On November 15, 2021, President Biden signed the Infrastructure Investment and Jobs Act which commits approximately $65 billion towards broadband expansion. Wisely, Section 60104(c) of the Act directs the Federal Communications Commission to submit to Congress “a report on the options of the Commission for improving its effectiveness in achieving the universal service goals for broadband in light of this Act” within 270 days of enactment. Congress also invited the Commission to make “recommendations … on further actions the Commission and Congress could take to improve the ability of the Commission to achieve the universal service goals for broadband.” Last December, the FCC launched a Notice of Inquiry to begin this process. Please join us for a teleforum with industry experts to discuss the legal, economic and policy implications of this important proceeding.
Patrick Halley, SVP, Policy & Advocacy and General Counsel, USTelecom
Alexander Minard, Vice President & State Legislative Counsel, NCTA
Angie Kronenberg, Chief Advocate and General Counsel, INCOMPAS
Dr. George S. Ford, Chief Economist, Phoenix Center for Advanced Legal & Economic Public Policy Studies
Moderator: Lawrence J. Spiwak, President, Phoenix Center for Advanced Legal & Economic Public Policy Studies
As always, the Federalist Society takes no position on particular legal or public policy issues; all expressions of opinion are those of the speaker.
Jenny Mahoney: Welcome to The Federalist Society's webinar call. In today's webinar, we discuss The Future of Universal Service after the Infrastructure Act. My name is Jenny Mahoney and I'm Associate Director of Practice Groups at The Federalist Society.
As always, please note that all expressions of opinion are those of the experts on today's call. Throughout the panel, if you have any questions please submit them using the Q&A feature located at the bottom of the screen so that our speakers will have access to them when we get to that portion of the webinar.
Today we are fortunate to have with us our moderator Larry Spiwak, President of the Phoenix Center for Advanced Legal & Economic Public Policy Studies. With that, thank you for being with us today. Larry, the floor is yours.
Lawrence J. Spiwak: Thank you very much Jenny and welcome, everybody, to our Teleforum today entitled The Future of Universal Service after the Infrastructure Act. By way of quick background for those of you who haven't been following the universal service issue -- and it's an ongoing -- last November President Biden signed the bipartisan Infrastructure Act into law. And it commits about $65 billion dollars towards broadband expansion.
Wisely, as part of that law § 60104(c) directs the FCC to submit the comments for report within 270 days, basically looking at as we're spending all of this money, how does that affect existing universal service programs. That's what we're really going to get into today to talk about how sort of think about it.
The Congress invited the commission to "make recommendations on further actions the Commission and Congress should take to improve the ability of the Commission to achieve the national universal service goals for broadband." And so last December the FCC issued a Notice of Inquiry or NOI to begin this process.
We are very lucky and pleased today to be joined by a panel of industry experts with many years of experience in this business. I will just start to go around the horn. We have Patrick Halley who is the Senior Vice President of Policy & Advocacy and the General Counsel of USTelecom; Alexander Minard, who is the Vice President & State Legislative Counsel over at NCTA, the cable association. We have Angie Kronenberg who is the Chief Advocate and General Counsel of INCOMPAS for the [inaudible 02:45] perspective. And, as we don't have enough lawyers on this call, we are also very lucky to have Dr. George Ford who is the Chief Economist of the Phoenix Center to tell us why we're all wrong as lawyers. That will be really good. Again, my name's Larry Spiwak. I'm the President of the Phoenix Center itself.
Let me first to a quick little analytical set up of the issues and the problems that we're going to be talking about today. For those of us who've been doing this for a long time, universal service, to put it politely, is the third rail of telecom policy. It is a tremendous amount of money. It is highly political, but yet, it has been in law since the '96 act. But it is a hard problem if you approach this seriously. You have demand side considerations. And George will get into a little bit of that. Mostly relevant, do I want broadband or not? Of course we have supply side considerations where the goal is we live in a very diverse and big country, and we have a lot of high cost areas, and it costs a lot of money to serve areas, and many of those areas are uneconomic to serve.
Not to put too fine a point on the pencil, but we have been throwing a huge amount of money at this problem for years, '96 act it's been over 25 years. And now that has been ramped up by the Infrastructure Act with $65 billion. So it's a bit of an oversimplification, but we'll get into this in a moment. But the Infrastructure Act generally -- there's some crossover, so I'll get to that in a moment -- usually is designed to go to deployment. You want to go to deployment, while -- and you've got the BEAD program, which is Broadband and Equity Access Deployment program, while traditional USF's Universal Service Programs tend to go to adoption, WIFI being the most obvious.
Now, there are some crossovers. We need to think about that a little bit, some exceptions. The Universal Service Fund has the high cost fund which is designed to provide subsidies to high cost service areas so people can get that. And the Infrastructure Act has the Affordable Connectivity Program or ACP which subsidizes demand side. So there's just a ton of money and a ton of programs going out there.
So cutting to the chase, with one who is unfamiliar with the industry, one would think -- and to read the press releases out of a lot of places -- that with now that we're spending this huge amount of money, we have finally solved the digital divide. We've finally solved the homework gap for that kind of money. This is a once in a generational thing.
For those of us who are familiar with the economics of the industry -- and I would include probably the FCC itself if you read the NOI -- we're probably going to end up with a never ending stream of subsidies.
So again, Congress asked the FCC to issue this report, and they issued an NOI. And I think they did a pretty good job to try and make sense of that problem. So what we are going to do today is we're basically going to follow the outline of the FCC's NOI and try to walk along their framework to see what we can figure out here and discuss various aspects.
So let's start with the first topic -- and I think it's a good topic to start the discussion with -- is that what is the policy goal here that we're trying to solve. There's always these great phrases. Universal service is great, but the Act does provide some guidance along with the Telecom Act. So the Infrastructure Act defines the Commission's universal -- the Act defines the Commission's universal service goals as what's mandated in § 706 of the Telecommunications Act, which -- for those of us who have been doing this a long time know that line almost by heart -- encourage the deployment on a reasonably timely basis of advanced telecommunications capability to all Americans. Great. Okay. And that's it.
Now, the FCC goes one step further. They say that for purposes of the report that they're going to be drafting, they propose to consider -- and I quote -- the Commission's broadband service goals as "universal broadband, affordability, adoption, availability, and equitable access to broadband throughout the United States."
So I'd like to start the panel by asking a couple questions to everybody. So let me start with you, Alexander, because you're first on my screen here. So what exactly does that phrase mean, when we're talking about equity, when we're talking about availability? How do you put that into practice? Is this interpretation of § 706 correct? Does it go too far? Does it open the door to broader powers? What do you think about that?
Alexander Minard: First of all, thanks to The Federalist Society for having me on. Hopefully this will be a good panel. I'm looking forward to it.
So I don't know if that's a correct interpretation of 706 report. I noticed that the FCC cross references in that same footnote to § 254(b) which I think is where historically the Commission has rooted its universal service principles. There is a fair overlap between availability. I think the way they describe some of those things might be slightly different than how the Commission has historically interpreted its universal service mission. But I think conceptually it's all mostly there.
Lawrence J. Spiwak: Angie, what do you think?
Angie Kronenberg: Alex is correct. The Commission did note in the NOI its § 254 authority. And you may recall that § 254 was about providing network access as well as affordability and specifically addresses rural, middle income schools, libraries, makes reference that this isn't just about providing telecom service per se, but also information service. So they did incorporate that into the NOI, and I feel like the questions that they're asking are the right questions to be asking.
The 706 annual report that the Commissions does, it previously has looked at adoption and whether or not communities have adopted broadband service. So I do believe that the Commission has a responsibility to be looking at these questions and setting goals that are going to prepare our nation for being able to meet the future needs of our nation, be able to compete internationally.
So where we see this going, right, people need access to high-speed network in order to do their jobs, see the doctor, look for a job, do schooling. And COVID really brought this to light over the last couple of years how it is important for our society to be connected and ensuring that everyone has the opportunity to be connected.
And I think, Larry, you mentioned maybe not everybody wants to be connected. And certainly, I think the Commission may want to look at why that is. But I don't think that they're looking for a mandate, but rather they're looking at making sure that everybody who wants to get connected can get connected and have access to the networks that they need in order to do all the things that folks now need to do online including something like this, a virtual webinar.
Patrick Halley: Larry, if I could jump in.
Lawrence J. Spiwak: Please do.
Patrick Halley: Yeah. USTelecom is comfortable with what the Commission has articulated. They sought comment on whether or not the articulation of the goal that you read is the right articulation. And we think it's a fair assessment of what our goals should be. There's two ways to look at it. One is the legal requirement to the Commission under the Act. And then more broadly speaking as just humans, what is our objective in terms of universal service?
This all started with telephone service, of course, going back well into the last century where our mission as a country was to ensure that everyone had access to a telephone. And we pretty much succeeded there with universal telephone service, fixed and mobile, at this point.
It was really around the middle of the 2000, the first decade of this century that we started to say, well, wait a minute. Shouldn't we also be looking at whether or not we should expand our perspective about what universal service is, a lot of that being culminated in the National Broadband Plan in 2010.
And Congress and the Commission and the stakeholders that advocate to the Commission all basically coalesced around the idea that we need to expand our definition and our thinking about what universal service is to include broadband for all the reasons that Angie just laid out.
So if you look at the statute and it talks about access to quality service at affordable rates and it's all about access. It's about affordability. It's about making sure that community anchor institutions specifically in the statute, schools, libraries, and healthcare organizations have access to what we define as universal service. And the statute itself acknowledges it's an evolving level of service even since 2010.
One of the reasons, to your point about why you would think we would have closed this gap by now, a telephone is a telephone. You either have it or you don't. Broadband is -- well, what is it? Is it 4 megabits? Is it 10? Is it 25? Is it 100? Does it need to be symmetrical? We're having arguments about that right now in various contexts.
But we all do acknowledge that universal access to broadband that's available physically to every home in this country, and business for that matter, that's affordable, that's a quality service, that's really an important goal. And I think all of us share that goal. We may have different opinions about what the right policy is to achieve it, which I'm sure you'll want to grill some. But I think it's a fair goal.
Lawrence J. Spiwak: George, do you have the economist perspective on that?
Dr. George S. Ford: Yeah. The Commission was told in '96 to get access to everybody, and they haven't done it yet. I think it might be time to quit expanding their objectives and start narrowing their objectives. Get access to everybody. You can't make people buy things. Some people don't want to buy things. The latest data from the NTIA survey shows, once again, that the number one reason, by a ratio of three to one, for not having internet at home is I don't want it.
So we need to stop growing it, unless you're trying yourself up for a problem you can't solve, and just target the main problem. And that is get broadband to everybody. And do it in a way that's most efficient. Okay? That doesn't mean everybody's going to have a gigabit connection. If you live out in the middle of nowhere, you may have to live with satellite. These networks are expensive, and it's not anybody's obligation except you to pay for your connection.
So focus on adoption, focus on efficient, or focus on availability, focus on efficient deployment of networks, and then once that is accomplished, you can start thinking about other things.
Lawrence J. Spiwak: Well, let me throw this one question out while we're still on this topic. I've given this a lot of thought for a while. [Clears throat]. Excuse me. When you phrase the word affordability -- as I like to joke, I'm not proud of my red necking background, but I have one. And so the Commission over the last 20 years -- and this is something from separate law reviews that I've done -- but we don't do official rate regulation anymore de jure. We've surrendered to the market.
But when I hear the concept of affordability, does that mean de facto rate regulation? We saw that in special access. We saw that in net neutrality. We said well I'm not going to set and give you a tariff, but you're going to do this price.
And the Commission can make recommendations. How far -- I don't think Chair Rosenworcel wants to go that far because they said we don't do rate regulation. But are we on the precipice of something where we're almost doing de facto rate regulation? I ask this only because affordability is now such a huge buzzword that's coming out. Is that a risk we need to worry about for all? Because if you're offering service it's got to be "affordable" and the word -- Title 2 talks about J&R which falls within the zone of reasonableness which is a defined term on the Supreme Court, but it's not affordable. So I just want to throw that out sort of the lawyers real quick. Alexander, I don't know if you have any thoughts on that.
Alexander Minard: Yeah. One way to look at this is Congress recently passed all of that money to do something very similar to what the USF has been doing for the last generation or so. And it explicitly said that NTIA does not have rate regulation authority. So clearly Congress has, in that context, said rate regulation is unnecessary for [crosstalk 00:16:40]
Lawrence J. Spiwak: But the FCC does.
Angie Kronenberg: Well, not technically for broadband. And then I would point out too that I think every commissioner probably sitting on the Commission and the one who's a nominee have all said that they no intention of doing rate regulation. So there's that. But I think, Larry, maybe you're looking further down the road beyond this Commission, not clear to me.
But I think that from the competitor's association's perspective, one of the ways to address affordability is by showing that consumers and business customers actually have choice. That competition does tend to bring down prices. And if it doesn't bring down prices, it usually just keeps everybody in check in terms of keeping those prices at a fair level. But I think that that doesn't always address some of the issues that we see.
And this is where some folks, if we had a public interest perspective here, might say that sometimes there's a market failure. We just have low income consumers in the United States when, even when a service is competitive, they may not be able to afford it. And what do we do to address that? As you also noted, USF as a program as other things to try to address affordability, like make sure that schools and libraries and rural healthcare facilities have affordable service so there's accessibility to those types of entities in certain situations.
And there is a role there for the Commission to ensure through USF and these other potential new programs that service is affordable. And so I think there is a role to be played for them looking at what are the prices that are being made available and what discount or what subsidy do we need to bring to the table to make sure that these entities and these consumers can actually get the service and making up that difference for them.
Alexander Minard: I was just going to say we're going to test George's theory about folks who don't want to subscribe at all because certainly many of my companies, some of the Patrick's companies have agreed to make an offering under ACP effectively free. And so to the degree that folks still aren't signing up for a free program, maybe there are other issues. Maybe it is that they don't see the need for it. Maybe it is that they don't have the digital literacy skills to understand why they might need it. But it takes the affordability question off the table, certainly, for low income consumers.
Angie Kronenberg: And there is an aspect --
Angie Kronenberg: But there is an aspect of the Infrastructure Bill that does try to help address some of these other needs of digital skill and making sure that people can get access to the education that they need in order to know how to use it.
Patrick Halley: Yeah. I feel like we're having three different conversations as once here.
Lawrence J. Spiwak: We are on Zoom.
Patrick Halley: Well, so Angie talked about competition being a way to make sure things are affordable. Agreed. I think George would agree too. And economically speaking having competition is usually good for ensuring that the market is pricing services accordingly.
But USF literally is a program designed to ensure that there's service available where there really isn't an economic reason for a provider to deploy to that area absent that government support. So historically the role of USF has been to say look, this is an area where it's just too expensive to deploy a network. There's not enough customers to recoup your investment. And so you're not typically in a USF funded area funding bunch of competitors. We certainly hope that that's the case historically and going forward. So this is money that's specifically being targeted at areas where it's too expensive.
And the whole reason is otherwise if the company were to deploy there, just based on pure customer density, they'd have to charge a price that was four times as much as anybody could actually afford. So in some ways the high cost element of USF -- and people don't think about it this way -- truly is an affordability play because otherwise either the company wouldn't have went in in the first place, A, or B, if they did, it would just be too expensive for anybody to pay for. It wouldn't make any sense. So we've been trying to tackle it historically for that. That's what USF is. That's why we have this program in the first place.
With respect to rate regulation, look, Alex is right. This new federal money, it flat out says that NTIA doesn't have the authority to regulate rates as they give this money out. And I think Congress is very intentionally, and the FCC, historically through Lifeline and now through the Affordable Connectivity Program, which for the uninitiated is a $30 discount if you're an eligible household, 75 on tribal lands, is meant to address the fact, as Angie said, there are some households where even that level of price is going to be too much. And so I think with that level of commitment, $14 billion for the ACP program, specifically targeted at low income households, will in fact address the "affordability issue" for those households.
The bigger question is is there any desire to address rates? Because systemically, the administration thinks that rates are just too high in general. And I know they think that because they keep telling you that over and over with all of the press that they do. And I think they're wrong if you actually look at pricing in the marketplace. And that's the one area where there's potential for direct or indirect rate regulation. But I think the fact that we're targeting so much funding for infrastructure, so much funding for the ACP program should give folks pause as to whether or not there's actually any need -- and there isn't to be clear -- forms of direct rate regulation. And I bet George has lots of thoughts on all of this.
Lawrence J. Spiwak: Well, let me jump in here because that was actually an excellent segue Patrick -- thank you -- for us now to drill down into now that we've done the set up. So I'd like to hit both the supply and demand side. Let's start with the supply side, which you alluded to a little bit, all right.
The Infrastructure Act, as I said in the beginning, it's clearly designed primarily for new network deployment, CapEx for ostensibly unserved areas. We'll get over to the question of over building in another Teleforum. But the problem is is that the economics that dictate that. Eventually, you build a new network -- and you can certainly see this from the municipal broadband experience. You build this new network. You get all this great subsidy. But eventually because you're building in an uneconomic area, CapEx runs out. So you're going to need additional not only CapEx to keep the thing running, and you're also going to need some OpEx as well.
So that brings us back, as you said Patrick, and the FCC main a point in the high cost fund. We're paying for this, and I think the question to be asked and to be answered is so we're spending 45 billion in subsidies, are we still looking -- we're talking about the future of USF fund -- at collecting billions annually in respect to the source of funds to support networks in uneconomic areas? Is this just this never ending -- I keep thinking that of Tom Hanks movie, The Money Pit. Angie, I'll start with you on that. What do you think about that a little bit? We're spending the money, but eventually if it's uneconomic, it's uneconomic. So I've built a giant home in the middle of nowhere, but it's one of those things.
Angie Kronenberg: Yeah. INCOMPAS actually had a lot to say about this point in our comments and my comments to the FCC. So I encourage you to look at that and take a look at that proceeding. But essentially, there are programs that the Commission has done and a high cost spend that have been competitive programs where they've said this is what you're getting for implementation and oh, this is it. Are you willing to meet these obligations? And there have been providers including INCOMPAS members who have participated in this program and said yes, absolutely we'll build. And there's no guarantee we're ever going to get any operating funding from the FCC again. We're going to see how it works.
But then there's a portion of the high cost program where that's not the case, where they continue to get funding, and they can use that funding to operate. They can also essentially use some of that funding to build and to upgrade their network. And they continue to have opportunity. And we've said in our comments with all of this funding coming from Congress, now is the time where we can build future proof network infrastructure that doesn't continue to need operating mechanisms, operating funding. Now's the time to begin making those assessments and seeing what it is that we can get. And where we don't need to continue to fund OpEx, we shouldn't continue to fund OpEx.
But this actually requires the agency to do a very deep dive type of an analysis, one that I think that they've not really done before. They've relied on cost model. I would argue that cost model was really old. It's pretty dated now, and that the best way to do this is roll out this money to address the unserved, and I know there's some underserved piece, right. Roll it out, and let's access what gets built and then make an assessment about what's still needed out of the high cost portion.
So that's the pitch that we made to the Commission in our comments and reply comments. And I believe others on this panel may have had a similar view.
Lawrence J. Spiwak: All right. Alexander, what do you think about that?
Alexander Minard: I think that NCTA made many of the same points that Angie just rolled out. I mean we're talking about future proof networks. And the administration certainly put its thumb on the scale for fiber in the NOFO that it released last week. And by definition these networks are supposed to require less OpEx. So I think the FCC should think long and hard before it entertains any requests from BEAD recipients for ongoing USF operating expenses. And certainly they don't have a program that set up right now to give only OpEx to a network that's been fully supported through a CapEx.
And there's also the question of the legacy recipients. Patrick's going to -- I know what Patrick's going to say, so I'll preempt him a little bit by saying some of the FCC's existing high cost programs will operate for a number of years. I think we were happy to see that NTIA recognized that some of those areas will get speeds in excess of 120 in the near term and so shouldn't be eligible for BEAD funding. But there are legacy areas that there is no obligation on the part of the carrier to do anything more than 25, 30, and that's by definition unserved. And so it remains to be seen whether those areas get picked up in BEAD either by the legacy recipient or a competitor. And then what does that mean for the legacy USF support? I think hopefully that's something that the Commission will grapple with.
Lawrence J. Spiwak: Patrick?
Patrick Halley: Lots of thoughts. So historically USF was not a CapEx fund. Okay. Historically USF was about ongoing maintenance and operations costs.
Alexander Minard: Well, historically, USF was in perpetuity as well.
Patrick Halley: Yeah. But my point it the way this worked back in the day -- and I'm not saying it's the right way today. I'm just staying historically the Commission identified areas that were "high cost," and effectively providers who were serving those high cost areas -- now post '96 exact. I'm not going to back pre '96 act. And they would say okay, in light of the fact that there are high cost areas, you're permitted to earn a certain rate of return and effectively, we'll reimburse you for eligible costs that you incur to deploy, maintain, and operate these networks.
More recently, as Angie laid out, we've gotten to a world which is more like okay we're going to identify -- because now it's just about broadband primarily -- we're going to identify these locations, and we're going to give you however much money you say you need to build this network. Does that include OpEx or not? In theory, you could build into your bid some level of OpEx into your bidding structure, and it would in theory cover OpEx. For how long? I don't know.
So there's this notion of competition for subsidy dollars I think is theoretically and academically a good idea. The problem is that also gets gamed. Look at the FCC's RDOF process. You had some companies bidding literally one third of the cost to serve locations as other people who were saying how much money they needed to serve that location. And then after the act, they're trying to get other government funding sources to pay for their costs to meet what they promised they would do with the money that they underbid on in the prior option.
So are you really bidding just for CapEx, or are you bidding for CapEx and OpEx, and what portion of your OpEx are you including in all that? I think we have very little experience with the success of these reverse auctions, to be honest, to know whether or not it's truly sufficient. So my big picture take away in all of this is we have a really interesting time right now with a whole bunch of money that's going to go out in the form of some form of a competitive bidding process with the Infrastructure Act money.
Whether or not there will be a need for additional ongoing OpEx after the fact I think is an open question. I'm not saying that the Commission should answer it right now. I think the Commission should acknowledge that this is an issue, and they should come up with a process that provides clarity on the front end. If they're going to look at providing OpEx after the fact, people should know that before they start bidding in these auctions. If they're not, people should know that.
So anyway, that's where I sit, but I don't think we can categorically say competitive bidding, no problem. This whole thing should just be a CapEx fund. We're talking about the middle of freaking nowhere where nobody has ever built broadband before. And now they're going to be competing, which means they're going to have to make promises about the least amount of money they can get to serve those areas. And we'll see if that all works out. But I bet you there's going to be an ongoing need for OpEx and maintenance in some of the locations going forward. How you determine which locations, that's a tough question.
Alexander Minard: I just think it shouldn't be a foregone conclusion that you go to the FCC with your BEAD award and say give me OpEx forever.
Patrick Halley: And I think it shouldn't be a foregone conclusion that could be in a competitive auction like RDOF and then ask the government for more money later to pay for your costs either. So we just need certainty and clarity up front is what we need.
Dr. George S. Ford: How do you get certainty and clarity when you've got two different -- well, really fifty-two different organizations who are managing $45 billion of subsidy? That's not even in it.
Angie Kronenberg: It's more than that when you think about the fact that the BEAD program is actually running through the states and territories. And the notice just came out, and everybody's still digesting them, but the folks that are really in charge aren't going to be at the state and local levels. And I think we're going to see a lot of different results depending upon what their priorities are.
And I will make a pitch, though, in case this audience is interested in taking a deeper dive into some suggestions about how states may want to look at that, and that is Paul de Sa with Quadro Partners, who used to be at the FCC and worked with all of us when we were at the FCC, put forward a paper to help the states understand what they should be looking at, how they look at a business plan, how they should be comparing the different bids that they will be getting. And I thought it was really interesting because this really is a business issue. And this is often hard for regulators and politicians to wrap their heads around it. And they're going to need a lot of guidance and a lot of help.
And we need a lot of coordination as much as possible. I know NTIA is doing a really good job at trying to coordinate with the states. They got one person working with states for so many states, so they have their direct person. And then the federal agencies have entered in to an agreement recently about how they're going to coordinate and share information. And when you see the NOFOs as compared to what we saw come out of treasury, it does look like that are trying to reconcile and make these as consistent as possible so that we don't have so many different types of rules that people would be dealing with and based on the program that they're in.
And it's a hard job. I don't mean to suggest that it's not a hard job. It is going to be really, really hard, and I think it's going to require a lot of coordination between the states, the locals, and the federal government and industry which means we all need to keep talking about this.
Lawrence J. Spiwak: George, do you have something on this from the economist perspective? Lord knows you've done a lot of work on subsidization of networks. I'm sorry. Again, I'm not in the network business. I work for a thinktank. But this notion of a future proof network is kind of like the perpetual motion machine to me. In all the years I've been in this business, I have never seen somebody say I built the network. I'm done.
Dr. George S. Ford: Right. Well, the future is five years in telecom, something like that. So future proofing doesn't mean a whole lot. One of the first things you learn from working at the Commission -- and I suppose my other former Commission colleagues might have realized this as well is you've got to be real careful about the constituency you create. And here we've created a massive constituency with $45 billion, really $65 billion because the ACP, they're going to come back looking for that too. So they're going to be begging for money from here to the day I'm dead and then past that. So the Commission's just got to realize that's going to happen.
Theoretically all this is feasible. We could just tell them in the auction you never get another penny so you better bank in on that present value of your OpEx losses. And they'll say okay, and then five years later, they're back begging for money. That's going to be. It's the way it's going to be. You're creating a constituency. You're creating a multibillion dollar constituency here, and this is going to become the third rail just like universal services. And universal service and lifeline and all that's not going anywhere either.
Patrick Halley: I want to bring it back to affordability too. The other dynamic here that's interesting, so you've got this competition for money. Who can deploy to service these areas at the lowest subsidy? That's good from a government efficiency perspective right? It also creates challenges because you will inevitably have bids that are too low in order to win, and then, as George just said, they're going to realize after the fact uh oh, I may need some more money here to actually make this a going forward operation that can actually succeed.
The other pressure is there's super pressure from the administration right now about charging low rates, right? And even to get access to this money, there's a whole bunch of obligations on offering a low cost option and ensuring that it's affordable for the middle class, very vague. We'll have to see what that means in practice.
So you're saying bid for this location at the lowest subsidy amount, and by the way, we're going to tell you what percentage of the population on a state-by-state basis as the state determines approved by NTIA what percentage of those households you also have to have a standalone low cost option for. And therefore by definition you're reducing the revenues that a company can make from end user charges for a pretty significant portion of the subscribers in that state. That affects your going forward ability to monetize your network and actually make it break even, let alone make a profit on that network.
So there's a lot of factors going in there that make this extremely complicated. I don't envy any of the agencies who have to try to figure out how to make all of this work. But as Angie said, it certainly challenging. We're all going to have to work together to make sure that policy objectives that folks have gets officially addressed but in a manner that actually makes this work.
Lawrence J. Spiwak: Well, that's once again, Patrick, that's an excellent segue into my next topic now that we've exhausted the supply side. Let's turn to the demand side real quick. We've kind of alluded to that. So again we want adoption that's all [inaudible 00:37:43] build it. I remember George and I back in the '96 act, if they build it they will come is a falsehood. Okay. Fine, but we're back to that. So you want to get the demand side.
And certainly the USF funds and the Infrastructure Act, those demand side programs have their own peccadilloes. So, and as we've talked about, ACP is funded through the Infrastructure Act which means the program is arguably finite. Lifeline is funded through USF. ACP is $30 a month. USF is a little over $9. ACP supports devices. USF does not. ACP is just whatever a carrier is offering. USF's got to be bought by an eligible telecommunications carrier.
So a couple of questions, and I doubt we're going to solve this problem today, but it will be fun to talk about it. Here's a couple. So should we subsidize these disorder programs with a single mechanism? Do we need USF Lifeline if we have ACP? What would the best form? I think George had just raised this earlier. Are we going to have the political will to re-up ACP? I just read Jonathon Spalter's blog this morning saying we should make ACP permanent. Were we better off -- and this is the sort of think that struck me -- prior to the ACP and the EBB before that, a lot of companies were offering $15 a month plans. And now all of a sudden the price is going up to $30.
So let me start with George because George has actually written two excellent papers, one on ACP and the other one on Lifeline. How would you design it, George? And you're looking at it from a -- I know we can be here for two hours, but give us an overview because you've actually modeled this in a sophisticated way looking at the Lifeline and the ACP programs. So give us a quick summary of that, if you wouldn't mind. I think it's fascinating work.
Dr. George S. Ford: Well, the Lifeline paper I did talks about basically a separating equilibrium which I think would be useful in all these cases. And basically what that says is that you offer -- you have to offer a plan, a subsidized plan that is largely unattractive to a customer who would pay for broadband otherwise. And that way, the people who opt in to that plan and are subsidized are not taking money from the funds that are needed to support the network generally, as Patrick was talking about a minute ago. And you also don't end up subsidizing people who really don't need to be subsidized to get it because their value's high enough or for some other reason. So that's theoretically what I discussed about these kind of programs.
I think they probably ought to try to condense this into one program. I know that's going to be very difficult because of the permanence of one and the non-permanence of the other, not to mention the constituencies that are being created in the Lifeline program. So that’s going to be tricky, but it's obviously should be done.
Whether or not it's permanent or not -- nothing in government is permanent. It's a vote away from being unpermanent. You could make it look more permanent by having something more like a Lifeline or USF style legislative statement.
But what I would really like to see is what is the motivation for subsidizing broadband in the first place. And that has not been stated clearly. People throw things around about how great the internet is, yada, yada. And it's a necessity and all that. Well, it's not a necessity because a bunch of people don't want it. And if it was necessary, everybody would want it. So it's not that. I'm not exactly sure. I have my own ideas about what motivates it. But you have to say what motivates it because they you can decide how much you're going to spend, who you're going to give it to, and so on and so forth.
Right now we're just throwing money around because of this vague notion of affordability and all that. And certainly there are low income people who have a hard time paying for the internet, but we need to define what it is, what problem specifically we're attempting to solve. I don't think these are market failures. There are no market failures. You don't build networks where it's unprofitable to build, and people don't buy it when they can't afford it. That is not a market failure. That's just markets working.
So what's the motivation? It could be government services. If you're going to require kids to do homework online, then the government has set itself up to make the internet essential for education. But that was a choice to do that. So there's a lot of groundwork that needs to be laid that won't ever be laid because it becomes a constraint on your thinking when you actually have to think. But that's sort of the way I'm looking at it right now.
Lawrence J. Spiwak: Angie, what do you think?
Angie Kronenberg: I'm sorry. Did you direct that to me?
Lawrence J. Spiwak: I did indeed. Do you have any thoughts on the demand part of it?
Angie Kronenberg: I don't believe that people don't need broadband just having watched what happened during COVID. They didn't really have a choice. There were school children who needed to be actually not just to do their homework. They needed to be able to be online with their teacher. And they didn't have capacity at home. So they were sitting in fast food restaurant parking lots, and parents were struggling to get them the access and the devices that they needed to be able to do that. And that went on for a very long time. That is a pure example of why it is that we've got to have opportunities for everyone. And it is a market failure when we haven't been able to deliver what it is that people need to be online.
So that's my perspective. And I will say that the industry that I represent, it is first and foremost their goal to make sure everyone has access who wants access and needs access, and that they've got affordable service, and that they can have the skills that they need to do what it is that they need or want to do online. That’s a [inaudible 00:44:38]
Internet is providing people more choice. I also represent -- Larry, you were so nice to set up the panel in such a way to say that I represent the [inaudible 44:48]. I represent more than competitor and competitive network companies. I also represent online content companies and streaming companies. Consumers today have more options to access video content. They don't have to just use the services that Alex's members have or that Patrick's members have. They have so much more choice. And that choice actually saves them money, and that's a good thing.
But it's not just entertainment video and gaming services. It's also making sure that the person who's at home who's suffering from cancer and needs to have a doctor's visit but can't go to the doctor because they can't actually get exposed to COVID at all can still see their doctor. I think we're well past the time of saying that this is something that is like a utility. It is like electricity. It is like water. And people who need it. And I really thought COVID showed us that like no other event at least in my lifetime in demonstrating why it is that people need it.
When I was working at the FCC over a decade ago with Patrick and Alex on broadband, we were saying at that point we thought it was really important. This is where the jobs are going to be. This is going to help us internationally, but it's so much more than that now. And I think it's because of COVID we've seen why it's so much more than that now.
Dr. George S. Ford: COVID's a great case. What did COVID do to broadband? It increased the demand for it. Now you had to work from home. That's just the market, the way the market works. But still in November 2021, we asked 43,000 people about broadband use. And of the people who weren't using it, 60 percent said they didn't need it or weren't interested in it.
Now that becomes an issue certainly if a government is going completely online, how are those people going to get served? That's an issue. It's not an externality. It's not a market failure. It's the government making a decision that puts some people in a bind. And now it may have to pay to get people online so that it can save money by having fewer offices open and so on and so forth. That's not an externality. That's just an efficiency that the government is going to have to pay for if they're going in that direction.
Patrick Halley: But George, some percentage of folks who don't go online, it's because they say they can't afford it, right?
Dr. George S. Ford: Twenty percent. Twenty percent.
Patrick Halley: I've always had trouble with those numbers, but okay. So let's assume those numbers are right. Then we should have some level of policy reaction to that. Whether it's a direct subsidy like Lifeline and ACP that's the right answer or not, I guess we could debate. But we certainly support the ACP and the Lifeline program.
And if there's a certain percentage that just don't want it, I guess what you're saying is then why are we spending so much money investing in digital equity and training and digital literacy and those types of things. There's a whole separate NTIA program that's several billion dollars just for digital equity. If they don't want to pay for it, then that doesn't affect our spend because they won't take advantage of ACP. I guess I don't understand your point. So who cares? If they don't want it, then they won't end up taking the subsidy. It doesn't cost any money. It'll be useful for those who do need it though.
Dr. George S. Ford: The point is is that they're establishing these goals of universality which are not feasible, which is not going to happen. So why do you keep pretending like it's going to happen and building programs and using rhetoric to suggest that it will? It's not. We never had 100 percent adoption of the telephone. It's just not going to happen. And then you get even deeper and deeper into this, and you start thinking if somebody doesn't want to be on the internet or is not on the internet, what value is it to the nation if they are on the internet after we spend money trying to convince them and subsidizing their service? What is the value?
Patrick Halley: I can think of lots of benefits. And another reason they may not be on the internet is because they don't have a device to connect, and I'm not here to advocate --
Dr. George S. Ford: - So now we've got to buy them a computer too? What is the net present value of the benefits that that individual provides the nation who's paying for all this? Does it exceed the cost of talking them into it and buying them a computer and everything else you have to do? It may be. I'm not saying it's not, but nobody's doing the math to ask that question. We're just throwing billions of dollars around on what I think or how I feel about it. Well, let's do the damn math and see what it says. And I've done the math, and it ain't pretty.
Patrick Halley: It's not an issue of pure economics. And I think the Congress pretty much answered that question that we're going to spend the money. So to go back to Larry's original question which is should there be a single program. Was that what you were asking originally?
Lawrence J. Spiwak: Among other things, for sure. Let's go with that.
Patrick Halley: I love George. He's an economist. He thinks and talks like an economist. I appreciate him. Look, there's ACP which is not a USF program. As you said, Larry, it's funded by appropriations. I'm concerned because it's political that that program may not end up being permanent even as you acknowledge my CEO suggested it should later. That is one of the challenges of appropriations. But we think there's a perfectly reasonable role for Congress to play in appropriating funds for programs like this. So we would encourage them to keep doing it.
At the same time, whether Lifeline and ACP should be merged, we haven't come out with a specific opinion on that other than to say the Commission needs to answer the question. Because Lifeline supports voice. ACP does not.
Lawrence J. Spiwak: Well, let me get then -- because we only have about a few minutes. But I do want to raise what I call the big enchilada and that is universal service contribution mechanisms. I'm going to keep my mouth shut on this one and let all you guys fight about this. Unfortunately, we don't have that much time.
So USF is funded by interstate switch telephone revenue. It is a dying business. We've been looking for ways to increase the issue. There's a lot of ideas perking around. They all have pros and cons. So real fast, how do we crack that nut, if at all? Because I think George would probably argue and I'm sure I would actually argue that the tendency is actually to spend more as opposed to going maybe we should offer less. If that's not in the cards, we're just going to find -- we don't want to spend a lot of money. What else can we do this? So is it increase the bait, general revenue? What is it? So let me start with Angie first and we'll move around the horn real quick.
Angie Kronenberg: I feel like you keep starting with me --
Lawrence J. Spiwak: I'm trying to be nice. All right. Fine. You wait. I'll let you wrap up. Patrick, go ahead. You go first.
Patrick Halley: I want Alex to start because he --
Angie Kronenberg: Yeah. Alex should really go first.
Alexander Minard: I have the reactionary response, so I'll just say many people are saying that it's crisis. They've been saying it’s a crisis for as long as I've been around these issues. It's not clear that it's a crisis. Free press of all places have said it's not a crisis. I think that there's a lot of open questions about what some of the proposals in the record would actually do to the economy. And I think if you look at the record, it's a lot of people who are mostly interested in growing the fund rather than stabilizing or focusing it.
And so I think if we're searching for deep pockets to go after just because we want to fund this program, I think that might be best decided by Congress rather than the Commission. And certainly if we're going to spread this broadly enough, then why not do it through appropriations?
Patrick Halley: It's easy to say there's no crisis when your industry doesn't pay the bulk of the money, but Angie, why don't you go because I think I have a -- if you want.
Angie Kronenberg: You are so --
Angie Kronenberg: - No, no. It's fine. I just I felt bad because I'm talking a lot, and Alex was sitting over there and my left hand corner and hadn't really said anything.
Lawrence J. Spiwak: I'll take a stopwatch to this afterwards and see what the actual clock was but go ahead, please.
Angie Kronenberg: Yeah. Sure. We have, we INCOMPAS, have been working on USF contribution reform. And we've actually been doing that for a number of years now with a very wide, diverse set of parties who are stakeholders in USF. And we commissioned Carol Mattey, who's a formal FCC official and worked in USF for many years, to put this report together. What we were looking at was what under the Commission's jurisdiction could it do to address the issue. As you noted, telecom revenues are going down. It's more than just interstate switch, by the way that pays into USF. But still, telecom revenues are going down, which doesn't really reflect what's been going on in the industry or the modernization of all of the programs to support broadband availability and broadband services.
So looking at the items that the Commission has previously discussed, we recommended that the Commission should broaden the base to include the broadband internet access service revenues. And those have increased dramatically as George noted. Many more people are taking broadband today than ever before because I think it's needed and it's wanted. And the programs are supporting broadband services. So that was our recommendation.
And Carol found that if the Commission were to broaden the base, we would see the contribution factor go down dramatically. That would help the consumers and the customers -- because this is customers too -- who are paying the majority of this 30 percent rate these days. That's a really high rate. The expectation would be it would drop to below four percent. The US Forward report is available online. You can find it on INCOMPAS's website.
But we also just note that the instability of the program is one that's concerning. This 30 percent rate is very concerning to customers. And I would say some customers who buy a lot of services are very sophisticated and are now questioning why hasn't the Commission done something about this. This is a ridiculous amount of money that they're paying into the fund.
I think that's a legitimate question. And we do think it's important for the Commission to act. They've been studying this for over two decades of what they should do to reform the system. We are past the time for reform. Even once the commission were to do an order on what the reform is, it's going to take a while for it to implement it. I don't think it's appropriate to ask Congress to fix a problem that the Commission has the jurisdiction to fix it now.
Lawrence J. Spiwak: All right. Patrick, what have you got?
Patrick Halley: I'm going to try to wrap this up, Larry. The base of revenues, okay, that we assess for purpose of contribution since 1996 has dropped by $25 billion. And that's because nobody buys telephone service anymore like that used to. So there's no doubt that there's a crisis. We can't have a 30 percent, upwards of 40 at one point percent, fee on people's telephone bills or enterprises, the bills that businesses pay. That's just absurd.
So what we have to do is determine are we going to need to continue to fund USF, first and foremost. That was the first 45 minutes of our conversation. I'm going to say the answer's got to be yes going forward. Is it going to be 8 billion like it is now, 9 billion, 10 billion, 20? It depends on the policy makers choices as to what they want to spend the money on. But we're going continue to have money to be spend on high cost, low income, rural healthcare, and schools and libraries programs. And the question is what does the base look like? And surely it needs to be expanded. All I would say is the Commission has authority right now, under § 254(d) to expand the base beyond what it already assesses beyond just interstate telephone customers.
Patrick Halley: I would say include broadband, include any service that has a telecommunications component. The Commission's permissive authority allows it to do that, which would include things like self-provision networks, cloud services, etc. And look to the extent that there are services whose entire business model depend on consumer business access to broadband, whether that's digital advertisers or other cloud based services, or the app stores, whatever it is. Let's look to make the revenue base as broad as it can be. And then let's have the contribution factor be percent or less than one percent. I think that's achievable. The Commission can move forward with its existing authority to significantly expand the base. And to the extent that some services just can't be covered, well, then that's what Congress needs to do and step in.
So we hope that the Commission looks at this very holistically. There's nothing that they can do, and they're not going to do anything overnight, to Angie's point. But I think we need to have a fulsome discussion on certainly expanding the base. And I would hope it would not just be only broadband providers because that would be -- I agree with Alex -- just doing that would be a mistake.
Lawrence J. Spiwak: Well, I see that Jenny has just popped up, which we're now at the one hour mark, even though I had far more questions. This is fascinating. So I want to thank our panelists to today, Patrick Halley, Alex Minard, Angie Kronenberg, George Ford. This was an excellent, substantive discussion.
As I always like to joke, the reason why I tried to avoid universal service in my 25 plus years in telecom is that it's far too important to be determined on the merits, but yet we managed to talk about the merits today, so it was an excellent discussion. I want to think everybody for tuning in. This will eventually be turned into a FedSoc podcast. And so with that, Jenny, I think we're done. Thank you all for again for an excellent, excellent discussion. I really appreciate it. And Jenny, I'll give it over to you.
Jenny Mahoney: Yes. Thank you. I also wanted to thank our panelists for joining us today and also thank our audience for joining and participating. We welcome listener feedback by email at [email protected] As always, please keep an eye on our website and your emails for announcements about upcoming virtual events. Thank you all for joining us today. We are adjourned.