USF cuts could curb rural Alaska investment by telcos

Alaska telecoms will have to evaluate their investment plans for expanding networks into rural areas after the Federal Communications Commission approved a plan to reduce high-cost support from the Universal Service Fund.

The Oct. 27 FCC action shifts $4.5 billion in USF high-cost support for wireless and wired service into a new Connect America Fund that will subsidize rural broadband deployment.

State telecoms currently receive some $205 million annually in USF high-cost support, a crucial funding source that has allowed the companies to build out wireless networks that would be prohibitively expensive without it because of the low density of customers.

Matanuska Telephone Association CEO Greg Berberich said there is “no way” to deploy service in rural Alaska without USF high-cost support.

“We wouldn’t be here building if it wasn’t for USF,” Berberich said. “It’s a critical piece for everybody.”

Similarly, General Communications Inc. Chief Financial Officer John Lowber said there was “no question” future rural communications infrastructure will be impacted if the challenges of Alaska’s massive geography and remote villages aren’t addressed by the FCC.

“We’ll look carefully at each of our proposed extensions of the end user network and evaluate them in light of a smaller market in what are already some small locations,” Lowber said in GCI’s third quarter earnings call Nov. 3. “There are 30 or so village locations un-built with wireless. It’s an open question to whether those will be built until there is more clarity with what happens with increased support in the long term. We’ll take a flashlight to our (capital expenditures) and make sure we can continue to achieve the returns. There’s almost certainly reductions in rural cap-ex that will flow from this.”

GCI expects to receive about $54 million in USF high-cost support revenue this year, and anticipates the FCC order will reduce that amount by at least $5 million per year in 2012 and 2013.

Likewise, Alaska Communications Systems Inc. receives about $43 million in USF high-cost support and expects to lose $4 million to $5 million per year in revenue in the next two years.

During the ACS third quarter earnings call Nov. 8, CEO Anand Vadapalli said tribal land exemptions currently allow for some of the USF support, and that a new high-cost support program for wireless will be in place by 2014.

However, Vadapalli said, “this long-term uncertainty will cause us to evaluate where and how we provide services and make investments.”

ACS Chief Financial Officer Wayne Graham, also on the earnings call, said, “we have no visibility into the new model that will drive the future mechanism, nor anticipated levels of funding under this new model.”

Berberich said MTA receives about $25 million per year in USF high-cost support, and like his fellow telecoms is facing about a 10 percent loss in revenue.

“We’re all going to take a haircut,” Berberich said. “That’s a given.”

Berberich has a number of concerns about the FCC decision. He said MTA felt there should be a mechanism to recover investments made under the prior rules, as infrastructure was built out on the expectation of receiving USF high-cost support.

Berberich said he also would have liked to see more certainty in how the reformed USF would allow for continued investment in broadband because of Alaska’s “middle mile” problem. Wireless build-outs require wired backhaul, and without USF support Berberich said it would be impossible to continue constructing infrastructure to reach remote rural areas.

Finally, Berberich said he would have like to see an acknowledgement from the FCC that Alaska does not fit a nationwide model.

Lowber said the changes in USF mean GCI’s TERRA-Northwest project — set to build on the completed TERRA-Southwest terrestrial broadband starting next spring — may not go farther than Nome because of the FCC action. The FCC has not yet released its final order, expected to number more than 400 pages.

“We believe, with great caution as the full order has not been released, the high-cost support flowing to rural Alaska will be capped at approximately its current level, which means expansion in either wireless or wireline for end-users won’t receive any increase in net total revenue in the market as the number of lines served or wireless handsets provided increases,” Lowber said.

“That reduces the market as a whole out there. High-cost support is probably 30 percent of the total support flowing to that market when you look at Lifeline, schools and library support,” he added. “There’s no question that if you cap the amount of end user support available in rural Alaska, and potentially reduce the total market by 30 percent, that investment will go down.”

The USF is paid for through charges on phone customers’ bills, with three separate funds for high-cost support, Lifeline (subsidized individual phone service) and health care, libraries and schools.

The affected fund is the high-cost support, which includes both wireless and wireline.

Alaska’s Congressional delegation — as it often does whether the issue is bypass mail, essential air service or USF support — finds itself having to defend and explain the state’s unique needs.

In letters to the FCC and in comments after the order was issued, the Alaska delegation noted that the move toward subsidizing broadband would come at the expense of rural areas still catching up to the wireless technology.

“We cannot afford to use a one-size-fits-all approach when making changes to our communications infrastructure,” said Rep. Don Young, who has formed a USF caucus in response to the FCC action. “There are too many rural communities and villages that are just now seeing the benefits of 21st century technology and it is crucially important that the FCC remember that as they seek to reform the Universal Services Fund. As the Co-Chair of the newly founded House USF Caucus, I will continue to work to ensure that Alaska receives the same level of commitment that other, more populated states are receiving.”

Andrew Jensen can be reached at andrew.jensen@alaskajournal.com.