Now, a new study, which NCTA commissioned and which was prepared by Jeffrey Eisenach of Navigant Economics, shows that flaws in RUS lending practices have extended into the similarly inefficient high-cost Universal Service Fund (USF), creating a double whammy for both taxpayers and companies that are trying to compete against these heavily government-subsidized operations.

Before jumping into the results of the new study, it’s important to state emphatically that the cable industry is absolutely committed to ensuring that Americans have access to telephone and broadband Internet service – goals that we have been working on for decades. While government funding may be necessary to ensure that these goals are achieved in some high-cost areas, the current systems of providing this funding are in need of serious reforms.

First and foremost, resources ought to be devoted specifically to extending broadband access to unserved areas.  Government funding programs, like USF, should be used to provide funding for the building of networks where it doesn’t make sense for private investment.

We’ve previously discussed the critical changes that need to be made to government funding programs. For examples, see this 2009 post on broadband stimulus funding or this 2010 post on how to connect America to broadband in an affordable fashion. In February of this year, we talked about the necessary principles to consider for USF reform. Just last week, we argued that USF funds must be spent in an efficient manner.

The key points of the Navigant Economics study released today can be deduced from its title: The Rural Utilities Service Should Reassess Its Reliance on Universal Service High-Cost Support to Leverage Broadband Loans. To cite a few examples from the document:

• Inefficiencies in the two programs have created a vicious cycle in which consumers finance both the RUS loan and the universal service revenues that underwrite the loan, and where the burdens keep expanding as new RUS borrowings leverage higher USF payments from the high-cost fund, which in turn are used again to justify even more RUS lending.
• Despite the fact that fundamental USF reform – which would reduce the level of USF support received by RUS borrowers – has been on the table for 15 years, and is well-known to be a top priority of the current Federal Communications Commission, the RUS has continued to treat USF subsidies as a stable source of revenue for repayment for loans with maturities of 20 years, an assumption that is highly questionable and seems unrealistic under the circumstances.

The study recommends that RUS should temporarily suspend new loans to recipients of USF funds and stop leveraging USF support to qualify applicants for RUS loans. It also suggests that after the FCC concludes its USF reform proceeding and new rules are in place, Congress and RUS can reassess whether a loan program continues to be needed and if so, how that program can be better coordinated with the USF program to eliminate the problems inherent in the current RUS regime.

The time for reform is here, but let’s make sure we do it right and don’t let past traditions guide future mistakes.

In response to the study – which was prepared by economists Jeffrey Eisenach and Kevin Caves of Navigant Economics – RUS said: “The projects highlighted in the NCTA study are in rural areas that lacked sufficient broadband for rural economic development, as required by the statute,” the spokesman said. “All were carefully vetted on the ground by RUS field staff, received strong support from the local community, and will vastly increase broadband capacity in their communities.”

The RUS is correct in that some small sections of the three case studies lack sufficient broadband access, but when looking at the overall project area, the vast majority of consumers in those areas were already being served.  So instead of using limited government resources to extend broadband to unserved homes, these projects allow for the construction of duplicative networks.  The Navigant study simply demonstrates that the cost of building duplicative networks means that the small number of unserved homes that will be reached comes at an extremely high – and clearly inefficient – cost.

The funding of duplicative networks is also at odds with the prudent strategy that the FCC is implementing in its reform of the universal service system.  As we have noted before, both the National Broadband Plan and the Commission’s February 2011 USF/ICC NPRM recognized that the key to a successful broadband subsidy program is targeting scarce funding to those areas that do not have broadband.  Such an approach achieves the benefits of extending broadband to new areas without the negative consequences of subsidized overbuilding that were identified in the study.

Specifics of the Study

The economic analysis released yesterday shows that the RUS’ history of funding duplicative service has continued under its Broadband Initiatives Program (BIP) despite findings by the Department of Agriculture’s Inspector General and the Government Accountability Office that such projects are not cost effective.

The study examined three large BIP subsidy awards which total $231.7 million, or about seven percent of the total BIP $3.5 billion combined loan and grant program, and found:

• Of the three projects analyzed, more than 85 percent of households were already passed by existing broadband providers, and in one project area, more than 98 percent of households were already passed by at least one provider.
• The estimated cost per incremental home passed will be $30,104 if existing coverage by mobile broadband providers is ignored, and $349,234 if mobile broadband coverage is taken into account.
• The RUS funding approach was at odds with the National Broadband Plan recommendations; the approach used would massively increase the cost of extending broadband to all unserved homes.

On Monday, James Assey, Executive Vice President of NCTA, participated in a Roundtable on Nondiscrimination and Interconnection Obligations.

As part of the stimulus package, funding was included to “establish a Broadband Technology Opportunities Program for awards to eligible entities to develop and expand broadband services to rural and underserved areas and improve access to broadband by public safety agencies.” NTIA and RUS, the agencies that are implementing BTOP, are holding a series of public meetings, and Monday’s event was part of this. In broad terms, “Nondiscrimination and Interconnection Obligations” refers to how networks interact with each other and exchange traffic.

That’s a whole lot of background to set-up the statement that Assey delivered, which can be accessed on our website, along with a summary.

On Tuesday, NCTA Associate General Counsel Steve Morris spoke on a panel at another public meeting. Andrew Feinberg at BroadbandCensus.com provided coverage:

The statutory guidelines provide a good start in determining standards, said Morris. Morris invoked President Obama’s call for a transparent process, and said it be governed by a merit-based system of seven objective measurements to be shared between NTIA and RUS.

Job creation and preservation should be first and foremost among the selection criteria, Morris said. Preference should also be given to those applicants that can complete build-out within the statutory time periods, and that are able to maintain projects afterwards.

Infrastructure should be built out first the “last mile,” Morris said. And programs that target schools, libraries, and other “public interest” institutions should be ranked ahead of those that don’t, he added. Further considerations could be cost per capita and relative expense compared to other forms of communication, he said.

On Wednesday, NCTA responded to a Request for Comments on the FCC Report On Rural Broadband Strategy; those comments can also be found on our website. Essentially, we called for complete interagency communication and coordination; transparency; a set of coherent and clearly defined goals; an update of the FCC’s universal service and pole attachment policies; and an initial focus on extending broadband facilities to unserved areas and underserved populations.

Also this week, Representatives Joe Barton [R, TX-6] and Cliff Stern [R, FL-6] sent a letter to NTIA, RUS and the FCC about the broadband stimulus funds. You should read the letter, but some of the key points are:

• Stimulus funds should go where broadband mapping has been completed
• Funding should go to the unserved over the underserved
• We should stimulate demand rather than supply
• These efforts should be technologically & competitively neutral
• We should fund economically efficient projects

Today, we started trucking equipment over to the Washington Convention Center here in D.C. A crew will start setting up our Broadband Nation exhibit over the weekend (see this previous post).

Broadband Nation is our 20,000-square-foot interactive exhibit at The Cable Show.  This exhibit will demonstrate the many ways in which broadband technology has changed the way Americans live, work and play.  It’s a hands-on opportunity to experience a wide variety of innovative new technology products and services available both now and possibly in the future for the home, school, and office, as well as specialized applications for medical centers, schools, and retail and entertainment outlets, among others. Broadband Nation seeks to capture in tangible ways how broadband has, and will, alter the everyday life of Americans; the exhibit will provide a good rationale for the broadband stimulus funding.

Next week, there will also be a couple sessions at The Cable Show that will focus on this issue.

• Wednesday, April 01, from 3:00 – 4:15 p.m., the session “21st Century Communications Policy: The Role of the States” will feature a conversation with State Public Utility Commissioners examining (like it says in the title) the states’ role in this process.
• Friday, April 03, from 11:00 a.m. – 12:15 p.m., the session “If We Build It, Will They Log On: Barriers to Broadband Adoption and Use” will look at how to drive adoption of broadband applications within the medical, education, safety and environmental/energy sectors.