Misconceptions about Independent Local Exchange Companies (ILECs) in Kansas
Todd Houseman, United Telephone Assoc., Inc.
January 11, 2017
I would like to thank Chairman Olson and the rest of the Senate Utility Committee members for giving us this opportunity to speak with you all about the great companies we proudly serve. And, to have the chance to share our thoughts and clarify our positions as they relate to our unique place in this exciting and ever-changing industry that is so important to Kansas.
My name is Todd Houseman, I am the General Manager and CEO for United Telephone Association, Inc. (UTA) and its related companies. I am also the current President of SITA – State independent Telephone Association of Kansas. Headquartered in Dodge City, United Telephone Assoc. has been providing regulated telephone services to 10 rural exchanges in southwest Kansas since the early 1950’s (Cimarron, Ingalls, Copeland, Montezuma, Ensign, Ford, Ashland, Englewood, Spearville and Hanston). As a non-profit member owned cooperative, we have a Board of Trustees that is elected by the members to oversee the business of the association and, in turn, to look out for the best interests of the membership as it relates to providing for their communications needs.
In 1979, a separate company/member owned cooperative, United Communications Association, Inc. (UCA), was formed to handle the “non-regulated” lines of business that were coming into play at that time. Inside wire maintenance and long distance/toll services were the early efforts. But now, Cable TV, Business Phone/Interconnect Systems, Competitive Local Exchange Carrier (CLEC), and internet services dominate UCA’s endeavors. UCA has its own membership, based on being a customer of these competitive services, but it shares the Board, management and employees with those of UTA.
About 11 years ago, United Wireless Communications, Inc. (UWC) was established to bring improved cellular service to southwest Kansans. United Wireless is a for-profit company and is a wholly owned subsidiary of UTA – again sharing Board, management and employees with UTA. United Telephone Assoc. was a founding member of Kansas Cellular in the late 1990’s, and after its sale to Alltel (and eventually to Verizon Wireless), it was determined that there was still an ongoing need to build a wireless company that would focus on the rural areas of our service territory – where our members both live and work.
As we were discussing our approach to this meeting, it was determined that I would focus on various misconceptions/inaccuracies that are out there in relation to the ILEC (Independent Local Exchange Carrier) world. We are a small segment of a very large telecommunications industry that is dominated by the “Big Guys”. We have historically been the carrier who was willing to serve an area that was at some point in time, and is generally still, overlooked by the large companies. Our members, or our founding families, took it upon themselves to start, and then keep afloat, a company that faced huge obstacles from the very start. One of the obstacles that have always been present is a lack of understanding as to who we are and why we are even in existence. I hope my narrative about the United companies, and those of my colleagues about their respective companies, went a long way toward enhancing your understanding about those reasons. I will spend the balance of my time answering some other questions and statements that we often hear from “Big” Telephone, “Big” Wireless, “Big” Cable and even the regulators of our industry (Federal and State). After that, Kelly, Jeff, Archie and I would be happy to answer any remaining questions you might have for us.
Why support the ILEC’s, isn’t everyone getting rid of their landline anyway?
While our industry has indeed experienced some level of decline in demand for our fixed-line services, that trend is slowing down and is thought to be reaching its point of equilibrium. Almost all of the businesses that we serve in our markets continue to demand access to the security and reliability of a fixed- line service. Also, that security and reliability is important to another large portion of our membership – those households with elderly inhabitants and/or young children.
Plus, as the demand for data continues to grow exponentially, a well engineered fixed line network is an indispensible piece of the total solution bundle. And other communication services will still be delivered over a fixed-line (VoIP, e-mail, video conferencing, etc.) United Telephone had a residential customer consume over 3 terabytes of data last month (3,000 Gigabytes). Any service other than a fixed-line would struggle to provide this amount of bandwidth. And, with even higher definition video (4k, etc.) becoming mainstream, this trend will continue.
Why is broadband service so slow (if it is even available) in rural Kansas?
While this is certainly the case in many rural areas of Kansas, it is generally not the case for rural areas served by ILECs. Rate of return regulation and the access to Universal Service Funds has incented and enabled ILECs to take much better care of their rural based customers.
How come the independent rural operators get to use their USF/KUSF money to compete against unregulated operators in competitive markets?
While this topic has been covered a lot in the past, it still remains an area of frustration within our industry. Jeff spoke to it again in his earlier presentation on the regulatory aspects of our business. USF is not a grant, it is not free money. USF dollars, in a rate of return regulation system, have to be earned by building something, or incurring certain types of expenses, under strict guidelines and oversight. Many times they are spent to repay the loans that were used for the construction of the facilities. Other times they might be used to replenish general funds and then used for any number of purposes or activities.
Isn’t the USF/KUSF programs merely “corporate welfare” and rife with rampant fraud, waste and abuse? I hear they are receiving USF based on their non- regulated plant and expenses!
As discussed before, Universal Service Funds are not “welfare” and not passed out on a “willy-nilly” basis. On the federal side, the FCC, NECA and USAC all play their respective role in determining who can receive funds and how much they qualify for based on information provided on various certified forms and filings. In Kansas, the KCC is charged with carrying out the will of the legislature as it relates to disbursing KUSF funds. There have been a number of audits of both the USF programs in general and the disbursements to companies in particular that have shown that the programs are well run and effectively managed. In the last few years, United Telephone has had 1 KUSF audit done by the KCC staff and their consultants and 2 audits on FUSF performed by USAC and their independent audit firms. NECA has also audited our pooling and reporting activities twice in that time frame. Each of these included a review of our cost allocation procedures and non-regulated accounting practices. Also, each year we hire an independent firm to audit our books and ensure to our members, and other stakeholders, that we are in fact operating our companies in a prudent and lawful manner.
Are the rural areas the ILECs are trying to serve even worth worrying about? The towns they serve are slowly dying and becoming irrelevant.
We sure feel that they are worth worrying about. And we are doing everything in our power to see that from a communication services standpoint these communities have access to quality services at affordable rates. If they do ultimately become ghost towns, it won’t be because of a lack of quality telecommunications. And we hope that having state-of-the –art services available, we can turn that into something that has a chance to revitalize these important communities by attracting people and new business.
Why don’t we just let the “Big” wireless guys do it all? Isn’t that approach more cost effective? Their map shows Kansas is already completely covered.
Well, the short answer here is that they can’t – or more accurately they won’t. It may look on their television commercials like they already have rural Kansas well covered, but they don’t. Ask any farmer or rancher or oil and gas professional or wind turbine crew about “Big” wireless rural coverage in rural southwest Kansas and you will hear a long list of problems and concerns. As I indicated earlier this is an area where United has focused a lot of attention. We have wireless equipment on over 105 towers in the 17 counties that make up our wireless service territory (in comparison we estimate that “Big” Wireless has only 50-65 in this same coverage area). Even with the 105 locations and a true member driven desire to provide truly great coverage, we still have gaps in coverage -you just can’t afford to build a ubiquitous wireless network. Wireless technology and rural coverage is a huge challenge. The cost of a land lease, the cost of the tower, the cost of the crew to erect it, the cost of the radios and antennas, the cost to install the equipment on the tower, the cost of the utilities, the cost of the back-up generator, the cost of the building to house the equipment on the ground, the cost to backhaul the traffic to the wireless switch, and the ongoing maintenance costs all total a number that makes it extremely difficult (if not outright impossible) to justify that cost in a rural setting with just a handful of customers to recover those costs. We have only been able to do what we have done with the help of USF funds that were targeted to help small wireless carriers. As those funds wind down (KUSF for CETC’s is set to run only through February 2018 and the Federal fund is set to expire sometime soon as well), it will be a true challenge for us to just maintain the wireless network we have built. I believe there is a role for all form of communication services delivery – Copper, Fiber, Coax, and Wireless. No one type can fit everyone’s needs in total.
Thank you again for this opportunity and I would be happy to answer any questions you might have for me.