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Recognizing Errors: Giveaways to Carlos Slim, Glen Post, Ivan & Randall
Saturday, 29 January 2011 14:14
Carlos Slim of Telmex, the richest man in the world, is a smart businessman who wouldn't have paid nearly $2B for Puerto Rico Telephone if it didn't make a lot of money even without a USF subsidy. But the lure of "free government money" is strong and he hired Henry Rivera and some of the most effective lobbyist/lawyers in the world to convince Washington that he overpaid for Puerto Rico Telephone and the ratepayers of America should bail out his mistake. He bought the company from Verizon for $1.89B without any subsidy and now says he can't afford to provide decent service. Many in Washington want to give him the money, because they think it's helping the poor people in Puerto Rico. In practice, it's far more likely to go to profits than to increased investment.

   That's one of the most dramatic proposals that may or may not be in the coming USF/ICC rules.  The time for reporters to discuss the issues is before the decisions are made, so the sunlight yields a better decision. The FCC rarely lets reporters know what's in their work until after the decisions are made, meaning only some of the issues I'm reporting are relevant.
Kevin Martin refused to go along even though it was his old law firm, Wiley Rein, leading the charge. They orchestrated a deceptive campaign that "the poor and rural people of Puerto Rico" were suffering because "they" didn't get USF subsidies. This is pure gibberish; the money goes to the company and there is no effective means to ensure it creates additional investment. I can't find public figures for PRTC capex, but I'm pretty sure it's below depreciation and they have been milking the island for a long time.
Hint to reporters: this is typically buried in a clause about "insular" territories. There's no large "insular" teritory except Puerto Rico and most of the money would primarily go to Slim. $100M or so, it looks like.
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Similar windfalls ($Billions) are expected at Frontier, Iowa Telephone and others that bought lines from the Bells knowing no subsidy was attached. They are immensely profitable companies paying some of the highest dividends on the stock exchange. "It's not fair that we don't get as much of a subsidy as others," they shout across D.C., with blind support from home state Congressmen. Both have capex below depreciation and put "returns to shareholders" above network maintenance. It's almost certain that if they get a bigger subsidy, it will go to Wall Street, not better service.
   It's simply wrong to rip off ratepayers for the shareholders of a few companies just because some other companies are oversubsidized. Instead, unneeded subsidies need to be eliminated everywhere.
Hint to reporters: The best way to discover this is to demand a list of which companies benefit from the changes, with estimates. Lead state commissioners Larry Landis and Ray Baum asked for this three months ago, as have I.
If they claim they don't have that data (at least approximately) they should be fired for incompetence. If they have the data and stonewall, I'd assume they are covering up things, assume their spin is inaccurate, and find the facts. We're reporters, not stenographers.
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AT&T, Verizon, and Century/Qwest are almost certainly getting the major boost from the changes. Bell lobbyists expect to get windfalls in the billions from the coming rules.  Some of that is direct subsidies and some would be paying them for "lifeline broadband" twice as much as they would be charging in a competitive market.  But what would drive the windfall into the amazingly high figures would be eliminating their $billions paid in intercarrier compensation.

Getting rid of ICC, like all terminating monopolies, is a good move. Richard Clarke and AT&T in Missoula claimed that the benefit would be passed through because long distance rates are competitive. That clearly hasn't been true for at least five years. LD costs have continued to drop but LD prices have gone up. That's darn persuasive evidence LD is not very competitive. The vast majority of Americans who buy LD get it with their primary local phone, paying the price asked by the carrier.

   Result: if the bells pay less for LD termination/access, their shareholders, not their customers, will reap most of the benefits. This is part of the emerging economics of the incidence of a subsidy, similar to the traditional economics of incidence of a tax. You have to look closely at the actual industry structure to see cui bono.

Reporter's angle: Again, the best place to start is by having the FCC give you the data on who benefits. If not, you need to go to about 10 companies to get 90% of the U.S. market. It's a lot of work, especially if they resist, but that's our job. If the FCC won't give you the data, our job is to go get it. Otherwise, we're just what Howell Raines calls stenographers.

Almost any Payment for Operating as Opposed to Capital Costs
The direct cost of a broadband customer is $5-$12 anywhere backhaul is reasonably priced. Since it sells for $20-50, it is almost always a profitable service. Both UBS and Bernstein estimate cable modem gross margins of 90%, although I'd include more items like call centers and think the figure closer to 75-80%.  I'm a strong supporter of USF funding when needed, but it would be very, very rarely needed for broadband operating expenses.
      Almost always if you trace back a request for operating subsidies it's because of high backhaul rates or misleading accounting. The way to deal with high backhaul because of local monopolies is special access. It's absurd to look for $billion in subsidies because the telcos, especially the Bells charge $100 and $200/megabit for backhaul that usually costs $5-15. (Below)

    Reporter's lookout:  USF for phone lines is calculated as anything above a certain % of an arbitrary "national average" cost. For broadband, we know the average cost is $10 or so. So look for a base that's below 200% of the "average cost". Even better, if the $30-40 service is profitable, it doesn't need an operating subsidy.

Providing a subsidy to the telco where cable already offers service without a subsidy.
This is a huge one, with Verizon asking for subsidies on 20-30% of their lines because they are "unprofitable." I cannot believe that's accurate accounting.  Almost everyone agrees we shouldn't be subsidizing territories where cable is able to serve without a subsidy, but the telcos have made an enormous push to collect anyway. The smaller telcos don't just want to collect from those lines, they want their subsidy rate increased for every customer who switched to cable or wireless.

Reporters should be able to get this answered right in the summary but I bet they are hide it. Watch out for ambiguous categories like "underserved." Something like 90% of the NTIA stimulus went to places that already had coverage. Paper after paper got this wrong. The Boston Globe, for example, thought the Western Massachusetts reached tens of thousands who couldn't get broadband. In fact, the number was less than 3,000.


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Serious omissions:
Auditing:
Right now, the entire USF program has minimal auditing, mostly making sure the paperwork is in order. No one asks "Should taxpayer money go here?" In particular, the folks nominally in charge - USAC - believe the FCC has ordered them not to look and pay any claim with good paperwork. Staffers at USAC are furious because of the money they know they are wasting. They believe the FCC wants it that way.
Reporter's notes: Talk to USAC or FCC people about how they catch the carriers spending money in ways that don't serve the program goals. Unless the paperwork is bad, they don't even look hard for fraud.

Getting the USAC/NECA Information Public
These are foxes guarding the chicken coop, with the majority of their board members representing carriers that collect subsidies. Of course they overpay. These secretive bodies determine how to allocate $billions every year but it's almost impossible to get enough information to identify waste. Both USAC and NECA should follow the rules of the Freedom of Information Act. The non-profit side of NECA, which plays a huge role in determine subsidy levels, needs to be split from the for-profit subsidiary that sells servies to the carriers getting subsidies. This is an extreme conflict of interest. Rumor is that the NECA officers make out like bandits but I can't get the data.
Reporter's thought: Just try to get the information you need from either organization. USAC currently is at least trying but far too much is considered "confidential." NECA is generally inpenetrable.


Monopoly-like Backhaul Pricing
2-4% of the U.S. has only one or two backhaul connections and they often gouge. This includes a very high percentage of the "unserved" and poorly served territories. The normal rate is $5-15/megabit, but time and again at the Broadband Workshops we heard of prices of $100 & $200. We also heard that the FCC has the authority they need to fix this obvious market failure. Mark Cooper testified in 2009 there's enough of a record that the FCC could move on this immediately, not wait for the other parts of the special access proceeding.
   
    High backhaul costs often are far more significant than problems of rural distances and densities. The broadband planners estimated it was 30-40% of the total problem.

Reporter's test: This would be a major part of the proposal if included. You can infer it's absence if they set aside funds for broadband operating expenses beyond initial construction costs.

Overpaying for Broadband because of duopoly/monopoly pricing of the service for each customer.
Also huge. AT&T & Verizon happily and profitably sold DSL for years at $15/month but with only cable competition have raised it to as much as $30 for slow, back of the bus service. That's because they can, not because of real costs. Many (not all) broadband costs in Europe are 30-60% lower than the U.S. duopoly.

    If the government demanded a wholesale price for the millions of lines they hope to subsidize under lifeline, it should come to $15-20. That provides a normal 40% margin for carriers. Demanding more is for poverty pimps.

    I calculated that not overpaying for broadband would double the number of people you could help with a given amount of lifeline subsidy.

Reporter's note: Lifeline broadband was separated into another proceeding coming in a couple of months, but any money wasted will in the Feb 8 proposals is less money for the poor. My guess is they will cover less than a quarter of the cost of the actual affordability gap.