Best of the ISP-Lists

The Long Term Consequences of a Small Town Ruling

A veteran telecom consultant warns that arcane rules allow ILECs of all sizes to work to mutual advantage to milk money from the federal government.

[May 22, 2008]

On the ISP-CLEC list, in a conversation about the FCC's decision [.pdf] to grant forbearance to ILEC Qwest on April 21, 2008 in the township of Terry, Montana, we found a particularly perceptive post. Fred Goldstein, consultant and principal of Ionary, wrote:

Terry was a no-brainer, though I found the use of forbearance to be problematic. The risk is that it could be used as precedent, when there's nothing precedential about Terry. It's a tiny town where a neighboring coop simply muscled in to an isolated Qwest outpost. Mid-Rivers overbuilt Qwest and took something over 90 percent of the business away.

Now what gets interesting is how this is all tied to USF subsidy flows. Mid-Rivers was subsidized as an ILEC, but in Terry it went in as a CLEC. Qwest might have gotten a little subsidy money (don't know for sure) but since it was a big company, it was expected to cross-subsidize its high-cost rural areas from its low-cost urban ones. Not that Montana's "urban" ones were very big either. The natural effect of such a rule is to encourage the Bell to divest itself of its rural territories. US West and later Qwest did indeed spin off a lot of territory.

Now two things come into play. One is an old rule that when a rural ILEC took over a Bell territory, it couldn't reset the USF to its own, higher level of funding; it just kept whatever USF the Bell got. That rule was lifted a coulpe of years ago. So now the rural ILECs can buy Bell turf and go to USF for new funding, raising the net cost to USF. Yet the Bell is on price caps, not rate of return, so by getting rid of unprofitable cross-subsidized turf, their own margins could go up. So consumers pay twice.

The special thing about Terry was that Mid-Rivers got itself declared "ILEC" in Terry a few years ago, after taking the dominant market share. They were not ILEC there per the Telecom Act definition, since they hadn't bought the Qwest exchange, but they were already dominant. Normally you'd think being ILEC is worse than being CLEC, because it carries more obligations. But in this case it really carries much bigger USF checks. So Terry essentially had two ILECs. Now Qwest's ILEC obligations are forborne, which seems a little silly given how they had little to lose from them, and their assets sit idle, and now closed to new competitors, however unlikely they'd be to come along. But since Mid-Rivers is a rural coop, their plant is not open to competitors either.

So basically it's a complex scam to raid the USF, while hoping the regulators, especially those watching USF, don't forget to take their stupid pills.

— End