Think Tank: USF 'Reverse Auction' Asks The Right Questions

Telecom Policy Report, August 21, 2006

The Federal Communications Commission (FCC) is asking the right questions about the universal service fund (USF) in positing the idea of using so-called "reverse auctions" to determine carrier eligibility and awards on the basis of lowest cost. The concept is a promising way to distribute funds, according to the top managers of a high profile Washington, D.C., think tank.

In what it bills as an upcoming "snapshot" of the telecom-policy environment, the Progress & Freedom Foundation (PFF) - a critic of the USF status quo - credits the FCC with taking a "bold step" in asking whether reverse auctions might be used to reform the high-cost-funding segment of the subsidy program. The PFF says that "despite inevitable catcalls from the current program's corporate welfare recipients," the regulator should be "commended for exploring this very important idea for bringing rural consumers lower costs, more competition and greater innovation."

In what could be one of the biggest policy shake-ups of the USF in years (TelecomWeb news break, Aug. 14), the regulator and its Federal-State Joint Board on Universal Service recently started seeking comment on reverse-auction competitive bidding to determine eligible telecommunications carriers (ETCs) because much of the current USF debate surrounds the program's out-of-control high-cost segment for rural companies.

The reverse-auction idea - posed by FCC Chairman Kevin J. Martin earlier this year and receiving some relatively favorably feedback from several industry quarters (Telecom Policy Report, April 3) - is designed to stem the growing dollar volumes being pumped into the USF due to what are perceived to be somewhat unrestrained conditions on qualifying carrier recipients. The PFF pointed out USF outlays have exploded in recent years, from about $4 billion in 1998 to almost $7 billion currently, with most of the increase attributable to high-cost-fund growth that has more than doubled from about $1.7 billion to $3.7 billion during the same period.

The Details Need Exploration

"Serious reform is needed to curb these rising costs," says the PFF paper written by Senior Fellows Raymond Gifford and Thomas Lenard - president and senior vice president for research, respectively. "Reverse auctions are potentially one of the most promising mechanisms. They say that although there are important details to be explored, a reverse-auction system would essentially invite communications providers to compete for USF subsidies by bidding, and while rules may vary and transitions may be necessary, the lowest bidder in a reverse auction would 'win.'"

They continue, "Such a system would lower burdens on taxpayers, promote cost efficiency for providers and encourage innovation among competing bidders. To be sure, the details of a reverse auction method are critically important. Reliance interests on the current system will have to be taken into account. That auctions reward the right bidders, for the right terms, in the right areas, will determine the success or failure of any distribution system."

The PFF authors maintain reverse auctions can help resolve USF problems because they are a way of introducing competition into the market for USF, and they provide the needed services more efficiently, but they need not doom incumbents. "Yet, a reverse auction need not spell ruin for current recipient rural phone companies," they say. "Rural phone companies often have low actual incremental service costs. That these companies should be confronted with incentives to act on their cost advantages should be celebrated by taxpayers and rural customers."

Nevertheless, the PFF claims the "political economy hurdles" to actually realizing a reverse-auction method for USF distribution remain formidable because the "current beneficiaries of the system will fight hard to retain their welfare payments, and the beneficiaries of this reform - taxpayers as a whole - are a diffuse and unorganized constituency." Nonetheless, the PFF believes that interest in the idea by Martin and the other commissioners "is an important first step to building a more sustainable, more innovative and less costly subsidy system."

Another Key Researcher Cited

The PFF paper also credits USF critic Thomas W. Hazlett, a George Mason University professor of law and economics, with research showing USF subsidies can be as much as $13,000 per year per line. He also estimates that yearly savings of $1 billion are easily achievable using standard mobile- and satellite-phone subscriptions to provide service to people in sparsely populated areas (Telecom Policy Report, July 30).

In a report sponsored by The Seniors Coalition (TSC) lobbying group for the elderly - "Universal Service' Telephone Subsidies: What Does $7 Billion Buy?" - Hazlett attacked a wide number of USF flaws, especially in the rural- oriented high-cost segment. However, he also regards the use of reverse auctions to assign USF service obligations as an "encouraging sign" among many policy makers. The coalition also has said it supports the reverse-auction idea.