Expanding the Universal Service Fund

A bipartisan bill has been introduced in Congress that would expand the size of the FCC’s Universal Service Fund by adding a fee on top of broadband bills. This fund is currently funded by fees added to landline telephone and cellular bills. The USF assessment on Interstate traffic recently increased to 26.5% – which is an extraordinarily high tax.

The bill was introduced by Collin Peterson (D-Minn.) and Don Young (R-Alaska). Also sponsoring the bill are T.J. Cox (D-Cal.), Hal Rogers (R-Ky.), Angie Craig (D-Minn.), Frank Lucas (R-Oklahoma), Luis Correa (D-Cal.) Jeff Van Drew (R-N.J.), Ed Case (D- Hawaii), and Vicente Gonzalez (D-Texas).

I’ve been advocating this for a decade because the Universal Service Fund is the FCC’s only tool to tackle the rural broadband issue. The USF already does a lot of good. The Fund is used to bring affordable gigabit broadband to schools. It’s used to bring affordable broadband to rural health care facilities. And even though the FCC keeps fighting it, the USF is used to hold down broadband bills for low-income households, with the Lifeline program that makes ISPs whole for providing lower prices.

In the past the Fund was used to fund two large-dollar broadband expansion projects – one successful and one a total bust. The successful program was ACAM, which has provided the funding to build rural fiber networks by small telcos. I see people around the industry praising the rural broadband in states like North and South Dakota – and that fiber was largely funded by the ACAM program.

Unfortunately, the USF doesn’t always get used wisely. This was the source of funding for the CAF II program that handed $11 billion to the big telcos to ostensively upgrade rural broadband speeds to 10/1 Mbps. It appears that money was largely frittered away or pocketed by the telcos because it’s still hard to find rural households with DSL speeds of 10/1 Mbps. The entire project basically shoveled billions to the bottom line of the telcos.

The Universal Service Fund is about to be used again in big ways. USF is the source of the $16.4 RDOF grants that will be awarded later this year, with another $4 billion to be awarded next year. Assuming this reverse auction doesn’t go cockeyed by awarding money to satellite providers instead of fiber networks, then this will be the biggest boost to rural broadband ever. I’ve been working with a lot of ISPs planning to use this money to build fiber in rural counties all over the country.

The Universal Service Fund is also the source of the proposed $9 billion 5G Fund with a goal of bringing cellular coverage to everybody in the US. Again, assuming the FCC does this right, this would make it a lot easier to live in rural America. Done poorly, this could instead line the pockets of the giant cellular companies.

What nobody is talking about is that those two programs – the RDOF grants and the 5G Fund will use all of the dry powder in the Universal Service Fund. These programs will both award funding over 10 years, and if we don’t find a new source of funding, there will be no additional big grants coming from the USF for the next decade.

What’s even scarier is that the revenues into the Universal Service Fund are dropping as people continue to drop landline telephones. Without some bolstering, there is no assurance that future FCCs will be able to meet the obligations to the recipients of the RDOF and 5G grants.

The revenue impact of imposing a $1 fee on broadband connections is gigantic. There are currently around 106 million broadband customers in the US. A $1 monthly fee on broadband would add $1.3 billion annually to the USF, or over $13 billion over the next decade. That would allow for another big rural broadband grant program.

The members of Congress sponsoring this bill seem to trust the FCC to disperse grant funding. Honestly, their track record on choosing winning grants is mixed. There are also plenty of policy people who think we should take every step possible to keep broadband affordable and that even a $1 monthly fee helps to push broadband out of the affordability range for homes.

If the Universal Service Fund is not expanded, then the only other source for funding rural broadband is Congress. There is a lot of talk about broadband funding coming out of the various COVID-19 stimulus packages. But if that doesn’t happen, we are likely facing an economy with a lot of problems for the next few years. In that environment, rural broadband funding might get shuttled behind other priorities.

Auditing the Universal Service Fund

I recently heard FCC Commissioner Geoffrey Starks speak to the Broadband Communities meeting in Alexandria, Virginia. He expressed support for finding broadband solutions and cited several examples of communities that don’t have good broadband access today – both due to lack of connectivity and due to the lack of affordable broadband.

One of his more interesting comments is that he wants the FCC to undertake a ‘data-driven’ analysis of the effectiveness of the Universal Service Fund over the last ten years. He wants to understand where the fund has succeeded and where it has failed. Trying to somehow measure the effectiveness of the USF sounds challenging. I can think of numerous successes and failures of USF funding, but I also know of a lot of situations that I would have a hard time classifying as a success or failure.

Consider some of the challenges of looking backward. Over the last decade, the definition of broadband has changed from 4/1 Mbps to 25/3 Mbps. Any USF funds that supported the older speeds will look obsolete and inadequate today. Was using USF funding nine years ago to support slow broadband by today’s standards a success or a failure?

One of the biggest challenges of undertaking data-driven analysis is that the FCC didn’t gather the needed data over time. For example, there has only been a limited amount of speed testing done by the FCC looking at the performance of networks built with USF funding. A more rigorous set of testing starts over the next few years, but I think even the new testing won’t tell the FCC what they need to know. For example, the FCC just changed the rules to let the big telcos off the hook when they decided that USF recipients can help to decide which customers to test. The big telcos aren’t going to test where they didn’t build upgrades or where they know they can’t meet the FCC speed requirements.

The FCC will find many successes from USF funding. I’m aware of many rural communities that have gotten fiber that was partially funded by the ACAM program. These communities will have world-class broadband for the rest of this century. But ACAM money was also used in other places to build 25/3 DSL. I’m sure the rural homes that got this DSL are thankful because it’s far better than what they had before. But will they be happy in a decade or two as their copper networks approach being a century old? Are the areas that got the DSL a success or a failure?

Unfortunately, there are obvious failures with USF funding. Many of the failures come from the inadequate mapping that influenced USF funding decisions. There are millions of households for which carriers have been denied USF funding because the homes have been improperly classified as having broadband when they do not. Commissioner Stark said he was worried about using these same maps for the upcoming RDOF grants – and he should be.

Possibly the biggest failures come from what I call lack of vision by the FCC. The biggest example of this is when they awarded $11 billion to fund the CAF II program for the big telcos, requiring 10/1 Mbps speeds at a time when the FCC had already declared broadband to be 25/3 Mbps. That program was such a failure that the CAF II areas will be eligible for overbuilding using the RDOF grants, barely after the upgrades are slated to be completed. The Universal Service Fund should only support building broadband to meet future speed needs and not today’s needs. This FCC is likely to repeat this mistake if they award the coming RDOF grants to provide 25/3 Mbps speeds – a speed that’s arguably inadequate today and that clearly will be inadequate by the time the RDOF networks are completed seven years from now.

I hope the data-driven analysis asks the right questions. Again, consider CAF II. I think there are huge numbers of homes in the CAF II service areas where the big telcos made no upgrades, or upgraded to speeds far below 10/1 Mbps. I know that some of the big telcos didn’t even spend much of their CAF II funding and pocketed it as revenue. Is the audit going to look deep at such failures and take an honest look at what went wrong?

Commissioner Stark also mentioned the Lifeline program as a failure due to massive fraud. I’ve followed the Lifeline topic closely for years and the fraud has been nowhere near the magnitude that is being claimed by some politicians. Much of the blame for problems with the program came from the FCC because there was never any easy way for telcos to check if customers remained eligible for the program. The FCC is in the process of launching such a database – something that should have been done twenty years ago. The real travesty of the Lifeline program is that the big telcos have walked away. For example, AT&T has stopped offering Lifeline in much of its footprint. The FCC has also decided to make it exceedingly difficult for ISPs to join the program, and I know of numerous ISPs that would love to participate.

I try not to be cynical, and I hope an ‘audit’ isn’t just another way to try to kill the Lifeline program but is instead an honest effort to understand what has worked and not worked in the past. An honest evaluation of the fund’s problems will assign the blame for many of the fund’s problems to the FCC, and ideally, that would stop the current FCC from repeating the mistakes of the past.

The Penn State Broadband Study

Penn State conducted an intensive study of broadband in rural Pennsylvania. The study was funded by the Center for Rural Pennsylvania, a legislative agency of the Pennsylvania General Assembly.  The results will surprise nobody who works with rural broadband and the study concluded that actual broadband speeds are significantly slower than the speeds reported by the ISPs to the FCC.

The study concluded that there was not one rural county in the state where more than 50% of residents actually achieve the 25/3 Mbps that the FCC has defined as broadband. The study came to these conclusions by conducting more than 11 million speed tests. Residents voluntarily provided an additional 15 million speed test results.

These results are similar to what’s been reported by Microsoft – they measure the actual speeds at which millions of customers download Microsoft software every month. Microsoft says such tests are the best measure of real broadband speeds and that roughly half of all broadband connection in the country are done at speeds slower than the definition of broadband.

Some of the Penn State results are dramatic. For example, in Westmoreland County the FCC maps show the whole county has access to 25/3 Mbps broadband and yet the average download speed for the county was only 12.3 Mbps. Allegheny County also shows 100% broadband coverage on the FCC maps and yet the average download speed in the County is only 20 Mbps.

The study further showed that the difference between actual and reported speeds have been widening since 2014. That’s likely to mean that the FCC maps are showing improvements that aren’t really happening in the rural networks.

I have to point out, in the FCC’s favor, that households don’t always buy faster broadband when it’s available – many households continue to purchase older, slower DSL to save money. However, this phenomenon can’t come close explaining the results in Westmoreland County, where the actual speeds are only 12 Mbps – half the FCC’s definition of broadband. A more likely explanation is that the maps for the County show broadband available in rural areas where actual DSL speeds are only a few Mbps.

CCG helps our clients conduct similar tests on a smaller scale and we’ve seen similar results all across the country. The FCC maps are often pure fantasy. We routinely find rural areas that supposedly have fast broadband where there is no broadband. We often study county seats that supposedly have fast data speeds and yet where actual speed tests show something far slower. The speeds on the FCC maps come from data that is self-reported by ISPs, and some of the ISPs clearly have reasons to overreport the available speeds.

What is really irksome is that the FCC knows all of this already. They know that ISP reported broadband speeds are overstated, and yet the FCC compiles the faulty data and makes policy decisions based upon garbage data. The FCC’s recently published their 2019 Broadband Deployment Report which concluded that broadband is being deployed in the US on a reasonable and timely basis. In my opinion, that conclusion borders on fraud since the FCC knows that much of the data used to reach that conclusion is wrong. The real broadband situation in rural America is much more like what is being reported by Penn State and Microsoft. Rural residents in places like Allegheny County, Pennsylvania should be incensed that the FCC is telling the world that their broadband is up to snuff.

The FCC is starting a multi-year process to ‘improve’ the broadband maps – but this will just push the problem a few years into the future. The fact is that it’s almost impossible to map real broadband speeds in rural America. How can you map broadband speeds when real networks in rural America are in lousy shape? How can you map broadband speeds when two neighbors can experience drastically different broadband speeds due to the nuances in their copper wires? The big telcos have neglected maintenance on copper networks for decades and it’s no surprise that broadband speeds vary widely even within a neighborhood.

The best solution is to throw the maps away. The fact is that every place served by copper ought to be considered as underserved, and locations more than a few miles from a DSLAM ought to be considered as unserved. We need to stop pretending that we can somehow make a realistic map of broadband speed availability – the proposed new mapping might be a little better, but it can never be accurate. Every ISP technician that works in the field will tell you how ridiculous it is to try to map rural broadband speeds.

We need to face facts and recognize that we’re going to have these same issues until rural America gets fiber. There are now enough places in rural America with fiber to show it can be done. The FCC’s ACAM program has shown that fiber can work if there are subsidies to help with the construction costs. We’ve understood this for more than a century since we built the rural electric grids. But we probably can’t fix the problem until we’re honest about the scope of poor broadband. I have big doubts that this FCC is ever going to acknowledge that the real state of broadband is the one highlighted by this study.

The Big Telco Problem

A few weeks ago I made the observation in a blog that we don’t really have a rural broadband problem – we instead have a rural big telco problem. As I work around the country helping communities that are looking for broadband solutions it finally struck me that the telcos in almost all of these areas are the big companies – AT&T, CenturyLink, Verizon, Frontier, Windstream, etc.

I don’t see these same problems in areas served by smaller telephone companies. These smaller telcos have either upgraded networks to deliver faster broadband or have plans to do so over the next few years. I know of numerous rural telcos that are currently building fiber to rural areas, and those networks are going to serve those areas for many decades to come. There are undoubtably a few small telcos that are not making the needed upgrades, but for the most part the smaller telcos are doing the right thing – they are reinvesting into the rural areas and making the upgrades needed for the future.

The large telcos have done just the opposite. Most of them have been ignoring rural America for decades. They yanked customer service centers from smaller communities many years ago. They drastically cut back on rural technical staffs and it often takes weeks for customers to get repairs. They stopped investing in rural networks and have not upgraded electronics or networks for decades.

There is currently a burst of activity in these rural areas for those big telcos that accepted the billions of dollars of CAF II funding. This funding requires them to upgrade rural broadband to a measly and inadequate broadband speed of at least 10/1 Mbps. However, the rules in the CAF program are weak and there are no repercussions for not meeting the goals and I’ve always expected they will spend the FCC’s money until it’s gone, and then stop the upgrades. This means while some rural customers will get speeds even a little faster than 10 Mbps that there are likely to be many customers who will so no upgrades. I don’t expect the big telcos to spend a dime of their own in rural America once the CAF II upgrades are finished.

While I call this a big telco problem I might just as easily have called it a regulator problem. The FCC and the various state commissions largely deregulated telephone service, and the FCC recently washed their hands of broadband regulation. The big telcos have been milking big profits out of the rural copper networks for decades and have not reinvested any of those profits back into the networks. That’s how big companies act if regulators don’t require them to spend some of their profits on service and upgrades.

By contrast the smaller telcos were not required to upgrade networks, but they have done so anyway. The small companies got a big boost recently from the ACAM program – a different FCC plan that encourages building forward-looking broadband networks. Many of these companies had already upgraded to fiber before the FCC money was available. These smaller telcos are part of the rural community and feel an obligation to do the right thing – and the right thing is to find a way to bring broadband that rural customers need.

Regulators have let us down by not forcing the big telcos to act responsibly. The big telcos now want to walk away from rural copper that they claim is obsolete and in bad shape. But that copper would be in much better shape had these telcos done routine maintenance for the last thirty years. We built a great nationwide copper network due to the simple regulatory principle of universal service. Regulators at both the state and local level believed that the role of government was to ensure that everybody got access to the communications networks that ties us together as a nation. They know that universal service was good for people, but also good for the economy and good for the country as a whole. It’s something that very few other countries did and set America apart from the rest of the world.

I worked at Southwestern Bell pre-divestiture and it was a source of company pride that the company served every customer to the best of our ability. But along came competition and any sense of obligation to the public went out the door and the big telcos instead concentrated on satisfying Wall Street’s demand for ever-higher profits. There have been big benefits from this competition that are hard to deny, but what was missed in the transition to a competitive telecom world was that competition was never going to benefit rural America in the same way it benefits urban areas. We should have foreseen this and kept the universal service policy in place for rural America.

I get angry when I hear politicians and regulators say that municipalities shouldn’t be in the broadband business because the commercial sector will take care of our broadband needs. That is obviously not true and one only has to look at the big telco networks ten miles outside any urban area to see how the big telcos have abandoned customers in higher cost areas.

The big telcos are still milking big profits out of rural America and are still not reinvesting any of their own capital there. I don’t know if there is a way to put the genie back into the bottle and reintroduce regulation for rural America. If we don’t then we are only a few years away from having third-world telecom networks in rural America that will be a major drag on our society and economy.

Why I am Thankful – 2017

Every year at Thanksgiving I take a pause to look at the positive things happening with the small carrier industry. This is not the easiest year to make a list because we currently have an FCC that clearly is in the pocket of the big ISPs like Verizon, AT&T and Comcast. While some of the new FCC policies supporting those big companies will benefit all ISPs, in many cases the FCC decisions are given the big ISPs a leg up over competition. But there are still things to be thankful about in our industry:

Demand for Broadband Intensifies. In the work I have been doing in rural communities it’s becoming clear that broadband has moved from a nice-to-have feature to a must-have commodity. I see evidence of this in several different ways. First, rural communities and their citizens are making a lot of noise to politicians about not having broadband. The broadband issue has become the top priority in many communities. I also see evidence of rural broadband demand when looking at the high penetration rates that come from projects being built in areas that didn’t have good broadband. Over the last few years I’ve seen such projects getting customer penetration rates between 65% and 85%. I call this a good news topic for rural carriers since it means there are still lots of opportunities for expansion, and enough customer demand to help pay for broadband projects. It’s not a positive that there are still so many communities with no broadband, but the positive here is that communities are making demands, which is the first step towards finding a solution.

Public Private Partnerships are Thriving. Very few government entities want to be an ISP and they are instead hoping to find commercial partners to bring better broadband to their communities. In just this last year I’ve worked with half a dozen local governments that have contributed funding to public private partnerships, where the government acts like the bank and the ISP owns and operates the network. Since rural broadband projects are often a challenge to finance this is a promising new trend.

ACAM Money is Financing Fiber. The ACAM money from the Universal Service Fund is being used to expand fiber and advance broadband in rural areas all over the country. The fact that some rural communities are getting fiber is helping to drive the demand for other who want the same thing. We’ll have to wait until next year to see of the CAF II reverse auctions drive similar results.

Wireless Technology Getting a Lot Better. I have a lot of clients who are now deploying point-to-multipoint radios for broadband deployment. Over the last three years these radios have improved dramatically. They are more reliable, almost approaching plug-and-play. By combining multiple frequency bands they deliver bigger broadband pipes, faster speeds and a much-improved customer experience. Depending on customer density the networks can be designed to deliver 25 Mbps to a lot of customers with some speeds as fast as 100 Mbps. There are still big issues with the technology in heavily wooded or hilly areas, but there are a lot of places where the technology is now delivering a great broadband connection.

New Revenue Opportunities Materializing. While voice revenues continue to decline and many of clients are getting clobbered on cable TV, I see a number of them doing well with new products. I have clients getting decent penetration rates with managed WiFi. I have some clients doing well with security. And I have clients making some good margins on smart home technologies. Selling new products is out of the comfort zone for many small ISPs and it requires some new thinking to successfully sell a new product – but I’ve seen enough success stories to see that it can work.

Means Testing for FCC Funding – Part I

A recent blog by FCC Commissioners Michael O’Rielly and Mignon Clyburn asks if there should be a means test in federal high cost programs. This blog is something every telco, school, library or health care provider that gets any form of Universal Service funding needs to read.

There is already some means testing in the Universal Service Fund. For instance, the Lifeline program brings subsidized voice and broadband only to households that meet certain poverty tests. And the Schools and Libraries program uses a mean test to make certain that subsidies go to schools with the most low-income students. The FCC blog talks about now applying a means test to the Universal Service Funds that are used to promote rural broadband. There are several of these programs, with the biggest dollar ones being the CAF II funding for large telcos and the ACAM program for small telcos to expand rural broadband networks.

The blog brings up the latest buzzword at the FCC, which is reverse auction. The FCC embraces the concept that there should be a competition to get federal money to expand broadband networks, with the funding going to the carrier that is willing to accept the lowest amount of funding to expand broadband into an area. On the surface that sounds like a reasonable suggestion in that it would give money to the company that is the most efficient.

But in real-life practice reverse auctions don’t work, at least for building rural broadband networks. Today these FCC infrastructure programs are aimed at bringing broadband to places that don’t have it. And the reason they don’t have it is because the areas are largely rural and sparsely populated, meaning costly for building broadband infrastructure. In most of these places nobody is willing to build without significant government subsidy because there is no reasonable business plan using commercial financing.

If there was a reverse auction between two companies willing to bring fiber to a given rural area, then in my experience there wouldn’t be much difference between them in terms of the cost to build the network. They have to deploy the same technology over the same roads to reach the same customers. One might be slightly lower in cost, but not enough to justify going through the reverse auction process.

And that is the big gotcha with the preference for reverse auctions. A reverse auction will always favor somebody using a cheaper technology. And in rural broadband, a cheaper technology means an inferior technology. It means using federal funding to expand DSL or cellular wireless as is being done with big telco CAF II money instead of building fiber, as is being done by the small telcos accepting ACAM money.

Whether intentional or not, the FCC’s penchant for favoring reverse auctions would shift money from fiber projects – mostly being done by small telcos – to the wireless carriers. It’s clear that building cellular technology in rural areas is far cheaper than building fiber. But to use federal money to build inferior technology means relegating rural areas to dreadfully inadequate broadband for decades to come.

Forget all of the hype about how 5G cellular is going to bring amazing broadband speeds – and I hope the FCC Commissioners have not bought into cellular company’s press releases. Because in rural areas fast 5G requires bringing fiber very close to customers – and that means constructing nearly the same fiber networks needed to provide fiber into homes. The big cellular companies are not going to invest in rural 5G any more than the big telcos have ever invested in rural fiber. So a reverse auction would divert federal funds to Verizon and AT&T to extend traditional cellular networks, not for super-fast wireless networks.

We already know what it looks like to expand rural cellular broadband. It means building networks that deliver perhaps 20 Mbps to those living close to cell towers and something slower as you move away from the towers. That is exactly what AT&T is building with their CAF II funding today. AT&T is taking $426 million per year for six years, or $2.5 billion in total to expand cellular broadband in rural areas. As I’ve said many times in the past this is perhaps the worse use of federal telecom funding I have ever seen. Customers on these cellular networks are getting broadband on day one that is too slow and that doesn’t even meet the current FCC’s definition of broadband. And in the future these customers and rural communities are going to be light-years behind the rest of the country as household demand for broadband continues to grow at a torrid pace while these customers are stuck with an inadequate technology.

The FCC blog also mentions the concept of possibly re-directing future USF payments, and if I am a small telco that scares me to death. This sounds like the FCC may consider redirecting this already-committed ACAM funding. Numerous small telcos just accepted a 10-year commitment to receive ACAM funding from the USF Fund to expand broadband in rural areas, and many are already borrowing matching funds from banks based upon that commitment. Should that funding be redirected into a reverse auction these small companies will not be able to complete their planned expansion, and if they already borrowed money based upon the promise of that ACAM funding they could find themselves in deep financial trouble.