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Wednesday
Jun222011

Rural Telcos Illustrate Impact of USF Reform

Three RLECs Provide Evidence of Financial and Community Harm in Ex Parte Filings

Over the last few weeks, representatives from three RLECs have held ex parte meetings with the FCC on the topic of Universal Service Fund reform. Randy Fletcher and Tom Bowden from Lennon Telephone Company (Lennon, MI); Jeff Leslie from ITS Telecommunications Systems, Inc. (Indiantown, FL); and Jan Lovell, Tom Lovell and Doug Klein from Clear Lake Independent Telephone Company (Clear Lake, IA) each met with members of the Wireline Competition Bureau. Each company was represented by John Staurulakis, Inc., and each company illustrated the significant financial harms and negative community impacts that could come as a result of the FCC’s proposed USF reforms.

In their June 15 ex parte meeting, representatives from Lennon Telephone Company (“Lennon”) argued that the company is “heavily dependent on universal service support.” Lennon is a family-owned business with 15 employees, and the company provides service to 392 broadband customers and 981 voice customers. Lennon is concerned that reforming USF will hinder the company’s ability to repay loans, noting that they currently have two outstanding loans (one is for a softswitch). Lennon argued that “the near-term proposals in the FCC’s Notice of Proposed Rulemaking on universal service reform would significantly reduce the amount of universal service support that the company receives,” and the company currently receives 53% of its regulated revenues and 28% of its total revenues from USF support.

ITS Telecommunications Systems, Inc. (“ITS”) representatives held their ex parte meeting on June 9, where they stressed their company’s importance to the local community in Martin County, FL, noting that they are a top employer, a leader in economic development in an economically depressed area, and they support schools, community organizations and help attract new business to the area. ITS has 1,011 broadband and 2,973 access lines. ITS has utilized RUS loans and made significant investments in infrastructure to provide broadband at speeds of 10-100 Mbps based on the current USF support system, but unfortunately, “ITS would default on Rural Utilities Services loan commitments under the proposed reforms.” ITS illustrated that under a USF scenario based on the FCC’s NPRM, the company would fail the Times Interest Earned Ratio (TIER) test, with a TIER of less than 1.0000 for each of the next 3 years. As a result, ITS would default on its RUS loans and be unable to secure any additional capital investment opportunities.

Both Lennon and ITS provided “impact statements” showing probable financial losses to the companies as a result of reducing High Cost Loop Support, Local Switching Support, Interstate Common Line Support, and Safety Net Additive Support. As you can see in the chart below, these two companies stand to lose approximately 30-45% of their annual total universal service support if the FCC’s NPRM proposals are implemented:

The financial loss is only one side of the story. Clear Lake Independent Telephone Company (“CL Tel”) provided testimonials from members of their community to illustrate that RLECs are more than just telecommunications service providers in many rural areas. CL Tel has a total of 2,423 broadband and 5,299 voice access lines, and the company’s role in the Clear Lake, IA community should not be overlooked. CL Tel’s ex parte filing notes that “the company is a major contributor to the local communities both financially and with managers lending their expertise to community organizations and the area community college which recruits new industry and supports existing ones.” CL Tel also provides backhaul to four major wireless companies, and their fiber network helps bring new businesses to their rural Northern Iowa service area. CL Tel argues that rate-of-return regulation has facilitated long-term investments and has allowed the company to secure RUS and RFTC loans. According to CL Tel, these sources of capital will be at risk if the FCC’s USF reforms are implemented.

I found the testimonial letters from the Clear Lake community to be especially critical evidence to support first how important RLECs are to rural communities, and second how detrimental the FCC’s reforms may be to many rural Americans—not just RLECs alone. The superintendent of the Clear Lake Community School wrote, “CL Tel has always worked with the Clear Lake Community School District to improve telecommunications and to expand broadband to enable students, teachers, administrators and parents to keep up in the rapidly evolving world of technology.” I remember FCC Chairman Julius Genachowski’s opening remarks when the USF Reform NPRM was introduced back in February. He told an emotionally-charged story about a young student who had to spend the night in a parking lot of a library in order to complete a class project—the student did not have broadband at home and had to resort to using the library’s Wi-Fi network. Does the FCC really want to eliminate support for a company like CL Tel, which provides a 100Mbps WAN connection to all of the Clear Lake Community School buildings? CL Tel apparently provides free and reduced services to the school that amount to an annual savings of $25,856.20. The superintendent noted that this is particularly crucial as the school faces increasing budget cuts and layoffs. I believe that if funding is reduced for RLECs who strive to support their community schools, the FCC will have many more sad stories to tell about students going to great troubles to complete their homework.

In addition to the school, the Clear Lake Public Library, Clear Lake Arts Center, Clear Lake Police Department and the Mayor of Clear Lake all provided letters in support of CL Tel’s admirable community involvement. Each of these organizations receives free or discounted broadband services. CL Tel has also contributed to library and arts center renovations, and they are helping the police department install a fiber network for security cameras. The Mayor of Clear Lake commended the company’s support, adding that CL Tel “has been a major contributor in all our public/private capital campaigns such as: the Public Library, swimming pool, Central Gardens, lake restoration and Arts Center projects.” In total, Clear Lake public institutions save thousands of dollars per year on telecommunications services as a result of CL Tel’s community-oriented corporate philosophy. I am particularly impressed by CL Tel, because I imagine that offering free and reduced-cost services to community institutions probably hurts the company’s bottom line, yet the company clearly cares about the community enough to continue these programs despite the constant onslaught of financial, regulatory and technological challenges that most RLECs face these days. 

CL Tel is by far not the only RLEC that goes to great extents to support its rural community. I think it is very important for the FCC to realize just exactly how much rural America stands to lose if USF support is drastically reduced or eliminated for RLECs. I don’t argue with the FCC that in some cases, the RLEC might not be the proverbial “most efficient” broadband provider, but I do argue that it is absolutely critical for the FCC to acknowledge the goodwill contributions of RLECs to their communities in addition to the financial data. Should there be some type of goodwill or community support weighting factor in the new USF methodology, and if so, how would that work? I have to wonder if an investor-owned large price cap carrier would provide tens of thousands of dollars each year to ensure the survival of small-town schools, libraries and public safety departments—what would their stockholders and Wall Street brokers say?

You can read Lennon Telephone Company’s ex parte filing here, ITS’s filing here, and CL Tel’s filing here.

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