Today’s merger between CenturyTel (soon to be CenturyLink) and Qwest will combine 10 million Qwest customers and 7 million from CenturyTel into a single company serving 37 states in every region of the country except the northeast and much of California and Nevada.  CenturyLink gains access to Qwest’s highly valued portfolio of services sold to business customers and Qwest gets a partner that can help manage its $11.8 billion debt and help grow the last remaining Baby Bell, formerly known as US West, into a national player capable of withstanding ongoing erosion of landline service.

The deal will impact consumers and businesses, and will challenge regulatory authorities to consider the implications of ongoing consolidation in the traditional telephone service marketplace.  It brings implications for broadband service strategies for both companies, which we’ll explore in greater detail.

Breaking Up Was Too Hard to Do, So Let’s Put It Back Together

Ultimately, the genesis of this, and most of the other big telecom deals that we’ve witnessed over the past few years comes from the 1996 Communications Act, which deregulated large parts of the telecommunications industry and triggered a massive wave of consolidation that is still ongoing.  That legislation was the antithesis of the 1984 court ruling which ultimately led to the breakup of AT&T and the Bell System monopoly in 1984.  When President Clinton signed the 1996 bill into law, it allowed much of the Bell System to eventually recombine into two major entities:

• AT&T ultimately pieced itself back together with the acquisitions of:

BellSouth — serving the southeastern United States

Ameritech — serving the upper Midwest

SBC/Southwestern Bell — serving Texas and several southern prairie states

Pacific Telesis — serving California and Nevada

• Verizon became a regional powerhouse by combining:

NYNEX — serving New England and New York

Bell Atlantic — serving mid-Atlantic states

The remaining orphaned Baby Bell was US West, which comprised Mountain Bell serving the Rocky Mountain states, Northwestern Bell which covered the Dakotas, Minnesota, the prairie states not covered by SBC, and Pacific Northwest Bell which managed service for Oregon, Washington, and northern Idaho.  US West was subjected to a hostile takeover in 2000 by an upstart telecommunications company that was laying fiber optic cable in the late 1990s alongside the railways its owner, Philip Anschutz, also happened to own.  Qwest assumed control of US West that summer and rechristened it with its own name.  Owned by a Bell outsider, Qwest has always been the company that didn’t quite fit with the rest.

The company gained respect for its enormous fiber backbone that weaves across many American cities, including several in the northeast.  It is best known for its services to business customers.  On the residential side, the story is less impressive.  The company’s customer service record is spotty and the company has accumulated an enormous amount of legacy debt left over from earlier acquisitions.  Despite the company’s repeated efforts to find a partner, it took until today for it to finally find one.  There are several reasons for this:

1. Qwest’s service area is notoriously rural and expensive to serve.  Outside of its corporate headquarters in Denver, the majority of its service area is either mountainous or rural.  Even today, Qwest serves only 10 million residential customers, almost matched by CenturyTel’s own seven million largely rural customers scattered across the country.
2. Qwest’s history has been littered with financial scandals, starting with a series of deals with disgraced Enron from 1999-2001.  That was followed with charges of fraud and insider trading in 2005.
3. Qwest does not own its own wireless division and its previous efforts to deliver television service to customers were largely unsuccessful.  That made Qwest’s ability to withstand erosion in its core business – landline phone service, more difficult.
4. Qwest’s debt is downright frightening for would-be suitors.

Why Does CenturyTel Want to Buy Qwest?

CenturyTel claims such a transaction allows a combined company to become a larger player on the national scene.  By combining Qwest’s good reputation in the business telecommunications sector with combined efforts to deliver broadband products including high speed Internet, the company thinks the combination can’t be beat.  CenturyTel envisions packages of video entertainment, data hosting and managed services, as well as fiber to cell tower connectivity and other high bandwidth services to deliver replacement revenue lost from disconnected landlines.  It also believes it can realize cost savings from the merger and keep the company relevant on a stage dominated by Verizon, AT&T, and a few large cable companies.

But there are other reasons.  For the three super-sized independent phone companies that Americans are growing increasingly familiar with — Frontier Communications, Windstream Communications, and CenturyTel, their business models depend on their ability to constantly engage in deal-making and acquisitions.  All three companies have built their businesses on investors who see their stocks as “investment grade” financial instruments that dependably return a dividend back to shareholders.  As we’ve seen in countless quarterly financial results conference calls, all three companies are preoccupied answering questions from Wall Street about the all-important dividend.  TV personalities like Jim Cramer has specifically recommended these telecom stocks based, in part, on their dividend payout.  If that dividend dramatically shrunk or stopped, the share price for all three stocks would likely plummet.

One of the side effects of companies dependent on dividend payouts is their constant need to be on the lookout for additional merger and acquisition opportunities.  Here’s how it works.  Let’s say CenturyTel’s debt load and reduced revenue, caused by customer defections to cell phones or cable phone service, delivered a bad fiscal quarter for the company.  Cash flow was down, and company officials simply couldn’t keep the dividend payout at the same level as the previous quarter.  Since many people hold CenturyTel stock specifically because of the dividend, a downward turn in that payout could cause some to sell their shares, driving the stock price downwards.

One way around this is to seek out a new merger or acquisition target.  By bringing two companies together, preferably one with a healthy cash flow, suddenly the big picture changes.  Your balance sheet now reflects the combined revenue from both companies, which incidentally makes the percentage of debt versus revenue look a lot healthier.  Cash flow immediately improves, especially if you can slash redundant costs.  Come next quarter, that dividend payout is right back up in healthy territory.

Sometimes companies become so preoccupied with their dividend and corresponding stock price, it can lead them to pay out more in dividends than a company earns in revenue.  While that’s great for investors, it is unsustainable in the long run.

Many critics of telecommunications companies employing this strategy claim it’s evidence that a company is biding time and unwilling to invest in innovation for the future.  Some also believe dividend payouts shortchange customers because they can eventually bleed a company’s ability to invest in service improvements, research and development, and capital investments to maintain their network and expand service.

As consolidation continues, the number of new buyout opportunities begins to shrink, and one shudders to think what happens when there is no one else to buy.  How long is this business model sustainable?

Both CenturyTel and Qwest also recognize the impact of ongoing disconnections from landline service, now averaging 10 percent of their customers a year.  Those departing customers are now relying on their cell phones or alternative calling services like cable company “digital phone” service or broadband-based calling from companies like Vonage or Skype.

The one service they hope can stem customer defections is broadband.  Unfortunately, telephone companies are increasingly losing ground against their cable modem competitors, who have an easier time increasing broadband speeds for customers now seeking online video and other high bandwidth applications.

Of course, one of the benefits of being a “rural phone company” is the fact cable competition is often unlikely.  In fact, some of the lowest erosion rates for landline service are in rural communities where the telephone company is the only game in town.  There is plenty of money still to be made offering high priced slow speed DSL service in communities with no cable competitor and spotty wireless broadband that is often slower and usage-limited.

All three of these big independent players are well aware of this, and maintaining a strong position in relatively slow speed DSL service also protects another revenue stream — Universal Service Fund revenue given to rural providers to equalize telephone rates.  CenturyTel recognizes the increasing likelihood much of that money will be diverted to stimulating broadband expansion, something the phone company is more than willing to do if it means preserving their subsidies.

The new combined Qwest-CenturyTel company hopes the merger can help both survive obsolescence.

For Qwest, a debt reduction may make it possible to spend more to deliver fiber-to-the-curb service, similar to AT&T U-verse.  That could increase broadband speeds and prompt them to reconsider their earlier decision to abandon IPTV in the western half of the country.

CenturyTel can continue to offer traditional DSL service with a more incremental upgrade approach in its more rural service areas, but tap into Qwest’s fiber network to reduce backhaul expenses and potentially pick up new business customers by offering Qwest-branded business services.  Company officials strongly hinted that, at least for now, CenturyTel’s existing customers will continue to find the video portion of their “triple play” package delivered by DirecTV satellite service, so no IPTV for them.

What Does This Mean for Employees of Both Companies?

Mergers like this always generate great excitement over “cost savings” made possible by the merger.  Much of these savings typically come from employee expenses.  When you hear “cost savings,” think layoffs and pay cuts for all but top management.  Based on past precedent, Qwest employees can anticipate some serious job losses if this transaction closes, especially in the business office.  The combined company will be henceforth known as CenturyLink, with headquarters remaining in Monroe, Louisiana.  That is potentially bad news for Qwest’s employees in Denver.

The transaction is expected to generate annual operating cost savings (which CenturyTel calls “synergies”) of approximately $575 million, which are expected to be fully realized three to five years following closing.  The transaction also is expected to generate annual capital expenditure “synergies” of approximately $50 million within the first two years after close.  That means spending less on infrastructure improvements.

Billing and customer service are traditionally handled by CenturyTel when a company joins the CenturyTel family.  North Carolina customers can attest to that as EMBARQ, an earlier CenturyTel target, finally moves to CenturyTel’s billing system in the coming weeks.

For the sake of pushing the merger through state regulatory agencies, cutbacks in unionized technicians who handle service installations, repairs, and maintain the lines are not expected.  The Communications Workers of America issued a statement today that mildly acknowledged the merger announcement, saying the union “looked forward to serious negotiations with both companies” regarding employment security and assurances of aggressive high speed broadband rollout throughout both companies’ territories.

What Does This Mean for Qwest and CenturyTel Customers?

In the short term, nothing.  This merger will take at least a year to complete, assuming regulatory approval in every state where a review is required by state officials.  In 2011, should the merger be approved, Qwest customers can anticipate transition headaches as the Denver-based company winds down operations in favor of CenturyTel.  Billing and customer service will both be impacted.  Long term plans for major projects are likely to be stalled until the merger settles into place.  CenturyTel business customers will eventually see Qwest’s strong business products line become available in many CenturyTel service areas.  Eventually, some larger CenturyTel-served cities may find Qwest’s more advanced DSL service arriving on the scene delivering faster speeds.

Although CenturyTel has hinted it may review whether it’s now large enough to operate its own wireless mobile division, for the near term, expect the partnership to resell Verizon Wireless service to continue.

What is the View of Stop the Cap! on the CenturyTel-Qwest Merger?

Generally speaking, most of the industry consolidation that has been fueled by a deregulatory framework established by the Clinton Administration has not benefited consumers anywhere near the level promised by deregulation advocates.  The three largest independent phone company consolidators — Frontier, Windstream, and CenturyTel are spending more time and resources looking for new acquisitions and schemes to pay out dividends than they are working to enhance service in their respective service areas.  Smaller independent phone companies are deploying fiber to the home networks and answer to the communities where they work and live.  From companies like Frontier, we get Internet Overcharging schemes combined with slow DSL service, tricks and traps from “price protection agreements” that automatically renew, rate increases, and cost cutting.  Windstream plagues some of their customers with extended service outages, and CenturyTel’s promised broadband speeds often don’t deliver.

Unfortunately, bigger is not always better in telecommunications.  While the biggest players like Verizon seek to discard rural American customers, getting one of these three companies instead doesn’t always represent progress.  Our regulators are too often satisfied with basic answers to questions about broadband and service improvements that come with few details and deadlines.  It is just as important to ask what kind of broadband service a company will bring, at what speeds and price, and what usage limits, if any, will accompany the service.

Companies engaged in these mergers hope regulators don’t pin them down to specific service commitments and standards, which could harm the financial windfall these deals bring to a select few.  But they must be the first thing on the table, guaranteeing that customers also get the enjoy the “synergies” these deals are supposed to bring.

Jesse and his nearby neighbors on the west side of Milton are frustrated.  They live just 20 minutes away from Burlington, the largest city in the state of Vermont.  Despite the proximity to a city with nearly 40,000 residents, there is no cell phone coverage in western Milton, no cable television service, and no DSL service from FairPoint Communications.  For this part of Milton, it’s living living in 1990, where dial-up service was one’s gateway to the Internet.

Jesse and his immediate neighbors haven’t given up searching for broadband service options, but they face a united front of intransigent operators who refuse to make the investment to extend service down his well-populated street.

“After many calls to Comcast, they eventually sent us an estimate for over $17,000 to bring service to us, despite being less than a mile from their nearest station,” Jesse tells Vermont Public Radio.  “They also made it very clear that there was no plan at any point in the future, 2010 or beyond, to come here unless we paid them the money.”

Jesse and his neighbors want to give Comcast money, but not $17,000.

For at least 15 percent of Vermonters, Jesse’s story is their story.  Broadband simply remains elusive and out of reach.

Three years ago, Vermont’s Republican governor Jim Douglas announced the state would achieve 100 percent broadband coverage by 2010, making Vermont the nation’s first “e-State.”

Vermont Public Radio reviewed the progress Vermont is making towards becoming America’s first e-State. (January 20, 2010) (30 minutes)
You must remain on this page to hear the clip, or you can download the clip and listen later.

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In June 2007 the state passed Act 79, legislation that established the Vermont Telecommunications Authority to facilitate the establishment and delivery of mobile phone and Internet access infrastructure and services for residents and businesses throughout Vermont.

The VTA, under the early leadership of Bill Shuttleworth, a former Verizon Communications senior manager, launched a modest broadband grant program to incrementally expand broadband access, often through existing service providers who agreed to use the money to extend service to unserved neighborhoods.

The Authority also acts as a clearinghouse for coordinating information about broadband projects across the state, although it doesn’t have any authority over those projects.  Lately, the VTA has been backing Google’s “Think Big With a Gig” Initiative, except it promotes the state as a great choice for fiber, not just one or two communities within Vermont.

[flv width=”480″ height=”290″]http://www.phillipdampier.com/video/Google Fiber Vermont 3-22-10.mp4[/flv]

Vermont used this video to promote their bid to become a Google Fiber state.  (2 minutes)

Some of the most dramatic expansion plans come from the East Central Vermont Community Fiber Network.  ECFiber, a group of 22 local municipalities, in partnership with ValleyNet, a Vermont non-profit organization, is planning to implement a high-capacity fiber-optic network capable of serving 100% of homes and businesses in participating towns with Internet, telephone and cable television service.  In 2008, the group coalesced around a proposal to construct a major fiber-to-the-home project to extend broadband across areas that often don’t even have slower speed DSL.

The ECFiber project brought communities together to provide the kind of broadband service private companies refused to provide. Vermont Public Radio explores the project and the enthusiasm of residents hopeful they will finally be able to get broadband service. (March 8, 2008) (24 minutes)
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The Vermont towns, which together number roughly 55,000 residents, decided to build their own network after FairPoint Communications and local cable companies refused to extend the reach of their services.  Providers claim expanding service is not financially viable.  For residents like sheep farmer Marian White, interviewed by The Wall Street Journal, that means another year of paying $60 a month for satellite fraudband, the speed and consumption-limited satellite Internet service.

White calls the satellite service unreliable, especially in winter when snow accumulates on the dish.  Unlike many broadband users who vegetate for hours browsing the web, White actually gets an exercise routine while trying to get her satellite service to work.

“I open a window and I take a pan of water and, a cup at a time, I launch warm water at the satellite dish until I have melted all the snow off the dish,” Ms. White says. “It works.”

Other residents treat accessing the Internet the same way rural Americans plan a trip into town to buy supplies.

Kathi Terami from Tunbridge makes a list of things to do online and then, once a week, travels into town to visit the local public library which has a high speed connection.  Terami downloads Sesame Street podcasts for her children, watches YouTube links sent by her sister, and tries to download whatever she thinks she might want to see or use over the coming week.

A fiber to the home network like ECFiber would change everything for small town Vermonters.  The implications are enormous according to project manager Tim Nulty.

“People are truly afraid their communities are going to die if they aren’t on the communications medium that drives the country culturally and economically,” he says. “It’s one of the most intensely felt political issues in Vermont after health care.”

Despite the plan’s good intentions, one obstacle after another has prevented ECFiber from making much headway:

• The VTA rejected the proposal in 2008, calling it unfeasible;
• Plans over the summer and fall of 2008 to approach big national investment banks ran head-on into the sub-prime mortgage collapse, which caused banks to stop lending;
• An alternative plan to build the network with public debt financing, using smaller investors, collapsed along with Lehman Brothers on September 14, 2008;
• An attempt by Senator Pat Leahy (D-Vermont) to insert federal loan guarantees into the stimulus bill in February 2009 was thwarted by partisan wrangling;
• Attempts to secure federal broadband grant stimulus funding has been rejected by the Commerce Department;
• Opposition to the plan and objections over its funding come from incumbent providers like FairPoint, who claim the project is unnecessary because they will provide service in those areas… eventually.

For the indefinite future, it appears Ms. White will continue to throw warm cups of water out the window on cold winter mornings.

Vermont Edition takes a comprehensive look at where the state stands in broadband and wireless deployment. (April 8, 2009) (46 minutes)
You must remain on this page to hear the clip, or you can download the clip and listen later.

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For every Tunbridge resident with a story about life without broadband, there are many more across Vermont living with hit or miss Internet access.

Take Marie from Middlesex.

“I am in Middlesex, about a half-mile off Route 2, and five minutes from the Capitol Building. Yet up until just recently, we had no sign of high-speed Internet. I understand that my neighbors just received DSL a few weeks ago, but when I call FairPoint, they tell me it’s still not available at my house, which is a few hundred yards up the hill. Hopefully, they’re wrong and I’ll see DSL soon,” she says.

Marie is pining for yesterday’s broadband technology — FairPoint’s 1.5Mbps basic DSL service, now considered below the proposed minimum speeds to qualify for “broadband” in the National Broadband Plan.  For Marie, it’s better than nothing.

Geryll in Goshen also lacks DSL and probably wouldn’t want it from FairPoint anyway.

“We have barely reliable landline service. A tech is at my house at least three times per year. I was told the lines are so old they are decaying. Using dial-up is impossible. I use satellite which is very expensive and is in my opinion only one step up from dial-up. I am limited to downloads and penalized if I reach my daily limit,” he says.

Many Vermonters acknowledge Douglas’ planned 100-percent-broadband-coverage-by-2010 won’t come close to achievement and many are highly skeptical they will ever see the day where every resident who wants broadband service can get it.

Chip in Cabot is among them, jaded after six years of arguments with FairPoint Communications and its predecessor Verizon about obtaining access to DSL.  It took a cooperative FairPoint engineer outside of the business office to finally get Chip service.  His neighbors were not so lucky, most emphatically rejected for DSL service from an intransigent FairPoint:

“I laughed when Governor Douglas announced his e-State goal “by 2010” three years ago. Now I’m thinking I should have made some bets on this claim. It took years of legal battles and a zoning variance to obtain partial cell coverage here in Cabot. Large parts of the town still do not have any cell coverage. Governor Douglas can perhaps be forgiven – he has no technical knowledge, and as a politician would be expected to be wildly optimistic about such “e-State” claims. The Vermont Telecommunications Authority and the Department of Public Service should know better however. We’re talking about rural areas where there is no financial incentive to provide either DSL or cell service. It will take a huge amount of money to provide service to those remaining parts of the state. I’m not optimistic.”

[flv width=”512″ height=”308″]http://www.phillipdampier.com/video/Wall Street Journal Vermont Broadband Problems 03-02-09.flv[/flv]

The Wall Street Journal chronicled the challenges Vermonters face when broadband is unavailable to them.  ECFiber may solve these problems.  Some of the stories in our article are reflected in this well-done video.  (3/2/2009 — 4 Minutes)

Today marks the first anniversary of news that Time Warner Cable planned to expand an Internet Overcharging scheme being tested in one Texas city to four additional cities within its service area.

Residents of Rochester, New York, the Triad Region surrounding Greensboro, North Carolina, as well as Austin and San Antonio, Texas first learned of the planned expansion of so-called “metered broadband” from a Business Week article dated March 31st, which has since accumulated more than 450 comments to date:

Web users, the meter is running. In a strategy that’s likely to rankle consumers but be copied by competitors, Time Warner Cable is pressing ahead with a plan to charge Internet customers based on how much Web data they consume. Starting next month, the company will introduce tiered pricing in several markets.

In April, Time Warner Cable will begin collecting information on its customers’ Internet use in the Texas cities of Austin and San Antonio and in Rochester, N.Y. Consumption billing will begin in those cities later this summer. In Greensboro, N.C., the billing changes will begin sooner. Spun off from Time Warner this month, Time Warner Cable had been testing a plan to meter Internet usage in Beaumont, Tex., since last year.

Proposed pricing models created by Time Warner Cable would have tripled broadband bills to an unprecedented $150 a month for consumers seeking the same level of broadband service they enjoyed a month earlier.  For a cable industry that was used to pushing through rate increases well above the annual rate of inflation, such an enormous rate increase was unprecedented, even for them.

For consumers willing to ration their broadband use, the news was slightly better — you’d still pay more for less service, and be exposed to overlimit fees and penalties should you exceed your monthly allowance, which was as low as a 1 GB per month for one proposed plan.

While residents of Beaumont, Texas had to endure these prices for several months prior to the announced expansion of experimental Overcharging, once news hit tech-savvy cities in Texas, New York, and North Carolina, an all-out consumer rebellion began.  Residents in Austin met with city officials to discuss alternatives to a cable company that threatened Austin’s high tech status.  For residents in Rochester, already coping with a 5 GB usage allowance for Frontier Communication’s DSL service, it was a clear-cut case of monopolistic greed.  In North Carolina, working to transition its way towards a digital economic future, an Internet rationing plan would hurt the economy of the entire Triad region.  San Antonio residents were equally unimpressed with the cable operator as well, demanding alternative providers.

Consumers banded together on Stop the Cap! and other consumer-oriented websites to coordinate the pushback effort.  Protests were held, the media was engaged, and at least in New York, the politicians were not going to sit back in Time Warner Cable’s favor.  Former Rep. Eric Massa expressed outrage at the company for its new pricing plan and Senator Chuck Schumer personally called Time Warner Cable CEO Glenn Britt.

A few lapdogs in the trade press and “dollar a holler” astroturf groups praised Time Warner Cable’s price gouging plans.  One even went as far as to suggest Time Warner Cable “took one for the team” — referring to a cable industry just waiting to test some Internet Overcharging of their own.

Time Warner Cable dispatched some of their social media minions to try and explain away the outrageous price increases, offering to “listen” to consumers with suggestions about how to “improve the plan.”  One, like TWCAlex offered “proof” consumers wanted this kind of pricing.  The disingenuousness of the effort rivaled Lord Haw Haw’s Germany Calling propaganda broadcasts on the Reichssender Hamburg.  Company officials ignored the overwhelming consensus that consumers didn’t want metered or capped service and then weeks later those who did submit comments were notified they were “deleted without being read.”

Meanwhile, Rep. Massa’s office began drafting legislation to ban the unprecedented pricing schemes, culminating in a bill introduced in 2009 to ban unjustified usage caps and metered billing.

On April 9th, Landel Hobbs, Chief Operating Officer of Time Warner Cable, issued a recitation of the reasons why Time Warner Cable felt justified in exposing customers to up to 150 percent rate hikes — reasons we’ve managed to debunk over the past year’s coverage:

With the ever-increasing flood of content on the Internet, bandwidth consumption is growing exponentially. That’s a good thing; however, there are costs associated with this increased Internet usage. Here at Time Warner Cable, consumption among our high-speed Internet subscribers is increasing by about 40% a year. As a facilities based provider, we’ve built a network that must be maintained and upgraded. We have increasing variable costs and we have to continue to invest in the network itself.

As we’ve since proven, Hobbs statements to the public obscure the facts in his own company’s financial reports which are remarkably consistent quarter after quarter: revenues for broadband service are increasing while the costs to provide it are falling.  In fact, broadband is rapidly becoming the most important element of the cable industry’s quest for fat profits.  Time Warner Cable, as well as others, have plenty of financial resources from the billions in profits they earn from broadband every year to provide cost-effective upgrades that benefit them as well as consumers at today’s flat rate prices.

Just a few weeks ago, Hobbs told investors consumers are so devoted to their broadband service, the company could raise broadband prices anytime they like.  Funny how “increasing costs” never came into the discussion there.

This is a common problem that all network providers are experiencing and must address. Several other providers have instituted consumption based billing, including all major network providers in Canada and others in the U.K., New Zealand and elsewhere. In the U.S., AT&T has begun two consumption based billing trials and other providers including Comcast, Charter and Cox are using varying methods of monitoring and managing bandwidth consumption.

As Stop the Cap! has illustrated repeatedly, such consumption billing schemes are despised by consumers -and- most countries see them as hampering their digital economy.  Australia and New Zealand have government initiatives to improve broadband service to the point where consumption billing and usage caps are a distant memory.  Canada’s usage based billing schemes come from market concentration, particularly from Bell which is by far the largest wholesale supplier of bandwidth in the country.  Their quest for profits, along with a compliant regulatory body (the CRTC) has made such ripoff pricing commonplace.  The result on Canada’s broadband rankings are clear as the country continues to fall further behind other OECD nations.  Canadians do not want such pricing, but when a duopoly is allowed to exist unfettered by appropriate oversight, the end result is always the same – higher prices for poorer service.  In the United Kingdom, several flat rate plans are available, with more on the way as the UK embarks on its own Digital Economy plan.

There are other reasons why such consumption billing schemes are in place in other countries – namely insufficient international capacity to move traffic back and forth outside of the region.  That too is being addressed.

That other cable operators are overcharging consumers or limiting their usage is hardly a surprise considering insufficient competition in the marketplace makes that possible.  However, Comcast’s 250 GB limit is far more generous than anything Time Warner Cable proposed, Cox rarely enforces their limits, and Charter recently announced it had abandoned theirs.

For good reason. Internet demand is rising at a rate that could outpace capacity within a few years. According to industry analysts, the infrastructure may not be able to accommodate the explosion of online content by 2012. This could result in Internet brownouts. It will take a lot of money to fix the problem. Rather than raising prices on all customers or limiting usage, we think the fairest approach is to move to a tiered model in which users pay more if they use more.

Hobbs’ reliance on the “exaflood” or the “zettabyte” theory of Internet brownouts comes courtesy of the prostituting, industry-backed Discovery Institute — the people who will cough up bought and paid for “research studies” that say anything the buyer wants them to say and Cisco, which makes a handsome buck off selling broadband network equipment to providers they panic with stories of Internet data tsunamis and brownouts.

Two weeks after the Business Week article, Senator Schumer flew to Rochester and joined a few of our local Stop the Cap! members and myself to announce the end of the nightmare — no more Internet Overcharging consumers in any of the three states. Even Beaumont was soon freed from the ripoff pricing experiment.

But Time Warner Cable promised that one day, they could be back with the same schemes, after “educating their customers.”  Stop the Cap! has spent the last year assembling an extensive record of just how unjustified these pricing schemes really are, and we’ve been educating consumers about how an duopolistic broadband industry is seeking to monetize and control as many aspects of America’s online experience as possible.

We’ve exposed dozens of astroturf and other industry-backed groups trying to peddle the broadband industry agenda, often trying to hide who is paying the bills.  Whether it’s scare stories about broadband brownouts, fear that oversight and regulation will drive away investment and reduce service, or the need to stop Net Neutrality — it’s all designed to protect provider profits, not help consumers.

There is nothing fair about Internet Overcharging schemes.  There has never been a true consumption billing scheme that charged consumers nothing if they didn’t use the service, and the prices being charged for consumption above one’s allowance are often several thousand percent above actual cost.  Indeed the CEO of Crown Fibre Holdings CEO Graham Mitchell, admitted the truth about such pricing schemes when he told Techday that where ISP’s engage in such pricing schemes, they don’t make their money in providing access to broadband; they make it out of data caps.

We have no illusion providers won’t be back for a second bite at your wallets, which is why the education effort continues.  Over the last year, we’ve expanded our coverage to promote better broadband, and to expose bad actors among the broadband cable, telephone, wireless, and satellite industry.  We’ll continue to expose lobbying efforts to legislate away oversight, consumer protection, and limit potential competition.  Stop the Cap! also continues to fight for improved rural broadband that moves beyond today’s satellite fraudband that delivers woefully slow, heavily limited and expensive service.  We’ll also coordinate efforts to push back whenever Internet Overcharging schemes appear on the horizon, and we won’t let go until such language is banished from customer agreements and Acceptable Use Policies, whether they are formally enforced or not.

One year later, America’s broadband users are safer from such schemes, but not yet safe.  Thanks to all of our readers for staying engaged.

Franklin Delano Roosevelt

Watching the debate raging through the 1920s was one Franklin Delano Roosevelt, who was elected governor of New York in 1928 on a reformist agenda.  Like many other states, New Yorkers had a problem with their electric companies.  They charged too much, didn’t provide sufficient capacity, and ignored rural areas.

Roosevelt started his political life following in the philosophical (and political) footsteps of his fifth cousin Theodore, the 26th president of the United States.  FDR believed in individualist progressive ideals — improving privately held utilities but steering clear of advocating public ownership.

Roosevelt’s immediate predecessor, Al Smith, spent the 1920s in Albany arguing with the Republican state legislature over who would develop New York’s hydro power resources, which could deliver substantially lower-priced electricity from Buffalo to Long Island.  The legislature wanted the state’s private power companies to develop the resource, with a public service commission reviewing and, where necessary, regulating rates.  Smith wanted the state to build the plants as public utilities, arguing endless lawsuits by private power companies had made rate regulation meaningless.

Early into his term as governor, Roosevelt picked up where Smith left off, advocating first for the construction of a hydroelectric dam on the St. Lawrence River in upstate New York.  The legislature promptly said no.  Roosevelt refused to let go and expanded his proposal to also include the possibility of municipally-owned local power companies, delivering needed power without a profit incentive.

In upstate and western New York, firmly Republican territory, local newspapers blasted Roosevelt’s proposal, occasionally calling him a socialist conniver, an enemy of free enterprise, and dragging big state government into the lives of ordinary citizens.

Electric companies across the state joined the chorus of upstate opposition, but also quietly made preparations to counter Roosevelt’s proposal, just in case it began to catch on.

Roosevelt’s initial efforts to argue his position did not make much headway upstate, because he had to rely on newspapers to deliver his message — the same newspapers that rebutted him at every turn.  Direct mailing letters to voters was expensive and took a long time to create and distribute.  Roosevelt instead turned to the new medium of radio, speaking to residents statewide about issues like electrification.  Radio directly reached listeners and bypassed the newspaper filter, and it allowed the governor to deliver a populist message in terms every consumer could understand — high rates.

Roosevelt lit a fire for reform when he compared what state residents were paying for electricity compared to those on the other side of Lake Ontario, in Canada.  Canada had provincial power, owned and operated by the government.

Roosevelt told listeners that in a “modernized house” (one served by higher voltage lines capable of supporting large electric appliances), residents of Ontario paid just $3.40 a month in electric bills.  But in Westchester County, the same service cost $25.63.  It was $19.95 in New York City and $13.50 in Rochester.

Double-crossing Roosevelt With the Help of ‘The House of Morgan’

The electric companies soon saw the results of those price comparisons as voters demanded better prices.  Republicans began shifting toward Roosevelt’s plan.  For the power companies, it was time for “Plan B.”  Quietly meeting with J.P. Morgan Bank in the summer of 1929, three major upstate New York power companies planned to merge into one giant company: Mohawk Hudson Power Corporation.

Mohawk Hudson Power Corporation incorporated:

• Buffalo, Niagara & Eastern Power Corp.: Served 500 cities and towns including Buffalo.  Niagara Falls supplied most of its power;
• Northeastern Power Corp.: Served communities along Lake Ontario and the St. Lawrence;
• Mohawk Hudson Power Corp.: Served Albany, Schenectady, Utica, Syracuse, and many other communities.

With such a merger, Roosevelt’s original plan to let upstate power companies compete to offer the best possible rates for hydro power were dashed.  In fact, the power companies loved Roosevelt’s plan because as a combined entity, they’d profit handsomely from state taxpayers paying to construct hydro generating stations, saving them the trouble.  Then as a monopoly cartel, they’d set rates artificially high, pocketing the proceeds. J.P. Morgan Bank would also get paid handsomely for helping make it all possible.

To add insult to injury, just two months later, Mohawk Hudson acquired another state giant — Frontier Power Corporation, which in the words of Time magazine, “set Roosevelt agog.”

Governor Franklin D. Roosevelt of New York (Democrat) declared that the fact that 80% of New York State is now served by one hydro-electric corporation made it necessary for him once again to urge the Legislature (Republican) to create a body of public trustees to develop St. Lawrence water power for the people.

Roosevelt’s experience with the House of Morgan and the power utility trusts would be a lesson he would never forgive or forget.  In fact, it culminated in his broadened vision to consider power an integral part of economic redevelopment after the start of the Great Depression later that year.

Roosevelt’s New Deal

Americans only came to terms with the impact of the Great Depression in 1930, months after the stock market crashed.  What initially hurt Wall Street soon spread across the country in waves of bank failures, massive unemployment, a credit crunch, and rampant homelessness, poverty, and despair.  What was bad in the city could be much worse in rural America.

Services for rural Americans were few and far between, and electric power was absolutely not one of them.  The economic benefits of the boom years usually never made it to rural communities in the first place.  Banks did manage to turn an excellent business convincing rural farmers to mortgage their farms in return for ready cash to acquire farm equipment, pay transportation costs to bring crops to market, and obtain other necessities.  When the bust years arrived, more than a few farmers found themselves foreclosed and evicted from their own farms, seized by lenders to recoup their loans.

After witnessing thousands of farmers and other rural Americans displaced from their homes, Roosevelt embarked on wide-ranging reforms for rural America.  One of the most important was rural electrification, designed to guarantee electricity to any rural American that wanted it.  Through the New Deal, rural Americans would experience the benefits of modernization first-hand — bolstering farm production and development, increasing economic development, improving health and safety, and most importantly, make rural living economically self-sustainable.

After learning from his years as governor of New York, Roosevelt established some core principles for his rural-focused New Deal electrification program:

• Full electrical modernization of households defined the standard for quality of life, no matter where the households resided.
• Electrical modernization of farm productive processes, within the framework of planned production and marketing, would lower farm costs and return farms to prosperity.
• Electricity must be affordable to all households in quantities required for electrical modernization. Publicly owned and private utilities, lightened of their false capitalization by public regulation and the breakup of holding companies, would provide inexpensive electricity.
• Cheap electricity would make the redistribution of population and industry possible, because it could be transmitted long distances and sold at near cost to rural consumers.

The mostly rural and poor Tennessee Valley region, covering 80,000 square miles in the southeastern United States, including almost all of Tennessee and parts of Mississippi, Kentucky, Alabama, Georgia, North Carolina, and Virginia was an obvious first choice for rural electrification.  Tupelo, Mississippi was the first community to sign onto Roosevelt’s ambitious Tennessee Valley Authority plan to bring cheap power to a deprived region.

The results of electrification at reasonable prices were… electric.  Widespread poverty wasn’t solved overnight, but evidence of social transformation was at hand.  Americans from coast to coast were modernizing their homes, bringing in new electric appliances which fueled pre-war manufacturing, retail sales, and helped bring down unemployment.  Many businesses were thrilled to participate in New Deal programs, which included stimulus spending to help Americans improve their homes.

The impact of New Deal programs for electricity development exist in every American home.  The refrigerator replaced an ice-block powered icebox.  Hand scrubbed laundry in a sink now agitated in a washing machine.  The radio was made commonplace where electricity to power it was available.  Mixers, blenders, toasters, and other small appliances made their entrance with the advent of widespread electric power.  But the impacts go even further.  Technology as Freedom, by Ronald Tobey, notes:

The New Deal in domestic electrical modernization worked an invisible revolution. The New Deal shifted the majority of American families to an asset strategy for economic security through state-enframed home ownership of electrically modern dwellings. Geographic mobility declined. Unrestrained domination of local politics by a locally resident real estate elite ended. Material accumulation based in the owner-occupied home created unprecedented material affluence. The dwellings modernized their occupants, as households rebuilt their social and labor relations around new technologies. Minority groups previously locked out of affluence gained the keys to their future. The New Deal created the 1950s.

Is ubiquitous broadband the electrification challenge of our age?  Naysayers claim fast broadband is only useful for downloading entertainment products, often illegally.  They suggest economic development doesn’t require fast broadband — any version of broadband is good enough.  Worse yet, government involvement in it is suspect, according to these critics.

But after weeks of witnessing countless communities compete for Google’s Think Big With a Gig broadband project, it’s clear the clamor for affordable, fast broadband service is far more important than the naysayers would suggest.

The Progressive Movement of the 1900s-1920s

After the reform-driven progressive movement of the early 20th century was finished taking on the railroads, they turned their attention to so-called “utility services.”  These were telephone, energy, and water providers.

The progressive movement of the early 1900s split into at least two camps:

• Individualist Progressives — Most people in this camp belonged to Theodore Roosevelt’s Progressive Party, also known as the Bull Moose Party.  The Progressive party was made up mostly of disaffected centrists who left the Republican Party after Roosevelt failed to secure the 1912 Republican nomination for president.  A rift had developed between Roosevelt and then-president Taft over how much energy should be devoted to breaking up corrupt big business and corrupt politicians.  The Progressive Party believed the Republicans had developed an unholy alliance with big business, monopoly trusts, and corrupt politicians on the state and federal level.  These individualist progressives believed in a well-regulated capitalist system, and with respect to energy companies, they demanded honoring the services and pricing promised consumers.  Once those conditions were met, government should stay out of it.  These progressives opposed abusive trusts and monopolies and supported competition.  The Progressive Party had support in states like New York, Illinois, California, Michigan, and Pennsylvania — all states with a heavy manufacturing business base that suffered from monopoly abuses.
• Reformist Progressives — Reformist progressives believed essential services should be in the hands of public trusts or municipalities, operated as non-profit “utilities” answering to the communities they served.  They were major advocates for municipal utility projects, and believed it was immoral for important services to be left in the hands of for-profit businesses, much less trusts and monopolies.  Many reformist progressives rallied behind the newspaper magnate William Randolph Hearst, who loudly advocated radical reform in his newspapers.  Hearst even formed the Municipal Ownership League, a local party in New York City, whose primary goal was to force for-profit utilities out of the marketplace — turning services over to municipalities to run for “the public good.”  Reformist progressives often applied moral values to private enterprise, suggesting an improved capitalist model required companies to also consider the social good of operating in the public interest.

Where individualist progressives had control, rate regulation and oversight was the usual model when dealing with electric companies.  California and Wisconsin, fed up with the railroad abuses, saw many similarities in  electric monopolies.  In the end, they applied the same rate regulation philosophy used with the railways for all utility services.  Both states regulated rates charged based on their perception of fair pricing.  Beyond that, they tended to leave private providers alone.  New York’s governor Charles Evans Hughes was an individualist progressive who advocated regulatory crackdowns on monopolies who abused the terms and conditions under which they offered service.  Once they met that obligation, Hughes believed the free market would manage to sort out the rest.

That was all fine and well for communities already served by electric companies, but what about vast numbers of smaller communities bypassed for electric service?

Defenders of the free market, and the companies themselves argued that only through deregulation would providers get sufficient investment to expand their service areas into previously unserved communities.  Apply rate regulation and other government interference and investors will look elsewhere.

Reformist progressives disputed this assertion, believing hunger for quick profit was responsible for the disinterest in serving rural communities, where construction costs were higher and rapid return on investment was unlikely.  Besides, they argued, since most of these companies provided monopoly service, it wasn’t as if they faced imminent price-cutting competition.

Reformers advocated bypassed communities should form their own municipally-run electric companies or cooperatives, managed by local government and answerable to local ratepayers.  This solution was attractive to many communities, especially the growing number of planned new communities that came during the boom years of the 1920s.

As municipal power attracted attention, some in the private power sector balked.  Not only were these companies delivering good service to customers, they were often doing it at far lower prices.  Many large utility companies and their allies made municipal power a political issue, attacking the concept as anti-American.  Their argument: Public money should never be spent to construct services traditionally provided by private companies, even when those companies had yet to wire those communities for service.

As political lobbying for bans on municipal power projects grew more intense, newspaper magnate William Randolph Hearst declared all-out war on the electric monopolies.  Hearst advocated that electricity be a delivered only through not-for-profit municipally-run utility companies.

Hearst even went as far to seek the governor of New York’s office several times in the early 1900s, to implement his progressive reforms.  Hearst’s platform included advocacy of public power delivered for the social good. That meant companies would extend service to outlying areas as soon as practical instead of when it was grossly profitable.  Power companies would charge a fair price for good service.  Companies would also advocate for customer safety and work with government to define safety regulations instead of reflexively opposing them at every turn.

In one of several runs for office, his opponent was the aforementioned then-current governor Charles Evans Hughes, who promptly went on the attack.

Hughes had one word for Hearst’s reform views: Socialism

Governor Hughes told the Republican Club of New York in 1908, “Our government is based upon the principles of individualism and not upon those of socialism…. It was founded to attain the aims of liberty, of liberty under law, but wherein each individual for the development and the exercise of his individual powers might have the freest [sic ] opportunity consistent with the equal rights of others.”

Hearst lost the governor’s race each time he ran, and was outmaneuvered by the private industries he sought to reform.  In fact, the industry managed to outwit regulatory advocates at every turn.

For example, since states were permitted only to regulate commerce within its borders, giant national electricity holding companies, also known as “trusts,” typically escaped such regulation by opening headquarters out of state, which allowed them to ignore local and state regulations.  In Riverside, California, Southern Sierras Power Company was able to ignore California state regulations because its head offices were in Denver, Colorado.  That kept pesky state officials out of Sierras’ books to verify whether the rates it charged were fair.

When regulators sought to construct a formula for fair regulated pricing, creative bookkeeping and debt structuring made even confiscatory rates permissible.  Companies learned to use business regulations against the regulators.  For instance, when a regulator believed rates could be lowered, power companies increased their debt obligations, at least on paper.  They paid outrageous administrative fees to the holding companies they themselves often quietly controlled.  Or they used creative accounting tricks to make it appear free cash was obligated to satisfy investors who held company debt and had to be repaid under government rules within a limited time frame.  Companies were able to “prove” to regulators their current rates were fair, and there was no leeway to reduce them.

Only after municipal power companies began providing service at dramatically lower, and sustainable prices did suspicion reach a fever pitch that regulators were being played.

Tomorrow: A “New Deal” for Americans