The National Cable & Telecommunications Association today issued a report that disputes claims made by the Rural Utilities Service about the impact of proposed Universal Service reforms.

The RUS argued that proposed reforms would lead to widespread defaults on more than $4.3 billion in telecommunications and broadband loans issued or guaranteed by the RUS. The study released today, which was commissioned by the NCTA and conducted by Navigant Economics, calls that scenario “very unlikely.”

In the report, titled “The Rural Utilities Service should reassess its reliance on Universal Service high-cost support to leverage broadband loans,” author Jeffrey Eisenach argues that “USF reform aims primarily at increasing the effectiveness of the program, not reducing overall subsidies” and “it is certain to be implemented gradually and with a reasonable transition period.” Accordingly, he argues that “particularly in cases where the investment for which the loan was made has already been completed and USF funding to the carrier has increased, default is not likely to be a problem.”

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Eisenach also argues that the RUS practice of counting USF subsidies as future revenue streams in evaluating loan requests creates “a vicious cycle in which firms borrow money from the RUS to make inefficient investments, receive higher USF payments in return and use the higher USF payments to justify still more loans for still more inefficient investments.”

Accordingly he calls for the RUS to “suspend new loans to recipients of USF funds or, at a minimum, stop leveraging USF support to qualify applicants for RUS loans.”

This is not the first time the NCTA has called for such a move. Back in May the association made a similar recommendation, asking the RUS to suspend broadband loans until it could reform program guidelines so that loans would only be made to areas where at least 75% of homes could not already get broadband.

The proposed reform aimed to address a common cable industry argument– that rural telcos have an unfair advantage because they are subsidized for providing service that duplicates what cable companies provide in the same area without subsidies. Rural telcos argue that the cable companies only serve population centers and not sparsely populated surrounding areas—a situation sometimes described as “the donut and the hole.”

The frontrunner USF reform proposal aims to address that concern by targeting USF support only for the outlying “donut” area and not the more populous “hole” where competition exists. Perhaps recognizing that, the report issued today avoids any discussion about the “donut” and “hole.”

But I suspect some rural telco readers will disagree with the new areas of concern highlighted in the report.

For example, an announcement of the report findings observes that 78 cents of every dollar borrowed through the RUS loan program is repaid using USF dollars, citing that as evidence of why the system is inefficient. But that observation doesn’t seem to recognize that the reason certain carriers rely so heavily on USF is that there is no business case for providing service in their areas without the funding.

Eisenach also questions why rural telcos’ investment in plant increased when the telcos were experiencing access line loss—not acknowledging that the increase in investment was likely used to deploy broadband with the goal of obtaining a new revenue source to make up for lost access line revenues.

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