Small Telcos’ Disconnect with the Connect America Fund

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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.”

    The NTCA survey is not an outlier. It seems that the dynamic now is that the rural telcos must make a move, but are unsure of what direction in which to go. Cassandra Heyne, a senior analyst at John Staurulakis Inc., a consulting firm for independent telcos, said that despite legal action aimed to derail the CAF, telcos are assuming it will happen. “There is no turning back,” she said. “Rules have been in place since November of 2011.”

    The very name of one of the main tools being used to determine how much help a rural carrier gets – quantile regression analysis – is suggestive of the difficulty of these issues. Heyne described at a high level the massive amounts of money involved.

    One goal is to help small telcos reach the modest download speed of 4 Megabits per second. Even that is proving difficult: Heyne said that only $115 million of a possible $300 million in Phase I awards were disbursed last year. This was money earmarked for larger telcos, but was largely bypassed because they didn’t like the amount allocated per household and some of the fine print.  There will be a second part of Phase I this year, Heyne said, aimed at giving out the remaining $185 million.

    Phase I is a one-shot deal. Phase II, conversely, is an annual disbursement of $1.8 billion. The fate of that effort, she said, is unclear. All the while, the clock is ticking. “Rural carriers are caught up in a regulatory limbo while other providers that don’t have such stringent regulations can come in and pick away at their customers,” Heyne said.

    Heyne lauds the overall goal of the initiative of modernizing a creaky system. To her, however, the means to that end are another issue. “The way that they have decided to do it definitely is questionable,” she said. “It depends on the perspective of the industry participant. Every company – from AT&T to the little mom and pop wireless companies – are having issues adjusting to the rules.”

    Settles seems to agree. He is aware of the law of unintended consequences in a set of laws and regulations that rearrange the system in such a detailed and fundamental way. “Connect America is a 700-page document in which they are changing of whole program,” he said. “The fallout and pushback and all the rest of it is coming from the changes they have already implemented. The problem is that it is not clear exactly how it is going to roll out – probably because it is 700 pages.”

    Carl Weinschenk
    Carl Weinschenk
    Carl Weinschenk Carl Weinschenk Carl Weinschenk is a long-time IT and telecom journalist. His coverage areas include the IoT, artificial intelligence, artificial intelligence, drones, 3D printing LTE and 5G, SDN, NFV, net neutrality, municipal broadband, unified communications and business continuity/disaster recovery. Weinschenk has written about wireless and phone companies, cable operators and their vendor ecosystems. He also has written about alternative energy and runs a website, The Daily Music Break, as a hobby.

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