Small Iowa telephone companies face prospect of funding losses

Some of Iowa's old-line local phone companies say they are stuck in limbo while the Federal Communications Commission plans an overhaul of the Universal Service fund to bridge the "digital divide." .

The phone companies fear a drastic cut in revenue from the federal Universal Service fund, a surcharge on phone bills that is used to mainly to subsidize service mainly to remote rural areas and low-income households, and a cut in the access charges large carriers pay to terminate calls on the local phone companies' networks.

The FCC filed a proposal in February 2011 for its Connect America Fund plan to provide resources to improve broadband, or high-speed Internet service, in underserved parts of the country. The plan could mean reallocating some or all of the funds rural phone companies have long used to serve households in harder-to-serve rural areas, with fewer customers per mile of line.

A comment period on the proposal ends Wednesday. Facing steep cutbacks or the loss of the two revenue streams has left the telephone companies that serve Iowa's rural communities with a delimna , said Curtis Eldred, board president of the Rural Iowa Independent Telephone Association. He said the money may not be there for planned improvements to rural telephone networks, and they may have to raise rates or reduce service quality.

"The investment in the network isn't going to happen because we can't see if there is going to be a return, said Eldred, manager of the Clarence Telephone Co., which serves just under 1,000 households. "And the return wasn't that great to start out with."

The telephone companies are concerned that their only recourse will be to raise customers' monthly rates and cut expenditures, potentially lowering service quality. They expect the Connect America Fund to mainly benefit cell phone companies that provide broadband service, although not at the high data rates of fiber optic connections.

The cell phone companies don't have the same legal obligations that rural telephone companies are under to serve all of the households and businesses in their service territories, Eldred said.

Joe Hrdlick of the Iowa Telecommunications Association says the state's telephone companies have joined together in a campaign called "The Great Disconnect" to publicize their worries with the plan.

"It doesn't look favorable for the rural folks," said Hrdlicka, director of government relations. "It doesn't look favorable for most of the State of Iowa."

Eldred said many rural phone companies offer wireless services and provide back-haul connections to cell towers. They have a hard time competing in the broadband space with the big carriers, however, because they lack the licensed radio frequency

Iowa has about 154 independent telephone companies, including municipal phone companies, privately owned phone companies, and telephone cooperatives. Eldred said the phone companies were often established over a century ago in the small towns that "Ma Bell" didn't want to serve by local individuals who wanted their communities to share in the promise of telephone service.

The number of independent telephone companies in the state has declined from over 700 to 154, but is still larger than any other state in the nation, Hrdlicka said.

Many of the rural phone companies have taken out loans through federal agencies to provide broadband services, Hrdlicka said, and are concerned that the loss of revenue from interconnect fees and Universal Service will leave them without the means to repay them.

No other competitors have stepped forward in the small towns to offer some of the services like cable TV and Internet service that the small companies are providing, Eldred said.

"I think the FCC has a hard time comprehending our unique situation in Iowa," he added.

About 500 Iowans filled out letters expressing concern to the FCC at the request of telephone companies during the Iowa State Fair, Hrdlicka said.

The telecommunications industry will have until August 30 to reply to comments submitted on the Connect America program, Hrdlicka said. A FCC decision is expected in October or November.