Designing the Ideal Federal Broadband Grant Program

In April, FCC Chairman Ajit Pai announced a new rural broadband initiative that will provide $20.4 billion of new funding. We don’t know many details yet, but here are a few things that will likely be involved in awarding the funding:

  • The FCC is leaning towards a reverse auction.
  • The program will likely require technologies that can deliver at least 25/3 Mbps broadband speeds.
  • The program will be funded within the existing Universal Service Fund, mostly by repositioning the original CAF II plan.
  • The grants might all be awarded at once, similar to A-CAM and CAF II awards, meaning that there might be only one chance to apply, with the awards to be paid out over a longer time period.

I’m writing a series of blogs that will examine the ideal way to design and administer a grant program of this size. We’ve seen both good and also disastously bad federal broadband programs before, and i’m hoping the FCC will take some time to make this grant program one of the effective ones. I’m sure the details of this new program are not yet set in stone, and folks in rural America need to make their voices heard now if they want some of this money to benefit their communities.

I’m going to look at the following topics, and perhaps more as I write this. At the end of this process I’ll post a whitepaper on my website that consolidates all of these discussions into one document.

A well-designed broadband grant program of this magnitude should consider the following:

What is the End Goal?

It’s important up-front for the FCC to determine how the grant moneys are to be used. The best grant programs have a specific goal, and then the application and award process is designed to best meet the goals. The goal can’t be something as simple as ‘promote rural broadband’, because a goal that simplistic is bound to create a hodgepodge of grant awards.

What Broadband Speeds Should be Supported?

This is an area where the FCC failed miserably in the past. They awarded over $11 billion in the CAF II program that was used to upgrade broadband speeds to speeds of only 10/1 Mbps. When the FCC set the 10/1 Mbps speed that didn’t even meet their own definition of broadband. How should the FCC determine eligible speeds this time to avoid a repeat of the CAF II debacle?

Who Should be Eligible?

FCC programs in the past have usually made the monies available to a wide range of recipients. However, the specific details of the grant programs have often made it hard for whole classes of entities like cities or counties to accept the awards. As an example, there are many entities electing to not participate in the current Re-Connect grant program because they can’t accept any part of the awards that include RUS loans.

Is a Reverse Auction the Right Mechanism?

The FCC and numerous politicians currently favor reverse auctions. Like any mechanism, there are situation where reverse grants are a great tool and others where they will distort the award process. Are reverse auctions a good tool for this grant program?

Other Issues

There are two drastically different ways to hand out these grants. One is to follow the CAF II mechanism and award all of the $20 billion in one huge auction and then pay it out over 6 or 8 years. The other would be to divide the award money into even tranches and have a new grant award for each of those years.

In the recent Re-Connect grants the FCC decided to blend grants and loans. I know the loan component stopped most of my clients from pursuing these grants. Should there be a loan component of the grants?

There are also technical issues to consider. I had clients who were outbid in the recent CAF II reverse auction by wireless companies that gained bidding preference by promising that their fixed wireless networks could achieve across-the-board 100 Mbps broadband. I still don’t know of a wireless technology that can do that over a large footprint. How should the FCC make sure that technologies deliver what’s promised?

What’s the Role of States in this Process?

What should states be doing to maximize the chance for federal grant money to be awarded to their state?

This blog is part of a series:

Setting the Right Goals for Grants

Speed Goals for FCC Grants

Who Should be Eligible for Grants?

Are Reverse Auctions the Right Mechanism?

What Technology Should be Covered?

State’s Role in Broadband Grants

Summary and Conclusions

$20.4 Billion in Broadband Funding?

Chairman Ajit Pai and the White House announced a new rural broadband initiative that will provide $20.4 billion over ten years to expand and upgrade rural broadband. There were only a few details in the announcement, and even some of them sound tentative. A few things are probably solid:

  • The money would be used to provide broadband in the price-cap service areas – these are the areas served by the giant telcos.
  • The FCC is leaning towards a reverse auction.
  • Will support projects that deliver at least 25/3 Mbps broadband.
  • Will be funded from the Universal Service Fund and will ‘repurpose’ existing funds.
  • The announcement alludes to awarding the money later this year, which would be incredibly aggressive.
  • This was announced in conjunction with the auction of millimeter wave spectrum – however this is not funded from the proceeds of that auction.

What might it mean to repurpose this from the Universal Service Fund?  The fund dispersed $8.7 billion in 2018. We know of two major upcoming changes to the USF disbursements. First. the new Mobility II fund to bring rural 4G service adds $453 million per year to the USF. Second. the original CAF II program that pays $1.544 billion annually  to the big telcos ends after 2020.

The FCC recently increased the cap on the USF to $11.4 billion. Everybody was scratching their head over that cap since it is so much higher than current spending. But now the number makes sense. If the FCC was to award $2.04 billion in 2020 for the new broadband spending, the fund would expand almost to that new cap. Then, in 2021 the fund would come back down to $9.6 billion after the end of CAF II. We also know that the Lifeline support subsidies have been shrinking every year and the FCC has been eyeing further cuts in that program. We might well end up with a fund by 2021 that isn’t much larger than the fund in 2018.

There are some obviously big things we don’t know. The biggest is the timing of the awards. Will this be a one-time auction for the whole $20.4 billion or a new $2 billion auction for each of the next ten years? This is a vital question. If there is an auction every year then every rural county will have a decent shot at the funding. That will give counties time to develop business plans and create any needed public private partnership to pursue the funding.

However, if the funding is awarded later this year in one big auction and then disbursed over ten years, then I predict that most of the money will go again to the big telcos – this would be a repeat of the original CAF II. That is my big fear. There was great excitement in rural America for the original CAF II program, but in the end that money was all given to the big telcos. The big telcos could easily promise to improve rural DSL to 25/3 Mbps given this kind of funding. They’d then have ten years to fulfill that promise. I find it worrisome that the announcement said that the funding could benefit around 4 million households – that’s exactly the number of households covered by the big telcos in CAF II.

What will be the study areas? The CAF II program awarded funding by county. Big study areas benefit the big telcos since anybody else chasing the money would have to agree to serve the same large areas. Big study areas means big projects which will make it hard for many ISPs to raise any needed matching finds for the grants – large study areas would make it impossible for many ISPs to bid.

My last concern is how the funds will be administered. For example, the current ReConnect funding is being administered by the RUS which is part of the Department of Agriculture. That funding is being awarded as part grants and part loans. As I’ve written many times, there are numerous entities that are unable to accept RUS loans. There are features of those loans that are difficult for government entities to accept. It’s also hard for a commercial ISP to accept RUS funding if they already carry debt from some other source. The $20.4 billion is going to be a lot less impressive if a big chunk of it is loans. It’s going to be disastrous if loans follow the RUS lending rules.

We obviously need to hear a lot more. This could be a huge shot in the arm to rural broadband if done properly – exactly the kind of boost that we need. It could instead be another huge giveaway to the big telcos – or it could be something in between. I know I tend to be cynical, but I can’t ignore that some of the largest federal broadband funding programs have been a bust. Let’s all hope my worries are unfounded.

Capping the Universal Service Fund

FCC Chairman Ajit Pai recently suggested capping the size of the total Universal Service Fund at $11.4 annually, adjusted going forward for inflation. The chairman has taken a lot of flack on this proposal from advocates of rural broadband. Readers of this blog know that I have been a big critic of this FCC on a whole host of issues. However, this idea doesn’t ive me much heartburn.

Critics of the idea are claiming that this proves that the FCC isn’t serious about fixing the rural broadband problem. I totally agree with that sentiment and this current FCC hasn’t done very little to fix rural broadband. In fact, they’ve gone out of their way to try to hide the magnitude of the rural problem by fiddling with broadband statistics and by hiding behind the faulty data from carriers that come out of the FCC’s broadband mapping effort. My personal guess is that there are millions of more homes that don’t have broadband than are being counted by the FCC.

With that said, the Universal Service Fund shouldn’t be the sole funding source for fixing rural broadband. The fund was never intended for that. The fund was created originally to promote the expansion of rural telephone service. Over time it became the mechanism to help rural telcos survive as other sources of subsidies like access charges were reduced over time. Only in recent years was it repositioned to fund rural broadband.

Although I’m a big proponent for better rural broadband, I am not bothered by capping the Universal Service Fund. First, the biggest components of that fund have been capped for years. The monies available for the rural high cost program, the schools and library fund and for rural healthcare have already been capped. Second, the proposed cap is a little larger than what’s being spent today, and what has been spent historically. This doesn’t look to be a move by the FCC to take away funding from any existing program.

Consumers today fund the Universal Service Fund through fees levied against landline telephone and cellphones. Opponents of capping the fund apparently would like to see the FCC hike those fees to help close the rural broadband gap. As a taxpayer I’m personally not nuts about the idea of letting federal agencies like the FCC print money by raising taxes that we all pay. For the FCC to make any meaningful dent in the rural broadband issue they’d probably have to triple or quadruple the USF fees.

I don’t think there is a chance in hell that Congress would ever let the FCC do that – and not just this Congress, but any Congress. Opponents of Pai’s plan might not recall that past FCCs have had this same deliberation and decided that they didn’t have the authority to unilaterally increase the size of the USF fund.

If we want to federal government to help fix the rural broadband problem, unfortunately the only realistic solution is for Congress to appropriate real money to the effort. This particular Congress is clearly in the pocket of the big telcos, evidenced by the $600 million awarded for rural broadband in last year’s budget reconciliation process. The use of those funds was crippled by language inserted by the big telcos to make it hard to use the money to compete against the telcos.

And that’s the real issue with federal funding. We all decry that we have a huge rural broadband crisis, but what we really have is a big telco crisis. Every rural area that has crappy broadband is served by one of the big telcos. The big telcos stopped making investments to modernize rural networks decades ago. And yet they still have to political clout to block federal money from being used to compete against their outdated and dying networks.

The FCC does have an upcoming opportunity for funding a new broadband program from the Universal Service Fund. After 2020 nearly $2 billion annually will be freed up in the fund at the end of the original CAF II program. If this FCC is at serious about rural broadband the FCC should start talking this year about what to do with those funds. This is a chance for Chairman Pai to put his (USF) money where his mouth is.

Broadening the USF Funding Base

The funding mechanism to pay for the Universal Service Fund is broken. The USF is funded from fees added to landline telephones, cell phones and on large business data connections that are still billed using telco special access products (T1s and larger circuits). The USF fee has now climbed to an exorbitant month tax of 20% of the portion of those services that are deemed to be Interstate by the FCC. This equates to a monthly fee of between a dollar or more for every landline phone and cellphone (the amount charged varies by carrier).

The funding mechanism made sense when it was originally created. The fee at that time was assessed on landlines and was used to built and strengthen landline service in rural America. When the USF fee was introduced the nationwide penetration rate of landlines in urban America was over 98%, and the reasoning was that those with phone service ought to be charged a small fee to help bring phone service to rural America. The concept behind universal service is that everybody in the country is better off when we’re all connected to the communications network.

However, over time the use of the Universal Service Fund has changed drastically and this money is now the primary mechanism that FCC is using to pay for the expansion of rural broadband. This pot of money was used to fund the original CAF II programs for the big telcos and the A-CAM program for the smaller ones. It’s also the source of the Mobility Fund which is used to expand rural cellular coverage.

Remember the BDAC? That’s the Broadband Deployment Advisory Committees that was created by Chairman Ajit Pai when he first took the reins at the FCC. The BDAC was split into numerous subcommittees that looked at specific topics. Each BDAC subcommittee issued a report of recommendations on their topic, and since then little has been heard from them. But the BDAC subcommittees are still meeting and churning out recommendations.

The BDAC subcommittee tasked with creating a State Model Code has suggested the broadening of the funding for the USF. This is the one committee that is not making recommendations for the FCC but rather suggesting ideas that states ought to consider. The Committee has suggested that states establish a fee, similar to the federal USF fee and use the fee to expand broadband in each state. Many states have already done something similar and have created state Universal Service Funds.

The recommendation further suggests that states tax anybody that benefits from broadband. This would include not just ISPs and customers of ISPs, but also the big users of the web like Netflix, Google, Amazon, Facebook, etc. The reasoning is that those that benefit from broadband ought to help pay to expand broadband to everybody. The BDAC recommended language has been modified a few times because the original language was so broad that almost everybody in the country would be subject to the tax, and we’ve learned over years that taxation language needs to be precise.

This is not the first time that this idea has been floated. There are many who suggested in the past to the FCC that USF funding should be expanded to include broadband customers. Just as telephone customers were charged to fund the expansion of the telephone network it makes sense to tax broadband customers to expand broadband. But this idea has always been shot down because early in the life of the Internet the politicians in DC latched onto the idea of not taxing the Internet. This made sense at the time when we needed to protect the fledgling ISP industry – but that concept is now quaintly obsolete since Internet-related companies are probably collectively the world’s biggest industry and hardly need shielding from taxation.

AT&T is a member of this BDAC subcommittee and strongly supports the idea. However, AT&T’s motivations are suspect since they might be the biggest recipient of state USF funds. We saw AT&T lobbyists hijack the state broadband grant program in California and grab all of the money that would have been used to build real rural broadband in the state. The big carriers have an overly large influence in statehouses due to decades of lobbying, and so there is a concern that they support this idea for their own gain rather than supporting the idea of spreading broadband. We just saw AT&T lobbyists at the federal level sneak in language that makes it hard to use the e-Connectivity grants from competing with them.

But no matter how tainted the motivation of those on the BDAC committee, this is an idea with merit. It’s hard to find politicians anywhere who don’t think we should close the broadband gap. It’s clear that it’s going to take some government support to make this work. Currently, there are a number of state broadband grant programs, but these programs generally rely annually on allocations from the legislature – something that is always used annually as a bargaining chip against other legislative priorities. None of these grant programs have allocated enough money to make a real dent in the broadband shortfalls in their states. If states are going to help solve the broadband gap they need to come up with a lot more money.

Setting up state USF funds with a broad funding base is one way to help solve the rural broadband divide. This needs to be done in such a way that the money is used to build the needed fiber infrastructure that is needed to guarantee broadband for the rest of the century – such funds will be worthless if the money is siphoned instead to the pockets of the big telcos. It makes sense to assess the fees on a wider base, and I can’t see any reasonable objection against charging broadband customers but also charging big broadband-reliant companies like Netflix, Google, Amazon, and Facebook. The first state to try this will get a fight from those companies, but hopefully the idea of equity will win since it’s traffic from these companies that is driving the need for better broadband infrastructure.

Increased Telehealth Funding

On July 11 the FCC announced that they are seeking a new $100 million use of the Universal Service Fund to create a “Connected Care Pilot Program”. The announcement was made in a joint op-ed by FCC Commissioner Brandan Carr and Mississippi Senator Roger Wicker.

Commissioner Carr got interested in the concept when he visited Mississippi six months ago and looked at a telemedicine trial for diabetes patients in the Mississippi Delta. That trial was monitoring patients 24/7 and drastically reduced the cost of patient care by alerting doctors to problems at an early stage and avoiding costly hospital stays. That trial had saved $700,000 per year in savings due only to avoiding hospital readmissions. It’s hard to put a number of the avoidance of misery and early death that was avoided. It’s estimated if the same monitoring was done just for 20% of the diabetes patients in the state that the annual savings would be $189 million.

In the past the Telemedicine Fund has only been used support rural brick-and-mortar facilities – rural health clinics and rural hospitals. This new trial fund will be used to instead fund larger trials to monitor patients in their homes. It’s going to concentrate on programs that will benefit low-income patients including those on Medicaid and veterans receiving free health care. If approved the funding will support a handful of projects for a two or three-year period with the goal of measuring the savings.

We already have evidence that medical monitoring works. The Veterans Administration spends an average of $1,600 on patients in it’s remote monitoring program compared to $13,000 per year for similar patients who have home-based primary care. Another monitoring trial in the northeast showed a $3.30 net savings for every dollar spent on remote monitoring.

The FCC blog on the issue also points out that home monitoring improves the health outcome for patients.

  • A study of 20 remote patient monitoring trials found a 20% reduction in all-cause mortality and a 15% reduction in heart failure-related hospitalizations;
  • The VHA’s remote patient monitoring program resulted in a 25% reduction in days of inpatient care and a 19% reduction in hospital admission;
  • One remote patient monitoring initiative showed a 46% reduction in ER visits, a 53% reduction in hospital admissions, and a 25% shorter length of stay.

For the FCC to get involved in this means there will be connectivity costs to cover. I envision that a significant share of this program will go towards paying for some kind of broadband connectivity for patients in the program. In some places there will be decent broadband and in rural areas this is likely going to mean buying a fixed cellular connection for the monitoring.

Health care costs are out of control in this country and after more of these trials we’ll hopefully see insurance covering the needed connectivity costs for monitoring programs. If the savings are as large a promised then insurance companies and everybody will benefit from monitoring and early detection of problems compared to acute care costs when problems have gone too far.

This funding will be voted on at the August FCC meeting. The FCC in May already increased the annual funding for telehealth from $400 million to $571 million. I can’t tell by the press releases if this would be funded by that increase or if this is additive on top of it.

Broadband Deserts

I recently spoke with a guy who lives 30 miles outside one of the larger cities in North Carolina. Where he lives there is zero broadband. It’s hilly and full of pine trees and they can’t even easily get satellite broadband. There is zero cellular coverage. Even though most of the people who live there work in the nearby city, from a broadband perspective it’s at the end of the earth. And there is very little prospect of anybody bringing broadband there without some sort of grant or other financial assistance to help pay for the construction.

This guy’s horror stories are familiar to the millions of others who live in similar situations. In order to send or receive an email he has to drive to the top of a hill 20 minutes from his house which is dangerous due to narrow road shoulders and heavy big truck traffic. If schoolkids or others in his area want a real broadband connection they have to go even further to find one of a handful of public hot spots.

Just recently there was a blog by two of the FCC Commissioners that suggested that the ‘wealthy’ people that live in rural areas ought to pay for their own broadband connections. But this guy’s neighborhood is not full of millionaires enjoying a mountain get-away retreat – they are everyday working people. The homes in his neighborhood were built decades ago before there was broadband, so nobody can be faulted for moving to the “sticks” and then demanding city services.

I would describe where he lives as a “broadband desert.” Broadband deserts are areas of our country that for some reason are unlikely to get broadband in any form. Sometimes they are remote (often due to terrain), and sometimes these are just the leftover places that never even got good telephone copper wires. These broadband deserts are not just in the most remote parts of the northern Rocky Mountains as those in the federal government might imagine – there are pockets of broadband deserts around all of us. A few years ago I was working with one of the most populous counties in Minnesota and they were shocked when our research identified a number of such pockets scattered around their county.

I believe these broadband desert areas are on the verge of being abandoned and blowing away if we can’t find a way to get them broadband. We have had three other major events in US history that have created ghost towns. The first was when many little towns were bypassed by the railroads in the late 1800’s and disappeared as a result.  Secondly, in the early 20th century, towns that didn’t get electricity faded away. And finally, later in the 20th Century, a number of little towns that were bypassed by the then-new Interstate highway system languished and many have now disappeared.

Broadband is next on this list of breakthrough technologies that will be vital for communities to continue to flourish. Towns without broadband are going to become irrelevant. People who live in these broadband deserts will soon be unable to sell their homes and will eventually walk away from them. And certainly nobody is going to build new homes or bring new businesses to places with no broadband. Families won’t be able to raise kids in the broadband deserts. People won’t be able to partake in the work-at-home economy that is proving to be a boon to a lot of rural America. Communities that don’t find a broadband solution are going to dry up and blow away just like the towns in the old west that were bypassed by railroads.

Probably the worst reality for this guy I was talking with was that he knows what broadband can do for a town. He runs a gigabit broadband network for a city that is used to connect city buildings. I met him at a meeting of CLIC NC, a local chapter of the Coalition for Local Internet Choice – a group that strongly advocates for gigabit fiber networks. This guy can see that many other similar neighborhoods in North Carolina are getting fiber to their homes because they happen to live in an area where a cooperative or small telco is willing to invest in their neighborhoods. But the majority of these rural broadband deserts are not so lucky and there is nobody even thinking about bringing them broadband.

The clock is ticking for these broadband deserts. If there is not a solution to help these folks within a decade it might be too late. People in these broadband deserts will reluctantly leave and it doesn’t take a whole lot of egress to push any town or neighborhood onto the irreversible path towards becoming an abandoned ghost town.

It seems to me that a lot of regulators and policy people are okay with this. These neighborhoods are often not large (although in some places entire counties have no real broadband) and by being scattered they don’t have much political clout. Without broadband and cellphone coverage they can’t even call or email to complain. They are easily ignored and easily forgotten.

But it doesn’t have to be that way. The Universal Service Fund was originally created to fix the problem of bringing telephone service to the most remote parts of the country. The original genesis of the USF was the belief that we are stronger as a nation when we are all connected. And that is probably truer for broadband than it was for telephone service. As a country we have the money to get broadband to everybody, but the question that most matters is if we have the political will.

Michael O’Rielly’s Vision of Broadband Expansion

FCC_New_LogoA whole lot of the telecom industry is anxiously watching the news to see if there will be a federal program to expand rural broadband. We’ve already had new FCC Chairman Pai come out in favor of closing the digital divide and bringing broadband to everyone. And there are those in Congress pushing for money to expand rural broadband.

Last week FCC member Michael O’Rielly entered the fray with a blog post about funding rural broadband expansion. There are things in that blog I heartily agree with, and others that I disagree with (as you might expect).

O’Rielly warns that the government should not shovel money at a rural solution in such a way as to drastically overspend to get a solution. I completely agree and I wrote a series of blogs last year (1, 2, 3, and 4) that make the same point. The government wasted a lot of money when handing out stimulus grants in the past and I’d hate to see them make the same mistakes again. There is a long list of things that were done poorly in that grant program, but a lot of this was because it was cobbled together quickly. Hopefully, if we give out new federal money to help deploy broadband we can take the time to get it right.

O’Rielly suggests that any rural broadband expansion program be handled through the Universal Service Fund. No matter which part of government tackles this there will be a need to staff up to implement a major broadband expansion program. But I agree it makes more sense to hand this to an existing program rather than to hand it to somebody like the NTIA again.

He stated one thing that has me scratching my head. He stated that he has heard of ‘countless’ examples of where stimulus middle-mile fiber routes hurt commercial providers. I have hundreds of clients, most of them commercial ISPs, and I have never once heard anyone complain about this. Many of my clients instead are enjoying lower-cost rural transport on the BTOP networks. These complaints have to be coming from AT&T and Verizon who don’t like lower-cost alternatives to their massively overpriced special access. Special access transport is one of the biggest killers of rural business plans.

It’s clear that O’Rielly has a bias towards having commercial solutions for broadband rather than government ones. I don’t know anybody that disagrees with that concept. But by now it’s pretty obvious that the big commercial ISPs are never going to invest in rural America and it’s disingenuous to keep pretending that if government funds rural broadband that it will somehow harm them. The big ISPs have been working hard to withdraw from rural America and the providers that are left – the independent telcos, cooperatives, and rural governments – are the ones we should trust to deploy the broadband we know is needed.

I take major exception to his contention that “ultra-fast residential service is a novelty and good for marketing, but the tiny percentage of people using it cannot drive our policy decisions.” This statement has two glaring omissions. First, there are many households that need fast speeds today for home-based businesses, education, and reasons beyond just watching videos or playing games. When 10% of homes in the US don’t have broadband those homes are excluded from participating in the benefits of the digital economy. It’s hard to put a dollar value on what that is costing our economy – but it’s huge.

But second – and more importantly – this ignores the inevitable increase in demand over time. US households have been doubling their need for speed and the amount of total download every three years since 1980 – and there is no sign that growth in demand is over. This means any network that is just adequate today is going to feel obsolete within a decade – and this also means you don’t make policy for today’s demands, but for demands that we already know will be here in another decade. This is why there has to continue to be a focus on fiber first. As much as O’Rielly might hate some of the worst practices of the stimulus grants, his FCC approved the disastrous giveaway of billions to the big telcos to expand rural DSL in the CAF II program. We can’t take that path again.

Finally, O’Rielly says that the government should not be picking broadband winners and losers. That sounds like a great political sentiment, but if the government is going to supply funding to promote rural broadband that money has to go to somebody – and by definition that is picking winners. But O’Rielly does temper this statement by saying that funding shouldn’t just go to the ‘well-connected’. I hope he really means that and gets behind a plan that doesn’t just hand federal broadband funding to AT&T, Verizon and CenturyLink.

Libraries in the Digital Age

LibraryToday’s blog was inspired by reading Libraries: Broadband Leaders of the 21st Century by Craig Settles, a well-known broadband advocate. As someone who hasn’t been to a library for many years his paper surprised me with the number of different ways that libraries are engaged in broadband today.

Probably the best known role of libraries is as a source of broadband for those who don’t have access anywhere else. Libraries today offer broadband at computers as well as WiFi for patrons to use on their own devices. A recent FCC report noted that in most cities anywhere from 15% to 25% of citizens don’t have broadband at home, and for many of them the library is a place they can get access to the web.  This access lets kids do homework, provides job training for those looking to change careers and gives access to government web sites that are increasingly moving input to social systems on-line.

But many libraries go a lot farther. For instance, there are libraries today that are lending mobile hot spots to enable people to have internet access outside the library for a few hours at a time. Many libraries are at the center of efforts to improve digital literacy and they have programs to train people in computer skills and to help them accomplish needed tasks on the web. Many library systems also have training programs in advanced computer skills like coding.

Libraries everywhere want larger faster broadband connections. In many communities the libraries get the same speeds of broadband that are available at homes. And while having a 100 Mbps connection sounds fast, when that much bandwidth is divvied up among a hundred patrons it slows to a crawl. And sadly, there are still a lot of libraries across the country that are served by only T1s or slow DSL connections.

The White House announced a goal in 2013 in the ConnectED initiative to get at least 100 Mbps connection to schools and libraries within five years, with the ultimate goal being gigabit bandwidth. And there has been a lot of progress, but the most recent FCC Broadband Progress Report says that 41% of schools and libraries still don’t have 100 Mbps connections.

Libraries can get assistance to build broadband facilities using the Schools and Libraries portion of the Universal Service Fund, and which is generally referred to as the E-rate program. This fund can be used to subsidize the monthly broadband bills, but can also be used for physical parts of the network like fiber to connect library branches or WiFi systems within a library.

Some communities have been able to really leverage E-rate funding by tying their schools and libraries together into an integrated network and by using libraries to meet educational goals of the schools. It’s generally easier to get funding for schools compared to libraries, but by networking them together you can bring some of that funding in to help improve the libraries and to make them an integral part of the education complex. This leverage can be expanded to be even stronger by linking networks to hospitals and leveraging funding available to improve broadband for healthcare.

Settles makes a case for allowing libraries to participate in the upcoming Lifeline program that will provide $10 monthly subsidies for broadband for qualifying low-income homes. Since libraries are the source of broadband for many low-income people an argument can be made that spending that subsidy at a library can benefit more people than spending it at one home. It’s an interesting concept and would take action by the FCC or USAC, the entity that administers the Universal Service Fund.

Since most cities are still far away from a time when there will be affordable broadband available to everybody, the libraries are likely to continue to be an important part of the broadband solution for most communities. It’s important for library administrators to understand the options available to them to maximize the funding they can get to provide public broadband. Papers like the one written by Settles are an important step in that process.

An Idea for Funding Rural Fiber

eyeballI’ve been working for a long time with rural broadband and it has become clear to me that there is no way on our current path that we can build fiber everywhere in the US. The borrowing capacity of all of the small telcos and coops is not nearly large enough to fund fiber everywhere. It’s often difficult to have a business case for rural fiber that you can get funded at a bank. It certainly doesn’t look like the federal government has any plans to fund fiber, and even if they did they would probably spend too much by imposing unreasonable rules that would drive up construction costs.

But there are other ways that we could fund fiber everywhere. For example, consider the utility model. Utilities are generally able to get funded because they are guaranteed a rate of return of perhaps something like 10% on their investment. It has been the guaranteed returns that have allowed rural telephone to borrow the money needed to operate.

If fiber networks had a guaranteed return there would be many commercial lenders and other investors willing to provide the money to build rural fiber networks. There is a huge amount of money available from pension funds, insurance companies, and other large pots of money that would be attracted to a steady 10% return.

There is no reason the utility model can’t be applied to rural fiber. The primary characteristic of a regulated utility is that it is a monopoly, or nearly a monopoly. In rural America today there is no real broadband competition. Rural areas are served by a combination of dial-up, satellite, cell phone data, very poor DSL or fixed wireless systems. There are many millions of households with no other options other than dial-up or satellite.

There are two keys to making this idea work – how to pay for it and how to monitor and regulate the earnings of these new broadband fiber monopolies. We already have a historical model of how to pay for this. Rural telephone companies for years were regulated in this manner and there was a combination of funding mechanisms used to fund rural telephony. Most obvious was local revenues collected from customers. I know of rural fiber networks today with 70% to 80% broadband penetration rates, so these networks would get a significant number of customers and local revenue.

Telephone companies have also pooled some of their revenues nationally in process called cost separations. Phone companies throw all of their interstate revenues into a pot and divvy up the money according to need. There is no reason that some of the broadband revenues couldn’t be pooled.

Finally, the telcos had direct subsidies from the Universal Service Fund to make up any shortfall. The biggest complaint about the Universal Service Fund is that it isn’t paid to companies on the same basis as other revenues, and thus it enriches some companies unfairly and doesn’t give enough to others. But if USF revenues were put into the same pool as other revenues then it would be allocated each year where the financial need warrants it.

The process of pooling revenues has always been a bit complicated in practice, but simple in concept. Each company in a pool calculates their costs according to a specific formula – in the case of telcos, using rules proscribed by the FCC. Then, some external pooling body examines those calculations and administers the collection and distribution of pooled monies. This whole process of administering a pool adds only a tiny fractional additional cost onto the process – and is necessary to make sure everybody plays fair and that there is no fraud.

The basic concept of pooled revenues and some kind of broadband USF could provide the economic basis for obtaining the funding needed to build rural broadband. I would expect that rural telcos and cooperatives would jump onto this idea immediately and build more rural fiber. And there is no reason that the large telcos wouldn’t at least consider this. But since they are driven by Wall Street earnings they might pass on regulated returns.

We know this process can work because it has been in place for decades for rural telephony. The only alternative to this that I can think of is for the federal government to hand out grants to build rural broadband. But I just don’t see that happening in today’s political environment. So rather than wait for the federal government to finally decide to hand out huge grants we ought to take the model we know and get going with it.

This concept would need a boost from the federal government to get going. It would probably require an act of Congress, but this is something that is probably easier to get enacted than a huge grant program. And it is a lot more attractive politically since it provides a way for private investment to fund rural broadband rather than the government. We have too try something because the rural areas are falling quickly onto the wrong sie of the digital divide, and that is not good for any of us.

A Better Way to Fund USF

USF-logoThe Universal Service Fund (USF) is shifting its focus dramatically and this leads me to ask if there ought to be a more equitable way to fund this effort.

Historically, the USF was established to help pay for providing telephone service in high cost and remote parts of the country. Largely, it worked and telephone networks were expanded to places that certainly never would have gotten service without these funds. Then, over the years, Congress and the FCC expanded the role of the USF and it was also used to provide telecom services to schools and libraries and to bring telecom and data services to rural health care providers. And as each of these new functions was added the size of the fund grew to over $8 billion.

But now there are big shake-ups in all of the traditional functions of the USF. Subsidies for rural telephony are being phased-out and instead these subsidies are going to be used to promote rural broadband. A significant number of billions of dollars are going to be given to companies over the next seven years that are willing to build rural broadband to places that don’t have it today. The money provided for schools and libraries has been refocused on getting gigabit connections to schools and libraries.

And so the fund is becoming very much focused on bringing better broadband to places that need it. But surprisingly, this is still being funded almost entirely by a surcharge on interstate and international telecommunications services. And there are some real problems with using interstate long distance as the base for collecting the fee.

First, the revenues used for long distance have dropped annually since the turn of the century. Long distance has gotten so cheap that it’s not something that is even noticed much by consumers any more, except perhaps in some rural communities that still charge a lot for long distance. Long distance has become such a commodity that it is often built into the base rate for telephone service. About the cheapest charge I’ve seen for this is where Charter is selling telephone lines with unlimited long distance in some of their markets for $15 per month.

The same thing has happened to interstate transport for special access service. It was routine just a decade ago to charge $4,000 – $6,000 per month for a DS3, which is about 45 Mbps of dedicated bandwidth. But today you can buy a gigabit of bandwidth for a fraction of that cost – and buy it from somebody who is not selling it as special access and who does not add a fee for USF to that charge.

As the amount spent on interstate long distance has continued to drop, the USF assessments have climbed as a percentage of the interstate revenues. I have a few clients who now have a USF assessment of over 17% of their interstate billings. Years ago this started as a rather small fee, but it is a noticeable item on customers’ bills, particularly on buyers of special access.

So if the new data-centric USF is going to work, we need to somehow expand the assessment base. Interstate telco revenues are going to continue to drop. There are only a few places that the assessment base can be expanded, but they are major sources of new revenue. First, cell phones get some USF assessment today, but not as large of a share as landlines. There is also the possibility of expanding USF to include intrastate long distance, but that gets into a messy jurisdictional fight.

The biggest way to spread out the USF fee and make it more reasonable and more sustainable is to assess it on broadband services. This is now easier to do since broadband is covered under Title II. But Congress has real heartburn against ‘taxing the Internet’ which I can’t understand. The original push to not tax the Internet came during the late 1990s as the new broadband services were growing. At that time the political wisdom was that you don’t tax a burgeoning industry and give it a chance to get on its feet.

But there is probably not a more mature industry in the country now than broadband. As far as home utilities, it now comes in third in penetration rates behind electricity and water. Adding a 50 cent per month tax on broadband would not cause any great economic burdens and would spread out the funding to the USF fund. Besides, who better to tax to get broadband to rural places and schools than all of the people who already have broadband?

Unfortunately it will take an act of Congress to change the way that the USF is funded. That is likely only to happen as part of a larger new Telecom Act, something that is overdue. But I can’t see any realistic way that this is going to happen with our split government. Republicans are likely to use a new telecom act to try to defund network neutrality and to cut back on the FCC’s powers in general. And as long as there is a democratic president a new act is not going to get signed. So I guess USF funding reform goes on hold with many other telecom issues that we ought to be addressing.