Audit of Kansas rural phone subsidies raises questions

? A recent audit of the Kansas Universal Service Fund found the program that subsidizes telephone service in many small towns and rural parts of the state is generally being run efficiently and effectively.

But it also noted the telecommunications industry has changed radically since the Kansas Universal Service Fund was established in the 1990s, and it suggested lawmakers should take a new look at the types of services taxpayers are now subsidizing.

“This includes broadband data and other unregulated services not contemplated in the State’s definition of universal service or in its definition of enhanced universal service,” the auditors said.

Sen. Marci Francisco, D-Lawrence, said broadband service today can even include services similar to cable television delivered through a telephone line, and she questioned whether that is a service taxpayers need to subsidize.

The Legislature’s Telecommunications Study Committee hired a private firm, QSI Consulting Inc., to conduct the audit. The special committee was established to study the program, along with a similar federal Universal Service Fund, and to make recommendations to the 2015 Legislature.

Sen. Mike Petersen, R-Wichita, who chairs the special committee, said the report was so large and detailed that committee members needed time to absorb the information before making any recommendations. But he did say the audit would be presented again during the 2015 session to the standing House and Senate utilities committees, which deal with the issue.

The Kansas Universal Service fund, or KUSF, was established in 1996, when widespread access to the Internet was in its infancy. It was intended to make sure that all areas of the state would have access to basic phone services such as dial tones for making local calls and 911 emergency service.

In addition, it was intended to help phone companies invest in the infrastructure needed to deliver broadband data service, which at the time was still being defined.

The revenue, which began at about $96 million a year, was important, especially for small rural phone companies, because LECs had been ordered to lower the fees they charge other phone companies for access onto their network for calls within the state.

But the revenues have dwindled over the years. In 2013, the tax brought in only about $46 million, largely because the state’s largest phone company, Southwestern Bell — now known as AT&T — was allowed to phase out its support.

AT&T’s participation in the fund officially ended in January. Today, the largest single recipient of funds is CenturyLink, a company formed out of four local exchange companies that were part of the former United Telephone Company of Kansas. CenturyLink receives $11 million to $13 million annually, the audit said.

The audit also broke down how much money each company gets on a per-line basis and found that one company, Zenda Telephone in south-central Kansas, received $1,521 per line in 2013, the largest of any of the 38 rural telephone companies receiving subsidies.

Gorham Communications, a small phone company west of Russell, received $1,435 per line last year.

The report also found that some companies are not necessarily using the funds to build infrastructure, contrary to the program’s intentions.

“In fact, the KUSF and capital expenditure data we analyzed demonstrates that at least seven carriers spent substantially less on capital improvements than they received in KUSF payments over the past five years,” the report said. “Moreover, when comparing combined state and federal USF payments to average capital expenditures for that same period, we determined that most companies do not invest more in plant and equipment than they receive in total support payments.”

The audit also found that in rural areas where companies are investing in new infrastructure, customers are getting state-of-the-art service, including fiber-optic cable coming directly onto the premises.

Overall, the audit said, Kansas ranks second in the nation for availability of broadband service in rural areas. Based on information from 32 Kansas rural phone companies that report such data, 72 percent of their lines provide both voice and broadband service, compared to 58 percent nationally.

Of those broadband lines in rural Kansas, 43 percent provide it through “fiber-to-the-premises” technology.