Proposed Broadband Fund Merits Serious Consideration by FCC

In a move last week little that went unnoticed by most American, a coalition of telecom companies proposed a new approach to delivering broadband service to the most remote rural communities in the United States. If it works as advertised, the plan could ensure real broadband access to virtually every business and home within five years. This would be an unusual bit of good economic news at a time when most data and reports are so gloomy.

The proposal, which only came after extended talks and concessions among the big telecom companies, would reform and update the regulatory program designed to ensure universal access to telephone service. That program, the Universal Service Fund (USF), succeeded in delivering virtually universal phone service across the United States, even as the telephone industry transitioned from monopoly providers to a competitive market. For years, everyone using telephones helped fund subsidies to ensure phone services for most poor households, especially in remote places. These subsidies drew on a byzantine rate schedule structure that charged varying rates for long distance, local, interstate and intrastate phone calls. The new proposal will update and reform this system to support universal broadband service.

It is admittedly a second-best solution, because it had to build on the existing subsidy scheme and its many billions of dollars of inter-carrier compensation. It also had to reflect the countless compromises required to transition existing streams of revenues under the USF to a more rational approach for compensating carriers who originate and deliver voice traffic to the public switch telephone network. It will be worth it: All Americans, even those in remote rural areas, finally will be able to draw on high-speed Internet. It may not be the optimal approach, but it probably does represent the best practical solution currently available.

The plan's sponsors say that a new "Connect America Fund" (CAF) will enable two million additional households to access the broadband Internet for the first time. That matters, because broadband has become such a critical communications infrastructure that creates the conditions for or actually stimulates economic innovations, investments and activities across the economy.

In addition to a new fund for universal broadband access, the proposal also would fundamentally reform the current, badly-outdated arrangements and rates for inter-carrier compensation. For many years, telecom companies have been able to game, arbitrage and litigate those arrangements, raising costs for American consumers. Technological advances and the new service plans sensitive to them have eliminated most charges based on distance. Setting a new, uniform low rate for handing off calls among carriers would generate $9 billion in consumer benefits, according to a recent study by MIT economist Jerry Hausing. That's $9 billion which American consumers will be able to spend elsewhere.

This plan, like all new ideas, will have to prove itself under real-world conditions in the real world, and its success is not guaranteed. The Federal Communications Commission (FCC) is now reviewing the proposal, and its changes could affect the plan's odds of success. But in its present form, it would provide broadband subsidies to only those communities where it is too costly for anyone in the market to deliver broadband. If even one company offers unsubsidized service in an area, the Connect American Fund subsidies will be suspended. And unlike the USF subsidies for phone service, which sometimes can create an illusion of competition by subsidizing several providers in the same service area, the CAF would limit its subsidies to one provider per community.

If it works, this new proposal could become a model for other government initiatives to achieve crucial goals, such as universal broadband access, in areas in which the private sector falls short. More important, if it works, it will creates new economic opportunities for rural Americans finally able to employ the same advanced technologies as everyone else. At a minimum, this proposal deserves careful review and consideration by the FCC as it strives to ensure access to broadband for every American.

Robert Shapiro, former Under Secretary of Commerce for economic affairs (1998-2001) and now chairman of the economic advisory firm Sonecon, has advised AT&T and other telecommunications firms.