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Weekly UpdatesIV. DISCUSSION AND CONCLUSION
In principle, reverse auctions are simple. The government defines say, a region, and asks for bids to provide service. Firms submit bids of how much the government would have to pay them to provide service in that region. The firm that asks for the smallest subsidy, all else being equal, wins the reverse auction and thus agrees to provide service in exchange for the subsidy it bid.
While the United States has not taken this approach for telecommunications, it may be the most common method the government uses when purchasing goods and services from the private sector. With most large purchases, a government agency issues an RFP describing in detail the product it wants to acquire. These products can be as simple as reams of papers or as sophisticated as tankers used to refill fighter jets in flight or supercomputers used for weapons testing and weather forecasting. Firms wishing to win this business submit bids and, all else being equal, the firm submitting the lowest bid wins the right to provide the service.
The details of a reverse auction, however, are different from most procurement requests. When designing these auctions, policymakers have several difficult questions to answer. Should multiple firms be able to win in any given area, or should only a single firm win each auction? The advantage of allowing multiple firms to win is that it can create competition in the market for services. The disadvantage is that it could drive up universal expenditures substantially, negating part of the purpose of the auctions.
How should reverse auctions continue over time in a given geographic area? The question of how to proceed after the auctions may be especially important if only one firm wins. In that case, firms compete for the market rather than in the market, meaning that there must be some future competition for the market.
Reverse auctions for universal service have been employed in several other countries around the world. One lesson is clear: details of the auction matter. A poorly designed auction may not generate any improvement over the status quo.
The second lesson is that reverse auctions can be implemented successfully. When done properly, they may reduce expenditures on universal service. That is, the auctions create a market where none existed and use that market to reveal the expected costs of providing telecommunications services. The information may not be complete, depending on the degree of competition, but it improves on the situation prior to the auction.
Many of the cases discussed in this paper are not directly comparable to providing universal service in the United States. In particular, the schemes intended to supply a payphone to a town or village would not be repeated in the United States, and it is presumably easier to define precisely what a bid is for under those conditions. In an auction, the good or service being sold must be well-defined or bidders will have difficulty assigning values to it.
Dale Lehman wrote that these experiences have little applicability in the United States: "It is also worth noting that the 'successful' Latin American reverse auctions rely, in part, on asymmetric interconnection fees to support rural providers. For example, the largest Chilean rural operator gets 60% of its total revenues from such charges; Colombia has recently introduced asymmetric fees, and Peru plans to." (92)
Lehman is correct in noting that these asymmetric fees are problematic. The claim that the presence of these fees means that the auctions may not have been a success, however, is probably incorrect. In a fair auction, the bidders take into account all future streams of income (and expenses) when making their bids. Bids, presumably, thus take into account expectations of these asymmetric fees. More importantly, as a result of the auctions, governments spent less subsidizing universal service than they would have otherwise.
As discussed above, while reverse auctions may be a new way to distribute funds for universal telecommunications service, it is the standard way the U.S. government procures most goods and services. In addition, several countries around the world have used reverse auctions to distribute universal service funds. Most of these reverse auctions have been successful in reducing expenditures on universal service. In two cases the auctions did not reduce expenditures (Australia, and the first and second auctions in India), but even there, expenditures were not more than they would have been without an auction.
However, policymakers must carefully consider two issues. First, they must take into account the effects of the incumbent's information advantages and existing infrastructure, which can advantage it relative to potential competitors. Second, policymakers must be clear about their objective. The existing evidence shows that reverse auctions can effectively reduce expenditures by promoting competition for the market rather than competition in the market. Reducing expenditures on universal service may not be consistent, at least in the short run, with increasing competition in a given geographic market.
In sum, reverse auctions have proven themselves both feasible and effective mechanisms for reducing expenditures on universal service and for revealing information about the true costs of supplying service in rural areas. Assuming these policy goals, policymakers in the United States should, at a minimum, devise pilot projects to begin implementing this idea.
(1.) See Universal Service Administrative Company, http://www.usac.org/default.aspx (last visited Jan. 30, 2009).
(2.) See Universal Service Fund Facts--About USF--USAC, http://www.usac.org/about/universal-service/fund-facts/fund_facts.aspx (last visited Jan. 30, 2009) (data reported by the Universal Service Administrative Company (USAC), a not-for-profit corporation designated as the administrator of the federal Universal Service Fund by the FCC).
(3.) See, e.g., Gregory L. Rosston & Bradley S. Wimmer, The 'State' of Universal Service, 12 INFO. ECON. & POL'Y, 261.
(4.) This chart was compiled based on data in mandatory, quarterly FCC filings by the USAC which project support requirements. See http://www.usac.org/about/governance/fcc_filings/ fcc-filings-archive.aspx (last visited Jan. 30, 2009).
(5.) High-Cost Universal Serv. Support, Notice of Proposed Rulemaking, 23 F.C.C.R. 1467, paras. 15-16 (2008).
(6.) See Paul Milgrom, Procuring Universal Service: Putting Auction Theory to Work, Lecture at the Royal Swedish Academy, Canberra (Dec. 9, 1996), (transcript available at http-//www.market-design.com/files/ milgrom-procuring-universal-service.pdf).
(7.) See Dennis Weller, Auctions for Universal Service Obligations, 23 TELECOMM. POL'Y 645 (1999).
(8.) See OFFICE OF MMGT. & BUDGET, OFFICE OF FED. PROCUREMENT POLICY, MANAGER'S GUIDE TO COMPETITWE SOURCING (2d ed. 2004), available at http://www.whitehouse.gov/omb/procurement/index_guides.html.
(9.) See, e.g., David Herszenhorn & Jeff Bailey, In Tanker Bid, It was Boeing vs. Bold Ideas, N.Y. TIMES, Mar. 10, 2008, at A1, available at http://www.nytimes.com/2008/03/10/business/worldbusiness/10tanker.html; see also U.S. GOV'T ACCOUNTABILITY OFFICE, JOINT STRIKE FIGHTER: MANAGEMENT OF THE TECHNOLOGY TRANSFER PROCESS (2006), available at www.gao.gov/cgi-bin/getrpt?GAO-06-364.
(10.) The Competition in Contracting Act of 1984, Pub. L. No. 98-369, 98 Stat. 1175 (codified as amended at 41 U.S.C. [section] 253 (2000)), states that the government must do procurement through "full and open competitive procedures."
(11.) See infra Part III.D.
(12.) Id.
(13.) See infra Part III.A. Australia is the one industrialized country that has tried the idea while India has used reverse auctions for mobile telephony in addition to public telephones. See DARYL WILLIAMS, MINISTER FOR COMM. INFO. TECH. AND THE ARTS, REVIEW OF THE OPERATION OF THE UNIVERSAL SERVICE OBLIGATION AND CUSTOMER SERVICE GUARANTEE (2003) (Australia).
(14.) The basic table design and much of the data for Chile, Colombia, the Dominican Republic, Guatemala, and Peru are from ANDREW DYMOND & SONJA OESTMANN, INTELECON RESEARCH & CONSULTANCY LTD., RURAL TELECOMMUNICATIONS DEVELOPMENT IN A LIBERALISING ENVIRONMENT: AN UPDATE ON UNIVERSAL ACCESS FUNDS (2002), available at http://www.inteleconresearch.com/pdf/update%20universal%20access.pdf. Several other sources contain a table similar to DYMOND & OESTMANN without attribution. As far as I can tell, that is the original source. Much of the information on the number of bidders comes from Hank Intven & Curt Howard, Least-Cost Subsidy Auctions for Universal Access Telecom Projects: A Practical Implementation Guide, Presentation at EBRD, IDRC, JICA, Keio University ICT Seminar, slide 10 (Aug. 25, 2004), available at http://www.ictseminar.org/Doc/IntvenAug.25am.ppt. Nepal data are from HANK INTVEN, EDGARDO SEPULVEDA & CURT HOWARD, WORLD BANK, OUTPUT-BASED AID IN NEPAL: EXPANDING TELECOMMUNICATIONS SERVICE TO RURAL AREAS (2004), available at http://www.gpoba.org/publications/approaches.asp. I derive India data from Roger G. Noll & Scott Wallsten, Universal Telecommunications Service in India, in 2 INDIA POLICY FORUM 2005-06 (2006), and other sources cited in the India section of this report.
(15.) Noll & Wallsten, Universal Telecommunications Service in India, supra note 14, at 258-60. This section draws heavily from joint research with Roger Noll with minor changes and additions and is used with permission of the author. Copyright is held jointly by Scott Wallsten, Roger Noll, NCAER and the Brookings Institution. Any opinions expressed in this paper are intended to reflect Wallsten's opinions only.
(16.) See HELMUTH CREMER ET AL., ECON. DEV. INST., THE ECONOMICS OF UNIVERSAL SERVICE: PRACTICE (1998), available at http://www.worldbank.org/wbi/regulationf/pdfs/practice.pdf; see also HELMUTH CREMER ET AL., ECON. DEV. INST., THE ECONOMICS OF UNIVERSAL SERVICE: THEORY (1998) available at http://www.worldbank.org/wbi/regulation-f/pdfs/theory.pdf.
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