coops reminded me of the wisdom of that injunction.

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