TVA Rural Studies

Improving Rural Telecommunications Infrastructure

Bruce L. Egan
Columbia University

1. Introduction

Advanced (digital) telecommunications technology has the potential to dramatically improve the quality of life and the rate of economic development in rural America1. Public access to advanced telecommunications technology needn’t imply that one has to be physically located in proximity to urban areas where most information and production is generated. But while technology adoption in communication networks continues at a very rapid pace, increased market competition among telephone network operators forces them to invest where the money is, in dense urban and suburban areas. Thus, while a modern and effective telecommunications infrastructure is crucial for rural economic development, its financing raises a multitude of difficult public policy issues.

The analysis herein examines the rural telecommunications infrastructure focusing on technological developments and the costs and financing of network modernization. While there has been considerable hype in the industry and trade press about digital information "superhighways" (as if we all can just sit back and wait for "it" to happen), a look at the facts would lead to a more pessimistic view, especially for rural areas of the country2.

There are some recent technological developments which provide exciting prospects for new digital wireless technologies to come to the rescue for some rural services, however, the government needs to pay more attention to spectrum allocations for rural radio services in order for these to fulfill their promise3. Because the cost characteristics of such technologies are not nearly as sensitive to the physical distances involved, these technologies hold special promise for rural applications, but will likely not be deployed in rural areas until well after they appear in dense urban and suburban markets.

Much of rural America is served by small independent telephone companies. There are over 1300 local telephone companies in the US, the top 10 of which serve over 90% of all subscribers. The rest serve mostly rural areas with a relative handful of subscribers. Historically, financing for the modernization of rural company network facilities has come from a combination of the local tariff rates charged by the rural telco and cross subsidies derived from: 1) rural company charges to interconnecting toll carriers and, 2) other revenue sharing arrangements with larger local telephone carriers which serve relatively dense areas with lower cost (higher profit) subscribers. Increased competition has added considerable uncertainty to the traditional revenue flows derived from these sources.

Market competition is the natural enemy of cross subsidies. While direct competition for telephone subscribers may be long in coming to many rural areas, the competitive erosion of cross subsidies currently provided by toll calling, business and high profit residential market segments is surely going to proceed rapidly. Naturally, the political lobbies for competitive network operators do not want to provide any subsidies for rural development. At the same time however, small telephone companies want the government to assure that the rural network infrastructures and individual subscriber service in rural areas is affordable and equivalent to that available in urban and suburban areas4. The reality, of course, is that the outcome for the future will be similar to that of the past, namely, that rural network infrastructures will lag behind urban areas in terms of advanced service capability. In the new competitive environment, the risk (assuming the status quo of competitive entry with no proportional subsidy funding requirement from entrants) is that the disparity will become much worse.

In order to prevent the erosion of rural subsidies from newly competitive services, a number of federal and state initiatives are under way with the goal of preserving subsidy flows, usually under the rubric of so-called Universal Service Objectives. At the federal level, the FCC is investigating ways to better target subsidies to rural areas in need, and pending legislation in both houses of Congress contain provisions for maintaining subsidies for high cost areas5.

Rural Network Technology

The following analysis indicates that now and in the future, fiber optics will continue to be the technology of choice for all shared network facilities where terrain permits. At times, local conditions may call for microwave radio trunk transmission lines instead of fiber. In the future, however, digital fiber optics will dominate local network trunking. For the dedicated subscriber loop plant, there are several alternatives depending on local terrain and the spatial distribution of individual subscribers, including coaxial cable, copper wire and digital radio. Due to significant variations in local demographics and topography, some of the overall analysis and conclusions may not apply in many specific rural areas although they are relevant for broad public policy considerations. For example, new digital satellite systems may be the only realistic way to get relatively low cost and high quality digital service to certain remote locations.

The most important conclusion of all is that technological solutions must be tailored to specific circumstances regarding topology, terrain, subscriber demand and spatial distribution. A "cookie cutter" approach to technology deployment, while easier from a network standards perspective, is usually not the least cost method to optimize the network for local supply and demand conditions or for planning future network upgrades6. Indeed, flexibility in network deployment strategies is the key to successful low cost investment. This means that flexible standards must be developed by both wireline and wireless network equipment manufacturers to allow efficient interconnection between networks and a high degree of connectivity between end users7.

The cost of advanced rural communication network infrastructures is substantial. In a future competitive market environment, it may not be possible to finance its construction without significant increases in subscriber rates unless a new stable source of subsidy funding is adopted by regulators8. Assuming a construction interval of 10-20 years—a normal time span for turning over telephone plants—one estimate of the cost of digital service is about $1,000 per subscriber9. This would endow rural subscribers with digital communication capability comparable to narrowband ISDN service. While this may suffice for residential subscribers using home computers or other devices, such narrowband service capability may not meet the communication requirements of business customers. As subscriber needs develop, broadband services using fiber-optic technology or other suitable media may be necessary.

Achieving broadband communication capability in rural areas is a very costly proposition at about $4,000-$5,000 per rural subscriber10. Broadband communication facilities would allow consumers to enjoy high quality service, including entertainment video and multimedia applications where more than one communication activity may occur simultaneously. For example, with broadband telephony one may access an on-line database while viewing a movie, reading, or listening to the news. The cost of such capability is high because it requires new alternatives for the subscriber loop plant to replace traditional twisted-pair copper phone lines.

Where possible, existing coaxial cable television loops could be interconnected to a fiber backbone of shared network facilities to provide broadband capability. Elsewhere, fiber-to-the-home (or "near"-the-home) is required. Current satellite and microwave radio will not be the best option for most service applications because bandwidth limitations and delay times make these technologies unsuitable for a multimedia real-time environment. However, both radio and satellite are useful for infrastructure development in some applications. Satellites, for example, are preferred for delivery of distant video programming and may be interconnected to the wireline network infrastructure. But the use of satellites for voice service or other real-time two-way communications will likely be minimal11. This could change, however, with the future deployment of new Low and Medium Earth Orbit (LEO/MEO) digital satellite systems12.

Microwave radio is useful and cost effective in many situations where fiber is not practical, such as over rough terrain or water. Much of the existing microwave facilities are useful for providing advanced telecommunications because they are already digital and may feature high bandwidth and capacity for new service applications. However, for distribution of basic local service, both satellite and microwave will generally be limited to relatively high cost applications. The FCC-approved Basic Exchange Telecommunications Radio Service (BETRS) is the primary application of microwave radio technology for local service. It is expected to be the preferred alternative when wireline service is not feasible, but as such cases are rare, rural radio service, as currently defined by the FCC, is not being widely deployed as an alternative to traditional wireline service in rural areas13. The FCC could change this if new spectrum assignments for high powered rural radio systems were made. High powered digital radio systems for fixed telephone service are cost effective in rural applications compared to wireline systems, but only if there is enough spectrum and only if system power restrictions allow for large “macrocell” radio coverage areas (e.g., 15-30 mile radius) featuring maximum sharing of available spectrum within single base station area. Foreign countries, especially those with nascent network infrastructures are deploying new digital wireless systems as an alternative to traditional wireline connections14. The US government’s recent focus for radio spectrum policy has been on new convenient low power cellular and advanced paging and cordless telephone services which, while ideal for pedestrian and mobile applications in congested urban environments, is not cost effective or feasible in rural settings.

The best way to establish rural objectives for a network infrastructure is to begin at the state level. The reason: telecommunications depreciation policy, basic rates and economic development planning are set at the state level; each state determines its objectives, timetables and financing requirements. There is an important gap in telecommunications infrastructure planning in most states, especially regarding coordination with the important transportation and energy sectors. We find the synergies of telecommunication network providers and public power grid operators to be underutilized for fiber optic transmission and recommend more cooperation in this area. The same is true, but to a lesser degree, in the case of the transportation sector. The early beneficiaries of more cooperation between these sectors is rural education, health care and income growth.

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