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.

For the sake of public relations, most cable and telephone companies are happily providing service credits to customers who ask after they lost service as a result of Hurricane Irene.  Denying those requests through invocation of weasel contract clauses referencing “acts of god” or “weather-related incidents” will assuredly leave customers less than pleased.  That’s a lesson some employees in Comcast’s call center still need to learn.

The fact is, most consumers shouldn’t have to pay for service undelivered.

Here is one Comcast customer’s plight:

When I contacted Comcast in the days following Irene I was initially told I’d be without service for a day and would receive credit for the loss. When I called two days later, I was told it would be two days, but I would receive credit. When I called six days later I was told they didn’t know how long it would be and that when it was restored I would not be receiving credit for the lost service.

“Wait, you’re telling me you’re going to try and bill me for service I never received,” I asked the customer service agent.

“We’re not going to try. We will be billing you,” he responded.

Another customer service representative verified the information with a supervisor, but sounded as incredulous as I felt when he came back to the phone.

The outage, he explained, is now considered an “act of god”.

“I can’t believe we’re going to do this,” he said.

He suggested I call back when the service was restored for credit.

“I can’t believe we’re not going to give credit,” he said again, before telling me to have a nice weekend.

To be fair, this is the experience of a single customer, and a search of prior storm events in Comcast service areas does show the company is usually willing to issue storm-related credits, as long as it was their service that was disrupted.  One of the issues cable providers have to deal with in weather disasters is ascertaining exactly who and what suffered the outage.  If the area’s local power company loses service, Comcast cable service could be affected directly or not at all.  A widespread outage could cause amplifiers to lose power, cutting off cable service to those with or without power.  But should Comcast credit you for lost service if the only thing keeping you from watching is a downed power line in your neighborhood that hasn’t affected cable service?

That dilemma many customer care professionals solve with courtesy credits to maintain customer goodwill.  But not every provider may automatically issue them, especially when dealing with low level employees in a customer care center.

If Comcast is refusing to provide you with service credits, there are a few quick steps to bypass “the unauthorized to give you what you want”-team and get your money back:

1. If calling by phone, ask if you are talking with a local customer care representative or one located thousands of miles away.  Ask to be transferred to a local office for assistance.  Those on the ground going through the same storm nightmares you are are likely to be more amenable towards giving you a service credit.
2. If using an e-mail form or online chat, call Comcast or visit your local Comcast cable store instead.  Again, someone sharing your misery is more likely to find a way to get you a service credit than someone who hasn’t lived through it.
3. File a complaint with the Better Business Bureau online requesting your service credit.  While Comcast is not BBB accredited, the organization has helped satisfactorily close more than 2,000 customer complaints.
4. Call your local television or newspaper “consumer reporter” and alert them.  Bad publicity is a great way to get any unyielding business to bend.

We expect a few negative stories in the media will be more than enough to inspire Comcast to provide service credits, gracefully.

Besides, if Comcast gives you a hard time about “acts of god,” you can always tell them the same thing when they ask to be compensated for cable equipment that succumbed in the storm.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/WABC Hassling LIPA 9-2-11.mp4[/flv]

Storm-weary Long Island residents are getting fed up with extended service outages.  One went as far as to allegedly threaten a “Columbine-style attack” on a Long Island power facility.  Repair crews are also being hassled.  WABC in New York reports.  (3 minutes)

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/WCBS Anger in LI 9-1-11.mp4[/flv]

WCBS found the same kind of anger in Suffolk County, aggravated by self-congratulating press conferences by utility companies even as hundreds of thousands of customers remained in the dark with no end in sight.  One Connecticut man even threatened a repair crew with a gun for trespassing.  (2 minutes)

Charter Cable told a Howell, Mich. family that lost everything in a major house fire they owed the cable company $1,600 for cable equipment, remote controls — even the batteries — that were consumed in the blaze.

Kerry Cacchione, her three children and her husband Jeff lost every single possession they owned in the fire seven weeks ago.  The Cacchione family, like many home renters, neglected to purchase all-important renter’s insurance, and without it, all of their furniture, clothing, and other valuables were gone for good.

When the family returned home to see the property, undergoing repairs paid for by their landlord, they were confronted with an enormous bill from Charter Communications, their cable company.

“$1,600, and they [charged us] for every remote, every battery, every modem, every cable box, and every DVR box,” said Cacchione.

The Cacchione family took the bill to Charter Cable and begged for forgiveness, telling employees there was no way they could afford to pay that cable bill.

Kerry reports Charter was unsympathetic and refused to waive the charges, leading her to ask WXYZ’s “Call for Action” to intervene.

With the threat of more bad publicity on the 6 o’clock news, Charter Communications decided to wipe out their bill.

Charter is among the most intransigent cable companies when it comes to demanding compensation for cable equipment destroyed or damaged in fires.  The company always relents when confronted with the prospect of bad publicity, such as when a customer service representative told one tornado victim in Alabama she would wait on the phone while she searched through debris in the neighborhood for lost cable equipment.

Every renter should always have renter’s insurance, which typically will cover damaged cable equipment. It’s very affordable and protects renters from losses. Many consumers believe landlords carry insurance which will protect them in the event of a natural disaster or fire, but those insurance policies protect the landlord’s property, not renters’ possessions. The peace of mind afforded by renter’s insurance can make all the difference in a major loss like the one experienced by the Cacchione family.

[flv width=”360″ height=”290″]http://www.phillipdampier.com/video/WXYZ Detroit Losing It All 8-31-11.mp4[/flv]

WXYZ in Detroit comes to the rescue of yet another family falling victim to an enormous cable bill from equipment lost or damaged in a house fire.  (3 minutes)

Phillip Dampier

Now that the initial shock of an aggressive — some say “audacious” — move by the Justice Department to block a merger AT&T confidently called “a done deal” is past, analysts of all kinds are attempting to discern the inside reasons for the merger’s rejection, where the deal can go from here, and what signals this will send the rest of America’s telecom industry.

In short — was this one merger proposal too far over the line?

The Justice Department reviewed reams of data, document-dumped by AT&T, on the company’s rationale for wanting to absorb T-Mobile and its implications for employees, consumers, and the dwindling number of wireless competitors.

They quickly discovered they did not like what they were seeing:  an all-new AT&T with a combined 132 million wireless customers, completely dwarfing all of their competitors and signaling a full-scale retreat from the company’s historic landline network.  An unregulated, increasingly concentrated wireless marketplace, represents the Wild West of fat profits, ripe for the picking by those large enough to control the market.  Increasingly, that means two former Baby Bells — AT&T and Verizon.

The Wall Street Journal charted more than two decades of mergers and acquisitions, which reduced nearly two dozen players down to five supersized telecom companies.

The Politics

Decisions at Justice are hardly made in a vacuum.  Politics always plays a role, and it’s a safe bet Obama Administration officials well-above rank-and-file lawyers in the Antitrust Division sent clear signals to the Department about how it wanted the review handled.  After all, this same team of lawyers had almost no trouble approving a mega-merger between NBC-Universal and Comcast Corporation, not finding anything ‘antitrust’ about that deal.  But Justice officials hurried out their own lawsuit with a wide-ranging, harsh condemnation of the deal at yesterday’s press conference.  As most Americans already know, competition in the cable industry is hardly robust, but market concentrating mergers and acquisitions are approved regularly in that industry.  So why did the Justice Department have such a problem with AT&T?

America's Wireless Market: Beyond well-behind, third-place Sprint, no other carrier comes close to AT&T or Verizon Wireless.

Many analysts seem to blame the company’s “arrogance” in telling reporters the merger was a breeze to be approved, others point to spectrum issues, as well as complaints about AT&T’s poor service potentially ensnaring T-Mobile customers.  But above all, Justice lawyers believe that America’s wireless marketplace needs at least four national wireless carriers, particularly scrappy T-Mobile, which has a long history of being a disruptive player in the market, loathe to offer the kind of “identical twin”-pricing common at AT&T and Verizon Wireless.  Losing T-Mobile’s aggressive performance in the market would mean declaring open season for price increases and abusive business practices.  After all, where would wireless consumers go?

That “four national carrier”-test could be a big problem for T-Mobile, as it could mean Justice lawyers would also reject an presumed alternative — combining Sprint and T-Mobile,  rumored before AT&T moved in and stole the show.  A new entrant willing to buy-out Deutsche Telekom’s U.S. wireless interests may be the only palatable solution acceptable to Justice lawyers because it would keep T-Mobile intact and running, independent of other wireless carriers.

Justice also completely discounted the relevance of regional carriers like MetroPCS, Cricket, U.S. Cellular, and other smaller providers.  The reason is simple: roaming.  All of these smaller providers are completely dependent on the four large national carriers to deliver essential roaming services for their customers who travel outside of the regions where these smaller companies deliver service themselves.  All national carriers would have to do to control an overly-competitive “problem” carrier is withdraw roaming agreements or raise prices for them.

Sprint, among others, is obviously the most relieved by yesterday’s events.  Their long term viability as a national carrier dwarfed by AT&T and Verizon Wireless would have raised numerous questions about whether that company could survive in the long term.  Sprint would have also felt pressure to beef up its own operations, likely through acquisitions of several regional carriers, particularly MetroPCS and Cricket, which share its CDMA network standard.

Wall Street is livid, of course.

The great gnashing of teeth has begun on Wall Street, evident as stock analysts begin raising questions about President Obama’s “anti-business” policies.  While executives at both AT&T and T-Mobile are at risk of losing substantial bonuses for pulling the deal off (and providing special retention packages to keep key talent from leaving), there is also a lot of money to be lost in New York and Washington should the deal collapse.  Take the “little people” that will be out tens of millions in deal fees and proceeds from extending credit, implementing the merger itself, and structuring the legal mechanics.  They include:

Arnold & Porter: The now infamous law firm that accidentally posted an un-redacted document on the Federal Communications Commission website that exposed, in AT&T’s own words, what consumer groups already strongly suspected: AT&T preferred the long term benefits of knocking pesky T-Mobile out of the marketplace, even though the $39 billion dollar price tag dwarfed the $4 billion estimated cost of building AT&T’s own 4G LTE network.  That’s the 4G network executives deemed “too expensive” earlier this year.  With a deal collapse, the firm can say goodbye to lucrative legal fees and perhaps more importantly, their reputation of properly managing their clients’ business affairs.

Greenhill & Co.: Greenhill is one of several all-star, platinum-priced advisory firms hired by companies acquiring other companies to structure and implement their mergers.  With Greenhill hoping for a substantial piece of at least $150 million set aside by AT&T to cover these specific costs, a merger-interrupted could cost key people some nice year-end bonuses.

JPMorgan (Chase): The House of J.P. Morgan handed over a check for AT&T worth up to $20 billion to help finance the deal.  JPMorgan doesn’t do that for free.  In addition to any interest proceeds, JPMorgan also charges a range of underwriting and administrative fees that could easily total $85 million dollars.  AT&T might have to send the check back.

Cable Business News & Business Media: One of the most ironic developments watching the Justice Dept. decision unfold was the unintentional amount of AT&T advertising promoting the merger that preceded video reports and appeared adjacent to AT&T-related stories.  Those ads may soon end, costing cable news and the business press substantial ad revenue.

Cable business news networks offered up scathing analyses. Among anchors and analysts upset with the news of the merger’s potential derailment, it didn’t take long for “couched questions” to begin, pondering whether President Obama was against big companies, jobs, or the concept of the private sector in general.  Completely missing: coverage of the benefits for consumers who potentially don’t have to endure a further concentration in the wireless marketplace.

Craig Moffett from Sanford Bernstein, who usually celebrates all-things-cable, today told the Wall Street Journal the actions at Justice will harm business at every U.S. wireless carrier.

“Put simply, the industry will be structurally less attractive than it would otherwise have been,” he said. “Pricing is likely to be less stable, and profound technological risks, including free texting and bandwidth arbitrage, that would be manageable in the context of a significantly consolidated industry now become much more threatening.”

Judge Ellen

In other words, a hegemony of AT&T and Verizon Wireless could play rough with third party developers trying to undercut text message pricing and deliver data plan workarounds. With more competitors, consumers could simply abandon abusive providers.  Without those competitors, consumers have to pay AT&T’s asking price or go without service.

The Law

AT&T may be hoping it scored one potential success in its anticipated legal challenge against the Justice Department’s antitrust case.

The judge assigned to hear arguments is Ellen Segal Huvelle, who has a track record of slapping down government overreach.  Huvelle previously rejected Justice Department objections to the merger of SunGard and Comdisco — two disaster-recovery businesses.  The government argued the merger would leave just two major players in that business.  Judge Huvelle dismissed that, claiming the government too-narrowly defined what a disaster-recovery business entailed.  If she finds AT&T’s arguments of robust competition from regional carriers, landlines, and Voice Over IP credible, Justice lawyers may have a problem.  So could consumers.

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PBS Newshour explores where the AT&T/T-Mobile merger goes next, now that the Justice Dept. sued to stop it on antitrust grounds.  (7 minutes)