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AT&T, Comcast Gain From Subsidy Paid for by Customers

Orange County, Virginia, High School students study history and build websites using Apple Inc. laptops, Google Inc. software and a Comcast Corp. (CMCSA) broadband connection subsidized by U.S. telephone consumers.

Now President Barack Obama wants phone subscribers to pay as much as $5 more per year on their bills to connect almost all U.S. schools to high-speed Internet, an expansion of a $2.3-billion-a-year program that rankles some Republicans.

Ninety-seven percent of U.S. classrooms are connected to the Internet, up from 14 percent when the program known as E-rate was created in 1997. School administrators now say just connecting isn’t enough -- they need speed and service in more classrooms and that costs more.

“Increasing an entitlement is going to be thorny at best and highly controversial at worst,” Robert McDowell, until May a Republican member of the Federal Communications Commission, said in an interview.

E-rate offers discounts of 20 percent to 90 percent for Internet connections at schools and libraries. The phone companies that would have to bill customers more benefit from the subsidized payments the extra fees would cover.

AT&T Inc. (T) received at least $207 million from the E-rate program in 2011, while Verizon Communications Inc. (VZ) took in at least $169 million, CenturyLink Inc. (CTL) got $95.8 million, and Comcast got $18.9 million, according to the Universal Service Administrative Company, a Washington-based non-profit that administers the funds.

$1,600 Per Month

Orange County pays Comcast $1,600 monthly for the connection to the high school and eight other buildings, according to Darrell Hatfield, the county schools’ technology director.

The cable company based in Philadelphia delivers high-speed connections to “thousands” of schools, David Cohen, executive vice president, told lawmakers in July.

Comcast and other companies in earnings reports don’t break out income from the E-rate program, which is part of a larger $8.7 billion suite of subsidies aimed at ensuring communications for all U.S. citizens. The funds come from a tax on a portion of subscribers’ telephone bills. The rate has climbed to 15.6 percent from 5.7 percent in 2000.

Spokesmen Michael Balmoris for AT&T and Ed McFadden for Verizon, and spokeswomen Sena Fitzmaurice for Comcast and Linda Johnson for CenturyLink didn’t respond to requests for details of E-rate funding for their companies.

Republican Objections

Figuring out how to fund Obama’s goal falls to the FCC and its Democratic majority, which in July began what it called the first comprehensive update of E-rate. No vote has been scheduled.

For Obama, who says he can bypass Congress to expand E-rate, the equation is simple.

“In a country where we expect free Wi-Fi with our coffee, why shouldn’t we have it in our schools?” Obama said in a June 6 speech in Monroeville, North Carolina.

The FCC probably needs to act by mid-2014 to meet Obama’s five-year goal, Blair Levin, a former agency official now at the Aspen Institute in Washington, said in an interview.

In proposed changes, the agency suggested focusing more on broadband and reducing payments for traditional voice services, while encouraging school districts to band together to buy services. It didn’t say if phone user fees should rise.

Republicans in Congress and elsewhere don’t want consumers to pay more under Obama’s plan. Changes should take place “within the current resources available,” Senator John Thune, of South Dakota, the top Republican on the Commerce Committee that oversees E-rate, said at a hearing.

“We cannot ask Americans to pay even more in their monthly phone bills,” Ajit Pai, a Republican member of the FCC, said in a July speech.

$5 Increase

An increase of “probably on the order of $5 or less a year on cellphone owners, on an individual cellphone owner” may be needed to meet Obama’s goal, Josh Earnest, a White House spokesman, said in an August press briefing.

E-Rate isn’t the only source of money for wiring schools, which has also attracted interest from Internet entrepreneurs.

Facebook Inc. Chief Executive Officer Mark Zuckerberg’s Startup: Education foundation and the Bill & Melinda Gates Foundation combined to donate $5 million to EducationSuperHighway, which advises schools on how to bolster Internet connections, the San Francisco non-profit’s chief executive officer, Evan Marwell, said in an interview Dec. 4. Other donors have pledged another $4 million, Marwell said.

‘Leveling Field’

Obama’s idea to expand E-rate finds little argument among educators.

In Orange County, in the foothills of the Blue Ridge mountains, E-rate money allowed the schools to light up the fiber Comcast link, increasing connection speeds by almost six times, to 250 megabits per second from 45 megabits.

Ninth-grade students now can participate in the Blue Ridge Virtual Governor’s School, an initiative spanning seven central Virginia counties that offers courses that can’t be supported by a single rural high school, such as biotechnology and computer science.

“We can level the playing field somewhat” compared with richer school districts, Douglas Duncan, principal of the school, said in an interview.

Orange County still falls short of recommended speeds, and can’t get there without more E-rate funding, Robert Grimesey Jr., the school system’s superintendent, said in a Sept. 9 letter to the FCC.

He suggested increasing funding from the $2.3 billion annual limit set by the FCC to $5 billion -- which he called “an amount commensurate with current demand.”

Juggling Funds

The FCC proposal didn’t ask how or whether to increase charges to consumers to pay for changes -- an omission that caught the attention of McDowell, the former commissioner.

“Who do you tax?” McDowell said. “Will it be the Googles and Facebooks of the world, as well as the traditional telecom companies? If that’s the case, that starts a huge policy food fight which could create gridlock.”

It’s possible connections could be increased by rearranging spending within the E-rate fund, Representative Anna Eshoo, a California Democrat who supports Obama’s proposal, said in an interview.

“You examine it and see,” Eshoo said. “There’s a way of structuring it.”

The program has concentrated on getting Internet service to the schoolhouse door, and now needs to drive connections to students’ desks and laptops, she said.

“If we fail in this next effort, then the first one is just wiped off the boards,” Eshoo said.

To contact the reporter on this story: Todd Shields in Washington at tshields3@bloomberg.net

To contact the editor responsible for this story: Bernard Kohn at bkohn2@bloomberg.net

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