Rural telephone companies sound warning over state lowering fees

Iowa’s local telephone and Internet service providers took a hard financial hit last year when the Iowa Utilities Board (IUB) issued a ruling forcing them to lower access rates charged to other companies using their phone lines. And now they say the loss of revenue could result in massive layoffs at some of rural Iowa’s largest employers.

The unanimous IUB decision has already cost independent telephone companies a combined $1 million a month since the decision was made, according to Dave Duncan, president of the Iowa Telecommunications Association (ITA). For some companies, it has meant a cut in revenue of 50 percent or more.

And a recent report compiled by Iowa’s telecommunications companies shows their cost of upkeep on the lines is higher than their rate of reimbursement, something they say the IUB promised they would take into consideration in order to set the rates.

Each time a long distance phone call is made to a resident in Iowa, the long distance provider pays the local telephone company an access charge, known as a tariff, to use their telephone lines. Local companies say revenue from the tariff is essential for them to maintain their networks.

But long distance providers disagree, saying that the original intent of the tariff was to help construct phone lines. Now that the infrastructure is in place, they argue, there’s not reason to continue charging for access.

The IUB agreed with long distance providers, and lowered access rates by nearly one third, from around nine cents per minute to six.

Because companies provide access for millions of minutes every year, those cents add up quickly, Duncan said.

Debra Lucht, general manager of Minburn Communications and member of the board of directors for the Rural Iowa Independent Telephone Association (RIITA), said her company in Woodward has seen its revenues cut in half.

“It has impacted our bottom line dramatically,” Lucht said. “From our perspective, there continues to be more and more regulated restraints which allow people to use our networks, but we’re not compensated for them.”

The debate

The answer to the question of whether the IUB’s decision did more harm than good depends on which side of the issue you’re on.

Local service providers say they’ve seen such a dramatic cut in revenue that they may be forced to lay off employees or put off needed upgrades to their infrastructure.

However, companies charged with paying those tariffs contend that Iowa’s access rates were higher than those of other states and the national rate. Access rates for interstate phone calls are set by the Federal Communications Commission (FCC). Individual states set their own rules for how to regulate access rates on calls within that state.

Sprint Nextel Corp. brought the case before the Iowa Utilities Board arguing that the rates within Iowa should be more in line with those set by the FCC.

Rural companies in Iowa were charging higher access rates to other businesses to subsidize artificially low phone rates for their local customers, said John Taylor, a spokesman for Sprint.

Sheila Navis, executive director of RIITA, said it makes sense to charge people in rural Iowa less for their local phone service, because they have fewer people they can call within that network. Customers in rural areas might only be able to speak with a couple hundred people without being charged long distance, where as in Des Moines, someone could talk to a few hundred thousand, she said.

Taylor said the access rates were originally established to help companies build telephone networks into rural areas. Now that those networks have been built, there is no reason for companies such as Sprint to continue paying access rates.

“It’s a complicated situation on the face of it, but really its quite simple to understand, the rural companies in Iowa have long since paid for the development of this infrastructure,” Taylor said. “There is no justification for maintaining the subsidy.”

Those associated with the local telephone companies contend that rural companies constructed and maintain the networks of telephone lines and fiber cables, and other companies should have to pay if they want to use that property.

“(You) don’t get to ride on somebody else’s most valuable asset for free,” Duncan said.

The value of competition

When the argument was heard before the Iowa Utilities Board two years ago, Sprint and other companies — including AT&T Inc. and Verizon Communications Inc. — argued that the high access rates in Iowa stifled competition.

At the time, the Office of Consumer Advocate (OCA), whose job it is to represent the public’s best interest in matters before the Board, agreed. In a brief presented to the IUB, the OCA urged regulators to take action that would “further the development of competition” and “eliminate any subsidies in price structures.”

The problem with the argument, says Navis, is that in rural Iowa, the competition simply doesn’t exist.

“The IUB has this concept that competition is good and with the expanded use of cell phones, there certainly has been a lot of competition,” Navis said. “Everything that they look at is always viewed from this competitive environment, but the reality is when you’re out in Griswald, Iowa, there’s not a lot of companies out there clamoring to deliver telecomm services to very rural customers.”

The companies that brought the suit also argued that lower access rates would allow them to lower their long distance rates for Iowa customers. It was a compelling argument, but one that Joe Gerot of the accounting firm Kiesling Associates says never came to fruition.

“The access rates charged to long distance carriers are one of their main expenses,” said Gerot, whose company provides accounting, consulting and tax services to communications companies in Iowa and other states across the country. “One would guess that if you reduce the expense, they would in turn pass some of that savings on in the terms of lower long distance rates, but in fact (companies) have increased long distance rates.”

Duncan said after the IUB made their decision in 2009, the ITA conducted a study of local company’s costs and found that the cost of providing access “significantly exceeded what the IUB was going to allow us to recover.”

Duncan said he presented the study do the IUB in January, but had not received any feedback.

Originally, the Board said they would reconsider if companies could should their costs, Duncan said.

“We prove our high costs of serving rural, sparsely populated areas and they basically said never mind,” he said.

The impact of lost revenue

“Companies are tightening their belts in terms of hiring capabilities,” Navis said. “I do know that some companies have had to lay off employees, too. It hasn’t been widespread to date, but over the next couple years it could be telling.”

Heath Mallory, the president of Western Iowa Telephone in Lawton and president of RIITA, said his company has lost $20,000 per month since the decision was made. But he warns that the impact to communities could reach beyond the telecommuncations services they provide..

“We’re easily the largest employer, besides the school,” Mallory said. “We contribute significantly, not only though taxes but through a wide variety of donations, through school events and church events. There could be a significant impact to Lawton and the 11 communities we serve.”

For many rural providers, one of the most frustrating challenges is making people recognize the important role they play for all Iowa customers, not just those in their networks.

“Customers would not be able to make cell phone calls without our landline networks,” Lucht said. “People don’t understand. Even when people go to use their debit card and they are purchasing gas at the gas pump, how do they think that transaction is made? It’s coming through our telephone network.”

Gerot agreed, saying it’s hard to find a local benefactor in the decision.

“In the final analysis, if your goal is to look out for Iowans, there doesn’t seem to be anyone,” he said. “Unless you own stock in AT&T, I don’t see how this has helped Iowans in any aspect.”