Reverse Auctions and Universal Telecommunications Service: Lessons from Global Experience

Article excerpt

 I. INTRODUCTION

II. UNIVERSAL SERVICE IN THEORY AND IN PRACTICE
    A. Rationale for Universal Service in Telecommunications
    B. Tax and Distribution Schemes are Inefficient
    C. How Much Should We Spend and Where?

III. GLOBAL EXPERIENCE WITH REVERSE AUCTIONS AND
    UNIVERSAL SERVICE
    A. Australia
    B. Chile
    C. Colombia
    D. India
    E. Nepal
    F. Peru

IV. DISCUSSION AND CONCLUSION

I. INTRODUCTION

Nearly every country in the world has universal service or access regulations in an attempt to ensure that everyone in the country can access telecommunications services at affordable prices, although "telecommunications" and "affordable" are not always easy to define. Universal service subsidies are typically used for telecommunications services in rural areas. The United States also subsidizes schools and libraries, and a small share of the subsidies go to low-income people. (1) Annual spending in the United States on universal service has increased substantially, reaching approximately $7 billion in 2007. (2) Most of this growth is the result of increases in the High Cost Fund (Figure 1). Because these subsidies have been so inefficient, (3) the mounting expenditures--and thus inefficiencies--are creating increasing pressures to reform the system.

[FIGURE 1 OMITTED] (4)

The FCC is considering "reverse auctions" as one possible method of controlling these expenditures. (5) Paul Milgrom proposed this idea more than a decade ago, (6) and Dennis Weller developed a more specific proposal. (7) The general idea is for firms to bid for subsidies, and the firm with the lowest bid--that is, the firm that asks for the smallest subsidy--provides the service. While the United States has never allocated universal service subsidies in this way, it is not untested.

A reverse auction is the standard way in which the government typically procures any good or service. When the government needs to purchase something, it issues a request for proposals (RFP) describing specifically what it wants. (8) Firms reply to this request, and the government picks the firm that submits the best bid. The best bid may be the lowest, but the government may also take other factors into account when making the decision, especially in the case of complex projects. While it is easier to conduct a reverse auction for simple products, the U.S. government has also used them to supply highly complex goods like weapons systems, (9) demonstrating that feasible auctions need not be simple.

Since a reverse auction for universal service is simply a RFP to supply telecommunications services, and because no-bid contracts are typically controversial, (10) perhaps it should be surprising not that the FCC is considering reverse auctions, but instead that reverse auctions have yet to be used for universal service.

In addition, other countries have used reverse auctions to provide universal service with some success. Their experiences demonstrate convincingly that reverse auctions can bring down subsidies substantially. Their experiences also demonstrate that, as in any auction, the rules matter a great deal. India's first attempt at reverse auctions was not successful, failing to reduce the subsidy and concluding with the incumbent as the only winner. (11) India persisted, and its most recent auction ended with firms bidding for no subsidy and even bidding to pay to provide service rather than to receive subsidies. (12)

This Article surveys global experience with reverse auctions in universal service. In particular, it discusses reverse auctions in Australia, Chile, Colombia, India, Nepal, and Peru and draws lessons from these countries for the United States. Figure 2 gives an overview of reverse auctions in these countries, as well as Guatemala and the Dominican Republic.

Most reverse auctions have been aimed at providing public telephones in developing countries. …