For RLECs, opportunities still outweigh obstacles; Universal Service and RUS funding fears abound, but rural carriers remain on the cutting edge

Telecommunications Americas, Feb, 2004 by Jim Barthold

When it comes to the USF (Universal Service Fund), rural LECs are like coal miners working a profitable vein of anthracite: They realize the lode is finite, but figure there's plenty to be tapped so long as nothing causes a cave-in.

The federal government's evolving attitude about rural service these days has the RLECs justifiably jittery that a catastrophic cave-in is imminent.

"Universal service is a very important revenue stream for RLECs. Now that support is threatened, or at least its future is uncertain, it has a lot of people nervous," said Bernardin Arnason, vice president of business and technology for the NTCA (National Telecommunications Cooperative Association).

Wireless carriers--the FCC's darlings, some RLECs contend--are diluting the fund even though their infrastructure costs are lower and many VoIP subscribers are circumventing it. In each instance, it means less money for RLECs who are eyeing a number of FCC open proceedings this year for resolution about who contributes to the USF; who draws from it and how contributions are determined. The USF isn't the only policy matter worrying RLECs. The FCC's decision on inter-carrier compensation will affect 2004 affairs as well.

Mixed Signals

"We get mixed signals out of the FCC. We're told we're supposed to deploy broadband ... but then [they] turn around and want to go with bill-and-keep with inter-carrier compensation," said Rick Vergin, CEO of Chibardun Telephone in Wisconsin. "How are we supposed to pay for this network if we're supposed to give it away for free?"

Vergin sees VoIP as a great way for service providers to cut expenses and deliver advanced features over broadband networks. But it's also an opening for interlopers to ride on RLEC infrastructure without paying a toll so "without some direction from the FCC on inter-carrier compensation and USF, it leaves companies with a real difficult decision," he said.

Because there has always been federal grant money from the USF and low-interest loans from the RUS (Rural Services Fund), RLECs, in even the harshest economies, were better able to pursue advanced broadband data and video offerings than their debt-ridden RBOC siblings. Chibardun, for example, is using RUS loans to finance Next Level Communications'-based VDSL infrastructure so that about 85 percent of its network is now broadband-capable and about 65 percent of its customers have video available to them.

The RLECs worry that policy indecision will compromise the revenues they use to build broadband networks. This is aggravated by the start of true competition from cable, fixed wireless and cellular carriers into previously monopoly territories.

Fiber to the Home

To fight these incursions, RLECs like SureWest Communications in Sacramento, Calif., are pursuing broadband initiatives. SureWest has paved the way for advanced services such as high-speed DSL and IP video with an aggressive FTTH (fiber-to-the-home) plan that already counts 10,000 homes.

Although SureWest will "leverage our copper infrastructure as long as possible," it will eventually move to all fiber because that "makes it significantly easier" to offer advanced broadband services like video-on-demand, said Bill DeMuth, SureWest's CTO.

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Driving deep fiber is understandable; SureWest operates in a competitive hotbed with SBC and Comcast and if it doesn't deliver advanced services, the competitors will. It's more surprising to hear Charles Gowder, general manager of the Valley Telephone Cooperative in Raymondville, Texas, talk about deep fiber and advanced services.

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While not the most rural LEC, VTC is "right down there," Gowder said. Still, he is emphatic: "I want to move as aggressively as I can to FTTH."

At the same time, Gowder is planning other advanced offerings such as a local wireless service that uses 700-MHz spectrum for which he "paid a lot more than I wanted to" at auction. Gowder is pushing vendors to build gear that connects his Class 5 switches to the wireless network so Valley Telephone customers can answer calls while driving the tractor in the North 40 but "don't necessarily need a cell phone service," he said.

Gowder's video plans are complicated by a unique must-carry burden that could require carriage of signals from four MSAs (Metropolitan Serving Areas).

"If I get a 50-percent take rate, we're talking 3,000 to 4,000 customers spread over three or four markets, and having to juggle the must-carry channels to make them match-up would be a huge administrative cost," he said, noting he will seek a "waiver or something" to ease this cost burden.

Valley Telephone, Gowder said "wouldn't exist without USF ongoing funding" which he says should be logically targeted for providing advanced services. "A phrase sticks out in my head: Provide service to high-cost areas. It turns out they want Internet; they may want video ... they want mobility because everyone wants mobility."

While RUS helps--and the company has tapped it--the USF is the mother lode. If telephone customers nationwide circumvent the fund by using VoIP or other untaxed alternatives, it could make real Gowder's biggest fear that "people in the big cities are not going to fund service to the rural areas," he said.