Rural Telcos Worry that USF Reform Points to Consolidation

The “dynamic” rural market may inevitably result in mergers or acquisitions, but rural carriers are still worried that the FCC will push them into consolidation, said NTCA Policy Director Josh Seidemann. “I think the FCC certainly indicated their view that there could be benefits to consolidation,” he said. “This is an aspect of the industry, however, that should be left to market forces and the market forces will determine what works best for a particular carrier or for particular carriers.” Parts of the rulemaking notice ask about whether companies ought to share switching support, Seidemann said. Some rural telecom officials read that as an indication that their operations ought to be merged, he said.

There have been other indications that reform points toward M&A. After listening to an Iowa regulator talk at an FCC workshop on the pending reforms about the difficulties in regulating the 140-some telcos in her state, AT&T Vice President Bob Quinn asked aloud whether “we really need” so many small telcos in Iowa. FCC staffers have made similar statements in ex parte meetings, a rural telecom official told us. Blair Levin made clear in a number of public speeches that he thinks the entire rate-of-return regime should be rethought (CD Jan 25 p9). Levin led the team that wrote the National Broadband Plan, from which many of the pending USF reform proposals have come.

Rural consolidation is already underway, Vermont regulator John Burke told us. Shoreham, a Vermont telco, is about to be acquired by Otelco, a wireline provider that works in Maine, Massachusetts and New Hampshire, he said. He said he would expect M&A to increase if the incumbent-backed ABC plan is adopted by the FCC. The cost models in the plan simply make it too hard for small, rural carriers to operate, Burke said. That would be a disaster for rural economies, Federal/State USF Joint Board Chairman James Cawley said. “Small, independent telcos are part and parcel of the business and social fabric of rural communities.”

Anxiety over a shrinking market has become “a new angle in the USF battle” but it’s not clear that consolidation is a direct consequence of pending reforms, MF Global analyst Paul Gallant said. “Financial buyers of rural telcos raise certain issues for regulators, but one rural telco buying another shouldn’t have much effect on consumers,” he said. “So I don’t think rural consolidation is per se good or bad from a public policy perspective.” If consolidation follows from the pending reforms, it’s probably an unintended consequence, Gallant said: “The commission’s goal is expanding broadband by rationalizing a fairly irrational system of subsidies. One consequence might be some rural consolidation, but I doubt that’s what’s driving the commission.”

In the meantime, rural telcos ought to be “looking at each other” to see if they can maximize efficiencies - with or without M&A, John Staurulakis Inc. Senior Vice President Steve Meltzer said. “Our position is that the FCC should not force these companies to consolidate,” said the consultant to small and mid-size telcos. “However, there are certain services where they can gain economies of scale.” Companies can theoretically pool resources for help desks, engineering and billing to cut costs, Meltzer said.

Meanwhile, a group of Missouri rural telcos released a study Wednesday claiming that USF is central to the state’s rural economy. Without USF support, economic output would drop by $604 million over five years, 3,500 jobs would be lost either directly or indirectly, wages would decline by more than $162 million and federal tax revenues would fall by $36.4 million, the study claimed.