Universal Service and Rural Broadband

Chris:  Hello, and welcome back to TPI’s new podcast. I’m Chris McGurn, TPI’s Director of Communications. Each week on this podcast, we facilitate a conversation between TPI fellows and eventually special guests on some of the most pressing and important issues in tech policy and tech politics.

This week’s episode features a very important conversation on the Universal Service Fund and rural broadband. What that means is a matter of some debate as to who pays what it does and how we get broadband out to the most rural parts of our country. It’s a topic that’s very timely because just recently [Representative] Marsha Blackburn of Tennessee has opposed dedicated funding for rural broadband, going against other rural representatives on thinking that there needs to be a dedicated federal funding service.

We will focus on topics ranging from history of the Universal Service Fund to whose responsibility is it to pay and why we need broadband for all Americans. Tonight we have with us Sarah Oh, a TPI fellow, and Scott Wallsten, TPI Senior Fellow and President. And as it’s a podcast I should clarify that it’s not just tonight but you can listen today, tomorrow, in the morning, afternoon or whenever you want.

Scott:  Yesterday.

Chris:  Yesterday. However you want to do it. Without further ado, I will hand it over to Sarah and Scott to give you some more insight on rural broadband and the Universal Service Fund, and let you be enlightened by them.

Sarah:  Thanks, Chris. I can start with a little bit of background on the Universal Service Fund, and then maybe ask Scott some questions.

The Universal Service Fund was started in the 1996 Telecommunications Act. That was a bit over 20 years ago. Since then, over 20 billion dollars [Correction – 100 billion dollars] have been spent in four programs starting with a High Cost fund for rural broadband, now called Connect America Fund. There is a Lifeline program that funds mobile phones to low-income Americans. There’s also the E-rate fund for schools and libraries. And there’s the Rural Health program which is a smaller portion of $8 billion spent per year through the Universal Service Fund.

There have been reform efforts along the way in the last 20 years and even recently. In the news, there’s also some talk of $500 million being distributed by Chairman Pai through the FCC for rural broadband.[1] We can talk a little bit more about where that money, extra money, comes from.[2] But first, I’ll ask Scott some background. You’ve done a lot of work on the Universal Service Fund, what do you think are the most important issues related to that fund and how should we think about it?

Scott:  First of all, we want to think about why we have a Universal Service Fund in the first place and what it’s supposed to do and what it actually does do. The idea behind Universal Service is that we believe that everybody should have access to some minimum level of services. This is a common goal around the world, lots of countries have Universal Service programs.[3]

There are generally three reasons people give and really only two of which kind of hold up to inspection. The first is market failure that any given person doesn’t take into account the full benefits of an additional person on the network. They don’t subscribe when society would want them to. The second is that we want everyone to have some minimum level of service. The third is that politicians like to give out money – its distributional politics, right?

Now the externality argument doesn’t really hold up because it might be external to the person but it wouldn’t be external to the network. But the other two – that we want people to have some minimum level of service, and that politicians like to give out money – both of those things are definitely at play.

We first had an official Universal Service program as part of the 1996 Telecommunications Act, and that’s because prior to that service was mainly funded through a series of cross-subsidies that became no longer possible as the industry became more competitive.

Now an important point is that it’s not just for rural service, most of the money that we spend on Universal Service does go to that, but another part of it is helping low income people pay for service. It used to be, originally, it was the Lifeline program for low income – with two parts to help people connect and then to help people pay. It was focused of course at just home phone service and you could have one phone per household.

Eventually [Lifeline] was expanded to mobile phones and that caused some problems when there weren’t very good controls and people had multiple phones,[4] households had multiple phones, and there was sort of limited checking on who was eligible.[5] Then the FCC kind of got that under control.[6]

Now most recently, the Lifeline funds now can be used for broadband too, and people get just about almost ten bucks a month that they can put towards broadband service if you qualify. And those are mostly income-based.

Chris:  Are all those services now available under the Lifeline fund or do you have to pick, “I want a phone or I want broadband.” Or can you pick all the services if you’re a low income person?

Scott:  You get you get $10 a month, and you can use it I think for mobile phone service or for a broadband connection, but you can’t use it twice. [7]You can’t use it for two different services, except to the extent you can put it towards a mobile plan and you can use that to talk, right?

Chris:  But if you’re talking about low-income people $10 a month doesn’t really get you very far in this market. You don’t have to get the soup to nuts broadband package, but you still, I can’t think of any available services that are ten bucks a month, twenty bucks a month even.

Scott: You’re raising what is the fundamental question and which really should be part of a fundamental question for all of these things which is what is the price elasticity of demand, especially for in this case low-income people. How much of an effect will $10 a month have? What is the goal of Lifeline?[8]

Now the goal of the Lifeline program, it’s supposed to be to help low-income people get online. And so then there’s a lot of argument about what that really means. And if it’s specifically to get low-income people online, then that means that if you give a $10 subsidy to somebody who already has broadband you haven’t done anything, you haven’t help to reach that goal.

You may have made life easier for them, and because they’re poor it’s hard to kind of hold it against them, and an extra $10 a month … I mean, it means something for a poor person or low-income family. But Lifeline is not supposed to be a general welfare program, it’s supposed to help people get online. You want to find the people for whom that $10 a month means the difference between having a phone or broadband and not having it.

Part of the problem with Lifeline is that we don’t know the answer to that question.[9] The FCC itself has done a little bit of work on this.[10] They did some experiments in 2013 – 14 different experiments, pilot programs – to see how low-income people react.[11] In particular, low-income people who had never had broadband reacted to all different kinds of prices and promotions and subsidies on equipment and digital literacy programs. They did this in connection with various providers.

A lot of these were really well done studies with control groups and so on. What they found was that they really couldn’t get anybody to sign up, they got each company, each program got about 10% of the subscriptions that they thought they would, like even for a few dollars a month they could get people to sign up.[12]

Because those programs were kind of varied, the reforms that made the Lifeline program ignore the studies.  You can’t find any reference to these pilots in the Lifeline order.[13] But in fact we did learn a lot from that; we learned that we don’t know how to get this last group of people online. If society’s goal really is to get them online we will take that to heart, and rather than just spend money because it makes us feel good to get people $10 a month, we will do more experiments and more study to figure out what makes a difference.

Chris:  Do we know what the population is, this remaining population that’s not online? Do we have any idea of how many millions or how many families?

Sarah:  In the digital divide studies, there is a large literature; I don’t know how conclusive it is because everyone’s trying to figure out this last long tail of people.[14] There’s a lot of variation in the last 10% of people who are unconnected. They’re very different [from each other] so it’s not like one intervention will reach everyone, all the time.[15]

Scott:  There are different reasons people aren’t online because some people aren’t online, like this low-income group. They’re low-income rural people of course, but most of the low-income people who weren’t online are in areas that have access, they just aren’t connected. Then there’s a group of people who don’t have access to wired connections, but they do have access to satellite at a minimum. We know that they don’t connect because they don’t like the type of service they get for the price available. These are hard things to sort out.

Sarah:  And there are older people[16] – there are a population of older Americans like over 60 years old – who aren’t connecting.[17] Maybe that’s about half of the people who aren’t adopting internet.

Scott:  There’s also the question of how much we care. If a person is well-off financially, and they’re happy not having internet, they really don’t care. Let’s say that they’re sufficiently informed, then there’s not a problem.

Sarah:  Right – consumer preferences. So that’s the adoption question. Just because they have deployment and access is available, the adoption question is – well, why aren’t people signing up and paying for it? Even if you lower the price close to zero, people will still not find any interest or relevance.

Scott:  Some people.

Sarah:  Some people, yeah.

Scott:  There is also an open question, there’s been these surveys over time, Pewhas done a lot of them, and they asked why people don’t sign up. Of course these are surveys; we don’t know that people necessarily tell the truth or how much they care. But a top reason is almost always that they’re not interested or there’s nothing online that’s useful to them.

That percentage has stayed the same while the number of people who are not connected keeps decreasing, right? Some of those people who said they’re not interested, became interested. Is it that they were consistent and at the time there wasn’t [content] and now there is – or did they learn? Because there’s also some evidence that once people are online, they’re more likely to stay online, because they begin to learn what’s available.

Sarah:  So grandparents getting on Facebook or parents getting on Facebook, they find that it’s relevant to them and they find other uses.

Scott:  It could be.

Sarah:  People need to get online to find jobs and opportunities that’s relevant to them. But maybe what gets people online is entertainment or things that are, I don’t know, less important.

Scott:  Yeah, no, I mean that’s also an excellent point. As we’ve decided that getting everyone online is important for society, but being able to renew your driver’s license without going to the DMV is not what gets people online. Like you said, it’s entertainment and staying in touch with friends and family. Those are the things that get people interested. Now if you can build all those other civic services on top of that, that’s great, but you’re not going to attract people by promoting those.

Chris:  We got some lead with cat videos is what you’re saying.

Scott:  Exactly.

Sarah:  More cat videos. I wanted to ask you, Chris, what do you think about subsidy programs? How expert should governments be in offering smart subsidy programs? Should we just spend money and not really know where it’s going?

Scott:  I have to imagine that’s a rhetorical question.

Chris:  We do a really good job of spending money and we don’t know where it goes. Anyway, I don’t know, I think it raises a bunch of questions. If we’re willing to pay ten bucks for low-income people to get it, there are obviously subsidies to the companies to expand out their services. Which one has more value and how do we actually get that last bit of the population online? I’m not sure if you can force people to do something they really don’t want to do.

In terms of rural broadband, that brings up another issue which is, is there service available or why are we giving out 500 million more dollars? Why is it that someone who represents a rural district who also happens to be the chairman of the subcommittee that deals with these issues says, “We don’t need to more money to it.” That raises the question of, are they basically taking the field of dreams approach that if you build it they will stream? Or are they just saying, “Here’s a great way to appeal to a large base of people that we want to appeal to, so we’re going to give more money through these subsidies and whatnot.”

It’d be nice if the money got tracked, but living in the United States you know that your tax dollars go to a lot of different places and it’s very hard to keep track of where that is.

Scott:  Well, a few things about that. One, is there’s no evidence that the money that has been spent so far has actually gone to help build out rural areas. Most of the research seems that it does not find much of an effect at all on the margin of these subsidies; it goes to overhead of these rural companies.[18] It’s been, it’s a huge boon for rural telephone companies,[19] unclear how much of the benefit has actually accrued to rural citizens.[20]

Service in rural areas is not as bad as we’re led to believe. According to National Broadband Plan, 96% of rural America has decent speed broadband.[21]  That still leaves 5%, still a large number of people.

Chris:  Okay, but that is more than had telephone usage from our conversation earlier. So for at 96% broadband and we only got to 95% telephone and we did the same thing, we’re already doing better.

Scott:  It’s adoption versus availability. So this 96, 95% was not about broadband, that’s about availability, and the excluding satellite adoption is going to be much lower. Adoption across the country for home wired broadband is around 75, 78%,[22] and it’s going to be lower, not usually lower but lower availability. In rural areas, it’s lower there than it is in urban areas.  It’s not just our regular tax dollars going to it, because we pay for this by taxing the services themselves.

Scott:  The way this tax rate is determined is every quarter[23] company’s more or less say how much they will need, and the Universal Service Administrative Corporation aggregates that and say, “This is how much money we’ll need.” They sum up the total amount of money, the base that they can tax revenues, and then determine what that rate needs to be to get the amount of money they need.

It’s not like there’s a budget and they try to minimize the budget. They sort of just determine what they need and then figure out how high the tax is. It changes every quarter, although the general trend has been up, up, up.  So it’s 19% of this basethat’s derived from long-distance, international calls, and mobile phone service. I think most people are still amazed to realize that there is something called long distance service now.

Sarah:  I’ll write a blog post at some point with the numbers, but telecom industry revenues are going down each year, just a little bit. So the contribution factor has to keep going up.[24]

Scott:  Right, the contribution factor being the tax rate.

Sarah:  The tax rate, right? That’s why it’s around 19%, but earlier, years ago it was around 8%.[25] It keeps inching upwards because the total amount of the Universal Service Fund is fixed like Scott said, around $8 billion a year.

Chris:  What sort of oversight goes into this process where they say, “Oh, we’ll need this much money this year, and then we’re going to tax at this rate,” is there any?

Scott:  Not really. Because it’s not fixed. In theory there’s a budget for the rural, for the Connect America Fund which is a High Cost program. And that’s four and a half billion dollars, but in fact that’s not a budget, that’s not a cap, that’s a floor. They can’t collect less than that. They can distribute less than that, and so they collect that much and distribute less, and build up these slush funds.[26]

But there’s no limit. There really isn’t a limit to how high it can go, except for how much people are willing to be taxed before they protest. But when there’s talk of putting a budget on parts of it people who either believe in the program or benefit from the program, and when I say people who benefit from the program I mean companies that benefit from the program object vociferously.

Sarah:  From my own work on E-rate, the E-rate Program, which spends about half of the money, $4 billion a year, every school district administrator has a consultant who helps them file forms at the FCC to get E-rate funding. There’s actually quite an ecosystem of people who are benefitting from this program.

Maybe it’s job creation, I don’t know, but there are like thousands of forms that are filed to get [USF] money every year. Even on the school district side, there’s this algorithm for how to determine income requirements for schools.

In one of my papers I find that, well, because the rules depend on the income levels of students, certain school districts have been getting a lot of the Universal Service Fund every year. So it accumulates, like New York School District Department of Education has reaped like over a billion [Correction – $3 billion since 1998] dollars of this fund,[27] and LA Unified School District too like over a billion dollars.[28]

They’re swimming in this fund because the rules help them because they’re written to benefit low-income students, but at the same time you wonder about saturation rates – like how much money can you keep pouring in to building broadband to schools. Shouldn’t these school districts have like … shouldn’t they be very wired by now?

Scott:  They’re very creative with this too. There has been some outright fraud. For example, a few years ago somebody noted [a] yeshiva [in] New York that was taking funds every year despite not having any computers or using the internet at all. But that sort of outright fraud is not the big issue, that’s less common.

But another example is school districts will figure out every way possible to spend this money. The Montgomery County Schools for example use it to buy these Prometheus boards, these are kind of whiteboards that you draw on and then shows up at the screen and you can poke it and do all kinds of fun things with it. The Prometheus company is presumably makes a fortune on this.

When I pointed this out I’ve had people react by saying, “No, no, that’s illegal. You’re not allowed to do that with the e-rate money.” That may be true, but they did. The school district did spend money on it and there’s even a memo, a public memo describing[29]   their discussion of whether or not this was illegal use of those funds. They concluded it was obviously.

Chris:  Sarah, since you’ve written some papers on this, can you just give us a little background on what the E-rate program is and what it was intended to do, how it’s actually working aside from the chicanery that Scott told us about?

Sarah:  Each of these programs have a lot of rules attached, so even in the E-rate fund there are different categories of funding. There’s Priority One and Priority Two funding.[30] Half the money goes to paying telephone bills, so schools buy telephone service and this money helps subsidize just telephone bills. The other half can go towards equipment like computers, Wi-Fi, Prometheus boards.

There’s a whole list of the equipment that can be sold by vendors and paid for with the E-rate fund. But funding is fungible, so if you’re using E-rate money to pay your telephone bills then there’s other money to be spent on Prometheus boards, so that’s one point.

LA Unified School District also had an episode where they distributed iPads to all their students, and that program failed because kids were taking the iPads home or stealing, unlocking them and LA Times wrote some pieces about it.[31] It was a fail. Not a good use of the money,[32] and I think the iPads were subsidized by Apple.

But it also raises a bigger question of technology in the classroom, if it’s really good for students to have Wi-Fi in high school and middle school streaming and chatting on their phones? Are they really learning?[33] Does it help learning?[34] That question is very hard to measure in economics papers.[35]

I’ve tried – you have to talk about tracking test scores, graduation rates. Education economics is just challenging generally to see if kids are learning.

Scott:  To the extent that there is research it does not say good things about technology and education, nobody’s found yet that it really does make up a positive difference. Although, we’re criticizing these programs and the waste and the E-rate program,[36] but it’s not that, well, I don’t want to speak for everybody, but – it’s not that we’re actually necessarily opposed to spending public money on these things to the extent that technology is useful.

It’s that the programs operate essentially without oversight and without the ability to be evaluated. The Government Accountability Office notes this again and again and again.[37] The FCC consistently refuses to do anything about it. It’s simply not in anyone’s interest who participates in the program to have a true evaluation. That’s really the problem.

Chris:  Does that mean that Congress needs to get involved with their oversight responsibilities, or is that something that the FCC should be doing if they wanted to?

Scott:  I don’t think it’s even in Congress’ interest because it’s a way to get money to constituents. That’s part of the problem. It’s not in anyone’s interest to evaluate this stuff rigorously.

Sarah:  I’ll agree with that. It takes graduate students to dig through the filings and come up with reform proposals for how to move the money around.

Scott:  But we could do it. I mean, graduate students are cheap; instead they’ll pay companies millions of dollars to do fraudulent evaluations. But you can pay a grad student $10,000 and it would be much better.

Sarah:  Yeah, find a better way to distribute this money, or like, if you give $8 billion to some smart entrepreneurs and say, “Here fix the problem.” They’ll figure out a way, maybe.

But what happens is there are these pockets of schools that are just wealthy enough to not get E-rate funding, but they do have poor students, but they’re just not concentrated.[38]

Chris:  What’s the cutoff for that?

Sarah:  They use a discount rate which is pretty much an income-based number, the percentage of students in a school who qualified for free and reduced lunch. Depending on how many students in your school qualify you get higher priority for funds. A lot of schools in New York have 70% free or reduced lunch students. So they get a lot more money.

You can actually criticize that criteria, like, “Well, should we really be looking at concentrations of low income students or how about low-income students who are dispersed in rural areas?”[39]

Scott:  To be fair that’s a problem that any program that’s income-based is going to have. You’ve got to decide to cut off somewhere. I don’t know how much they think about the cutoff and when where it should be. But I think at least that’s not unique to this income-based program.

Sarah:  Yeah, any subsidy program will have to deal with some criteria. Even the Lifeline program doesn’t use the SNAP [food stamp] cutoffs yet, but I think they’ve been recommended to.[40] SNAP meaning food stamps. But Lifeline, they depend on the states, at a state level to determine a list of verifiable low income people, which is an area of compliance like a lot of states don’t keep close watch on who is on that list, that’s why you see companies like repeating names on their lists or sending like a lot of phones to one person because the monitoring isn’t very good.

Scott:  Let’s set aside Lifeline and E-rate in schools for the moment, and talk about the ways in which one should give away subsidies if you think that there are places that should be subsidized. Let’s again set aside the reasons why society would have a Universal Service program and think about why and said why a company wouldn’t invest in a particular area, and those are the areas we focus on, and that’s because they don’t expect it to be profitable enough, right? And so that’s where the areas are that there you might want some subsidies if you believe for any reason that you want everyone to have this service.

Sarah:  We talked about this a few months ago but we dug through the High Cost Fund a little bit to see where the money was going. A lot of areas are kind of like Minnesota’s 10,000 lakes. Those are areas where it’s hard to build a line out to every home because of the topography of the land.

There’s no explicit cut off in the U.S. of [using subsidies to build out to] vacation homes versus residences. I think there could probably be more of a strict criteria on places where people are actually living.

Scott:  You’re talking about sort of it’s a difficult normative problem where it’s not just an economic question of where it may or may not be profitable, but who we think deserves it too. Is that where you’re going with this?

Sarah:  Yes, right. We talked about it last week. Lake Tahoe or Jackson Hole, Wyoming – just because an area’s rural and maybe has a pocket of high wealth, does it mean we should be subsidizing lines out to those areas or maybe the neighborhoods around those areas because they’re rural?

Scott:  If we’re going to subsidize we want to at least have criteria that’s more objective. When you’re not taking into account these sort of equity issues, which you arguably should, how to distribute them so you get the most bang for the buck. That’s not the way it’s done now. The way it’s done now is you ask for money you get money more or less. I’m being facetious.

Instead it should be treated as a procurement process, and you can give these out by reverse auctions.[41] Economists had been arguing to use reverse auctions, and which defined as a second for a long time, rural interests fought very hard against them because they don’t want to have to compete against each other for funds. But other countries started doing it far back as in 1980s,[42] and so it could clearly be done.

Now the FCC is doing reverse auctions, and so what that means is that you have to define particular areas that will get service, you have to define this minimum level service that you want, and then companies can bid and say, “I need this much money in subsidies in order to provide the service that you want.” Another company will come in and say, “I can do it for a million dollars less than that person did.” When you bid the amount of subsidies down, that’s why it’s called a reverse auction because you’re getting down instead of up.

The first one that the FCC did was a mobile fund, and the units, the geographic units were based on road miles that did not have sufficient I think it’s 3G coverage.[43] What they found was that there weren’t many areas that got multiple bids,[44]but what they were able to do was take the bids for all the areas and then line them up in order of cost-effectiveness and start funding them that way.

You start finding the most cost-effective and go down to the next most cost-effective and keep going until you run out of your budget. That way you’ve known you’ve got the biggest bang for your buck.

Sarah:  How is it that they don’t do that already? What do they do then? Do they just go through alphabetically at grants?

Chris:  Drop money out of the sky I think.

Scott:  That’s right. They take a big 747, open up the bay doors, like a 747 7-1/2 bay doors, do they? But a lot of it’s just legacy, once you’re in the program you get money forever. A lot of it was based on cost bottles, companies would say, “This is how much it costs to provide service. This is how much we can charge. This is how much money we need.”

Cost models are flawed, they can be gamed. The FCC has moved, advanced beyond that for some of the payments to price cap models and so on. But this just isn’t the way it’s been done, and so now they are doing more reverse auctions. These are still just relatively small programs on the margin.

There’s going to be another Mobility Fund auction, and then Connect America Fund is having a reverse auction. They’ve recently released the rules on it. In this case the way that they’re defining the service is a little bit more complicated, because rather than just submitting a bid your bid gets scored and the score is based on the speed that you’re going to provide and the latency that you’re going to provide.

On one hand it’s the right way to do it, and based on research that we’ve done it looks like those sort of weights on the speeds are not bad given what people are actually willing to pay. But the latency penalty is much higher than the research suggests it should be. It’s just satellite penalty more than anything else and without much basis or any basis as far as I can tell in research.[45]

They’re on the right track by doing these reverse auctions, but it’s still just a tiny percentage of the total that they’re spending.[46]

Chris:  Great. Well, we covered a lot of topics, and we’ve given the FCC and government in general a lot of criticism. Aside from reverse auctions it doesn’t seem like there’s much other real firm or tangible solutions. A lot of that’s political, a lot of that is the people getting money and part of this program like the status quo, so it seems like there’s a big hurdle to reform it, but there are some proposals out there like these reverse auctions if we were willing to do so.

Scott:  Which we’re not.

Chris:  Which we’re not.

Scott:  In a big way.

Sarah:  Great. Thank you.