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INNOVATIVE TELEPHONE HEAVILY SUBSIDIZED

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May 2, 2002 – Telephone customers throughout the United States now provide an annual subsidy of more than $25.5 million to Jeffrey Prosser's Innovative Telephone, the Virgin Islands' telephone company.
Each month, millions of telephone customers across the nation pay surcharges of varying amounts — 34 cents in the Virgin Islands — that wend their way into an obscure federally sponsored fund designed to make telephone service affordable to low-income users in hard-to-reach rural areas such as Alaska and the mountains of the American West.
Research by the Source discloses that Innovative Telephone, formerly known as Vitelco, has been remarkably successful at tapping into this so-called "universal service" fund.
By far the largest subsidy to Innovative from the Washington-based fund is for the presumed high cost of installing and maintaining telephone lines in the territory. For each one of its 68,283 lines, Innovative Telephone receives $22.07 each month from the fund, an annual grant totaling approximately $18,084,000.
That per-line monthly subsidy is $3.52 more than the $18.55 Innovative says it bills the typical Virgin Islands residential customer for monthly no-frills phone service. Innovative's figure does not include a $5 end-user fee, the government's $1 emergency-service assessment or the 34-cent surcharge.
What this means to Innovative is that each month, for each of its lines, it receives at least $18.55 — and in most cases more than that — from the customer and $22.07 from the federal fund, for a monthly total of $40.62.
Another program covered by the fund provides Innovative an additional annual subsidy of about $7,480,000 in long-term support. And Innovative receives four other minor subsidies from the fund which together amount to less than $77,000 per year.
Innovative reacted swiftly Thursday when asked about the subsidies.
"Federal subsidies assure available and affordable telephone service especially in high cost areas such as the U.S. Virgin Islands," Innovative's president, Samuel E. Ebbesen, wrote the Source. Without the subsidies, he said, residential telephone rates "would more than double from the current $18.55 to over $40 per month."
Further, Ebbesen continued, "Innovative Telephone and the Virgin Islands Public Services Commission proactively guard these telephone consumer subsidies because of the great benefit they provide to the people of the Virgin Islands."
The fund is administered by the relatively unknown Universal Service Administrative Company (USAC), a not-for-profit entity operating under the Federal Communications Commission. USAC's web site states that an appropriate local regulatory agency must certify each recipient's claim to the subsidies annually. The certification must state that the federal support will be used only for the "the provision, maintenance, and upgrading of facilities and services for which support is intended."
Ebbesen told the Source that Innovative filed the required information with the Public Services Commission last August and that the PSC provided the necessary certification to the FCC by the Oct. 1 deadline. PSC officials declined comment on the agency's certification of the subsidies.
The PSC chair, Desmond Maynard, referred all questions to the commission's executive director, Keithley Joseph, who also declined to comment on the certification. However, Joseph pointed out that the federal subsidies will be a part of the PSC's current investigation into Innovative Telephone's rates.
Innovative Telephone is one of the companies owned by communications magnate Prosser under his umbrella company, Innovative Communication Corp. Other companies in the ICC group include The Virgin Islands Daily News, St. Thomas/St. John Cable TV and St. Croix Cable TV. Separate from ICC, Prosser also owns Virgin Islands Community Bank, which has three offices on St. Croix. He also has cable television holdings elsewhere in the Caribbean.
Prosser, who now spends most of his time in South Florida, is so secretive in his business dealings that no one outside his close circle of advisers has any idea of his financial situation, which has led to flurries of wild rumor. His companies all are private and do not issue financial statements. It is known, however, that in addition to securing the USAC subsidy for the telephone company, Prosser has used that same company to borrow huge sums of money at favorable rates.
Last year, the Source reported Innovative Telephone had borrowed almost $600 million from another relatively obscure Washington entity, the National Rural Utilities Cooperative Finance Corp. (See "Does Prosser have money problems?".)
Unlike the USAC subsidies, the $600 million eventually must be repaid with interest. The big questions about the giant loan are why Innovative Telephone needed that much money and what it did with it. As a privately held company, Innovative doesn't have to answer those questions publicly, and it hasn't done so.
Over the course of two years, through last October, the Source reported Prosser's attempt, through his Virgin Islands Community Bank, to purchase the Virgin Islands branches of Chase Bank. The sale ultimately fell through; each side sued the other, but eventually the matter was, according to a JPMorganChase executive, "amicably resolved." (See "Prosser sues Chase for $50M; bank deal dead" and "Chase: VICB failed to meet August deadline".)
An analysis of the largest subsidy Innovative Telephone receives from USAC results in some interesting comparisons:
– Despite the relatively small size of the Virgin Islands, Innovative Telephone is the only phone company with more than 40,000 lines that receives a federal grant of more than $22 per line per month.
– Despite its modest size — 68,283 lines — Innovative ranks fifth nationally among phone companies in the amount it receives from the so-called High Cost Loop subsidy for installing and maintaining lines. Of the five top companies, Innovative's per line/per month subsidy of $22.07 is the highest.
– Compared to phone companies in other U.S. territories, Innovative is the clear winner in the High Support subsidy stakes. Guam and American Samoa get nothing. Two companies in Puerto Rico receive $2.79 and 79 cents per line per month, respectively.
Innovative Telephone customers found a notation on their June 2001 bills which read as follows: "On June 14, 2001, the Federal Communications Commission (FCC) ordered all local telephone companies nationwide to add a charge of 34 cents to each customer's monthly telephone bill beginning August 1, 2001. The funds collected will be sent to the FCC and used to continue the national policy of keeping local telephone service available and affordable for all Americans. Lifeline customers will not be billed this additional cost."
The FCC in its online "Universal Service Consumer Information" site states that "The FCC did not require companies contributing to universal service to recover their contributions directly from their customers. Each company makes a business decision about whether and how to assess customers to recover universal service costs." Most phone companies do, however, bill customers directly to do so.

Editor's note: David S. North researched this report from Washington, D.C. Frank J. Jordan wrote the story with additional reporting by Jim Day on St. Thomas.
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