A new proposal from the nation’s six largest telephone companies would double or triple Universal Service Fund (USF) fees on many telephone lines, extending them to wireless, broadband-based phones, cable TV “digital phone” products, and potentially even Internet accounts, providing billions from consumers for the companies proposing the plan.

Universal Service Fund reform has been a hot topic this year in Washington, as regulators attempt to reform a long-standing program designed to help keep rural landline telephone service affordable, subsidized with small charges levied on customer phone bills that range between $1-3 dollars, depending on the size of your community.

The original goals of the USF have largely been achieved, and with costs dropping to provide telephone service, and ancillary services like broadband DSL opening the door to new revenue streams, some rural phone companies don’t need the same level of support they received in earlier years.  As a result, USF funds have progressively been disbursed to an increasing number of projects that have little to do with rural phone service.  Several funding scandals over the past decade have underlined the need for USF reform, and FCC Chairman Julius Genachowski has been a strong advocate for directing an increasing amount of USF resources towards rural broadband deployment projects.

But now some of America’s largest phone companies want to establish their own vision for a future USF — one that preserves existing funding for rural phone service –and– levies new fees on ratepayers to support broadband expansion.

The ABC Plan's chief sponsors are AT&T...

America’s Broadband Connectivity Plan (ABC), proposed jointly by AT&T, Verizon, CenturyLink, Windstream, Frontier Communications and FairPoint Communications, departs markedly from Genachowski’s vision for a revised USF that would not increase the overall size of the Fund or its cost to consumers.

That’s why some ratepayer consumer groups and utility regulators have taken a dim view on the phone companies’ plan.

Colleen Harrell, assistant general counsel to the Kansas Corporation Commission says customers would find USF fees doubling, if not tripling on their home phone bills under ABC.  That could mean charges of $6 or more per month per phone line.

While the plan substantially benefits the companies that propose it, critics say ABC will do little to enhance service for ordinary consumers.  In fact, some language in the proposal could open the door for landline companies to discontinue universal landline service, a long time goal of AT&T.

In fact, protection for incumbent phone companies seems to be the highest priority in most of the ABC’s framework:

1. The proposal provides a right of first refusal to the incumbent phone company, meaning USF grant funds effectively start at the landline provider, and are theirs to accept or reject.  This has competitors howling, ranging from Wireless ISPs, mobile data providers, cable companies, and even fiber networks.  The ABC proposal ignores who can deliver the best broadband most efficiently at the lowest price, and is crafted instead to deliver the bulk of funding to the provider that has been around the longest: phone companies.
2. Provisions in the ABC Plan provide a convenient exit door for landline providers saddled with providing service to some of America’s most rural communities.  An escape clause allows “satellite service” to be provided to these rural households as a suitable alternative to traditional wired service, sponsored by an annual $300 million Advanced Mobility/Satellite Fund.  This, despite the fact consumer ratings for satellite providers are dismal and existing providers warn their services are often unsuitable for voice calls because of incredibly high latency rates.
3. Provisions in the ABC Plan adhere to a definition of acceptable broadband well within the range favored by telephone company DSL providers — 4Mbps.  Setting the bar much higher could force phone companies to invest in their networks to reduce the distance of copper wire between their offices and customer homes and businesses, allowing for faster speeds.  Instead, lowering the bar on broadband speeds assures today’s deteriorating rural landline network will make-do, leaving a rural/urban speed divide in the United States.
4. To “resolve” the issue of the increased fees and surcharges that could result from the plan’s adoption, it includes a subjective cap of $30 a month on residential basic landline home phone service (without calling features).  But since most ratepayers pay substantially less for basic home phone service, the maximum rate cap provides plenty of room for future rate increases.  Also, nothing precludes phone companies from raising other charges, or creating new “junk fees” to raise rates further, ignoring the “cap.”

...and Verizon

Rural states seem unimpressed with the phone companies’ proposal.  The Kansas Corporation Commission (KCC) called various provisions of the plan “a train wreck.”  Kansas is one of several states that developed their own state-based Universal Service Fund to help the state’s many rural agricultural areas receive acceptable telecommunications services.  Kansans initially paid one of the highest USF rates in the country when their state plan was enacted in 1996.  But Kansas phone companies used that money to modernize their networks, especially in rural communities — some of which now receive fiber-based phone service, and the rates have fallen dramatically as upgrade projects have been completed.  Today, most Kansans pay just $1.45 in USF fees to rural phone companies, while AT&T customers in larger Kansas towns and cities pay an average of $2.04.

If the ABC Plan is enacted as-is, Kansans will see phone bills spike as new USF fees are levied.  That’s because the federally-based USF Fund reform program would require today’s 6.18% state USF rate double or triple to sustain various programs within its scope.

And forget about the $30 ‘smoke and mirrors’ “rate cap”, according to the KCC:

[…] The ceiling will not preclude carriers from increasing the basic rate beyond $25 or $30 through higher state USF surcharges or higher local rates.  Multiple states including Kansas  have partially or totally deregulated basic local phone service rates, and the only component of retail  local service pricing that the FCC regulates is the federal Subscriber Line Charge.  Thus, a carrier may face no constraint whatsoever in increasing basic local rates to the point that total local rates are well above the illusory ceiling.

The state of Wyoming was also unimpressed with a one-size-fits-all national approach advocated primarily by big city phone companies AT&T and Verizon, the chief sponsors of the ABC Plan.

The Wyoming Public Service Commission filed comments effectively calling the ABC Plan boneheaded, because it ignores the plight of particularly rural states like Wyoming, chiefly served by smaller phone and cable companies that face challenges in the sparsely populated, mountainous state.

First among the Wyoming PSC’s complaints is that the plan ignores business realities in rural states.  No matter how much USF funding becomes available or what compensation schemes are enacted, dominant state phone companies like CenturyLink are unlikely to “invest in broadband infrastructure unless it is economically opportune to do so.”

The PSC points to the most likely outcomes if the ABC Plan is enacted:

• Phone companies not challenged by a broadband competitor will make due with their current copper wire wireline infrastructure the PSC says has been deteriorating for years.  The PSC fears broadband expansion funds will be used to improve that copper network in larger areas where cable competition exists, while the rest of the more-rural network gets ignored;
• In areas like larger towns or suburbs where phone companies suspect a cable (or other) competitor might eventually expand or launch service, USF funding could be spent to bolster the phone company’s existing DSL service to deter would-be competitors from entering the market;
• 

  We'll pass, too.

  The Wyoming PSC believes phone companies will spend broadband funds only where it would improve the phone company’s competitive position with respect to cable competitors.  Providers are unlikely to expand into currently-ignored rural areas for two reasons: lack of ongoing return on investment and support costs and the ABC Plan’s willingness to abandon rural America to satellite providers.  “We are familiar to a degree with satellite service at it presently exists in Wyoming markets, and we are not particularly enamored of the satellite solution,” the PSC writes.  But if adopted, no rural phone company would invest in DSL service expansion in areas that could be designated to receive federally-supported satellite service instead.

Wireless competitors are not happy with the ABC Plan because it ignores Wireless ISPs and sets ground rules that make them unlikely to ever win financial support.  Many also believe the ABC Plan picks technology winners and losers — namely telephone company provided DSL service as the big winner, and everyone else a loser.

The Fiber to the Home Council also heaped criticism on the ABC Plan for the low bar it sets — low enough for any phone company to meet — on broadband speeds.  The FTTH Council notes the ABC Plan would leave rural America on a broadband dirt road while urban America enjoys high-speed-rail-like service.

Coming Next… Who Really Supports the Phone Companies’ ABC Plan.

Bartz

The CEO of the Yahoo! has been shown the door, but unlike many recently-unemployed workers who get the bad news during an exit interview, Carol Bartz learned she was out in a humiliating phone call from the board of directors.

That left Bartz telling employees she’d been fired in an internal memo sent from her iPad.

Investors were happy to see the back of Bartz, sending Yahoo! shares higher on the news.  Bartz faced a growing number of critics in the past few years, almost immediately after arriving as CEO in early 2009.  Much like Yahoo! itself, her critics accused her of being out of touch with Internet culture and the realities of today’s high-tech businesses.

Bartz was no friend of coordinating expanded and improved broadband projects through the government.  She opposed the National Broadband Plan and Net Neutrality policies, dismissing both as government interference.  That put her in direct opposition to Google, which has spent millions in the public policy arena to influence expanded broadband in the United States.

Despite the lackluster results Yahoo! managed under her leadership, Bartz remained well-compensated, earning $60 million over the past two years.

Yahoo! has remained a challenged endeavor as a first generation Internet superstar long-faded after the dot.com crash in 2000.  Various efforts to relaunch Yahoo!’s flagging advertising revenue business, long dominated by Google, have not been very successful.  Yahoo!’s biggest problem has been its lack of innovation, creating new reasons for web visitors to return to a company that used to be a household name.

Now some believe the only hope Yahoo! has left is to sell itself to someone else.

[flv]http://www.phillipdampier.com/video/CNBC Broadband Regulation 3-2-10 .flv[/flv]

Free Press’ policy director Ben Scott held his own, despite being hopelessly outnumbered, in a business-friendly CNBC ‘Power Lunch’ debate over broadband public policy held in March 2010.  Scott faced Yahoo! CEO Carol Bartz, Larry Clinton from the “Internet Security Alliance,” which receives substantial support — not disclosed by CNBC — from AT&T and Verizon, and CNBC’s clueless Michelle Caruso-Cabrera, who insisted 99 percent of America already subscribes to broadband.  All of the industry talking points were on hand, which isn’t too surprising when they come from industry front groups like the ‘ISA.’ (3/3/2010 — 5 minutes)

When is a cable, wireless, and video rental conglomerate big enough to start its own financial institution?  When it achieves the size and scope of Rogers Communications.

Rogers announced, through a tiny legal notice filed over the weekend, it had taken the first steps to achieve its ambition of launching Rogers Bank:

ROGERS BANK

APPLICATION TO ESTABLISH A BANK

Notice is hereby given, pursuant to subsection 25(2) of the Bank Act (Canada), that Rogers Communications Inc. intends to apply to the Minister of Finance for the issue of letters patent incorporating a bank under the Bank Act (Canada) primarily focused on credit, payment and charge card services.

The bank will carry on business in Canada under the name of Rogers Bank in English and Banque Rogers in French, and its head office will be located in Toronto, Ontario.

Any person who objects may submit an objection in writing to the Office of the Superintendent of Financial Institutions, 255 Albert Street, Ottawa, Ontario K1A 0H2, on or before October 24, 2011.

If approved by the Minister of Finance, don’t expect to get your next home mortgage or checking account from the cable company.  Rogers Bank intends to focus mostly on the payment services business, according to the application.  Among the potential angles to be pursued by Rogers Bank:

• Offering a Rogers-branded credit card to interested customers, perhaps tied to a rewards program;
• Getting a substantial discount processing credit card payments and the growing popularity of mobile micropayment services, which allow consumers to purchase items from vending machines, parking meters, and other in-person transactions using a mobile phone;
• Offering its own payment transfer service, similar to PayPal;
• Leveraging credit opportunities by running the credit-granting institution inside the company, instead of appealing to outside institutions.

Rogers’ idea, while unusual, is not unique.  Canadian Tire and Loblaw both operate their own “banks,” primarily for financing products and services.

Not satisfied with relying on the U.S. Department of Justice to protect the competitive marketplace for cell phone service, Sprint Nextel today brought suit against AT&T, Inc., AT&T Mobility, Deutsche Telekom and T-Mobile seeking to block the proposed acquisition as a violation of Section 7 of the Clayton Act. The lawsuit was filed in federal court in the District of Columbia as a related case to the Department of Justice’s (DOJ) suit against the proposed acquisition.  It has been assigned to the same judge handling the Justice Department’s own lawsuit — Judge Ellen S. Huvelle.

“Sprint opposes AT&T’s proposed takeover of T-Mobile,” said Susan Z. Haller, vice president-Litigation, Sprint. “With today’s legal action, we are continuing that advocacy on behalf of consumers and competition, and expect to contribute our expertise and resources in proving that the proposed transaction is illegal.”

Sprint’s lawsuit focuses on the competitive and consumer harms which would result from a takeover of T-Mobile by AT&T. The proposed takeover would:

• Harm retail consumers and corporate customers by causing higher prices and less innovation;
• Entrench the duopoly control of AT&T and Verizon, the two “Ma Bell” descendants, of the almost one-quarter of a trillion dollar wireless market. As a result of the transaction, AT&T and Verizon would control more than three-quarters of that market and 90 percent of the profits;
• Harm Sprint and the other independent wireless carriers. If the transaction were to be allowed, a combined AT&T and T-Mobile would have the ability to use its control over backhaul, roaming and spectrum, and its increased market position to exclude competitors, raise their costs, restrict their access to handsets, damage their businesses and ultimately to lessen competition.

Sprint believes that in a marketplace dominated by AT&T and Verizon Wireless, the two largest players would likely collude on pricing and terms of service rather than compete heavily against one-another.  Sprint’s assumptions may already be true, considering both companies largely charge near-identical prices for service.

While Sprint proceeds with its own legal action, squabbling has broken out over whether or not AT&T so carefully crafted the terms and conditions of their $6 billion “breakup fee,” payable to T-Mobile USA if the merger fails, that it almost guarantees AT&T will never have to pay it.

“Under its agreement with Deutsche Telekom, the deal is only valid if the acquisition receives regulatory approval within a certain time frame,” an anonymous source told Reuters. “Also, the agreement could become invalid if regulatory conditions for the sale push the value of T-Mobile USA below a certain level.”

T-Mobile, unsurprisingly, disagrees with that characterization.

A Deutsche Telekom spokesman said Tuesday that AT&T could retreat from the transaction if the concessions necessary to get approval amount to more than $7.8 billion, but added Deutsche Telekom would still be entitled to receive the break-up fee package, which includes cash and wireless spectrum.

Five years ago, municipal Wi-Fi projects were enjoying a small boom.  The concept of providing low-cost or free Internet access seemed like a winner because it could provide service to those who could not afford traditional broadband, would stimulate economic development downtown, and possibly attract business as shoppers stopped in cafes or stores to use their wireless devices.  In some communities, just the spectacle of a city-wide high technology wireless network delivered worthwhile bragging rights that adjacent communities didn’t have.

For most city or town officials pondering investment in a Wi-Fi network, the idea germinates from a perceived lack of service from private providers.  If private companies were delivering the service, few communities would spend the time, effort, and money duplicating it.

In the community of Marshalltown, public Wi-Fi in 2005 was a service only found in a small selection of stores and cafes in the central business district.  The Marshalltown Economic Development Impact Committee sought to change that, promoting a plan to construct a free-to-use Wi-Fi network covering a 20-block radius centered on the Marshall County Courthouse.  The community of 27,000 got a three month trial of the downtown Wi-Fi network in 1995, with the city and county sharing 50 percent of its cost, with the remaining 50 percent paid for by private donations.

Mediacom, the cable company serving Marshalltown, was incensed by the notion of a community-owned broadband provider delivering improved (and free) Internet access across the city.  Even worse in their eyes, local government officials were pondering creating a public broadband utility.

Marshalltown (Marshall County), Iowa

It wasn’t long before new, shadowy groups with names like “Project Taxpayer Protection” showed up in town attacking the concept of municipal Internet access.  After a blizzard of brochures and exaggerated claims about “government broadband,” the network became a point of controversy among the locals.

Only later would the community learn the group (whose status as a non-profit was later revoked by the Internet Revenue Service for failure to file timely reports on its funding and activities) was actually funded mostly by Mediacom itself, with the full support of the Iowa Cable Association.

The astroturf campaign against public involvement in Wi-Fi, which could threaten Mediacom’s broadband service profits, was effectively an investment against competition.  It was an effort that paid dividends by late 2005, when the city and Mediacom suddenly announced a new “public-private partnership” to administer and expand the Wi-Fi network.  There were a few important changes, however:

1. Mediacom’s concept of “free” was markedly different than the designers’ original vision.  The cable company had other ideas, placing restrictions on how much “free use” was allowed;
2. Customers who used the newly-announced “free service” got it at speeds not much better than dial-up and definitely slower than 3G;
3. Residential Mediacom broadband customers could get unlimited time on the formerly-free network, if they paid $19.95 a month for 256kbps access;
4. To make the network seem business-friendly, business customers were told they could get up to 10Mbps service for $59.95 a month.

The goal of the partnership, according to Mike Miller, chairman of the Marshalltown Economic Development Impact Committee, was to see low-cost broadband Internet access citywide by the end of 2006.

Oh, and Mediacom insisted on something else: no more talk of a city-created municipal telecommunications provider, at least for a year anyway.

“We commend you on the foresight and vision to do this,” Bill Peard, Mediacom’s government affairs manager, told city officials at the time the deal was announced.

Friends until the community-owned...

Once Mediacom got its hands on the formerly community-owned network, it was the beginning of the end.

Business customers could not get Mediacom to sell them access at the promised price because representatives could not find the offer.

It was much worse for residential users.

Free Wi-Fi access soon became limited to one hour a day, up to 10 hours per month for non-Mediacom customers.  After that, you paid if you wanted more.

City and company officials spent most of their time wrangling over the costs of the service and its future potential.  What city officials were not planning for was the network’s virtual demise at the hands of the cable company.

...free Wi-Fi network is at an end.

Today, free access is a distant memory, as Mediacom pulled the plug claiming there was “limited interest.”

Effectively, Mediacom’s idea of a public-private partnership was the systematic decommissioning of a community’s public Internet alternative, all to protect its own broadband business.

That’s a lesson of caution for any community seeking to team up with private broadband providers.  Marshalltown allowed that partnership to first and foremost serve Mediacom’s business interests, not the public.  Now that network is effectively gone and largely-forgotten.

That suits Mediacom just fine.