Posted on: Sunday, May 27, 2007 Three phone companies rake in subsidies StoryChat: Comment on this story By Sean Hao

Advertiser Staff Writer The tax you pay on your long-distance phone bill  $2 or more a month  is resulting in a major income boost for three Hawai'i phone operators. Since 1998, Sandwich Isles Communications Inc. has been collecting $765 a month per customer for providing phone service to residents of Hawaiian Home Lands. Now two cell-phone companies  Sprint Nextel Corp. and Mobi PCS  have gotten in on the deal. Nextel and Mobi also get $765 a month per customer for extending their cell-phone service to Hawaiian Home Lands. By September, the three companies will have received a combined $132 million in subsidies for servicing less than 3,500 residences. The generous subsidies come from the Universal Service Fund, a federal program initially designed to ensure that phone companies would extend landlines to customers in high-cost rural areas. Later, the program was amended to allow cell-phone companies to collect the same subsidy as landline companies. In Hawai'i, the program provides phone service to those living on Hawaiian Home Lands, the 200,000 acres of property formerly owned by the Hawaiian monarchs, which is set aside for use by eligible Hawaiians. The national program is coming under increasing criticism as wasteful and inefficient, and the federal government is looking at ways to bring the subsidies under tighter control. The high-priced services in areas such as Hawai'i also lead to higher taxes for all long-distance users. "This was a good idea that's gone terribly bad," said Mac Haddow, chairman of the policy advisory council for The Seniors Coalition, a Fairfax, Va.-based advocate for Universal Service Fund reforms. The $765 per month subsidy for each qualifying rural phone line in Hawai'i is 36 times higher than the average national rural phone line subsidy, and the costliest subsidy in the nation. The phone companies say they provide a valuable service in underserved areas, and at least one said there is no evidence of a windfall from the subsidies. Still the mounting costs of the subsidies  especially those going to cell-phone companies  are driving a push to reform the program. Earlier this month, a Federal-State Joint Board on Universal Service recommended the Federal Communications Commission, which oversees the program, take immediate action to rein in explosive growth in high-cost universal service fund reimbursements. "Changes in technology and increases in the number of carriers who are receiving universal service support have ballooned, placing significant pressure on the stability of the fund," FCC Chairman Kevin Martin said during a February speech in Washington, D.C. "The current trajectory is unsustainable." Nationwide fund payments to the new companies serving rural areas  known as competitive eligible telecommunications carriers  soared from $16.9 million in 2001 to an estimated $1 billion last year, according to the FCC. SUBSIDY COSTS TO GO UP The cost of subsidizing phone service in Hawai'i is expected to climb further this year following a February decision by state regulators to allow Mobi, a Honolulu-based wireless phone company, to receive subsidies. Mobi will now compete for customers with Reston, Va.-based Sprint Nextel Corp. and Sandwich Isles. Instead of getting reimbursed based on actual costs, Sprint and Mobi are reimbursed based on the costs of Sandwich Isles. Sandwich Isles is installing the country's most expensive tele-communications network, burying fiber cable to connect homes on Hawaiian Home Lands on the Big Island, O'ahu, Maui, Moloka'i, Lana'i and Kaua'i. Reforms being considered for the subsidy program include an immediate emergency cap on the support that cell-phone companies receive. Another alternative is to reimburse cell-phone companies based on their actual costs, rather than on the costs of wire-line companies. Other options being considered include the use of reverse auctions in which companies would submit competing bids to become eligible for reimbursements. "We're looking at all these proposals through a lens: is the proposal competitively neutral and technologically neutral," said Sprint spokesman John Taylor. "We do not believe that our company, because we are a wireless service, should be treated any different" than the wire-line phone service. Gil Tam, Sandwich Isles vice president, referred questions about the reforms to the Organization for the Promotion and Advancement of Small Telecommunications Companies, which lobbies on behalf of rural phone companies such as Sandwich Isles. Stuart Polikoff, director of government relations for the trade group, blamed wireless companies for taking advantage of the fund. "The problem is the wireless carriers are able to get support based on the unrelated costs of the wire-line company," he said. "It's a windfall, and that's why they go after it. It's a pot of money. That's the crux of the problem, and that is what needs to be reformed." DISPUTING 'WINDFALL' Sprint's Taylor said there is no proof that wireless companies are making a windfall. "There's no way for you to know what's costing what and whether the costs of the incumbent (wire-line phone company) are significantly higher or lower than the wireless companies," he said. "In some areas the costs may be higher and in some areas it may be lower." Mobi PCS President and Chief Executive Bill Jarvis said he had no opinion on Universal Service Fund reform proposals. However, Jarvis pointed out that wireless companies and their customers put more money into the fund than they take out in the form of reimbursements. "I'll leave it to the government to decide where they ought to go with this program," he said. "We do feel we're offering a very valuable service." The subsidies are in part a result of the way companies are compensated for providing service. Under the Universal Service Fund, companies are guaranteed an 11.5 percent return on network expenses and face little scrutiny over how they spend money, according to critics. In addition, neither the state Public Utilities Commission nor the Universal Service Administrative Co., a nonprofit corporation that administers the fund nationwide, has audited Sandwich Isles. And nearly all financial information, construction spending plans and other documents filed by Sandwich Isles, Nextel and Mobi to the state PUC are not available to the public. "It really gives incentives for these local carriers to be very, very inefficient," said the Seniors Coalition's Haddow. "The solution has to come where we force them to be competitive in a bidding process. "The pigs are getting fat. Somebody is going to have to put them on a diet." Money in the Universal Service Fund comes from an 11.7 percent fee on interstate phone bills paid by Hawaiian Telcom, the state's main landline phone provider, and a higher rate for wireless customers. Hawai'i wire-line customers pay about $2 per phone per month. In an attempt to stabilize the fund the FCC last year made Internet-based phone calls subject to USF fees and raised fees on wireless calls. In 2005, Hawai'i phone users paid $28 million into the fund, which was up from $25 million in 2004, according to the FCC. During the same period, USF reimbursements to local companies such as Sandwich Isles and Sprint rose from $12 million to $27 million. Reach Sean Hao at shao@honoluluadvertiser.com.      





