Federal tax changes could affect subsidies for Kansas rural phone companies

? The sweeping federal tax cuts that Congress enacted in December could end up reducing the subsidies that rural phone companies in Kansas get from the state, a change that could spark political competition over what to do with any excess money that may be left over in the fund that pays those subsidies.

That issue came to light Tuesday as the Kansas Corporation Commission, the state agency that regulates public utilities, clarified an order it issued in January directing all utilities that are taxed at the corporate level to set aside into a special account any savings they realize from the tax cuts while the commission reviews how those tax cuts should affect utility rates.

The order applies to all utilities — electric, gas, water and telephone — that pay federal corporate income taxes.

But a group of 33 rural phone companies that do business in Kansas filed a petition Feb. 2 asking to have that order clarified, arguing that it would be impossible for them to calculate those savings, using the guidelines spelled out in the KCC order.

Rural phone companies in Kansas are regulated differently from most other utilities because they receive subsidies from the state to hold down their rates. That subsidy is based on the idea that it costs them more to provide service because they have fewer customers per mile of telephone line.

The fund is also used to help pay for telecommunications services for low-income and disabled individuals.

The subsidies are paid out of a fund called the Kansas Universal Service Fund, or KUSF. Money flows into that fund from a fee charged to all phone companies, based on a percentage of the revenue they get from local phone service and long-distance calls within Kansas.

Currently that rate is set at 7.5 percent, which is expected to generate a little more than $41 million in the subsidy year that begins March 1, according to KCC estimates.

Phone companies are allowed to pass that on to their customers by building it into their rate structure, but until 2016 the cost was assessed directly on customer phone bills. For AT&T customers, that fee was $3.19 per line in 2015.

One of the factors that go into determining a company’s cost of service is its federal tax liability. Under the KCC order, utilities were directed to set aside into a separate account the difference between their cost of service before the federal tax cuts took effect and their actual cost of service with the tax savings.

But the rural phone companies argued in their petition that there is no relationship between their KUSF subsidies and their cost of service.

“A review of the most recent KUSF determination proceedings for all but one of the affected (companies) shows that such proceedings lack any determination of the companies’ respective costs of service as approved by the Commission,” the companies stated in the petition. “Rather, each of these proceedings was resolved through Commission Order approving a so-called ‘black box’ stipulated settlement agreement that expressly did not identify or determine the carrier’s cost of service.”

That statement raised questions about how the subsidies were being determined, if they weren’t based on cost of service.

Staff at the KCC, however, said that statement was not an entirely accurate description of how the subsidies are set, and they insisted that the KCC does actually review the operating costs of rural phone companies.

Christine Aarnes, who heads the telecommunications staff at the KCC, said in a phone interview that the agency does regularly review their costs of rural phone companies to determine their subsidy rates. But she said that’s often not reflected in the KCC’s final order because the actual subsidies are the result of negotiations that the agency and companies engage in to avoid litigation.

In the order issued Tuesday, the KCC directed the rural phone companies to work with the agency’s staff to come up with a best estimate of their federal tax savings under the new law.

The commission has not yet determined what it will do if it finds that rural phone companies are receiving too much subsidy from the KUSF. That’s a matter that is still being reviewed as part of its “general investigation” into the impact of the tax cuts on utilities’ cost of service.

One option could be to refund it to the phone companies that pay into the fund and order those customers to refund it to customers in the form of rate reductions.

But Kansas lawmakers have also been eyeing that fund as a possible source of revenue to build out more wireless telephone capacity and broadband internet service in rural Kansas.

The KCC has not set a date for when it intends to finish its investigation.