Prospects for Widespread Access to Electric Vehicle Charging Stations: Insights From Telecommunications Technology Diffusion

            An energy reporter, for a major daily business publication, contacted me to understand how electric vehicle charging stations might become more readily available, particularly in rural locales. She wondered whether the fast take up of new telecommunications technologies, such as cellphones, cable television, and broadband, might offer insights on what works to jump start market penetration.

             Bear with me as this apparently geeky subject offers insights on when electric vehicles might reach critical mass, in time to achieve a significant reduction in greenhouse gasses.

             The reporter intrigued me with a curious question whether the fast proliferation of gas stations might provide a model for similar geographical market penetration by electric vehicle charging stations.  My small collection of vintage gas station published road maps confirms she may be onto something.           

 

             This late 1950s map of Iowa identifies locations where motorists can fill up with Skelly gasoline:

             Marketing 101 suggests that a companies can bolster brand loyalty by offering a product far and wide.  The map identified locations where motorists could find a Skelly station on the recently constructed Interstate 80.

             Access to EV charging follows a similar chicken/egg challenge: car buyers will become more inclined to buy an EV if they have confidence that access to charging stations will not create FUD: fear, uncertainty, and doubt.

             Several parallels in telecom provide insights on what business models work. 

 Cellular Radio

             Some of you might remember the bad old days when a lack of vigilance when “roaming” might result in a hefty and unexpected charge.  Before nationwide roaming, with “anytime, anywhere minutes,” the U.S. had many standalone, “independent” operators, primarily serving ex urban and rural locations.  These carriers made a killing by providing access to their networks by motorists speeding along a major Interstate highway.  Few noticed the icon on their handsets (or bag phones) showing that a call was being handled by another carrier.

             The major operators, such as Bell Atlantic, Pacific Telesis, Bell South, and Southwestern Bell eventually executed roaming agreements with the small, independent operators, thereby reducing or eliminating “non-network” roaming charges.  The end to unexpected, extortionate roaming charges helped expand subscribership and the eventual mergers and acquisitions that now leave us with only three national carriers.

 Cable Television

             Unlike cellular radio, cable television debuted in lots of rural areas at the same time, or even before urban service.  First generation cable was labeled Community Antenna Television, typically offered by local, “Mom and Pop” television sales and service ventures.  These entrepreneurs offered cable television, primarily to stimulate interest and demand for television sets.

             CATV market penetration occurred on small, town-by-town basis without coordination, or accrual of scale economies.  Rural residence, starved for any broadcast television reception, gladly paid for access to a few broadcast channels.  Their urban counterparts had free, off-air reception options.  Only after cable operators embraced satellite technology to deliver distant signals and new cable only content did national penetration and subscribership speed up.

 Broadband

             High speed Internet access provides a case study in a most desirable, but costly technology largely unavailable in rural locales unless and until, private and public actors subsidize access.  This technology has high startup costs that operators must bear before the first dollar arrives.  On the other hand, adding an additional subscriber typically has much lower, so-called incremental costs, especially for high density locales.

             A private venture might vertically integrate into the electric charging market to remove FUD, generate brand loyalty, and stimulate vehicles sales.  It might also install facilities using proprietary standards resulting in incompatibility with EVs manufactured by competitors. 

             A government agency might want to stimulate demand, but typically the legislature must enact laws creating tax incentives and financial subsidies.  Unless and until incentives are anticipated and/or funded a “Digital Divide” has resulted.  The Covid-19 pandemic underscores the consequences when broadband access is unavailable or deemed too costly.

             For broadband and EV charging, state and federal governments may have to create generous financial incentives to achieve anything close to ubiquitous access.  Early adopters might not need as much external funding, because they can anticipate market opportunities, such as when a national hotel chain prioritizes the installation of charging stations.

             In any event, the past technology adoption models may offer insights on this new challenge.

Tracking Inconsistent Zigs and Zags in Telecom Policy Research

Sponsored researchers surely embrace Oscar Wilde’s view that “consistency is the last refuge of the unimaginative.”  Why bother building a multi-year record of empirical evidence when there are ample publishers and even appellate court judges (and their law clerks) waiting for intellectual support no matter how suspect.

Just now, I am seeing how both wireless and wireline carriers have unleashed a torrent of inconsistent advocacy research.  On one hand, the conventional wisdom dished from this group and their sponsored researchers was the “fact” that network neutrality and other regulations directly and negatively impact investments made in infrastructure.  Former FCC Chairman Amit Pai made a point to repeat this assertion early and often and it became gospel truth, so much so that cherry-picked and quite questionable “research” became the foundation for the appellate court affirmance of the Restoring Internet Freedom Order.

Now, circumstances and motivations have changed with the Covid pandemic offering a true test whether carriers have made sufficient plant investment, both under the disincentivizing network neutrality regime and free of it.  No one has convinced me that a single regulatory or degregulatory initiative substantially impacts carrier investment decisions one way or the other, particularly because of far more impactful factors such as interest rates and the normal ebb and flow of technological development cycles.  

Carriers did not close their wallets when network neutrality rules were in force.  That is corroborated by ample current evidence—now touted by the carriers-- that during the pandemic, U.S. carriers were able to meet rising demand for bandwidth.  If the carriers had scrimped on investment, because of the horrendous burdens imposed by network neutrality, how could their networks show such resiliency and ability to accommodate significant increases in subscribership and bandwidth requirements? It shows me that the need to stay competitive and to install new technology, such as 5G, trumped any incentive to forestall investment to make a regulatory and public policy statement.

Additionally, carriers cannot credibly oppose municipal broadband networks and expanded universal service subsidies if they persist in spreading the gospel that network neutrality forced underinvestment.

We no longer hear that consumers do not want, and will not pay for something better than 25 megabits per second download speeds and 3 megabits per second upload speeds.  We no longer hear that carrier networks are woefully underfunded and unable to satisfy consumer requirements. Such assertions now would support the case for market failure and the need for taxpayer funded networks, because the carriers have no interest in building.  Of course, now that Covid has unleashed a torrent of new universal service money, who can dispute the premise that incumbent carriers want to tap the gravy train.

By the way, the new FCC has yet to reinstitute network neutrality, but I am not seeing any new evidence of substantial increases in network investment by carriers still freed from the unconscionable burdens previously imposed.

Who needs consistency?

What You Need to Know About the Restoring Internet Freedom Court Decision

            The D.C. Circuit Court of Appeals affirmed most of the FCC’s Restoring Internet Freedom Order [1] largely on Chevron Doctrine deference grounds.  This two-pronged judicial review model first considers whether applicable statutory language is ambiguous.  If applicable law is clear and unambiguous, the court must assess whether the FCC complied with the legislative mandate.  If the applicable law has ambiguities, the court must consider whether the FCC’s chosen course of action was reasonable under the circumstances.  Because judges lack expertise in statistics, economics, electronic engineering, accounting, corporate management, finance etc. they must rely on the expertise resident at the regulatory agency and which advocacy and sponsored research it embraces.  In this case, the court opted not to second guess the FCC’s legal and economic rational, despite the agency’s clear preference for the filings that support its deregulatory agenda. [2]

            Put another way, experts at the FCC and ones financed by stakeholders will have ulterior motives precluding an unbiased assessment, but appellate courts will not reject selective and even one-sided evaluation unless the process exceeds generous deference and a basic assessment of reasonableness.  In this case, the court opted not to question the FCC’s reclassification of broadband Internet access as an information service, wireless broadband access as a private, non-common carrier mobile service and the limited scope of new transparency requirements in lieu of prior open-ended general conduct standard and the specific rules prohibiting blocking, throttling, and paid prioritization of traffic.

            The court did reverse the FCC on four specific areas where the court determined that the agency failed to set out its legal authority or address the implications and impact of its deregulatory initiative.  The court vacated the FCC’s blanket preemption of state laws and that would impose regulatory requirements, despite the FCC’s near complete abdication of jurisdiction.  The court also remanded to the FCC the duty to address three discrete issues that the agency largely ignored:

(1) The Order failed to examine the implications of its decisions for public safety; (2) the Order does not sufficiently explain what reclassification will mean for regulation of pole attachments; and (3) the agency did not adequately address Petitioners’ concerns about the effects of broadband reclassification on the Lifeline Program. [3]

            The court fully embraced the FCC’s legal, technical and economic rationales for reclassifying broadband Internet access as a largely unregulated information service.  The decision validates the FCC’s emphasis that Internet Protocol domain name identity queries (“DNS”) and temporary storage of traffic—caching—justify an overall information service classification.  Because these two information service functions are inextricably linked with other functions, which do include a telecommunications transport function, the overall composite service cannot be functionally subdivided into separate information services and telecommunications service elements. [4]

            In making this finding, the court heavily relied on the Brand X case precedent [5] for guidance and validation.  In this prior case, the Supreme Court also relied heavily on the Chevron Doctrine to support a prior reclassification of broadband Internet access from telecommunications, common carriage to the largely unregulated information services designation.  Brand X also determined that DNS and caching were “inextricably intertwined” with high speed bit transmission that the FCC could reasonably conclude that Internet Service Providers did not offer a telecommunications service on a standalone basis, a conclusion reached by Justice Scalia in dissent. [6]

            The court also rejected the view that these two functions fit within an exception to the normal application of the information service classification for a subset of information processing functions that satisfy necessary telecommunication management requirements, rather than constitute part of an information service.  The court refers to its prior affirmance of the FCC’s common carrier reclassification decision, United States Telecommunications Ass’n. v. FCC, 825 F.3d 674 (D.C. Cir. 2016) to emphasize that the case only permitted Title II common carrier attribution to functions like domain name look ups and caching, but did not mandate it. [7]

            The court also validated the FCC’s reclassification of mobile broadband Internet access as a private, non-common carrier service, despite an amendment to the Communications Act creating a definition for Commercial Mobile Service provided by cellular companies in their provision of voice and text services accessible to and from the wireline public switched telephone network (“PSTN”). [8] The court was predisposed to side with the FCC so that the Commission would not have to confront a “statutory

contradiction” [9] of having reclassified wired broadband access an information service, but not its wireless counterpart that the FCC increasingly believes constitutes a functional and competitive alternative.  Such regulatory asymmetry could adversely impact the commercial attractiveness of wireless services, particularly if one believes any sort of government oversight imposes costs, such as reduced innovation, infrastructure investment and flexibility.

            The court addresses three areas that support the FCC’s information services reclassification.  First, the court notes that the applicable statutory language uses public switched network and not public switched telephone network.  The absence of telephone, in conjunction with the Chevron Doctrine and the Brand X case precedent, supports “leaving the door open to a different, adequately supported, reading, which the Commission has provided here.” [10] The FCC now considers the use of IP addresses, in conjunction with telephone numbers, as sufficiently uncoupling wireless broadband networks from the telecommunications service classification even though cellular telephone networks surely provide voice telephony, including access to the wired PSTN, in addition to broadband Internet access.  The court also accepts the FCC’s argument that even though Voice over the Internet Protocol services make it possible to originate and receive telephone calls, that functionality by itself does not make wireless networks fully interconnected with the PSTN, nor does it deemphasize the core, non-telecommunications nature of broadband Internet access.  In a nutshell, “blurring [of information and telecommunications services] is not erasing.” [11] Lastly, the court supports the FCC’s determination that mobile broadband does not qualify as a functional equivalent to mobile voice even though consumers use a single handset and wireless network to access both services.

            Arguably the most questionable aspect of the court’s decision lies in its endorsement of sponsored research claiming to show that network neutrality regulation had a direct and significant impact on infrastructure investment and innovation. As part of its analysis to determine whether the FCC acted reasonably and not in violation of the Administrative Procedure Act prohibition on arbitrary and capricious decision making, the court reviews the evidentiary record.  The court did not question the validity, significance, methodology, or rigor of research supporting the Commission’s view that network neutrality rules and regulations created significant disincentives for innovations and investment.  Instead it appears to downplay the scope, nature and reliance of the Commission’s reference to sponsored research supporting its views established well before the issuance of a decision.  While deeming the FCC’s references and reliance on these studies as reasonable, the court also appears to characterize the Commission’s use of the research as minor and fully apprised of the “modest probative value to studies attempting to draw links between the Title II Order and broadband investment . . ..”[12]  This characterization does not jibe with the many instances where FCC rulings [13] and statements by Chairman Pai [14] and others emphasized the disastrous impact on network neutrality regulation. The FCC and D.C. Circuit refer to Title II regulation as “utility-style regulation,” [15] even though the FCC had established rules that substantially exempted broadband Internet access providers from conventional oversight including the elimination of any regulation of rates for service, or profit margins. [16]

            The court did not entirely endorse the FCC’s world view and deregulatory agenda.

The court rejected as unlawful the FCC’s attempt to foreclose any state regulation inconsistent with the Commission’s policy including efforts to impose network neutrality regulations for over which he Commission now lacks jurisdiction. [17] In effect, the FCC cannot abandon jurisdiction over broadband Internet access and then foreclose states from asserting jurisdiction over intrastate service: “[I]n any area where the Commission

lacks the authority to regulate, it equally lacks the power to preempt state law.” [18]

We can expect some states, such as California, New York and Vermont to enact network neutrality regulations that the FCC probably will reject as unlawful despite the clear direction provided by the D.C. Circuit.

            Additionally, the court considered it arbitrary and capricious for the FCC not to have considered the implication for public safety in light of the Commission’s statutory duty to promote “safety of life and property through the use of wire and radio communications.” [19]  The court noted that Verizon had deliberately slowed the data speeded available to first responders in California as they tried to contain forest fires.  Such “throttling” is now permissible under the FCC rules, but the court required the Commission to address its impact on public safety.

            The court also recognized that the FCC left unresolved issues pertaining to pole attachments, because the FCC shares jurisdiction with states and municipalities on this matter and providers of cable, telecommunications and information services seek access to utility poles even though the directly applicable statutory mandate, 47. U.S.C. § 224(a)(4) refers only to Title II regulated telecommunications services. [20]

            The court also required the FCC to address the impact of the largely deregulated information services classification on the Lifeline Program that subsidizes low-income consumers’ access primarily to Title II regulated telephone service and handsets. [21]  The court determined that the FCC left unanswered important questions whether stand alone broadband service providers can qualify for universal service funding despite eligibility criteria limiting eligibility to Title II regulated common carriers. [22]

           

           

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[1]           Mozilla Corp. v. FCC, No. 18-1051 (D.C. Cir. Oct. 1, 2019); Retrieved from: https://www.cadc.uscourts.gov/internet/opinions.nsf/FA43C305E2B9A35485258486004F6D0F/$file/18-1051-1808766.pdf [hereinafter cited as Mozilla Corp. v. FCC].

[2]           “Regulation of broadband Internet has been the subject of protracted litigation, with broadband providers subjected to and then released from common carrier regulation over the previous decade. We decline to yet again flick the on-off switch of common-carrier regulation under these circumstances.” Id. at 145-46.

[3]           Id. at 13.

[4]           “[J] just as the USTA petitioners ‘fail[ed] to provide an unambiguous answer to’ whether ‘broadband providers make a standalone offering of telecommunications,’ USTA, 825 F.3d at 702, Petitioners have not done so here. Nor have they shown the Commission’s stance to be unreasonable. We conclude, under the guidance of Brand X, that the Commission permissibly classified broadband Internet access as an ‘information service’ by virtue of the functionalities afforded by DNS and caching.” Id. at 45.

[5]              National Cable & Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967 (2005).

[6]              See Rob Frieden, What Do Pizza Delivery and Information Services Have in Common? Lessons from Recent Judicial and Regulatory Struggles with Convergence, 32 RUTGERS COMPUTER & TECH L.J., No. 2, 247-296 (2006).

[7]              “To begin with, Petitioners misconstrue USTA. As they do persistently, they gloss passages that find parts of the Title II Order to be permissible readings of the statute as mandating those readings—when the passages plainly do not do so. A case in point is the treatment of the TME. Petitioners say that ‘[t]his Court has already agreed that DNS and caching fall within the terms of the telecommunications management exception.’ Mozilla Br. 43 (emphasis added) (citing USTA, 825 F.3d at 705). Yet all we said in USTA was that we were ‘unpersuaded’ that the FCC’s ‘use of the telecommunications management exception was * * * unreasonable.’ USTA, 825 F.3d at 705. The Title II Order, in other words, adopted a permissible reading, though not a required one.”  Mozilla Corp. v. FCC at 23.

[8]           47 U.S.C. § 332, Mobile Services (2018).

[9]           See Mozilla v. FCC at 49.

[10]          Id. at 50. “Similarly in USTA we rejected a claim that 47 U.S.C. § 1422(b)(1)(ii)’s use of the term “public switched network”— in a context pretty clearly meaning only the telephone network—meant that the Commission was required to so limit its definition for purposes of Section 332.  Id. at 52.

[11]          Id. at 58.

[12]          Id. at 76.  Empirical studies are available that measure actual investment outcomes.  See, e.g., Christopher Alex Hooton, Testing the economics of the net neutrality debate, TELECOM POL’Y (Sep., 2019); retrieved from: https://doi.org/10.1016/j.telpol.2019.101869.

[13]          “[T]he record shows that the existing regulations constrain technological advances and deter broadband infrastructure investment by creating disincentives to the deployment of facilities capable of providing innovative broadband Internet access services.” Appropriate Framework for Broadband Access to the Internet Over Wireline Facilities, Report and Order and Notice of Proposed Rulemaking, 20 F.C.C. Rcd. 14853, 14865 (2005).

[14]         “These Internet regulations will work another serious harm on consumers. Their broadband speeds will be slower than they would have been without these regulations.

The record is replete with evidence that Title II regulations will slow investment and innovation in broadband networks.” Protecting and Promoting the Open Internet, Report and Order on Remand, Declaratory Ruling, and Order, Dissenting Statement of Commissioner Ajit Pai, 30 F.C..C Rcd. 5601, 5927  (2015).

[15]          See Mozilla v. FCC at 10.

[16]          The court did find troubling “the Commission’s failure to grapple with the fact that, for much of the past two decades, broadband providers were subject to some degree of open

Internet restrictions,” arguably ample time to adjust to any regulatory restrictions.  See, Id. at 86.

[17]          “The Commission ignored binding precedent by failing to ground its sweeping

Preemption Directive—which goes far beyond conflict preemption—in a lawful source of statutory authority. That failure is fatal.” Id. at 121.

[18]          Id. at 123.

[19]          Id. at 93 citing 47 U.S.C. §151.

[20]          Id. at 104. “The Commission offered, at best, scattered and unreasoned observations in response to comments on this issue. Because the Commission did not adequately address

how the reclassification of broadband would affect the regulation of pole attachments, we remand for the Commission to do so.” Id. at 104-05.

[21]          In the Telecommunications Act of 1996, Congress codified and expanded the FCC’s universal service mission to cover “an evolving level of telecommunications services that the Commission shall establish periodically * * *, taking into account advances in telecommunications and information technologies and services.” 47 U.S.C. § 254(c)(1).

[22]          “[B]roadband’s eligibility for Lifeline subsidies turns on its common-carrier status. See In re FCC 11-161, 753 F.3d 1015, 1048–1049 (10th Cir. 2014) . . . As a matter of plain statutory text, the 2018 Order’s reclassification of broadband—the decision to strip it of Title II common-carrier status—facially disqualifies broadband from inclusion in the Lifeline Program.” Mozilla v. FCC at 111.

How the FCC’s 8th Broadband Report Became a Referendum on the Marketplace

           Only in this hyper-partisan environment can an FCC report become a stalking horse for libertarianism and antipathy to limited government efforts to stimulate broadband supply and demand. The Report (available at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-12-90A1.doc) offers a well-researched and appropriately granular analysis of broadband market penetration in the United States.  It provides ample evidence of progress, but candidly acknowledges that a significant portion of rural America, populated by 19 million people, have no broadband access and are unlikely to have the privilege without government developmental support.   Perhaps this Report has triggered such vigorous opposition, because several years ago a previous Report had a “mission accomplished” theme based on a toting up of even slow speed broadband options that were considered available to all within a zip code area even if only one subscriber existed.

            The Report has triggered vigorous dissent from the two Republican Commissioners, sponsored researchers and libertarian leaning publications by stating what I thought was obvious: there are plenty of areas in America where marketplace forces work against the offering of any affordable broadband access option, particularly wire-based services. I will go so far as to use two words that apparently cannot be uttered: market failure.  

            Broadband wireline options from carriers such as Verizon and AT&T do not even serve many urban and suburban locales.  These carriers are hell bent to jettison their rural customers and the obligation to service as carriers of last resort offering telephone service.  They have doubled down on wireless and do not seem to care about declining DSL subscribership and the need to migrate to faster transmission speed services outside the metered and more expensive wireless option. Smaller carriers do want to provide broadband services and generally have expressed support for FCC efforts to extend universal service subsidies.

            Some time ago both Democratic and Republican Commissioners at the FCC typically would thank the staff for doing such a comprehensive and conscientious job in preparing a Congressionally-mandated Report.  They would consider factors such as the public interest as their foremost concern, not whether they could accrue brownie points for their party and its ideology.  FCC Commissioners of both parties gladly supported extraordinary and admittedly too generous and inefficient universal service programs.  These initiatives included “rate integration” that required carriers to average in the higher costs of providing telephone service in non-continental United States locales, e.g., Alaska, Hawaii, Puerto Rico and the Virgin Islands.  No one balked at providing “free” satellite earth stations to Pacific island residents whose governments have an affiliation with the United States, e.g., The Federated States of Micronesia.  Nobody invoked Ann Rand to suggest that rural residents should suffer any cost disadvantage for the various upside opportunities from living in the hinterland.

            Now a Report to Congress somehow has all sorts of underlying messages.  By truthfully answering a question posed by Congress that more work needs to be done to achieve ubiquitous and affordable broadband, the FCC apparently is foreshadowing a broad agenda to preempt the marketplace.   See Larry Downes, How the FCC sees Broadband's 95% Success as 100% Failure, Forbes (June 23, 2012); available at: http://www.forbes.com/sites/larrydownes/2012/08/23/how-the-fcc-sees-broadbands-95-success-as-100-failure/.  And what kind of preemption would there be?  Most subsidies flow directly to the carriers!  But instead of acknowledging that carriers stand to benefit financially from such subsidies, opponents of candor strive to see some hidden agenda, including an effort by the FCC to impose network neutrality—if not the public utility, common carrier regime—on broadband.  

            At an unprecedented rate, the entire telecommunications policy ecosystem has become so politicized as to ignore the first principle of serving the national interest.  Instead we have warring parties arguing over whether and how government is subverting market forces that time and again work against making service available absent government efforts to stimulate supply and demand.

           

Distance Is Not Dead or Cost Free

In 1997, Frances Cairncross wrote a book entitled The Death of Distance (Harvard Business School Press) that heralded the Internet’s ability to transcend and mitigate much of the financial and logistical challenges posed by geography. Certainly the Internet enhances productivity and opportunities, particularly for people in remote places. But what make distance less significant is the product of cost allocation and cost recovery policies and not some new transcendental notion that it has become easier, cheaper or more efficient to serve rural areas.

Professor Michael Katz angered some rural advocates when he articulated this concept, perhaps more bluntly: “The notion that we should be helping people who live in rural areas avoid the costs that they impose on society … is misguided from an efficiency point of view and an equity one.” See Howard Berkes, Stimulus Stirs Debate Over Rural Broadband Access, National Public Radio, Morning Edition (Feb. 19, 2009); available at: http://www.npr.org/templates/story/story.php?storyId=100739283.

Professor Katz is quite right that because rural areas have a diffuse, spread out population, the cost of installing a distribution infrastructure is higher than the cost of serving the same number of people located more close together. If government decides to bridge this cost differential—as it did expressly in the Telecommunications Act of 1996—one could infer that universal service has a comparatively high public policy priority. Professor Katz might favor government spending less on broadband and more on subsidizing infant immunizations, but note that the issue becomes one of whether and how to compensate for cost differentials, not that technology somehow has eliminated them.

Rural residents have qualified for a number of public policy initiatives aiming to defray the cost of living in remote locales. “Keeping them happy down on the farm” may have national security benefits, and perhaps the United States does not differ much from China insofar as the consequences of mass migration from rural to urban areas and the congestion costs that would generate.

From my perspective distance surely does matter, both in terms of my out of pocket costs and more broadly “opportunity costs,” i.e., the time, money, effort and foregone options resulting from my residency in a rural locale. While I can blog to my heart’s content and achieve parity with an urban blogger, being out of sight and not a frequent attendee at various Washington, D.C. political/social/educational events means that I am not going to be on decision makers’ radar screens for conference invitations, new employment and life time achievement awards to name a few.

In my case, rural residency came with the decision to accept an academic appointment. Perhaps I could have held out for an urban posting, but it did not turn out that way. Thanks to cost averaging decisions and “All You Can Eat” unmetered monthly Internet access subscriptions—itself another inefficient artifact of the Internet’s long past promotional phase—I can try to compensate for my location. But being “centrally located in the middle of nowhere” has costs that government cannot offset.

Capitol Hill Briefing on Universal Service

Several of my Penn State colleagues and I briefed Senate and House staffers on universal service reform. Some of our papers are available at: http://www.benton.org/index.php?q=broadband_benefits.

It's been quite some time since I last made the rounds on Capitol Hill, but remarkably the process and the environment have changed little. The staffers are remarkably young and typically are both earnest and qualified. They welcomed our viewpoints, in part because we have the luxury of being able to answer their questions without a fixed party line. Having limited financial sponsorship--with no strings attached--appears to be the exception.

Additionally the staffer had a keen interest in hearing from anyone other than the telephone companies, their trade associations and their sponsored academic researchers. Several staffers mentioned how carpet bombing the Hill can work against stakeholders' interests. On the other hand an issue such as universal service has a substantial political and employment component.

Staffers want to find a way to avoid stranding sunk wireline telco investment, but also transition to an environment that recognizes voice telephony as a software application typically available at little cost.

Lies, Damn Lies and Broadband Statistics

For the better part of a decade, the United States lagged in broadband development largely because stakeholders invested in long haul capacity and failed local loop alternatives. Incumbent telephone company managers have emphasized regulatory uncertainty and “confiscatory” FCC sharing requirements, but the fact of the matter is that over $1 trillion was invested in the dotcom boom, a significant portion of which targeted burgeoning demand for local and long haul bandwidth.

Now that regulatory uncertainty provides no explanation for the United State’s comparatively poor performance in broadband market penetration the federal government has started to shoot the messenger reporting continuing poor penetration rates. Both the National Telecommunications and Information Administration and the State Department are challenging the statistics compiled by the Organization for Economic Cooperation and Development that ranks the U.S. 15th globally in broadband subscribers per 100 inhabitants (down from 12th last year). See
http://www.oecd.org/document/7/0,2340,en_2649_34223_38446855_1_1_1_1,00.html.

The State Department has made the issue something of a diplomatic affront to the U.S. See http://www.ntia.doc.gov/ntiahome/press/2007/State_OECD_042407.pdf NTIA offers explanations why scope of broadband access in places such as government offices and coffee shops means that the OECD ranking underestimates market penetration. See http://www.ntia.doc.gov/ntiahome/press/2007/ICTleader_042407.html.

So first stakeholders could blame the government for mandating common carriage facilities unbundling and interconnection. Now the government can blame outside data collectors as underestimating the kind of success the FCC found when it used zip codes as the relevant market penetration metric.

I am confident U.S. broadband penetration statistics will improve, but the initial “success” will occur in urban areas with greater likelihood for more than two facilities-based carriers offering true broadband at rates below $60 a month.

I fear the Digital Divide increasingly with cleve between cities and the hinterland.

The Dark Side of Incentive Creation

Much of the debate about broadband and next generation network development focuses on the alleged need for government to create incentives for carriers to invest. Ironically much of the excuses given for the disinclination to have invested emphasizes how government created disincentives, marketplace distortion and regulatory uncertainty.

So let me get this straight. The same person or corporation, with libertarian/deregulatory instincts, rails against government intervention as likely to fail even as they assert the need for incentive creation with a straight (if not disingenuous) face.

Let’s examine incentive creation, a government activity that has become so important that we now have a new word for it: incentivize, as in the FCC needs to incentivize broadband development in rural areas by expanding the universal service program.

With all this incentivization going on it’s no wonder that arbitrage and gaming opportunities abound. The most recent example lies in the realization by rural wireline telephone companies, particularly those entrepreneurial independent telephone companies in Iowa (see http://www.techdirt.com/articles/20070315/193857.shtml) that they can convert the universal service mission into cold cash. Because Congress and the FCC have created incentives for rural phone companies to wire up the hinterland, the crafty beneficiary of such incentives can earn extra cash by stimulating inbound traffic to the hinterland.

Brilliant! Funds designed to encourage telephone companies to serve expensive remote areas now flow more robustly into the coffers of the more creative incentive exploiters who offer outbound international long distance and conference calling all for the cost of the inbound call to rural Iowa. Wireless subscribers incur no additional charges for such calls made at nights and on weekends and cheap “postalized” long distance plans and calling cards offer 3-5 cents per minute calling any time of the day. The carriers handling the Iowa-bound call end up paying the Iowa telephone company as much as 7 cents a minute to terminate the call. Of course the call does not end ringing the telephone of some rural farmer in Iowa. It routes to a switch that provides second dial tone for outbound calling.

This clever money maker exploits the incentive to build out networks into the hinterland. Some of the outbound calling carriers, such as AT&T, have unilaterally decided to refuse to complete such calls. Unilaterally acting as judge, jury and executioner violates these carriers’ common carrier legal responsibilities. It also shows these carriers as asleep at the switch when the Iowa telephone company tariffed the extortionate 7 cent rate.

But most importantly the Iowa gambit shows that incentive creation has the very same potential to distort the marketplace and favor one group of stakeholders over others as the much more discussed disincentive creation.