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Tuesday
Oct042011

State USF Reform Impact Studies Predict RLEC “Death Spiral”

At Least 4 Rural States in Big Trouble if USF Reform Goes Wrong for RLECs

Anxiety about the impending decision on USF/ICC reform is definitely reaching a boiling point, if the long list of ex parte filings in the last couple of weeks is any indication. In addition to industry pleas and gripes for or against particular plans, two more states have weighed in on the potential impact of reducing or eliminating high cost USF support for RLECs. Universities from Colorado and Missouri conducted economic model analysis to determine the impact of USF reform on state jobs, income and taxes, similar to previous studies performed by universities in New Mexico and Kansas (The ILEC Advisor: New Mexico Study Depicts Life Without USF; September 27, 2011)

The state USF and National Broadband Plan impact studies do not take a position on any proposed course of action; rather they analyze what might happen in the state’s economy if RLECs lose their current level of high cost USF support. It should be noted that the studies only look at the impact of reducing or eliminating USF, not ICC as well. The results of losing USF alone are pretty dire, and I can’t imagine any of these states would be better off after further RLEC revenue reductions due to dramatic drops in ICC. For states where access revenue makes up about 30% of total RLEC revenue, you could probably just double the losses shown in these studies, which were mostly calculated assuming that RLECs receive (and stand to lose) about 30% of their revenue from USF.

Like the New Mexico study, the study conducted by Missouri State University’s Bureau of Economic Research calculates potential losses based on the assumption that the state’s 35 RLECs would lose all of their USF support. According to the authors, “It is highly probable that many of the ILECs in Missouri will not be able to survive such a transition in the long run and would go bankrupt.” Furthermore, “Even if the ILECs would survive they would decrease their investment in new infrastructure and equipment by approximately 40%,” which may negatively impact the quality, availability and affordability of telephone and broadband service. The combination of more expensive and less available broadband and the possibility that customers would have to drop services are “two things the FCC has stated it does not want.”

The Missouri study explains two possible options that RLECs would have if USF were eliminated. The first option is to increase rates, but “for every 10% increase in price that the ILECs use to offset the decrease in universal service funds, they will lose 7.6% of their customers” to either wireless substitution or no telecommunications service at all. The authors explain that “this creates a death spiral. In order to regain revenues, prices are raised, customers lost, creating pressure to raise prices again, which will again result in more customer losses. The result could be that a significant number of the ILECs, unable to make up the lost revenue, will cease operations all together.” The second option would be to drastically cut costs, including firing employees and reducing investment, which would contribute to unemployment and slow down broadband deployment.

The Colorado State University study took the analysis a little further. This study modeled different scenarios—eliminating USF, reducing USF by 30%, raising rates to help recover lost USF, and not raising rates, where the cost of losing USF support would be “borne entirely by providers.” The Colorado study reiterated the findings in the Missouri study, and concluded, “With such dramatic losses providers would likely follow one of two courses, each with important ramifications for Colorado’s rural communities.” The two courses are going out of business or surviving but with a much lower level of service. Another “death spiral” would likely occur in Colorado: “Some rural providers indicated that it would be difficult for them to raise prices without losing substantial numbers of customers. There was some indication that the impact of losing customers would be the provider going out of business.”

The four studies published so far used similar input-output models to illustrate the impact of eliminating or reducing USF on jobs, income and local/state taxes. The results are summarized in the table below. Although some of the studies project losses over a period of 5-10 years, I felt that the immediate impact results (estimates for 2012) were most accurate and revealing, given the assumptions in the studies. Some of the longer-range projections appeared fuzzy to me, as the studies did not consider possible USF replacements, like CAF or new revenue sources. The Missouri study also added the cumulative losses over 5 years, which led me to believe that their longer-term results were over-estimated.

We won’t know for sure until the final rules are revealed (expected this week, with a vote at the Oct. 27 FCC Open Meeting) exactly what percentage of USF support RLECs stand to lose (or how quickly they will lose it), but it might be an interesting exercise for companies to run the numbers and see what the impact of reducing or eliminating USF would be for their specific communities in terms of direct and indirect job, income and tax losses. How do you plan to offset USF revenue losses in order to avoid a “death spiral?” Obviously, generating more revenue is the solution; but what specific operating strategies and new business opportunities have enough momentum to overcome such significant losses and ensure future growth and profitability?

The Missouri and Colorado studies are available at SaveRuralBroadband.org.

Reader Comments (1)

When taxpayer bailouts to unsustainable businesses are ended, there is bound to be some disruption. However, it's better in the long run. More efficient and sustainable companies and technologies which do not rely upon the government dole will fill the gap.

October 14, 2011 | Unregistered CommenterBrett Glass

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