Montana Telecommunications Association Commentary: Reverse Auctions

I have mentioned in previous commentaries the importance of the federal universal service program, which is a statutory program designed to ensure that all Americans, no matter where they live, have access to affordable, quality telecommunications services. Under this program, users of most interstate telecommunications services contribute to the federal Universal Service Fund. Revenues are collected, and then disbursed to eligible telecommunications service providers whose costs of providing telecom services exceed by a certain percentage the average national cost of providing such service.

Telecom service providers in Montana receive a substantial portion of their revenues from the federal Universal Service Fund, because the cost of providing affordable, quality telecom service exceeds by a substantial margin the price we pay for such service. In other words, without universal service, either we wouldn’t enjoy comparable telecom services to the service offered in low cost, more densely populated parts of the country, or our rates would need to increase from $300 to $600 a year. In short, the federal universal service program ensures that we have access to affordable, quality telecom services in Montana.

In 1996, only a short ten years ago in calendar time, but an eternity in telecom technology time, Congress amended the federal Telecommunications Act to encourage competition in telecommunications markets, and to preserve and promote universal service. Sometimes these two goals have conflicted with one another.

For example, universal serviced is intended to ensure that consumers have access to modern telecommunications service. A contribution mechanism provides the means by which consumers contribute to and benefit from universal service. Arguably, universal service is provided only where telephone service would not be affordable without such support from the Universal Service Fund.

On the other hand, the Telecommunications Act also is intended to promote competition in telecom markets. Thus, since 1996, a multitude of telecom providers, mostly wireless companies, has sought, and obtained, universal service support to expand their networks in rural, high cost areas.

As a result, the universal service fund has grown dramatically. While traditional wireline telephone companies have seen the support they receive from the Universal Service Fund remain fairly constant, support to wireless carriers has grown from $0 in 1999 to over $1 Billion by year end. The Chairman of the Federal Communications Commission, among others, has questioned whether universal service is supposed to subsidize competition, especially in areas where support is needed just to maintain a single, let alone multiple, providers.

As a result of current policies, the Universal Service Fund is paying for more and more service providers, while contributions to the Fund are shrinking as a result of the introduction of new telecom services that may or may not contribute to the Universal Service Fund.

Something’s gotta give. Among other things, the FCC has begun to require providers of telecom services, no matter what technology they employ, to contribute to the Universal Service Fund. Also, the FCC has provided guidelines to states to be more prudent in scrutinizing requests by telecom providers to receive universal service support. These are significant policy changes designed to shore up the Universal Service Fund so that it can do what it’s supposed to do: that is, support access to high cost telecom services in rural parts of the country, like Montana.

Recently, a new proposal has surfaced. A Federal-State Joint Board on Universal Service has asked whether instituting a “reverse auction” mechanism would help shore up the Universal Service Fund. “Reverse auctions” refers to a competitive bidding process, by which the lowest bidder wins. In the context of universal service, the proposal would require telecom service providers to compete for universal service support by submitting the lowest bid.

The proposal is well intentioned. It is designed to limit the number of providers obtaining universal service support in a given area. Under one scenario, the proposal suggests separate wireline and wireless universal service mechanisms, a constructive idea.

However, in general, reverse auctions would threaten the very access to quality, affordable telecommunications services that the proposal is intended to defend. In order to “win” a reverse auction, a carrier would be tempted to offer the least investment possible to retain a minimal level of service. That’s hardly a formula for continued investment in advanced telecom services, which more and more form the foundation for economic development and national economic competitiveness.
In conclusion, universal service is essential in retaining adequate investment in modern telecommunications systems, especially in rural, high cost states like Montana. The FCC has proposed a number of policies designed to keep universal service program viable and productive.

Reverse auctions, however, is not one of them.

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Contact: Geoff Feiss, General Manager

Montana Telecommunications Association

208 North Montana Ave., Suite 105

Helena, Montana 59601

406.442.4316

[email protected]