Policy issues key to small telco financial, competitive health

The year 2009 was a challenging one for small U.S. telcos, as results of the latest Telergee Alliance Benchmarking Study, which we reported on recently, reveals. As I reviewed the study of small telco financial issues, which the authors were kind enough to share with me, I was also struck by how the data underscores the importance of a number of policy issues that are critical to small telcos.

Rate of Return regulation

For starters, the report challenges the notion that rate of return regulation gives small rural telcos some sort of cushy existence. One of the most eye-opening findings of the report was that on average, small telco operating margins comprised just 10.3% of their average revenues for 2009. This was driven by a decrease in operating margins of 17.3% on the regulated side of the business, where 2009 operating margins averaged 10.2%.

The idea behind the ROR system is to help ensure that small rural carriers earn a specific profit margin, with interstate access revenues distributed to carriers on that basis. The target number is higher than 10.2%. But as Chad Duval, a principal with accounting firm Moss Adams, told me recently the interstate access charge system has failed to collect sufficient dollars to meet funding requirements for the last several years.

That occurred, in part, because fewer and fewer people are using landline voice service and, in part, because some carriers have avoided paying access charges by omitting certain information from call detail records or by routing long-distance traffic over local trunks. That’s a loophole small telcos have been trying to get policymakers to address for several years. As Frontier CEO Maggie Wilderotter told Connected Planet recently, “Some people call it phantom traffic—we call it fraud.”

The National Broadband Plan

The FCC’s National Broadband Plan suggests revamping the access charge system to more accurately reflect the costs of terminating calls and eliminating ROR regulation, which the plan crafters say offers small telcos no incentive to operate more efficiently. Small telcos oppose eliminating the ROR system, arguing essentially that the current system is not broken, so there’s no need to fix it.

Considering that the regulated part of telcos’ business is declining as voice subscribership declines, and considering that’s the part of the business where ROR comes into play, the possibility that ROR might be eliminated might not seem to be such a big deal. But some of the costs of building and maintaining broadband networks are shared with the regulated side of the business, helping to enable carriers to earn a reasonable return on those expenses. The majority of small telcos have been able to deploy broadband thanks, in no small part, to the ROR system.

Small telcos also are concerned that the National Broadband Plan provides few specifics about how an alternative approach would work. The plan crafters said in the plan that they realized small telcos would need to get some of the money they currently get from access charges from somewhere else, but they didn’t say where.

Small telcos are open to the idea of revamping the access charge program, but they’d like to see that happen without eliminating ROR regulation—a goal Duval said the Missoula Plan proposed a few years ago but never adopted might have addressed.

Stay tuned

In our next Independent commentary, we’ll look at some other policy issues—including broadband universal service and wireless data roaming and handset exclusivity—in light of the Telergee research.