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RUS Writeoffs: Easily $300M, possibly $3B
Friday, 23 March 2012 22:22
More than just the USF cutbacks. A third of the small telcos will go bust the next few years, one of their advocates claims, unless the USF/ICC cutbacks are reversed. Some very intense lobbying is urging the White House to restore the old subsidies, no matter what the cost. Some waivers are appropriate for the truly brutal high cost areas, but after hours reading submissions I find no doubt doubt the FCC reductions are good government work. The companies simply haven't provided any solid data otherwise.

Whatever the details of the USF/ICC program, wireline telephony is a declining business. Many companies have large debt or high operating costs and will fail at any plausible level of subsidy. A decade ago the FCC forecast that loss of long distance revenues and wired lines would bankrupt many of the rurals. Robert Pepper, head of the Office of Policy and Plans, had figures that made clear a day of reckoning was coming. Every landline only company in the world is struggling, including British Telecom (dividend cut), Frontier (dividend cut), Hawaiian Tel (bankruptcy), and Fairpoint (bankruptcy, with a second bankruptcy hard to avoid.) Both Century-Qwest and Windstream have earnings below their dividend payments, propped up by capex far below depreciation and ultimately unsustainable. The smaller rurals are facing the same objective problems but don't report publicly so I can't provide firm numbers. Tweaking the details of USF might postpone but won't prevent wide distress.

Some of the coming RUS losses are clear cases of abuse. Sandwich Islands, with $116M in loans approved, has told the FCC they will default unless they get a huge (and totally inappropriate) change in the new FCC CAF/USF  regulations.   Sandwich Islands is a secretive outfit with close ties to Democratic politicians exposed by the local press. Lobbyist Mike Powell helped them out when he was FCC Chairman. It looks like they spent $100M on running unnecessary fiber between the islands. USF was showering money on them: somewhere north of $25,000 per home passed, although they refuse to provide the figures. (The FCC is considering my FOIA request for the basic data to report this story.)

RUS is already liquidating a $200M loan to Open Range gone bad. In the guise of reaching unserved, Open Range got funded for $267M. This was deceptive; in fact, most of their deployment was wireless to mid-sized metros that already had both DSL and cable. It was a mistake to fund it initially, especially because the FCC knew there were highly credible allegations of fraud against the CEO. (I know they were aware because I asked them about it in 2007 or 2008 before the loans was granted. The agency stonewalled me and I'm sorry I didn't push harder. Adelstein since he took office has watched them carefully and shut them down before all the money was disbursed.) A large loss is inevitable. I urge a full forensic audit because the company statements as they hit the skids were misleading.

    Another large borrower with a few hundred rural high cost homes borrowed extravagantly to run fiber to the home to a suburban area that already has cable. In an official filing, it also projects bankruptcy if its subsidy is cut to "only" $3,000 per year per home - including many homes that are reached by cable without subsidy.


Whatever the details of the USF/ICC program, wireline telephony is a declining business. Many companies have large debt or high operating costs and will fail at any plausible level of subsidy. A decade ago the FCC forecast that loss of long distance revenues and wired lines would bankrupt many of the rurals. Robert Pepper, head of the Office of Policy and Plans, had figures that made clear a day of reckoning was coming. Every landline only company in the world is struggling, including British Telecom (dividend cut), Frontier (dividend cut), Hawaiian Tel (bankruptcy), and Fairpoint (bankruptcy, with a second bankruptcy hard to avoid.) Both Century-Qwest and Windstream have earnings below their dividend payments, propped up by capex far below depreciation and ultimately unsustainable. The smaller rurals are facing the same objective problems but don't report publicly so I can't provide firm numbers. Tweaking the details of USF might postpone but won't prevent wide distress.

There's no reason to suspect fraud at Big Bend, which I believe also has RUS loans. They've graphically described their likely bankruptcy in another FCC filing. Without doing much research, I've found two more companies, one with an 8 figure RUS loan, that are contemplating bankruptcy.  The honorable outfits - I know many in rural telephony - are getting squeezed out because of the far too many abusers. Julius hides the data necessary to estimate accurately, but most estimates are that 1/3rd to 2/3rd of the $4B subsidy would be unnecessary based on the cost of moderately efficient rural operators.

     I'm a strong supporter of universal service but not blind to the massive overspending in the current system. Low densities and long distances do add costs. There are several million lines that need a modest subsidy to pay their way.
But except for half a million lines the excess operating costs are wildly overestimated by nearly everyone in the public discussion.

     Continuing subsidies higher than the necessary costs of service is simply bad policy. The intent of the FCC based on their recent proposals is to reduce subsidies to a generally more reasonable level but allow exceptions for truly high cost areas that would be otherwise unserved. That seems only common sense, but is totally different than the past two decades of "nearly anything goes."

Adelstein needs to review every loan in light of the USF subsidy changes and step in before trouble is uncontrollable. They need an operating team ready to go or operators ready to take over failing telcos just as the banking authorities do for failed banks. They also need a team of forensic accountants. False statements and contradictions from one of the largest likely defaulters suggest it probably was looted and the carcass will be turned over to RUS. D.C. reporters need to ask Jonathan Adelstein  what's he's doing to prevent $B in government losses. He's  an honorable public servant in a tough spot. The right thing to do is accept the reality and manage the crisis, starting yesterday.

   There's much more to discover in this story and I hope Amy Schatz and Cecelia Kang jump in.

Thoughts on resolving the rural crisis (first draft)
Throwing taxpayer money at the problem should be the last measure.
    First, we need to bring down the high rural costs every other possible way. The most important step is to reduce the often absurd rural backhaul costs. Many small carriers pay $100 and even $200/megabit/month when the going rate is $5-15. That's because there is local monopoly-like pricing. Fixing this was one of the most important recommendations of the broadband plan, which found high backhaul was often the largest contributor to high costs. Speaker after speaker at the Broadband Plan workshops insisted that Genachowski use "special access" rules to reduce the problem. He's failed.
    Second, most of the smallest companies need to be merged into larger ones. In broadband, the minimum economic size is about 20,000 lines. I don't think voice is very different. It probably costs twice as much per home to serve 2,000 homes as 20,000. Protecting rural service is important; $B's in subsidies to keep 1,000 companies independent isn't wise public spending.
    Third, unnecessary spending needs to be ruthlessly reduced. For example, a switch can serve 15,000 - 50,000 users, easily. It's ridiculous for every small company to have their own switch (and switch operator.) Time to share.
     Fourth, small telcos are paying far above the world price because they don't have purchasing volume. Since the government is paying so much of the cost, it should negotiate volume purchasing. This could be direct or through the existing coops.
     Fifth, we need disclosure of the real costs. The carriers demanding the $B's in subsidies need to open their books. One reason the figures are so high is that all the calculations are done in the dark. Any carrier who refuses to make basic finances public shouldn't be given government money.

10 Largest Telecommunications Borrowers        

      Based on Total Loan Dollars Approved           

      as of September 30, 2011           


Rank  Designation Borrower Name                             Total Loans
                 

1     CO 1103     Open Range Communications, Inc.           $267,298,000.00

2     SC 518      Farmers Telephone Cooperative, Inc.       $219,022,500.00

3     HI 501      Sandwich Isles Communications, Inc.       $166,406,370.00

4     PA 551      Commonwealth Telephone Company            $152,977,075.00

5     GU 501      Guam Telephone Authority                  $149,460,080.00

6     AK 504      Matanuska Telephone Association, Inc.     $148,791,296.00

7     MO 533      Grand River Mutual Telephone Corporation  $146,679,700.00

8     KS 537      Rural Telephone Service Company, Inc.     $146,267,670.00

9     MO 609      Gte Midwest Inc                           $146,216,958.29

10    SD 522      Venture Communications Cooperative        $140,562,772.51

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These figures, provided to me by RUS, may be very different that the actual losses if the company goes bust. They are amounts approved, some of which was never disbursed. For example, while RUS hasn't told me the actual exposure to Open Range, the bankruptcy filing lists only $73M due, far less than the initial $267M approved. (Via Paul Kapustka,)
Last Updated on Wednesday, 28 March 2012 13:49