Windstream disappointed Wall Street Friday when it reported a 16 percent income drop for the third quarter of the year, surprising investors who expected more from the Little Rock, Ark. phone company.

Windstream is attempting a makeover as it attempts to shed its image as a residential landline service provider for brighter prospects delivering business telecommunications services.  But shareholders weren’t impressed as company officials noted the company has increased spending on capital projects like data centers and wiring cell phone towers with fiber optics and the $840 million acquisition of Fairport, N.Y.-based PAETEC Holding Corporation.

Most of Windstream’s successes are tied to the company’s business products and services.  The company reported growth selling advanced Internet products to corporate customers, including virtual LAN services and dedicated Internet access.  A considerable amount of the company’s Internet revenue growth is coming from data center services such as webhosting and wireless backhaul circuits sold to cell phone providers.

Windstream’s residential customers can be split into two groups: traditional landline users who are increasingly disconnecting their service and those who are buying DSL service to accompany their existing phone line.  Windstream reported another 4.6% of their residential customers permanently disconnected service this year.  Windstream’s largely rural customer base has remained more loyal and the company added an additional 8,000 DSL customers during the quarter, a growth of 4.4%.  Windstream’s penetration rate for broadband among their landline customers is 65%.

Keeping broadband customers loyal to DSL requires regular service improvements to avoid customer poaching by cable competitors, and Windstream is attempting to keep up with a $40 million investment to improve broadband speeds, including the introduction of advanced VDSL service in selected areas.

Whittington

“We increased broadband speeds to residential and business customers that can now offer 12Mbps service to over 40% of our footprint and 24Mbps service in our most competitive markets,” said Windstream chief operating officer Brent K. Whittington. “We expanded our Raleigh data center to increase the floor space by 10,000 square feet to keep up with the rapidly growing customer base and demand for cloud-based services.”

Whittington notes customers that hunger for faster broadband speeds are using them largely to watch online video, and Windstream has begun marketing campaigns targeting video-hungry customers.  Customers using the Internet for basic web browsing and e-mail are not very interested in paying more for faster service, however.

“Customers still don’t want to pay incrementally for higher speed services,” Whittington said. “We try to position Windstream as all the speed you need, which is really trying to help make sure customers understand our parity with cable as it pertains to speeds because some of the perceptions around traditional ADSL services, they’ve used against us, and that’s working for us. But again, customers really just, we find, don’t want to spend a lot more for incremental speeds. We see that as revenue upside in the future, but not seeing a great deal of demand there right now.”

While Windstream customers will likely find current product pricing stable over the coming year, the FCC’s recent approval of Universal Service Fund (USF) reform does allow the phone company to raise rates on customers.  Some Wall Street investment firms have suggested Windstream do precisely that to boost revenues.

Timothy Horan from Oppenheimer & Co., Inc. noted Windstream’s local rates seem low.

“I don’t think they’ve been raised for a long period of time,” Horan observed. “I think you have to go through some [state regulators], but can you do that without having rate cases, and is that part of the plan at all?”

Anthony W. Thomas, Windstream’s chief financial officer, tried to put Horan at east.

“The FCC has provided a mechanism, it is our understanding, in the order that will allow us to pass along price increases up to $0.50 per month to our customers over a 5-year period,” Thomas explained.

Irony: Chesonis' 2007 book has this description on Amazon.com -- "When you put people first, you win. When you operate by the highest principles, you'll see the results in the bottom line. When you put a caring heart into how you operate, in your organization and your community, you build the only true foundation of long-term success."

Eight acres of rubble and a big hole in the ground.

That’s what residents of Rochester, N.Y., are calling the former site of Midtown Plaza, America’s first indoor shopping mall, torn down to make room for the new headquarters of PAETEC Corporation — headquarters that may never be built.

Now the city of Rochester has declared war on the proposed acquisition of PAETEC by Little Rock, Ark.,-based Windstream, suggesting the combined company may renege on its commitment to construct new headquarters in downtown Rochester after New York State and Rochester city taxpayers spent $60 million on an economic development package for the company.

In a letter to the Federal Communications Commission, the mayor’s office declared its official opposition to the merger proposal, citing the economic impact of wasted tax dollars and the deal’s impact on local jobs:

The Commission will note from the body of this correspondence that the City may be negatively affected if the transfer of PAETEC to Windstream takes place. The federal, state and local governments have worked to develop the site for the purpose of establishing a PAETEC headquarters in Downtown Rochester; tailoring a development package and investing millions to make this location shovel ready for development. New York State provided the Project’s most significant monetary investment, proceeding with the understanding that the Project would retain and grow employment in the Rochester region. It is in the public interest to examine, not just the financial and planning impact that this will have on the City, but to also study the effect this will have on employment, the communities surrounding the City and the lives of the individuals who may be affected.

[…] In anticipation of the PAETEC Project, New York State and the City invested $60 million to demolish the former improvements on the Midtown Site and create a shovel ready building site. To insure the success of the PAETEC Project, the City produced a development package (“Development Package”) which expedited and customized the demolition of the existing buildings at the Midtown Site to accommodate PAETEC’s construction schedule and provide a foundation for PAETEC’s corporate headquarters.

[…] The Development Package was intended to benefit a New York State employer and help that employer retain its current employees and hire additional employees to grow its business. Despite all the efforts of the City to facilitate and provide the positive economic environment for the PAETEC Project, Windstream has indicated that it intends to reduce PAETEC’s current 850-employee Monroe County workforce.

The two companies filed a joint response with the Commission essentially telling the city to stay out of the merger deal, and their concerns about PAETEC’s headquarters and how many jobs will ultimately be lost are not within the Commission’s power to review anyway.

PAETEC CEO Arunas Chesonis, who earlier put the highest praise for his company’s success on the employees who helped build it into what it is today, told a group of fellow business leaders a different story than he told readers of his 2007 book.

“For people who feel let down, we in Rochester should want to be let down like this 50 times a year,” Chesonis said. “Rochester will be a major operating center for the company. So along those lines, we have to figure out how many jobs will be in Rochester. We should be talking about the people that are going to lose their jobs. What are those people going to do next?”

Presumably collect unemployment, critics charge.  Among them is former Mayor William Johnson, who has criticized the city for bending over backwards for the ever-evolving plans for new PAETEC headquarters, which have been downsized repeatedly since they were originally announced.  Johnson thinks Windstream may have effectively put a knife in the back of taxpayers and the mayor’s office, and could ultimately exit the city of Rochester leaving countless local employees out of work.

Windstream seems resolute in its plans to cut what it calls “duplicative staffing positions.”  It reminded the FCC the agency “has routinely approved transactions in which—as will be the case in this transaction—increased efficiencies and economies of scale and scope are expected.”

That is code language for PAETEC employees: Update your resume.  You may need it.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/WHEC WHAM Rochester PAETEC Windstream 10-11.flv[/flv]

Finger-pointing over a messy, uncompleted downtown construction project. PAETEC may be planning to renege on a $60 million taxpayer-financed economic development package after it announced plans to merge with Windstream.  Reports from WHEC and WHAM-TV.  (6 minutes)

The primary backers of the ABC Plan

Today, Federal Communications Commission Chairman Julius Genachowski is scheduled to deliver a major announcement on reforming the Universal Service Fund (USF) — a federal program designed to subsidize the costs of delivering telecommunications services to rural America.

The reform, long overdue, would transition a significant percentage of USF fees every telephone customer pays towards broadband deployment — a noble endeavor.  For years, Americans have paid more than $5 billion annually to phone companies large and small to maintain rural landline service.  Small co-op phone companies depend on the income to deliver affordable service in places like rural Iowa, Kansas, and Alaska.  But large companies like AT&T and Verizon also collect a significant share (around $800 million annually) to reduce their costs of service in the rural communities they serve.

That’s particularly ironic for AT&T, which time and time again has sought the right to abandon universal rural landline service altogether.

Genachowski’s idea would divert USF funding towards broadband construction projects.  The argument goes that even low speed DSL requires a well-maintained landline network, so phone companies that want to deploy rural broadband will have to spend the money on necessary upgrades to provide just enough service to earn their USF subsidies.  The lower the speed, the lower the cost to upgrade networks and provide the service.  Some may choose wireless technology instead.  Since the telephone companies have fought long and hard to define “broadband” as anything approaching 3-4Mbps, that will likely be the kind of speed rural Americans will receive.

At first glance, USF reform seems like a good idea, but as with everything at the FCC these days, the devil is always in the details.

Dampier: Another day, another self-serving plan from the phone companies that will cost you more.

While headline skimmers are likely to walk away with the idea that the FCC is doing something good for rural broadband, in fact, the Commission may simply end up rubber stamping an industry-written and supported plan that will substantially raise phone bills and divert your money into projects and services the industry was planning to sell you anyway.

Stop the Cap! wrote about the ABC Plan a few weeks ago when we discovered almost all of the support for the phone-company-written proposal comes from the phone companies who back it, as well as various third party organizations that receive substantial financial support from those companies.  It’s a dollar-a-holler astroturf movement in the making, and if the ABC Plan is enacted, you will pay for it.

[Read Universal Service Reform Proposal from Big Telcos Would Rocket Phone Bills Higher and Astroturf and Industry-Backed, Dollar-a-Holler Friends Support Telco’s USF Reform Plan.]

Here is what you probably won’t hear at today’s event.

At the core of the ABC Plan is a proposal to slash the per-minute rates rural phone companies can charge big city phone companies like AT&T and Verizon to connect calls to rural areas.  You win a gold star if you correctly guessed this proposal originated with AT&T and Verizon, who together will save literally billions in call connection costs under their plan.

With a proposal like this, you would assume most rural phone companies are howling in protest.  It turns out some are, especially some of the smallest, family-run and co-op based providers.  But a bunch of phone companies that consider rural America their target area — Frontier, CenturyLink, FairPoint and Windstream, are all on board with AT&T and Verizon.  Why?

Because these phone companies have a way to cover that lost revenue — by jacking up your phone bill’s USF surcharge to as much as $11 a month per line to make up the difference.  In the first year of implementation, your rates could increase up to $4.50 per line (and that fee also extends to cell phones).  Critics have been widely publicizing the increased phone bills guaranteed under the ABC Plan.  In response, advocates for the industry are rushing out the results of a new study released yesterday from the Phoenix Center Chief Economist Dr. George S. Ford that claims the exact opposite.  Dr. Ford claims each customer could pay approximately $14 less per year in access charges if the industry’s ABC Plan is fully implemented.

Genachowski

Who is right?  State regulators suggest rate increases, not decreases, will result.  The “Phoenix Center,” unsurprisingly, has not disclosed who paid for the study, but there is a long record of a close working relationship between that research group and both AT&T and Verizon.

But it gets even worse.

This shell game allows your local phone company to raise rates and blame it on the government, despite the fact those companies will directly benefit from that revenue in many cases.  It’s a real win-win for AT&T and Verizon, who watch their costs plummet while also sticking you with a higher phone bill.

The USF program was designed to provide for the neediest rural phone companies, but under the new industry-written rules being considered by the FCC, just about everyone can get a piece, as long as “everyone” is defined as “the phone company.”  There is a reason this plan does not win the hearts and minds of the cable industry, independent Wireless ISPs, municipalities, or other competing upstarts.  As written, the USF reform plan guarantees virtually all of the financial support stays in the Bell family.  Under the arcane rules of participation, only telephone companies are a natural fit to receive USF money.

Genachowski will likely suggest this plan will provide for rural broadband in areas where it is unavailable today.  He just won’t say what kind of broadband rural America will get.  He can’t, because the industry wrote their own rules in their plan to keep accountability and oversight as far away as possible.

For example, let’s assume you are a frustrated customer of Frontier Communications in West Virginia who lives three blocks away from the nearest neighbor who pays $50 a month for 3Mbps DSL broadband.  You can’t buy the service at any price because Frontier doesn’t offer it.  You have called them a dozen times and they keep promising it’s on the way, but they cannot say when.  You may have even seen them running new cable in the neighborhood.

Frontier has made it clear they intend to wire a significantly greater percentage of the Mountain State than Verizon ever did when it ran things.  Let’s take them at their word for this example.

The telephone companies have helpfully written their own rules for the FCC to adopt.

Frontier’s decision to provide broadband service in West Virginia does not come out of the goodness of their heart.  At a time when landline customers are increasingly disconnecting service, Frontier’s long-term business plan is to keep customers connected by selling packages of phone, broadband, and satellite TV in rural markets.  Investment in DSL broadband deployment has been underway with or without the assistance of the Universal Service Fund because it makes financial sense.  Our customer in West Virginia might disconnect his landline and use a cell phone instead, costing Frontier any potential broadband, TV and telephone service revenue.

Under the ABC Plan, Frontier can be subsidized by ratepayers nationwide to deliver the service they were planning to provide anyway.  And what kind of service?  The same 3Mbps DSL the neighbors have.

If your county government, a cable operator, or wireless competitor decided they could deliver 10-20Mbps broadband for the same $50 a month, could they receive the USF subsidy to build a better network instead?  Under the phone company plan, the answer would be almost certainly no.

Simon Fitch, the consumer advocate of the Federal-State Joint Board on Universal Service, which advises the FCC on universal service matters, says the ABC Plan is a consumer disaster.

“Although a stated goal of the FCC’s reform effort is to refocus universal-service funding to support broadband, the industry’s ABC plan requires no real commitment to make broadband available to unserved and underserved communities,” Fitch writes. “Companies would receive funds to provide broadband with upload and download speeds that are already obsolete. States would be given no real enforcement power.”

Fitch is certain companies like AT&T and Verizon will receive enormous ratepayer-financed subsidies they don’t actually need to provide service.

Back to AT&T.

In several states, AT&T is seeking the right to terminate its universal service obligation altogether, which would allow the same company fiercely backing the ABC Plan to entirely walk away from its landline network.  Why?  Because AT&T sees its future profits in wireless.  Under the ABC Plan, AT&T could build rural cell towers with your money to provide “replacement service” over a wireless network with or without great coverage, and with a 2GB usage cap.

At the press conference, Genachowski could still declare victory because rural America would, in fact, get broadband.  Somehow, the parts about who is actually paying for it, the fact it comes with no speed, coverage, or quality guarantees, and starts with a 2GB usage cap on the wireless side will all be left out.

Fortunately, not everyone is as enamored with the ABC Plan as the groups cashing checks written by AT&T.

In addition to state regulators, Consumers Union, the AARP, Free Press, and the National Association of Consumer Advocates are all opposed to the plan, which delivers all of the benefits to giant phone companies while sticking you with the bill.

There is a better way.  State regulators and consumer groups have their own plans which accomplish the same noble goal of delivering subsidies to broadband providers of all kinds without increasing your telephone bill.  It’s up to the FCC to demonstrate it’s not simply a rubber stamp for the schemes being pushed by AT&T and Verizon.

So who is for the ABC Plan?  Primarily phone companies, their business partners, and dollar-a-holler astroturf friends:

American Consumer Institute:  SourceWatch called them a telecom industry-backed astroturf group.  Karl Bode from Broadband Reports discovered “the institute’s website is registered to ‘Stephen Pociask, a telecom consultant and former chief economist for Bell Atlantic [today Verizon].”  The group, claiming to focus “on economic policy issues that affect society as a whole,” spends an inordinate amount of its time on telecommunications hot button issues, especially AT&T and Verizon’s favorites: cable franchise reform and opposition to Net Neutrality.

Anna Marie Kovacs:  Determining what is good for Wall Street is her business, as founder and President of Regulatory Source Associates, LLC. RSA provides investment professionals with analysis of federal and state regulation of the telecom and cable industries.

Dollar-a-holler support?

Consumer Awareness Project: A relatively new entrant, CAP is AT&T’s new darling — a vocal advocate for AT&T’s merger with T-Mobile.  But further digging revealed more: the “group” is actually a project of Washington, D.C. lobbying firm Consumer Policy Solutions, which includes legislative and regulatory advocacy work and implementation of grassroots mobilization.

That is the very definition of interest group-“astroturf.”

Randolph May from the Free State Foundation supports "state's rights," but many of them want no part of a plan his group supports.

Free State Foundation: A misnamed conservative, “states rights” group.  Leader Randolph May loves the ABC Plan, despite the fact several individual states are asking the FCC not to impose it on them.

Hispanic Technology & Telecommunications Partnership:  Whatever Verizon and AT&T want, HTTP is also for.  The group was embroiled in controversy over its unflinching opposition to Net Neutrality and love for the merger of AT&T and T-Mobile.  Its member groups, including MANA and LULAC, are frequent participants in AT&T’s dollar-a-holler lobbying endeavors.

Robert J. Shapiro: Wrote an article for Huffington Post calling the ABC Plan worth consideration.  Also worth mentioning is the fact he is now chairman of what he calls an “economic advisory firm,” which the rest of the world calls a run-of-the-mill D.C. lobbyist firm — Sonecon.  It comes as no surprise AT&T is a client.  In his spare time, Shapiro also writes reports advocating Internet Overcharging consumers for their broadband service.

Indiana Exchange Carrier Association: A lobbying group representing rural Indiana telephone companies, primarily owned by TDS Telecom.  It’s hardly a surprise the companies most likely to benefit from the ABC Plan would be on board with their support.

Indiana Telecommunications Association: A group of 40 telephone companies serving the state of Indiana.  For the aforementioned reasons, it’s no surprise ITA supports the ABC Plan.

Information Technology and Innovation Foundation:  Reuters notes this group received financial support from telecommunications companies, so lining up behind a plan those companies favor comes as little surprise.  ITIF also believes usage caps can deter piracy, so they’re willing to extend themselves way out in order to sell the telecom industry’s agenda.

Internet Innovation Alliance:  Another group backed by AT&T, IIA also funds Nemertes Research, the group that regularly predicts Internet brownouts and data tsunamis, which also hands out awards to… AT&T and Verizon.

The Indiana Exchange Carrier Assn. represents the phone companies that will directly benefit from the adoption of the ABC Plan.

Bret Swanson:  He penned a brief note of support on his personal blog.  When not writing that, Swanson’s past work included time at the Discovery Institute, a “research group” that delivers paid, “credentialed” reports to telecommunications company clients who waive them before Congress to support their positions.  Swanson is a “Visiting Fellow” at Arts+Labs/Digital Society, which counted as its “partners” AT&T and Verizon.

Minority Media & Telecom Council: Tries to go out of its way to deny being affiliated or “on the take” of telecom companies, but did have to admit in a blog posting it takes money from big telecom companies for “conference sponsorships.”  Some group members appear frequently at industry panel discussions, and mostly advocate AT&T’s various positions, including strong opposition to reclassify broadband as a utility service.

MMTC convened a Broadband and Social Justice Summit earlier this year that featured a range of speakers bashing Net Neutrality, and the group’s biggest highlighted media advisory on its website as of this date is its support for the merger of AT&T and T-Mobile.  Yet group president David Honig claims he can’t understand why some consumer groups would suspect groups like his of engaging in dollar-a-holler advocacy, telling The Hill, “We’ve seen no examples of reputable organizations that do things because of financial contributions. It’s wrong to suggest such things.”

Mobile Future: Sponsored by AT&T, Mobile Future curiously also includes some of AT&T’s best friends, including the Asian Business Association, LULAC, MANA, the National Black Chamber of Commerce, and the United States Hispanic Chamber of Commerce.

Montana Independent Telecommunications Systems: Primarily a group for Montana’s independent telephone companies, who will benefit enormously from the ABC Plan.

What major corporate entity does not belong to this enormous advocacy group?

The National Grange:  A group with a long history advocating for the interests of telephone companies.  Over the years, the National Grange has thrown its view in on Verizon vs. the RIAA, a request for Congress to support industry friendly legislation, a merger between Verizon and NorthPoint Communications, and USF issues.

The Keep USF Fair Coalition was formed in April 2004. Current members include Alliance for Public Technology, Alliance For Retired Americans, American Association Of People With Disabilities, American Corn Growers Association, American Council of the Blind, California Alliance of Retired Americans, Consumer Action, Deafness Research Foundation, Gray Panthers, Latino Issues Forum, League Of United Latin American Citizens, Maryland Consumer Rights Coalition, National Association Of The Deaf, National Consumers League, National Grange, National Hispanic Council on Aging, National Native American Chamber of Commerce, The Seniors Coalition, Utility Consumer Action Network, Virginia Citizen’s Consumer Council and World Institute On Disability. DSL Prime helps explain the membership roster.

Taxpayers Protection Alliance:  One of the tea party groups, TPA opposes higher USF fees on consumers.  The ABC Plan website had to tread carefully linking to this single article favorable to their position.  Somehow, we think it’s unlikely the group will link to the TPA’s louder voice demanding an end to broadband stimulus funding many ABC Plan backers crave.

TechAmerica: Guess who is a member?  AT&T, of course.  So is Verizon.  And CenturyLink.  TechAmerica call themselves “the industry’s largest advocacy organization and is dedicated to helping members’ top and bottom lines.”  (Consumers not included.)

Tennessee Telecommunications Association: TTA’s independent phone company members stand to gain plenty if the ABC Plan is enacted, so they are happy to lend their support.

Rep. Terry's two biggest contributors are CenturyLink and Qwest.

Representative Greg Walden (R-Oregon):  His top five contributors are all telecommunications companies, including CenturyLink, Pine Telephone, and Qwest.  He also gets money from AT&T and Verizon.  It’s no surprise he’s a supporter: “We are encouraged by the growing consensus among stakeholders as developed in the ‘America’s Broadband Connectivity Plan’ filed with the Federal Communications Commission today, and we hope that consensus will continue to grow.”

Representative Lee Terry (R-Nebraska): He co-signed Rep. Walden’s statement.  Rep. Terry’s two biggest contributors are Qwest and CenturyLink.  Now that CenturyLink owns Qwest, it’s two-campaign-contributions-in-one.  And yes, he gets a check from AT&T, too.

Representative Steve Scalise (R-Louisiana): “Today’s filing of the ‘America’s Broadband Connectivity Plan’ is welcomed input on the intercarrier compensation and Universal Service Fund reform front,” Scalise said.  Now Scalise is ready to welcome this year’s campaign contribution from AT&T, which he has not yet reportedly received.  In 2008, Scalise received $13,250.  In 2010, $10,000.  This cycle, so far he has only been able to count on Verizon, which threw $2,500 his way.  Scalise voted earlier this year to overturn the FCC’s authority to enact Net Neutrality.

USTelecom Association: The only news here would be if USTA opposed the ABC Plan.  Included on USTA’s board of directors are company officials from: Frontier Communications, AT&T, CenturyLink/Qwest, Windstream, FairPoint Communications, and Verizon.  That’s everyone.

Wisconsin State Telecommunications Association:  Their active members, including Frontier Communications, are all telephone companies inside Wisconsin that will directly benefit if the ABC Plan is enacted.

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.