Small Telcos’ Disconnect with the Connect America Fund

Carl Weinschenk
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The highest-profile work on creating a deep, fiber-based broadband infrastructure in the United States has been done by two companies: AT&T and Verizon. Their U-verse and FiOS projects, respectively, have allowed a huge swath of the telephone industry to transition to a sophisticated broadband player.

What is not as newsworthy is that many of the advances in telecommunications infrastructure are made – and always have been made – by smaller telephone companies, many of which are rural areas. These companies, cumulatively, provide services to a large minority of the American people – and most of its land mass.

There always has been a tricky issue with rural phone companies: The density of subscribers per mile has made it financially difficult to justify bringing infrastructure to many areas. It just isn’t worth it. The Telecommunications Act of 1996 took on this issue by setting up a system of subsidies through which the big telephone companies support their smaller cousins.

That system, which has a complexity level that makes the tax code look like the puzzles on a kid’s menu at a diner, is based on mostly copper networks that are dedicated to delivery of voice. The problem, thus, becomes fairly obvious: Propping up the entire intricate edifice of rules and regulations becomes increasingly cumbersome as the technology shifts as drastically as it has during the past two decades.

Enter President Obama. One of the signature initiatives of his administration – or, more accurately, his administration’s regime at the Federal Communications Commission – is to modernize the Universal Service Fund (USF) to support richer fiber infrastructure and the broadband services that ride upon them. This effort is named the Connect America Fund (CAF).

The problem is that transitioning from the USF to the CAF is monstrously complex. Obamacare may be a bit more outwardly political and certainly has gotten far more publicity. The top-level challenges are similar, however: Both are hugely complex forays into largely unchartered waters that would be difficult even if everyone were pulling in the same direction. Add layers of differing philosophies and outright partisan political maneuverings and the result is a transition that is problematic at best and one step away from paralysis at worst.

All this is wearing thin on rural telcos. Telecom industry analyst, speaker and author Craig Settles pointed out that rural telcos depend upon those subsidies and certainly don’t like the uncertainty. “Everybody who has relied on the USF are now definitely in a nervous state as they try to figure out what is going to happen,” he said. “It’s a justifiable nervous state because the legislative battles and everything else about this is so mired in craziness that it’s hard to figure out what to do, what to hope for and how to adjust. This is very problematic.”

In the Obamacare analogy, the idea is that uncertainty about the new rules is slowing hiring and otherwise disrupting the normal flow of business in the health care sector. A similar thing is happening in the world of small telephone companies: Uncertainty over how much money they are going to get, when they are going to get it and other fundamental questions is slowing investment, according to those familiar with the situation.

In March, the NTCA–The Rural Broadband Association released a survey of its small telco membership. While many of the findings were positive – for instance, 74 percent of respondents offer fiber to the home, which is a 10 percent jump from 2011. Speeds also are up. However, the survey showed that the transition from USF to the CAF is generating great angst. Respondents said that their plans could be delayed or squelched completely due to regulatory uncertainty, according to the press release on the survey. More than three-quarters said that regulatory uncertainty is the greatest threat to broadband deployment. The concern that scored higher is cost, the release said.

NTCA economist Rick Schadelbauer said that the concern over regulatory reform also was the second leading concern when the survey was conducted in 2011, but the number of respondents citing it rose from 67 percent to 76 percent. The uncertainty is exacerbated, he said, by the pressures from other service providers and the fact that there could be a lull as the FCC looks for a new chairman and to fill an additional commission seat that is opening. “They are extremely concerned,” Schadelbauer said of rural carriers. “Standing still at this point is not an option. At a certain point in time investments have to be made.”

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Add Comment      Leave a comment on this blog post
Jun 4, 2013 7:12 PM DavidFlynn DavidFlynn  says:
Your right Carl that rural telecos can be more cutting edge since they have to solve real world distance problems (i.e. the last mile). Also their small size allows for greater flexibility and innovation. But beware when the government gets involved. There are serious consequences since it’s some industry lobbyist who’s “whispering in their ear”. I wonder who’s truly behind these actions and what is the motivation? Reply

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