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PUC’s Nelson Says FCC Connect America Fund Hinders Rural Broadband

Last week I mentioned CenturyLink's receipt of $35 million from the FCC's Connect America Fund to expand rural broadband as an example of Uncle Sam fulfilling one of Adam Smith's proper roles of government: providing basic services that the private sector won't.

CenturyLink's announcement of the grant tossed some sour grapes at the FCC: the company had hoped to get about $90 million, but they didn't like the restrictions included with the grant. AT&T has rejected CAF money nationwide.

South Dakota Public Utilities Commissioner Chris Nelson is sympathizing with CenturyLink. He says the Connect America Fund is actually hindering rural broadband development:

"Rural phone companies are completing their broadband infrastructure expenditures this year but are making very, very few plans for next year and literally nothing the year beyond that because of the uncertainty the order has caused," Nelson said.

Why the uncertainty? Companies are subsidized based on a complicated formula that considers how many customers are served in how large an area. Critics say that the changed formula means companies can't predict up front how much money they'll get back, and are therefore hesitant to invest ["FCC, South Dakota Utilities Split on Broadband Fund Reforms," AP via Rapid City Journal, 2012.07.29].

Nelson made similar comments in a June 20 Governing article on the Connect America Fund. However, the main complaint raised in that article seems to be less that the funding is uncertain and more that the CAF isn't immediately available to more companies and that it doesn't set sufficiently high standards to bring country customers bandwidth that compares well with what their city cousins get.

I disagree with the well-read Commissioner Nelson at my own peril, but I'm having trouble seeing the Connect America Fund hindering rural broadband development. The CAF seeks to bring service to people who aren't getting it now. If the private sector is already has a business case to build to these areas, those projects are happening. CenturyLink is putting $35 million into connectivity that I assume would not have happened otherwise. Even if not every player takes CAF funds, we still see an advance over the status quo, right? The CAF may not do everything we hope, but it's doing more than the private sector alone.

19 Comments

  1. Les 2012.07.30

    Give Rich Coit a call at SDATC and spend a couple of hours coming up to speed on this issue Cory.

    Their plan is so disorganized and filled with corrupted data it couldn't work even if the basis was good.

  2. Justin 2012.07.30

    "Their plan is so disorganized and filled with corrupted data it couldn’t work even if the basis was good."

    Not much detail there. If I am to be surprised that the local phone monopolies oppose this, I am not. The rural cooperatives have made tons off of "chat line" scams farming the large carriers lately and have still not put in fiber optics. There is a reason: it probably isn't economical for private enterprise if the government is willing to pay for it with this program. The idea is to build uneconomic locations out much like was done across the U.S. with rural electricity years ago.

    If it were, the local phone companies should have built it. I highly doubt there would be money to subsidize an already served area in rural SD.

    I understand people don't like competition, but if there is one thing SDATC needs, it is competition.

  3. Thad Wasson 2012.07.30

    I think Nelson is trying to say FCC is vague in it's desire for rural broadband. Do you place fiber to cell sites and provide consumers reduced i-phones? Do you provide funding for cable TV to upgrade broadband? Do you allow only rural carriers such as CenturyLink and GoldenWest to bury fiber to the curb for every analog voice customer they have?

    You need to follow the platform of rural electric, provide service (at least 5 meg) of broadband to every corner of this country.

  4. Les 2012.07.30

    Justin supplies pieces of truth mixed with untrue or exagerated comments.
    Some carriers made extreme profits being involved in traffice pumping. To say all rural carriers did so would be like saying all Justins are thieves. It was a minority Justin.
    Justin also says the rural carriers have not put in fiber, that is either a non informed statement or an outright lie. The rural carriers better serve their high cost customers with high speed than any of the large carriers do, and I'm talking high cost.
    The CAF pulls the plug on companies who put in infrastructure based upon the desires of an FCC who wanted high speed nationwide out into those high cost areas leaving them with little to no means to recover the costs of doing so.

    Justin, there are 750 pages in the FCC order and you obviously have read none.

  5. Justin 2012.07.30

    You keep mentioning that you have some good arguments and details, Les. I'm still waiting to hear them.

    The only thing I have confirmed mentally is that I was absolutely right about you being a shill for the rural electric cooperatives.

    Where are they "pulling the plug"? In what markets are they paying to lay fiber where it is already served by fiber? These missing facts would strengthen your argument.

  6. Michael Black 2012.07.30

    Do you think that everyone ridding themselves of their landlines and getting rid of cable might be the true reason rural telecoms are not investing in laying more fiber?

  7. Les 2012.07.30

    Justin@"The only thing I have confirmed mentally is that I was absolutely right about you being a shill for the rural electric cooperatives." Huh? Mentally speaking Justin, Telco's transmit voice and data not power as in your REC's.

    They are pulling the plug on access and high cost revenue that was promised to recover the cost for building out the network the FCC wanted in getting the broadband out to the high cost areas the the large carriers wouldn't serve. In other words paying for the product they asked the local exchange carriers to provide.

    I never stated they were paying to overbuild areas already served Justin, you dreamt that up.

    Mike Black, your question has a flaw. The rural carriers in the US have provided broadband at a much higher rate than their counterparts into those high cost areas such as almost anywhere in SD other than the half dozen cities that profit at the toss of a dart in the telcom biz. They have only become reluctant to build since the new order has been implemented. To further address your thoughts, people are ridding themselves of landlines because they want a phone on their hip. That cell phone only transmits to the nearest tower and thus needs a fiber backbone to get it anywhere so, fiber is here because with or without landlines we still need our broadband and voice be it wireless or wired.

  8. caheidelberger Post author | 2012.07.31

    Hang on, Les: so is CAF actually turning back infrastructure that's already been built, or shutting down plans that were already in the works?

  9. Troy Jones 2012.07.31

    The problem is complex yet illuminated in simple economics. Justin, considering this is an issue you have little knowledge and admit so, I think it better to question without such a palpable denigrating of character and motives.

    There is great information to be gleaned from the electrification of rural America. But must also grasp the differences.

    1). Electricity is a near "necessity" with broad tangible benefit to living (lghts, heating/cooling, refrigeration, water for cattle, etc.) for which the rural person is willing to pay several hundred dollars a month for the service.

    2). Broadband is mostly a "luxury" which most are unwilling to pay more than $30 a month (more if you include tv and phone).

    My point is there is a hurdle for both capital expenditures and ongoing expenses that CAF is not meeting. The dilemma is especially uncertain in covering the variable costs of the service.

    Cory, just like many "good ideas" (like many of the goals of Obamacare) intention doesn't always get the job done.

    Personally, I think the model is skewed relying too much on the REA model and needs to be totally re-thought.

  10. caheidelberger Post author | 2012.07.31

    Troy, might not we have found plenty of folks in 1930 saying electricity was a luxury? Farmers and ranchers were getting by without that new-fangled technology.

    Broadband in the modern economy hardly seems a luxury. It's what you need to communicate, market, and increase your margins.

  11. Les 2012.07.31

    Cory@"Hang on, Les: so is CAF actually turning back infrastructure that’s already been built, or shutting down plans that were already in the works?"
    Not only is it shutting down plans in the works Cory, it is not paying for systems built according the the design of the 1996 congressional telcom act. An FCC order overriding our congress if you can believe that.
    It is also turning back infrastructure built to the degree that some of that plant will be dead ended with no anticipated build out the end.

    The day has passed that broadband is a luxury as we and our business's have been converted into data monsters and I for one could not survive in any of my business's without broadband or highspeed as some may say.

    This order has used data that for example has called a company a 200 square mile service area when in actuality it is a 6200 miles service area. Though that company recieved a waiver to correct, that is only the tip of the iceburg.
    There is still a notice of proposed ruling making(nprm) that should have happened last Feb pending. As with our whole economy this only creates more uncertainty grinding this industry to a halt.

    As I said earlier Cory, you need minimum of a couple hours with Rich Coit. Justin is right in competition being good, but these rural telcos he so despises have been competing against wireless carriers who were receiving revenue's based upon the cost of the wired companies underground plant while dropping towers here and there only in the profit areas and not serving the last mile or the extreme high cost subscriber.

    While I agree there has been good to great return to the owners of the rural telco cooperatives which could survive some scrutiny, I find it hard to understand the attitude of a Justin who as a SD resident would rather see broken down companies providing a minimum service than what we have experienced. There will definately be companies failing under this plan, both from their performance and the CAF.

  12. troy 2012.07.31

    Cory,

    I wasn't using "need" and "luxury" in the context of common vernacular but in economic terms. Needs are usually described in ways in which there is little price sensitivity (people buy it and make sacrifices of other items if the price goes up) where luxuries have a price sensitivity (higher prices will result in some choosing to forego it).

    Like Les and you are saying, the demand for communication is making the transition (same as what you said with regard to electricity) as it becomes a "necessary luxury (oxymoron?).

    My point is that electricity's economics were such that the current income stream after provision of service provided sufficient revenue to contribute to paying for the capital costs. Because the revenue (price sensitivity) of data to remote areas with limited users is insufficient to do so the CAF model has problems which Les alludes to (or at least this is what I think he is doing).

  13. Les 2012.07.31

    You are very close Troy in that the greatest long term harm to the rural telcos would be access revenues. The .0007/minute rate coming versus rates over .10/minute on down at this time. The triple zero rates are not even comprehendable to a profit margin point of view.
    Another wreck coming will be the taxpayer picking up the pieces of the RUS loans gone deliquent as companies become unable to survive.

    These were/are not federal tax dollars the FCC is playing with but revenues generated by an equal access ruling fund paid for by all consumers but obviously the urban areas fund the rural areas. Our interstates are a similar commerce venture funded by taxes, but then again the urban areas being more densely populated carry the water for them as well.
    How's that look for taking our two track gravel roads back.
    As I've stated, there are over 700 pages in this ruling without the additional NPRM's and I have not covered 10 pages.

  14. Greg Dean 2012.07.31

    First, a disclaimer. I work for the SD Telecommunications Association and all of South Dakota's rural telephone companies are members of our association.

    There are two main issues (and many others as well) with the FCC's reforms which include the new Connect America Fund.

    First, there are major uncertainties regarding what funding companies may receive as they transition away from the previous funding mechanism (ie. universal service funding). The intent of the FCC is make the consumer pay for more of the costs associated with delivering these services (ie. voice and data services.). That becomes a serious issue for people in rural South Dakota because the equipment and infrastructure needed to make voice and broadband available in small towns and rural areas is very expensive. Without such mechanisms as the universal service fund, the cost of telephone service and broadband service would be much more expensive for the average South Dakotan.

    And, as is the case with most reasonable businesses (and governments), when projected revenues may be headed downward, major expenses such as infrastructure investment get put on hold.

    Side note -- The concept of universal service goes back to the first telecommunications law passed by Congress in 1934. The idea was that if telephone service was "affordable" to all Americans, it brought economic and social benefits to all people regardless of where they lived. That policy has worked well for almost 80 years and is the reason that more than 95% of Americans have telephone service.

    A second part of the FCC's reform proposal comes as companies shift from connecting calls through direct circuits and instead make more use of Voice Over Internet Protocol (VOIP). The FCC is proposing to decrease "access rates" down to almost zero in the next 8 years. "Access rates" are the rates that long distance companies pay local companies to start or complete a call (the best analogy is that these are the fees that long distance companies pay to "rent" time on local company networks). Access rates account for a significant portion of company revenues and with no clear road map from the FCC about where any replacement revenue may come from other than increased rates to consumers, again you can understand why companies' construction plans are being dramatically scaled back.

    Lastly, some would say, "Why isn't wireless an alternative?" First, available speeds over wireless connections always lag behind wired connections as well as offering more reliability and security. Ask any small business person or IT professional whether they want to operate their applications over a wireless network or a secured wired network and they will tell you that in virtually every case, wired networks are the preferred option.

    Second, wireless availability in a rural state like South Dakota has typically been spotty (try getting a signal driving from Pierre to Sturgis sometime).

    And lastly, and most important, is the fact that approximately 90 percent of the transport of a wireless call or the download of wireless data is done via a wired network. The only part of the connection that is wireless is the portion from your handset to the closest tower. Once that signal hits the tower, it goes into a wire that connects the tower to a buried fiber network. And in South Dakota the national wireless companies have very little of their own fiber. Typically, they lease fiber from companies like SDN Communications, CenturyLink, Midco or one of the rural telephone companies, in order to make their voice and data services work. So, if maintenance and upgrades on the wired network begin to lag, so will speed and capacity on the wireless network.

    Sorry for rambling, but this has only scratched the surface of a very, very complex issue.

  15. caheidelberger Post author | 2012.07.31

    No, Greg (and Les, too!), please, keep "rambling"! The issue is very complex, and I'm enjoying learning about it! If I understand one of your points correctly, replacing the old universal service model with the Connect America Fund actually puts rural users at risk of much higher rates due to the desire to shift more costs to consumers? And there is a risk that CAF somehow reduces the incentive to maintain our vital wired networks?

  16. troy 2012.07.31

    Cory, I probably should shut up as I know less than these two. However, maybe my stupidity will force them to clear things up.

    Yes and Yes.

    But that doesn't mean I think the current debate is framed right. We are having to choose between two models (universal service vs. CAF, which is really a transition from universal service to non-subsidization of high cost areas).

    Few people question the wisdom of universal service (phone or electricity) and Cory's statement about data access is not a luxury but a necessity (using his context). At the same time, data is a luxury (in economic parlance) because there is a price many would forego high-speed data (mostly home users) while businesses can't no matter the price. The loss of home users pushes even more burden (and economic disadvantage) on remote businesses.

    Reality: Wired broadband is highly efficient in urban/people concentrated areas because it is so leverageable per fixed capital cost to install. It is equally inefficient when you "run wire" that serves just a few people (remember when we laid the rural phone lines there was not alternative technology).

    I'm not sure "subsidizing" an inefficiency is not justified especially if there are practical alternatives that nearly serve the same purpose.

    What is the alternative?

    1) Pick a cost/benefit ratio of an acceptable capital install cost based on a certain number of amount of data that will likely run on the line. Make sure that is wired.

    2) Use the fastest (4G?) cellular-like technologies and towers to serve everyone else with appropriate subsidies on the installed capacity to hold the price down.

    3) Retain the current universal coverage (not reduced CAF) assessment for a period of time (say 10 years?) and bank the money to be used to make additional capital investment as we transition from 4G to 5G etc.

    Here is my point: NOBODY predicted the wireless technology was as imminent when Janklow wired the schools. Now, when we look back, that wasn't as "efficient" as new technologies came faster than expected. I believe if we don't burden the current cell phone users with a subsidy for unjustified reasons, we will actually see additional innovation sooner than later.

  17. caheidelberger Post author | 2012.08.01

    Chris Nelson will be on SD Public Radio this noon to explain his beef with the Connect America Fund further! Everybody tune in! Nick Nemec, call in with questions!

  18. Greg Dean 2012.08.06

    Cory, let me answer your two questions from July 31 (sorry for the late response--I've been traveling for a couple of days).

    1) What the FCC is attempting to do with the Connect America Fund is to shift funding away from what are called "high cost" areas of the country (ie. rural areas where deploying infrastructure involves high costs and low revenue returns) to areas where consumers are either "unserved" or "underserved" in terms of broadband availability.

    In theory, a wonk could certainly make the case for such a policy shift. The problem lies is that the FCC is attempting to make the shift without back-filling the universal service fund for those companies (like those that serve rural South Dakota) that have based their business plans on this stream of revenue.

    Understand, that over the past decade, the FCC has pushed service providers to get broadband out to consumers. Companies in South Dakota, and elsewhere, have made millions of dollars of investments in fiber infrastructure to bring broadband to large areas of the our state as well as to replace aging copper infrastructure with state of the art fiber optics.

    Now, with the change to the Connect America Fund, the FCC is changing the distribution side of the universal service formula but has not changed the contribution side of the formula. For example, content providers like Facebook, Google, Netflix, etc. do not pay into the fund and do not have to pay providers to send data over the network infrastructure. This is akin to letting the biggest and heaviest trucks in the country roll down our state highways and not charging them any gas tax.

    In addition, by re-directing CAF dollars to "unserved" and "underserved" areas of the country, the FCC is attempting to reward major corporations (ie. Verizon and AT&T) with millions of dollars to do a job that they should been doing all along. The ironic twist is that Verizon and AT&T don't want the money (http://www.huffingtonpost.com/2012/07/30/att-verizon-fcc-funds-america-fund_n_1719485.html?utm_hp_ref=mostpopular).

    So now we may be left with the worst of both worlds. We may end up with significantly higher costs for rural consumers in South Dakota and a lack of broadband for Verizon/AT&T customers living in other parts of the country.

    2) As i indicated in my earlier post, consumers drive bandwidth demand. As that demand increases, the need for maintenance and upgrades of the network increase as well (streaming video demands of consumers in the past couple of years have placed significant strain on the networks). Without strong and stable revenue sources, the ability of small companies to maintain these networks is compromised and that jeopardizes all aspects of life (education, health care, commerce, government, etc.) in rural South Dakota.

  19. caheidelberger Post author | 2012.08.08

    Greg, thank you for taking time to offer that explanation. You make the case well that this particular regulation may indeed bode ill for South Dakota's connectivity. I'll keep an eye on this issue, especially in the PUC debates this fall!

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