Coalition To Keep America Connected.

Arlington, Va., September 8, 2006 -- The Coalition to Keep America Connected, an organization representing millions of rural telecommunications consumers, today applauded the release of a paper disputing the findings of a study on the federal universal service program. The paper, authored by two telecommunications industry experts, rebutted the flawed policy recommendations made by George Mason University Law Professor Thomas Hazlett in his June 2006 paper entitled Universal Service Telephone Subsidies: What Does $7 Billion Buy?, which was commissioned by the Seniors Coalition. According to the officials, Hazlett s proposals could undermine the Universal Service Fund s (USF) ability to finance infrastructure needed to deploy advanced telecommunications services in rural areas.

Jeffry Smith of GVNW Consulting and Michael Fox of RT Communications, questioned Hazlett s proposal to replace the USF with wireless and satellite phones, saying that without the underlying wireline network infrastructure used to carry wireless and satellite calls, neither technology would work. Current wireless and satellite phones require connections to landline infrastructure to provide full functionality. As substantial up-front investments are needed to build, maintain, and upgrade rural wireline networks, eliminating USF support for this infrastructure would render offering wireless and satellite services impossible.

Despite the protestations of some, rural wireline networks remain capital intensive, fixed cost businesses that require substantial investment to develop, operate and maintain at an acceptable level of service quality, Smith and Fox explain.

The experts also disputed the claim that rural incumbent local exchange carriers (ILECs) are responsible for growth in USF expenditures over the last five years. Rather, data shows that USF support for competitive eligible telecommunications carriers (CETCs) has increased by 235 percent and will total almost $1 billion by the end of 2006. According to Smith and Fox, 97 percent of CETCs are wireless carriers, each of which receives the same level of support as the ILEC serving its service area.

We need to discipline the CETC process, Smith and Fox say. If the FCC and other policymakers would require CETCs to be compensated based upon their own costs, and demonstrate that they are using this funding for improved service in rural areas, rural consumers would benefit greatly, and the Fund would not be experiencing the growth pressures it is today.

Smith and Fox also called the professor s misunderstanding of cost differences between urban and rural areas a major flaw in his study. The authors contend that different population densities and extreme distances make telecommunications infrastructure more costly to deploy in rural areas, compared to more dense urban areas. They also corrected the professor s misleading terminology, explaining that the USF is a cost-recovery mechanism, not a tax. The officials conclude that because the USF enables investments to be made in infrastructure needed to deploy the very wireless and satellite services Hazlett would replace it with, Hazlett s recommendations are unworkable.

To make blanket statements, assumptions and conclusions like these, without any backup or documentation to support such claims, seriously weakens the entire study, said Smith and Fox.

A copy of the report by Smith and Fox may be accessed here.