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Wireless Excess Highlights Needs for Universal Service Reform

Who's at Risk? Everyone...

The FCC announced yesterday, February 8, 2010, a framework for reform of the Universal Service and Intercarrier Compensation Funds, reform which will, in all likelihood, put the funds many RLECs receive each year at risk. 

The long-anticipated move places emphasis on broadband service over voice—indeed, in a speech given Monday, FCC chmn Genachowski said, "At the end of this transition, we would no longer subsidize telephone networks; instead we would support broadband."  

Worse still (from an RLEC point of view), in a statement, Genachowski noted that “according to one study, approximately one hundred million dollars flow to phone companies each year to serve areas where competing providers, without a dollar of government support, offer voice service to all households.  In many places, USF funds four or more phone companies to serve the same area.  And it leaves hundreds of companies to control their own funding spigot, with guaranteed double-digit returns.  Does that make sense?”

Clearly, as Genachowski has often said, the system is broken.  But while $100m out of the $8.5b fund may seem like a small amount, it’s a big number for many RLECs, and those funds all too often mean the difference between profitability and losses.  Though it’s far too early to say what the ultimate ramifications of USF reform will be, we spent some time perusing the most recent Universal Service Monitoring Report, released last December, to see just where the money has been going.

Overall, the USF has nearly quadrupled in size over the past decade.  In 1998 total Universal Service funding was about $2.2b; for 2010 it was estimated at $8.4b.  Of that, more than half ($4.5b) is for high cost support—the program that allows telcos to earn a return on investment even in areas that otherwise wouldn’t economically support the cost of installing and maintaining phone lines.

Three other programs combined for about $3.9b:  The low-income program requirement for last year was estimated at $1.4b, schools and libraries got around $2.3b and the rural healthcare program cost $164m.

Looking at the states that receive the greatest net benefit (receipts from Universal Service less contributions to the fund), Mississippi topped the list, with a net benefit of more than $254m in 2009.  It was followed by Alaska, with nearly $225m net benefit, Kansas ($183.2m), Arkansas ($99.6m), Louisiana ($97.6m) and Nebraska ($87.5m). On the other side of the equation, the biggest contributor states were Florida ($274m), California ($239m) and New Jersey ($195.7m).

Looking only at High Cost Support, the top five recipient states were Mississippi ($281.3m), Texas ($262m), Kansas ($230m), Alaska ($168m) and Arkansas ($148.3m).  Nationwide, in 2009, total monthly high cost support per line ranged from less than $1 to more than $21.  On a per line basis, the states receiving the highest support were Alaska ($21.29 per line per month), the Virgin Islands ($19.24 per line per month), South Dakota ($13.67 per line per month), North Dakota ($12.79 per line per month) and Wyoming ($12.06 per line per month).

Who’s Getting All the Money?

This is where it really gets interesting.  Or upsetting, perhaps, for the RLEC industry.  We examined the companies receiving USF within those states with the highest levels of support.  With few exceptions, in these high cost states there are one or more wireless companies receiving the highest levels of support.

In Alaska, Dobson Cellular (AT&T) received $22.3m, followed by GCI ($12.9m), Matanuska Tel. ($11.7m) and Alaska Communications ($10.5m).  In South Dakota, Western Wireless (Verizon Wireless) received more than $20m in 2009; followed by Golden West Telecomm with just $5.3m.  Similar story in North Dakota:  Western Wireless received $9.5m and another four cellular limited partnerships received more than $10m combined.  In comparison, Consolidated Telcom received $3.7m.  In Kansas, Alltel Wireless (Verizon Wireless) received $40m in 2009; Nex Tech Wireless got $14.5m, followed by Rural Tel. Service Co. with $13.5m.

Blame it on the Wireless Guys

Indeed, it’s clear that the main reason the USF has spiraled so rapidly out of control over the past decade is largely because of wireless carriers which have gained CETC status.  High cost support to CETCs grew from less than $17m in 2001 to nearly $1.3b in 2009. 

In Local Switching support, wireless companies are also collecting millions, sometimes more than entire states receive elsewhere:  US  Cellular received $9m in Iowa, Western Wireless, $5m in Minnesota; Midwest Wireless (Verizon Wireless), $2m in Minnesota; Cellular South, $1.9m in Mississippi; Alltel of Nebraska $8.8m, and Western Wireless $4.1m in North Dakota.

Here’s a few more examples:  In Mississipi, Cellular South got $80.6m in total high cost support, and New Cingular Wireless (AT&T Wireless) got $80.2m, while South Central Bell-MS got $81.2m.  In New Mexico, the entire state received $93.7m, of that, NM RSA-4 LP got the biggest piece at $10.7m, followed by Western Wireless with $9.8m.  In Puerto Rico, Centennial and Cingular collected $32.1m and $23.3m, for a total of more than $55m to AT&T's wireless group.  And in South Dakota, Western Wireless got nearly $40m; the next closest recipient was Golden West Telecom with $10.3m. 

Wireless service revenues more than tripled between 1998 and 2008, to $120b, but over that same time frame USF surcharges have increased ten-fold, to nearly $3.6b.  And where ILECs accounted for the largest percentage of telecom revenue in 1998, wireless now wears that crown.

The Bottom Line

So not only has the wireless industry, in one short decade, taken over the voice business and become the biggest factor behind double-digit declines per year in total access line counts, it's also screwed up the funding mechanism that kept rural LECs going for nearly a century.  It's hard to say how wireless will impact the new system--both Verizon Wireless and Sprint Nextel have already agreed to forfeit their USF monies over five years, and the FCC has capped the amount that CETCs can receive. 

But in the brave new broadband world, the FCC seems intent on treating all potential service providers equally--wired or wireless.  And it also seems determined not to fund more than one provider per region...and if a viable fixed wireless guy moves into a market with a lower cost service, the incumbent wireline service provider might just find himself up the proverbial creek without a paddle. 

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