TVA Rural Studies
Improving Rural Telecommunications Infrastructure
Bruce L. Egan
Columbia University
8. Conclusions
Perhaps one of the most important policy conclusions from the analysis herein is a firm recognition that there is a notable difference between the costs of local network upgrades for the base of existing rural telephone subscribers, and the costs of serving brand new and physically remote subscribers. From a public policy perspective the latter group must be treated as special cases requiring significant cost subsidies, otherwise policy for the masses could fall victim to debates of subsidies for the few. Overall, the existing body of rural subscribers is currently being served cost effectively and profitably, and a timely digital network upgrade is a reasonable proposition without necessitating large rate increases.
The second important message is that small rural LECs cannot be classified according to average costs and subsidy requirements. There is just too much variability based on the local market conditions and geography, which presents a major problem for policy makers desiring to better target subsidies to those companies and subscribers who really need it. Average statistics just will not do. There is no such thing as an average rural LEC. This revelation has tremendous implications for state and federal government competition policy. If open market entry is allowed, existing subsidies will dry up—period. Therefore if the government is serious about having both competition and subsidies, the current system is in bad need of reform. The alternative is the natural market solution which is to drive out cross subsidies. This may not be bad since the subsidies may not all have been justified in the first place. Nevertheless, if it remains a public policy objective that rural areas of the US should be able to continue to obtain a comparable level of basic service (e.g., POTS however defined) at prices comparable to those in urban areas of the US, then the subsidy system must be reformed as soon as possible.
Third, the key to rapid adoption of advanced technology for rural subscribers is to take an infrastructure approach to the problem. This implies significant coordination and monitoring of public and private network investment and business activity, preferably at the state level. Specifically, in the current environment, there appear to be significant lost opportunities for the realization of public benefits and potential synergies from cooperation of the energy, transportation and telecommunication sectors.
The infrastructure approach could go a long way toward solving this problem and actually follows from the technology itself. First and foremost, new telecommunications technologies can be very efficient, but that efficiency depends on two critical factors which are often non-existent in rural areas of the country, economies of scale and end-to-end service capability. The first factor operates on the supply side of the equation and simply says that technologies such as digital fiber optics require relatively large scale operations to achieve the low unit costs which are ultimately available. End-to-end service operates on the demand side of the equation and simply says that unless advanced network functionality is adopted on a very wide scale, demand drivers will be unable to speed up the technology adoption process. It is no good to have ISDN service capability unless the other party to the call also has it. Thus, the critical issue for efficient technology adoption in rural telecommunications is sharing of
network facilities, both to achieve scale economies and to stimulate demand drivers.
Fiber optics is generally the most cost effective technology for shared network service applications, and new digital wireless technology has tremendous potential for reducing the cost of dedicated subscriber connections. (Fiber is not cost effective for dedicated (non-shared) customer connections). Most businesses, especially large ones, share network facilities among a number of telephones and therefore may cost effectively adopt fiber technology before residential customers. However, both businesses and residences must share facilities as much as possible to take advantage of the superior economies of scale which fiber exhibits relative to competing technologies.
Another important advantage with fiber optics is that it can support new broadband services like video telephony, multimedia services, and very high speed data service. It is not necessary that demand for broadband services precede fiber optic technology adoption because fiber is also very cost efficient for simultaneously transmitting narrowband services. Sharing and multiplexing allow fiber to become cost effective even when only narrowband service applications are used.
An infrastructure approach to rural telecommunications technology adoption should maximize the possibilities for sharing, thereby stimulating investment in those technologies offering the greatest cost efficiencies. The bonus with adopting digital fiber optic technology early on is that the network will be robust with respect to almost any conceivable demand scenario that ultimately develops.
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