FCC’s High-Cost USF Caps Cause ‘Tremendous’ Uncertainty, Former Chief Economist Says
If the FCC’s quantile regression analysis (QRA) caps were in place from 2006-2012, they would have caused “tremendous financial uncertainty” that could have prevented carriers from investing in broadband, said industry-sponsored research. The study (http://bit.ly/1bhvQAv), by former FCC Chief Economist Simon Wilkie, examined the effects of the FCC’s 2011 modifications to the USF’s high-cost loop support mechanism. A better implementation would be to use the caps not as an immediate limit on support, but as a “trigger” for further individualized attention from the agency, Wilkie said. An FCC spokesman said the reforms “provide much-needed fiscal discipline” on the fund.
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The retroactive analysis aimed to find the probability that a firm would be capped in any given year. In the simulation, the result was uncertainty that led to well over 100 firms coming under the cap during one year, but not in other years, said Wilkie, now an economics professor at the University of Southern California. In 2006, 120 firms would have been within 10 percent of the caps, he said on a conference call with reporters. That number varied across the years, where “perhaps a quarter of firms out there in rural areas face significant risk of being capped” in any given year, Wilkie said. “This creates tremendous financial uncertainty which the firms previously weren’t exposed to,” and creates a “significant disincentive to invest” in long-term infrastructure, he said.
"The risk that a firm is capped is higher than the FCC analysis suggests, and ... the adverse financial effects are significantly higher than the FCC suggests,” the study said. “This degree of uncertainty undercuts the incentives of even ‘efficient’ rate of return carriers (as defined by the model) to invest in network infrastructure, which undercuts the goals of both universal service and increased broadband deployment."
Dynamic equilibrium effects may be “even worse” than the historical data suggest, Wilkie wrote: Firms at the margin will have an incentive to cut capital costs in order to stay below the cap. This will drive down the quantile estimates of efficient costs for all firms, inducing a “race to the bottom,” he said. The strategic timing of a company’s investment will also take on a more importance, as companies delay new investments to lower costs in one year, thereby ensuring their eligibility to get new funds, he said: It’s “an incentive to game the system."
But an FCC official found flaws in the professor’s study. The study criticizes the Wireline Bureau for failing to establish “comparator groups” in developing the benchmarks to track similarly situated companies. “Instead, within the Bureau’s regression methodology, every firm’s costs are used to estimate the hypothetical 90% cost levels for a constructed firm with the same characteristics,” the study said. That’s not how it actually works, the agency official said: The bureau defines “similarly situated” by the similarity of study areas, not companies, across 16 significant variables. Such variables include the number of customers, density and type of terrain. That doesn’t mean there is an actual company with precisely the same characteristics, the official said.
The QRA should be used as a trigger, Wilkie said: Once a telecom firm exceeds a certain threshold, “it might warrant further investigation.” At the moment, the commission has no way of determining whether high costs are due to inefficiency or something out of a carrier’s control, he said. Another option, he said, would be to keep the caps in place for a longer period “rather than rejiggering them based on the annual data."
The QRA imposes a “hard cap” that doesn’t look at the reason for the high expenses, said Shirley Bloomfield, CEO of the National Telecommunications Cooperative Association. From a policy perspective, triggers would make a lot of sense, she said, and could take into account extenuating circumstances like whether a carrier’s service area was hit by a natural disaster. Triggers would allow for “a more thoughtful ability” to manage the USF, she said.
The study, commissioned by USTelecom, NTCA and the Western Telecommunications Alliance, was “not intended to be confrontational,” said USTelecom President Walter McCormick. Rather it was meant to “be collaborative with the FCC,” he said. The data-driven agency should appreciate that the associations have come to them with “verifiable data, now that we are a couple of years out, as to how the program is working with regard to the stated goal of increasing broadband investment in rural America,” he said.
"Connecting all Americans to broadband is a top priority for the FCC,” said an agency spokesman. The reforms in its 2011 USF/intercarrier compensation order “provide much-needed fiscal discipline on the fund and expand investment in broadband,” he said. “Our reforms of Intercarrier Compensation replaced a declining source of revenue with predictable support that allows carriers to plan and invest. We continue to meet with all parties as we pursue these and other reforms to help ensure that all of rural America enjoys the benefits of broadband.”