FCC Mulling Reform of Rural Phone Subsidies

WASHINGTON — Three years after opening the door to greater phone competition in cities, federal regulators are considering whether to do the same thing in rural areas, where experts say it costs more to provide phone service.

Several recent analyses--and a few rural phone company executives--suggest the rural phone industry is much healthier due to falling equipment prices and other efficiencies and may no longer need as big a share of the billions of dollars in subsidies it receives from federal and state governments.

One report, issued in May by the investment house Legg Mason Wood Walker Inc., claims that rural companies are more profitable than their urban counterparts and are viewed by some as attractive investments.

Last month, for instance, US West sold a collection of rural phone properties in Colorado and eight other states to Citizens Utilities for $1.65 billion in cash. And El Paso Telephone, which for nearly a century remained a closely held family business with about 2,000 phone lines, was sold to a Charlotte, N.C., investment firm earlier this year for an undisclosed amount.

Rural phone companies “have distinctive mixes of revenue and costs supporting higher revenue per line and superior margins, as well as relatively little competition and a favorable regulatory environment,” said the Legg Mason analysis, written by Michael J. Balhoff.

Paul Shultz, director of communications for National Telephone Cooperative Assn. in Arlington, Va., said of the Legg Mason study: “They are probably right; some rural phone companies probably are a good buy.”

Of course, it remains far more expensive to string telephone wire in sparsely populated areas than it does in urban neighborhoods, where new facilities are often built pre-wired for telephones and other communications services.

Edwin B. Parker, a Gleneden Beach, Ore., telephone consultant, has estimated that removing federal subsidies for rural telephone carriers could nearly double the rural residents’ average monthly phone bill to $74.53 from $43.20.

The Federal Communications Commission later this year could alter that arithmetic as the agency moves to fulfill a congressional mandate to overhaul telephone subsidies.

The commission was ordered by Congress in 1996 to make the more than $20 billion in annual telephone subsidies explicit, rather than buried in phone companies’ accounting statements. As part of that effort, the FCC has been analyzing the true cost of providing phone service--an effort that has already caused some long-distance carriers to add new phone charges that have boosted consumers’ monthly bills by a dollar or more.

Throughout this process, rural phone customers have been spared the turmoil gripping the rest of the recently deregulated local phone markets. Big carriers have focused most of their attention on lucrative urban areas, where businesses are concentrated, and have spurned the more difficult to serve rural markets.

Under federal law, anyone seeking to compete against rural phone companies serving 50,000 or fewer customers must go through a lengthy hearing process to determine if their entry into the rural market is in the public interest.

But now, some rural markets are seeing signs of competition as rural carriers branch out into long-distance, cable TV and other lucrative communications services that the bigger regional Bell telephone companies are restricted from offering under federal law.

Green Hills Telephone in Breckenridge, Mo., which serves about 3,600 phone customers in the region, has managed to capture 75% of the telephone subscribers in a nearby town served by Sprint. It accomplished the feat by underpricing its bigger rival and offering a one-stop package that includes cable TV, Internet access and local and long-distance telephone service.

“‘We have been doing pretty well by offering slightly lower prices and better service,” said James Simon, general manager of the company.

Experts are uncertain how such success stories might affect the FCC’s reform of rural telephone subsidies. But a Washington communications lawyer, who has followed the issue closely, said technology and rural markets are developing so rapidly that some dramatic change is inevitable.

“I don’t think anybody even knows where all the [subsidy] money flows now,” said the lawyer, who represents a telephone trade group. “We do want people on the farms in Wyoming to have affordable phone service. But there is likely to be some adjustment in the amount” consumers will pay.

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Times staff writer Jube Shiver Jr. can be reached at [email protected].