Although the opening of telecom markets to new competition a decade ago brought sweeping changes — both positive and negative — to the industry, it had less impact on small independent telcos than on larger players. Nevertheless, independent telcos felt the impact on many aspects of their business.

On the positive side, telecom competition has spurred new technology developments, which have enabled rural telcos to bring high-speed connectivity to areas where costs previously would have been prohibitive — although any rural telco will tell you that more work remains. Meanwhile, an unintended consequence of telecom competition is that new players and lower prices have shaken the foundation of the universal service program on which so many small telcos rely, driving them to seek changes to the system.

One of independent telcos' key vehicles for pursuing policy changes is the Organization for the Promotion and Advancement of Small Telecommunications Companies, one of several organizations that represent small independent telcos. Currently OPASTCO's policy efforts are focused on four key areas — broadband deployment incentives, access to video content, universal service and inter-carrier compensation.

Although small independent telcos have made substantial progress in deploying DSL and fiber to the premises, OPASTCO President John Rose argues that the job of deploying broadband is far from finished. Noting that 200 kb/s is considered broadband but customer demand often exceeds that level, Rose said, “As the need for more bandwidth grows, we need to grow to meet the future demands of our customers.”

To encourage broadband deployment, OPASTCO wants to see loans and grants, such as those available through the Rural Utilities Service, preserved or even expanded. In addition, OPASTCO is pushing for tax incentives for broadband investment. The organization's recommendation is for “tax credits for those who will invest and accelerated depreciation for those who already have invested,” Rose said.

Tax incentives are likely to have strong support from legislators, said Kenneth Johnson, an attorney with Bennet & Bennet, a Washington-based law firm that specializes in independent telco issues. “A lot of senators don't like to look at how far America is supposedly falling behind on broadband,” he said. “Support for broadband is better than usual by both parties.”

Upcoming wireless auctions in the 700 MHz band also could boost rural broadband deployment, as that frequency band is well-suited to high-bandwidth, long-range transmission. To enable rural telcos to win spectrum in the 700 MHz auction, OPASTCO is pushing for small license areas.

Broadband connectivity also could get a boost if small telcos had better access to video content, OPASTCO argues. “Content costs us 30% more than large cable systems,” Rose said. “We'd like to find a way to address that.”

For small carriers deploying broadband, high video content costs “can really hurt the business case,” said Steve Pastorkovich, OPASTCO business development director. “You're not only hurting consumer choice; you're hurting broadband deployment.”

One of the reasons video content costs are so high for small telcos is that content often is owned by the same conglomerates who own the large cable systems that often are in direct competition with small telcos offering triple-play services, Pastorkovich said. As a result, he said, the cable companies sometimes require telcos to buy packages of channels they may not want in order to get local stations, which the telcos are required to carry.

“There are proposals at the FCC and on Capitol Hill that would reform [this system], and we support those efforts,” Pastorkovich said. Those efforts, he said, “would let small video providers go to different markets to get [required content] if the local broadcaster is not negotiating reasonably.”

Small telco concerns about content tying arrangements are legitimate, said one industry observer who closely follows independent telcos. “The problem is that they're going up against the National Association of Broadcasters, which is an incredibly powerful lobby,” said Ken Pyle, a consultant with The Viodi View.

“Because the [independent operating company] is so small relative to the large companies, the negotiations are pretty tough,” added Pyle. “One of the things that makes it really difficult is the non-disclosure aspect of contracts. There's no good data about what one company is paying versus another.”

To address that issue, OPASTCO also would like to give video service providers the ability to invoke arbitration in the event they are not able to negotiate an agreement with a content provider. “We at least want the FCC to be able to look at these agreements,” Pastorkovich said.

Paradoxically, telecom competition has caused the demand for Universal Service Fund (USF) to grow at a time when traditional funding mechanisms already were under pressure. Since its inception decades ago, the universal service program has made payments to service providers in high-cost rural areas so that prices to consumers can remain comparable to those in lower-cost urban and suburban areas. Funding for the program has come from providers of long-distance service, which are charged a percentage of their interstate and international revenues.

But as long-distance prices come down, and as more people switch to alternative phone service providers that do not pay into the fund, the viability of the fund increasingly has come into question. Meanwhile, incumbent local carriers are no longer the only ones drawing from the fund. Competitive eligible telecommunications carriers (CETCs) also are receiving universal service subsidies, which are based on the incumbent's cost structure. OPASTCO would like to change that, arguing that CETC payments are not going to the companies for which they were intended.

“Most of the CETCs are large wireless carriers that serve a good part of the nation,” said Stuart Polikoff, OPASTCO director of government relations.

Although the wireless units of some rural carriers also have been collecting CETC funds, Polikoff said those companies represent a small percentage of the total. “When we say, ‘Get rid of identical support,’ we say ‘Eliminate it for everyone, including our guys.’”

Such changes could diminish competition, but some industry stakeholders say that's not necessarily a bad thing. A bigger concern should be what level of network investment is viable, Johnson said. “Supporting multiple networks ad nauseam doesn't make sense,” he said. “The problem for the FCC is how to target support. Currently there's a free-for-all there. People are saying, ‘There's money there; let's go for it.’”

OPASTCO also would like to see USF payments calculated based on a larger revenue base that would include intrastate calls. In addition, the organization argues that all providers of two-way voice services that interconnect with the public telephone network should be required to pay into the fund, including facilities-based Internet access providers. Finally, OPASTCO opposes imposition of a cap on the high-cost universal service program.

Closely linked with universal service is the issue of inter-carrier compensation. Intrastate access charges, which carriers pay to one another for interconnecting calls, often are set higher than interstate access charges, thereby providing another means of supporting high-cost areas. But the discrepancy in access rates encourages carriers to try to beat the system.

As Polikoff explained, “A lot of games are being played in terms of, ‘Let's not identify who or where traffic is coming from.’” As a result, independent telcos are unable to assess access charges on a substantial portion of their traffic.

Rose noted that as much as 20% of intrastate traffic reaches independent telcos through tandem switches operated by the former Bell companies, which are not always able to pass on complete information required for inter-carrier billing.

The idea of pricing intrastate access charges based on actual costs has strong support throughout the telecom industry, and a wide range of carriers have developed a proposal known as the Missoula Plan aimed at achieving that goal. The plan also calls for the creation of a “restructure mechanism” — a fund from which small telcos would draw to make up for revenues lost as a result of the reduction in access charges.

OPASTCO supports the Missoula plan. But as Polikoff noted, “We're doing our best to encourage the FCC to move on it, but the commission is more heavily focused on universal service.”

The FCC may be moving slowly on adopting the Missoula Plan because no one is pushing it, Pyle said. Because the Missoula Plan required compromises on the part of all participants, he said, “No one is enthusiastic about it.”

Despite the lack of enthusiasm, however, the FCC should tackle access charge reform at the same time that it tackles universal service, Polikoff said. “They're really linked together,” he said. “Doing one without the other doesn't solve the overall problem.”

However, Johnson argued that OPASTCO may have trouble gaining support for one of its recommendations involving access charge reform. The organization would like the restructure mechanism to be available only to incumbent telcos. “That will be a tough sell,” he said. “It will be tough to keep competitive ETCs from getting that.”