To what extent should the state subsidize communication services for those who live in the most rural areas of Maine?

A rate case before the Maine Public Utilities Commission is raising that question among policy makers and forcing a debate that could pit the utility rights of those living in densely populated regions against those in rural areas. The question has far-reaching implications, as any subsidy would result in higher telephone bills for all Maine residents. It’s a debate drawing national attention, and it slashes right to the heart of Maine’s identity as a rural state, says Tim Schneider, Maine’s public advocate.

While the state doesn’t guarantee a natural gas line to every home or cellular service for every resident, it does guarantee access to basic local landline telephone service. The mandate – known as universal service in general and Provider of Last Resort service in Maine – has been around since the 1930s.

But much has changed since the 1930s. While the monopolies of Ma Bell once dominated the telecommunications industry, deregulation introduced competition and free market forces. Cellphones are ubiquitous. People can make phone calls via satellite and Skype. The number of customers paying for a landline continues to fall, according to data from the Federal Communications Commission.

These changes mean the telecommunication companies mandated to provide basic service – known as Incumbent Local Exchange Carriers, or ILECs in telecom lingo – are finding it harder to justify the cost of maintaining sprawling networks without hefty state subsidies.

To wit: FairPoint Communications, the North Carolina-based company that is Maine’s largest incumbent carrier, is asking the Maine Public Utilities Commission for a $67 million subsidy from the Maine Universal Service Fund. The company claims it needs the money to stay solvent as it struggles to meet its basic service mandate.

FairPoint claims it has 29,000 customers receiving basic service, and says those customers are spread throughout the state.

If the company receives the subsidy, everyone in the state who pays a phone bill – be it a landline, a cellphone or even an Internet phone service like Vonage – would see their monthly bill increase by several dollars. That’s because everyone contributes to the Maine Universal Service Fund, which collects roughly $8.3 million a year. Those funds are used to support Maine’s small rural telephone companies, such as OTT Communications and Oxford Networks. FairPoint, like its predecessor Verizon, has never received nor requested money from the Maine Universal Service Fund until now.

HIGHER PHONE BILLS FOR EVERYONE

FairPoint’s request would boost the annual amount collected from Mainers for the universal service fund from $8.3 million to roughly $75 million. For a Maine resident paying $75 a month for cellphone service, that would add $5 per month to his or her bill. For a landline customer, the increase would be about $3 per month, according to estimates from the Maine Office of the Public Advocate.

Schneider, Maine’s public advocate, says the rate case lays bare the implications of that longstanding policy of providing universal service, and believes it could lead the public to question whether it’s worth subsidizing basic telephone service in the age of cellphones and the Internet.

“What you’re really doing is subsidizing people who live in the sticks. If you chose to live out there, everyone has to subsidize (your telephone service),” Schneider says. “Why are we paying you to live in a place remote from everyone else? What are we doing here?”

Those are questions that will be raised by the public, policy makers and regulators as the Legislature tackles this issue and the FairPoint case works its way through the PUC, Schneider says. Because Maine is one of the first states to address this debate, its decisions will be scrutinized nationally.

“A lot of folks around the country are watching this case with great interest because it does put a spotlight on the issue of how much value and what’s the cost of being a provider or carrier of last resort,” says Michael Romano, senior vice president of policy at NTCA – The Rural Broadband Association. “That’s one important piece of the puzzle. The other is how do you update the universal service mechanism for a broadband-enabled world?”

CHANGING TIMES

For nearly 100 years, telephone service was provided by monopolies, which were obligated to provide service to everybody within their geographic territory. Providing service to someone at the end of a dirt road in a tiny village costs more than to someone in the middle of a city, but regulators wanted everyone to pay the same rate. To do that, costs were spread around. Low-cost customers in profitable urban areas subsidized service for high-cost customers in rural areas. And regulators set higher rates for business customers to subsidize service for residential customers. By integrating these practices into the regulatory framework, these subsidies were largely hidden from the average telephone customer.

But now all that has changed.

Maine deregulated its telecommunications industry in 2012. FairPoint no longer has a geographic monopoly on telephone service and is able to set its own rates (except for its basic service, the only element still regulated by the PUC, which is currently set at $14.69, though the company wants permission for a $2 increase). Companies such as Comcast and AT&T can compete for customers wherever it makes economic sense, but are not required to serve the hinterlands.

The competition means FairPoint has lost some of its lucrative urban customers. In addition, Internet-based phone service and cellphones have also cut into the number of FairPoint’s landline customers, which fell 30 percent from 2008 to 2012, from roughly 411,000 access lines to fewer than 290,000, according to PUC data.

“The only thing that’s changed is the reasonableness of one provider in a fully competitive environment being required to maintain (basic service) when no one else does,” says Mike Reed, FairPoint’s president in Maine. “That’s what’s broken … and nobody broke it. It’s just competition. No one did anything wrong. It’s evolution. Regulation hasn’t necessarily kept up with the evolution of competition, but that’s across the country. No one’s to blame for that.”

Schneider confirms that FairPoint has lost many of its customers who were the cheapest to serve and the most profitable to competitors. However, he says, there is debate over whether the company lost customers to deregulation and the competition it unleashed, or to problems with phone service during the transition from Verizon.

“There are a lot of frustrated customers out there,” Schneider says.

IT TAKES A NETWORK

It’s been five years since FairPoint acquired Verizon’s landline business in Maine, New Hampshire and Vermont for $2.3 billion. In that time, the company has filed for and emerged from bankruptcy but also invested more than $700 million in its network in those three states, Reed says. In Maine, he says, the company recently met its final merger obligation – to upgrade its network to ensure that 87 percent of its customers have broadband Internet access.

These changes raise questions about how the money in the Maine Universal Service Fund should be spent. State Rep. Barry Hobbins, a Democrat from Saco and co-chairman of the Legislature’s utilities and energy committee, does not think it’s good public policy to subsidize FairPoint, at least to the extent requested.

“Maine cannot continue to invest in old technology,” he says. “It needs to modify its policies to ensure the technologies of the future are used. That’s one of the issues that went along with the original decision to deregulate.”

Hobbins also worries that the subsidy will flow out of Maine to FairPoint’s investors rather than be used to support Maine’s network.

He sponsored a bill that pushes the pause button on FairPoint’s rate case and allows the next Legislature to weigh in on how basic service subsidies should be allocated. Gov. Paul LePage vetoed the bill, L.D. 1479, but the Legislature overturned that veto Thursday. While the PUC originally said it expected to make a decision on FairPoint’s subsidy request by late summer, it now says the decision won’t be made until at least mid-2015.

The bill requires the PUC to submit a report to the Legislature by January 2015 with answers to questions such as: Can the state ensure universal access to telephone service without maintaining the basic service mandate? What areas of the state are the most uneconomical for FairPoint to serve, and therefore the most at risk if FairPoint receives limited or no financial subsidy? Could the basic service mandate be amended so other types of service providers fulfill that function?

“With this particular information the next Legislature would be able to make some prudent decisions next year regarding (basic) service … rather than flying blind,” Hobbins says.

In the work sessions on that bill, alternatives were discussed, including adopting a broader definition of universal service that refers to connectivity rather than basic telephone service. The point was made that it would be cheaper for the state to provide satellite phones to people in hard-to-reach places than to give FairPoint $67 million in subsidies.

Those arguments miss the point, says Ben Sanborn, executive director of the Telephone Association of Maine, which represents FairPoint and Maine’s other traditional telephone companies. He says the issue is about far more than just telephone service, because the network that FairPoint and other local telephone companies are required to maintain carries much more than telephone calls. It’s the same network that provides broadband Internet access to many parts of rural Maine.

“The subsidy is not for a customer; it’s for a network,” Sanborn says. “And if the support is not available and instead goes to satellite phones, then there will be no wires in those parts of the state where it’s only FairPoint or other TAM members because it doesn’t make economic sense for anyone to come in and provide service.”

While FairPoint claims its 29,000 basic service customers are spread throughout the state, it’s those customers in areas without competitive options that Schneider and others worry would fall through the cracks without a universal service mandate. Competitive telecommunication service providers serve the vast majority of the state, but five percent of Maine ZIP codes had only a single incumbent carrier as of June 2012, while 29 percent of the ZIP codes had 10 or more competitive providers, according to the FCC.

Implicit in FairPoint’s rate case is the threat that if it doesn’t get a subsidy, it could pull back in those areas where it’s losing money and leave people without service.

“I hope the Legislature will think about these larger policy implications,” Schneider says. “Like any big change, the people who are hurt the most are the most vulnerable.”

THE FUTURE OF BROADBAND ACCESS

It’s impossible to talk about FairPoint’s network, and its costs, without also discussing the implications for rural broadband expansion. FairPoint is required to lease its network to other companies, including competitors, to do things such as carry cellphone calls between cell towers. Critics may be unwilling to subsidize FairPoint’s basic service given the shrinking number of landline customers, but the importance of maintaining the network is not lost on anyone.

“No one in this case has argued that FairPoint’s network is not required,” Schneider says.

No one can say what the future will look like, but there are some safe assumptions.

“Most people agree that at one point in the future the public telephone network is going away,” Schneider says. “So the question is really how to manage that transition.”

David Littell, one of the PUC’s three commissioners considering the FairPoint rate case, expects a tough debate ahead.

“We need to think hard about the type of universal service the state of Maine should be providing 10 years out and 20 years out,” Littell said. “Is it going to look like telephone lines to every house or look like broadband to every house carrying telephone with it?”

Would he support a change that would have the Maine Universal Service Fund support broadband expansion – something the Federal Communications Commission has already begun with the Connect America Fund – rather than telephone service? That’s a decision for policy makers, he says.

“If there’s a desire by policy makers to advance broadband in rural Maine through universal service funding, that is a decision the Legislature would have to make,” Littell says.

Littell’s worry about granting FairPoint’s request for the subsidy is that there’s no end in sight, and that the next subsidy request will only be bigger.

“A system that’s subsidizes a business whose profitability is decreasing will only require an increasingly larger subsidy over time, and that’s an issue the commission needs to look at closely,” Littell says.

The Maine PUC has tackled this question in the past. In 2012, at the direction of the Legislature, the PUC questioned stakeholders to determine if consensus could be found on how to establish rates and the amount of subsidies for providing basic service. The PUC didn’t find consensus, but it did lay out a process to address those questions, which provided the framework for the discussion before the PUC now.

Reed realizes the public relations challenges the company’s rate case creates.

“I am the guy who did not want to file a Chapter 120 (rate case) … because you can’t sit down and have an hourlong discussion with every one of your customers to explain the network, the Fort Kents of the world and how this whole thing happened,” Reed says. “Here’s why I did it: Because I had absolutely no other avenue in front of me. It is the avenue put there by the PUC and approved by the Legislature.”

In the end, the public’s perception of whether and to what extent the state should subsidize traditional telephone service will play a role, says Hanns Kuttner, a senior fellow at the Hudson Institute who has studied the evolution of the telecom industry.

“This is a test of how much love people in Portland have for people in Aroostook County,” Kuttner says. “If it’s a sense of ‘we’re all Mainers and we’re all in this together,’ then they’ll pay. If there’s pushback, I think there’s some people with beautiful views who will be without the ability to pick up a phone and tell someone about it, or post it on Instagram or share that view with the world.”

Whit Richardson can be contacted at 791-6463 or at:

wrichardson@pressherald.com

Twitter: @whit_richardson

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