If, like me, you’re in a sports fan diaspora (i.e., you grew up someplace else and continue to follow the teams you rooted for when you were a kid), you’re probably familiar with the feeling you get when the local paper has a full-length article about one of your teams.  It’s a mix of excitement (yay! they’re writing about the Sox) and concern (I just know they’re going to somehow get the story wrong).  Well, that’s pretty close to the feeling I had when I saw this story about universal service reform in The Washington Post the other day (If you have not noticed yet, USF is one of the “teams” I follow closely).  As it turned out, I got to indulge both emotions.

First, on the concern front, readers of the Post article may have gotten the misconception that the Federal Universal Service Fund (USF) spends more than $8 billion annually on subsidies for rural America. In fact, the parts of the fund that focus on rural/high cost areas, account for about $4.6 billion. The rest of the money is divided among the E-rate program, about $2.7 billion, (which funds services provided to schools and libraries), the Low-Income program, approx $1.2 billion, (which provides discounts to qualified low-income consumers), and the Rural Healthcare program, approx $214 million, (which funds eligible health care providers for services, including broadband).

Now, on to the excitement.  The WaPo article asked, but did not answer (at least not directly), a very interesting question.  Why is it that AT&T and Verizon, which are the largest recipients of USF dollars, are supporting fundamental changes in the FCC’s high-cost support mechanisms? I mean, why would anyone want to turn down free money?  While I can’t speak for Verizon, I can explain why AT&T wants these mechanisms changed (and don’t worry, I’m not going to say that it’s out of the goodness of our heart).  But, in order to do so in a way that makes sense, I’m first going to provide a little more detail about some of the component parts of the high-cost program. 

The WaPo article cited information that the FCC recently provided to the House Energy and Commerce committee which showed that from 2007 to 2009, AT&T received about $1.3 billion in high-cost funding. (The article didn’t mention that, over the same period, AT&T – and, ultimately, its customers – contributed dramatically more than $1.3 billion to the fund.) AT&T is a company that provides a number of different services in many markets.

And (back on the concern front), readers may have gotten the wrong idea that AT&T invests all of these dollars in wireless networks for unserved areas.  In fact, about half of the money AT&T gets from the high-cost fund is for wireless and the other half goes to AT&T’s provision of wireline service to rural and high-cost areas.  And, none of the wireless subsidies are tied directly to investment in unserved areas.  What they’re tied to is whether an incumbent wireline provider receives funding in a given area.  In which case a potentially unlimited number of wireless providers may receive for every handset they sell to people in that area the per-line amount that the wireline provider receives.

Now I’m sure that in many cases this program caused wireless providers to invest in areas which they might otherwise have ignored.  But, when you see more than a dozen wireless providers receiving funding in the same area, you have to wonder whether this is really a cost-effective program.  It’s almost as if the FCC put out a sign saying GET DOLLARS HERE.  Needless to say, this became a very popular program.

This now brings us back to the question raised but not answered in the WaPo article.  In a competitive business like wireless, it’s not easy to sit idly by while your competitors tap into a new revenue stream.  Nor is it consistent with your shareholders’ interests.  So, AT&T’s mobility affiliates applied to receive this funding too.  AT&T’s attitude toward this funding has always been…we can’t allow our competitors to have this advantage over us.

At the same time, AT&T has been perhaps the leading proponent of fixing this broken program. AT&T urged the FCC, in 2007, to put a cap on this part of the fund, which the FCC ultimately did in 2008.  And, AT&T also recommended that the FCC entirely phase out this program over a five year period, and use the money to promote broadband investment in unserved areas.  I’m proud to say that the National Broadband Plan largely endorsed this approach.

The bottom line is that AT&T has long advocated for fixes to this program, despite the fact that AT&T continues to receive funding under it.  AT&T’s motivation for supporting USF reform and its receipt of funding under the existing program are not inconsistent. From a public policy perspective, we want a framework that’s rational and works for rural areas.  While AT&T believes that a better program would promote more rational market behavior that would ultimately benefit its owners, AT&T at the same time must have the same opportunities as its competitors, even when they’re based on wrong-headed regulatory structures.

In my next post, I’ll dig into the wireline side of AT&T’s USF funding.

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