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Rural Broadband Subsidies: The Gift that Keeps on Giving

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FCC Chairman Ajit Pai frequently discusses his commitment to addressing the digital divide. As part of that, he recently proposed $500 million in additional funding to promote rural broadband access. The desire to improve rural access is laudable, but the announcement glosses over the massive subsidies rural providers already receive.

U.S. consumers already subsidize rural providers to the tune of about $4.5 billion per year through the FCC’s Connect America Fund. Other programs provide even more subsidy dollars. Since 1995 the CAF (previously called the “High Cost Fund”) has distributed more than $80 billion in real dollars, the Department of Agriculture’s Rural Utility Service (RUS) has given out another $7 billion since 2009 in grants and loans for telecom programs, and the National Telecommunications and Information Administration gave away another $4 billion as part of the 2009 stimulus package.

So whenever you hear that someone wants to add even more subsidies, your first reaction should be, “why isn’t the money we’ve already spent working?” Because it isn’t, and we should fix the programs instead of making them bigger.

Analysis after analysis finds that the Universal Service subsidies have had little to no effect on rural penetration, while government reports find that the programs are not transparent and consistently avoids evaluation. In earlier research, I found that overhead costs take up about 60 percent of subsidies sent to rural providers, displacing potentially productive investment. The RUS, meanwhile, makes so little data available publicly that it is impossible to know whether their programs have any effect or how cost-effective they are. The Government Accountability Office suggested in the title of a 2014 analysis that “USDA should evaluate the performance of the rural broadband loan program.”

The subsidies, of course, aren’t free. The CAF is funded by a tax—or “fee” as the providers who receive the money would prefer you call it—on certain telecommunications services. The tax rate consumers face varies based on how much money in subsidies providers claim to need each year. The tax rate this quarter is 19.5 percent. Worse, this tax is highly regressive. Everyone pays it regardless of their income. In other words, low-income people in urban areas pay a tax that benefits rural internet service providers (ISPs) regardless of how wealthy the area they serve is.

None of those points are arguments against working to improve service in rural areas.

As a society we have decided that we want all residents to have access to the internet, and some areas are too remote or otherwise too costly to attract private investment for high-speed terrestrial broadband. Providing broadband access in a responsible manner requires being smart and transparent about how we distribute subsidies, as well as recognizing that for now some areas are too costly to reach through any technology other than satellite, which is available everywhere.

To minimize the negative effects of collecting the taxes from all users that are then given to rural users, the program should strive to be cost-effective and minimize the amount of money it must collect in the first place. However, the CAF program does not work that way.

The CAF rules require the program to collect a minimum of $4.5 billion every year. In other words, the FCC is not allowed to collect less from consumers even if CAF does not distribute it. As hard as it is to believe, paragraph 560 in the Order mandates that behavior. If the FCC distributes less than $4.5 billion to rural providers in a given year, it must still collect at least that much and, presumably, squirrel away the remainder in a slush fund. It is almost certainly this surplus that would make it possible for the FCC to distribute an additional $500 million.

A cost-effective subsidy program should provide funds first where they will yield the largest bang for the buck and last where they yield the smallest. But the CAF program sends recurring funds to providers to the same rural areas, year after year. Any subsidy program should be subject to evaluation and experimentation to ensure the best outcome.

Reverse auctions are likely to yield the best outcomes. In this case, the government would define the network services it believes everyone should have – hopefully based on a careful analysis of both supply and demand information – and geographic areas it wants covered, and ask companies to bid for how much money they would need in subsidies in order to build out in those areas. A group of 71 economists signed a letter in 2009 encouraging this type of approach. It would then be possible to make an objective choice about which projects receive subsidies and which do not.

And the FCC is moving in the right direction. It deserves high praise for promoting cost-effectiveness  with its Mobility Fund auctions and the upcoming CAF Phase II auction. The Mobility Fund Phase II will distribute about $4.5 billion  and CAF Phase II will distribute almost $2 billion over a decade.

It is good that the Chairman and the Commission more broadly are committed to rural broadband access. But that should not simply mean more money for the same wasteful programs. Instead, we should take this opportunity to expect better results from universal service and continue the FCC’s newer and better ways of promoting coverage where it does not exist so that subsidies truly benefit consumers and not just rural ISPs.