^{Democracy & Technology Blog} Interesting ideas for designing auctions to reduce USF subsidies

The FCC received public comments on the concept of using auctions to determine
who gets Universal Service support to provide subsidized phone service in rural areas. The leading trade association representing rural local exchange carriers (the Organization for the Promotion and Advancement of Small Telecommunications Companies) predictably claimed that “[s]electing winners based solely on price would surely be a ‘race to the bottom.'” According to OPASTCO, “[q]uality of service, service capabilities, and existing service area coverage should all be included in the criteria for evaluating carriers bidding for a rural service area, and those criteria should be given at least equal weight as the bidding price.”
OPASTCO’s premise is surely correct. The trick is to balance quality, reliability and price in a way that creates maximum value for everyone — including the taxpayers, er, ratepayers — and doesn’t create insurmountable hurdles for newer, more efficient and potentially more useful technologies in the earlier stages of development.

Alltel Communications of Little Rock, a company with 11 million wireless customers — and which receives universal service support in 28 of the 35 states in which it operates — proposed that the lowest competitive bid in an auction process would determine the level of high-cost support funding for all eligible carriers. In other words, all eligible competitors would get an equal amount of support per line, regardless of which one submits the lowest bid. The number of eligible carriers would be unlimited, so anyone who wants a piece of the action could get it. There’d be a reserved seat at the trough for everyone. Since wireless networks are generally cheaper than wireline networks, this proposal would presumably ensure that Alltel is adequately funded while its wireline competitors get squeezed. Nevertheless, Alltel is on the right track in attempting to ensure that the taxpayer receives some of the benefit of the falling cost of technology.
AT&T pointed out the absurdity of forcing “non-rural” carriers to rely on implicit subsidies to keep rates low in high cost areas on the basis of state-wide averaging. Implicit subsidies work wonders in government-imposed monopoly settings, but, as every serious student of this subject knows, can’t possibly survive in markets opened to competition.
AT&T proposes that only one auction winner should be selected, and that winner should be the one submitting the lowest bid in order to minimize the cost of universal service. Providing support to two or more carriers would increase the cost of universal service by reducing the economies of scale that a single carrier otherwise would achieve.
The winning bidder would get “a reasonable opportunity to recover its fixed costs of providing universal service in the relevant market,” which would be ten to 15 years, according to AT&T. The company points out that shorter terms could drive up costs and force providers to increase their bids to ensure that they will be able to recover their fixed costs over a shorter period of time.
The losing bidder(s) wouldn’t get any subsidy, but they would be deregulated. Specifically, they would be relieved of the carrier-of-last-resort obligation, which requires them to provide service to anyone regardless of the expense. They would also be relieved of any other federal and state regulation of rates. In other words, they would get the ability to pick and choose — or “cherry pick” — their customers, theoretically making it possible to build a profitable business even in rural areas.
Technology is driving the cost of telecommunications down, as Verizon discussed in more length than most of the others. Wireless prices have declined more than 50% since 2001. The prices for total telephone service decreased 5.8% from 1998 to 2005, while the cost of all consumer items was increasing by 15.3%.
Verizon makes the eminently reasonable point that first it should be determined if rates in a particular area would be affordable and reasonably comparable to urban rates without any high cost funding. The company points out that some rural customers actually pay less than customers in urban areas, and that the presence of competitive carriers receiving no support would seem to indicate that subsidies may not be needed in those areas at all. Auctions should only be used in areas where universal service support is necessary to ensure affordable rates, “even after factoring all the efficiencies of new intermodal competitors.”
Verizon notes that it should be possible to use the results of particular auctions which attract a critical mass of bidders to establish models “to set, and likely reduce, support levels” in other areas.
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See: Comments of OPASTCO
See: Comments of Alltel Communications
See: Comments of AT&T
See: Comments of Verizon
See: Comments of the National Cable & Telecommunications Association
See: Comments of CTIA – The Wireless Association