TVA Rural Studies

Telecommunications and Rural Development:
Threats and Opportunities

Edwin B. Parker
Parker Telecommunications
May 1996

8. Competition and Regulation

Some forms of telecommunications competition are already evident in rural communities. A telephone instrument owned by the telephone carrier and paid for as part of the monthly phone bill is no longer the only means to connect to the telephone network. A wide variety of telephones, some “smart” and some traditional, are available for subscribers to buy or lease from a variety of different sources. Subscribers connect computers, fax machines, answering machines and other “customer premises equipment” from a variety of competitive sources to the former monopoly network.

Competitive long distance carriers compete for the interstate and some intrastate business of both urban and rural telephone users. Local telephone companies that had been barred from providing long distance services will now, under the terms of the 1996 legislation, be permitted to enter the competitive long distance business once they have met a “competitive checklist” to ensure that their local phone service markets are open to competition. Cellular and other wireless carriers compete with the traditional wireline carriers for rural as well as urban business. Some rural subscribers have found that even through the monthly base rates for cellular service are higher than for wireline telephones, the wider “local” calling areas for cellular service result in lower monthly bills.

The long run benefits of telecommunications competition in rural areas are likely to come from alternate technologies that provide services at lower costs than traditional wireline telephone and cable technologies. Wireless technologies are particularly promising for rural areas. Since Federal law and FCC regulations have largely preempted state authority over wireless services, states cannot stop the rising tide of wireless competition. Virtually the only state regulatory role will be oversight of the rates charged by wireline telephone carriers for intrastate interconnection with radio (wireless) carriers.

The alliance of Sprint and three major cable companies, TCI, Cox and Comcast, announced in October 1994, is a harbinger of the coming competition. The alliance was successful in winning bids for PCS frequencies in the FCC radio spectrum auctions completed in 1995. Their longer term goal is to combine Sprint long distance service, cable television channels for local phone service, and wireless PCS customer access, completely bypassing the existing networks for many connections, while interconnecting with it to reach phone numbers not on their own national network. Their long range plan is to build a seamless national network with telephones that will work as cordless home telephones connected to the telephone network via cable when in range of the home base station and that will also work as a cellular phone (with the same phone number) when outside of the range of the home base station. The cable members of the new alliance together own a controlling interest in the Teleport Communications Group, which operates alternative voice and data networks in major US cities.

The merger of McCaw Cellular (Cellular One) into AT&T creates another formidable national competitor. AT&T won PCS licenses that will permit it to fill in holes in its current cellular coverage and therefore be able to provide close to national coverage for both local and long distance services. Since passage of the Telecommunications Act of 1996, AT&T also has filed applications for authority to provide local telephone service in all 50 states, either with its own facilities or by resale of the services of other carriers. Analysts anticipate that MCI will build a wireless national network through joint venture arrangements with other winning bidders in the PCS auctions, which permitted up to six competitors in each market.

The 1994 start of direct broadcast satellite services to rural locations with 18-inch diameter satellite antennas at prices comparable to urban cable prices is another indicator of things to come. Removal of regulatory restraints will also permit satellite and wireless competition for voice and data services. The major small dish satellite direct broadcast vendor, DirecTV, a business of Hughes Communications in which AT&T recently made a major investment, plans to start in late 1996 a satellite data network business, called DirectPC, with services to personal computers.

In some rural areas with local concentrations of population, cable television operators also may offer competition for voice and data services. The 1996 telecommunications legislation permits such competition. Cable television operators may compete for voice and data telephone business as telephone carriers consider whether to deliver video services that compete with cable and satellite vendors. Cable modems may permit cable companies to compete with telephone carriers for high speed Internet access.

Rural electric utilities also may be rural telecommunications competitors. With the advent of fiber optic technology, power line rights of way are more hospitable to telecommunications because electric power does not interfere with fiber optic communications as it does with standard telephone wire and cable. Furthermore, besides hospitable rights of way and existing connections to most rural homes, electric utilities have an internal telecommunications application that could justify most of the telecommunications investment. Real time monitoring, control and pricing of power usage could lower peak load utilization enough to pay for most of the communications investment with power cost savings. Once in place for justifiable power utility reasons, the incremental costs to provide voice, data or video communications services are likely to be very competitive with present telecommunications providers. The main barrier to competitive entry by electric utilities has been regulatory, not technical. The 1996 telecommunications legislation removes regulatory barriers by overturning prior Federal prohibitions and preempting state laws and regulations that would prohibit electric utility entry into telecommunications. Rural electric utilities could provide fiber optic trunk capacity along their power poles and rights of way. They could team with PCS or other wireless providers to offer local wireless access to telecommunications services in their territories.

Competition in local and other intrastate telecommunications services will continue to increase, driven by Federal policies and technological imperatives that are outside the control of state authorities. Eventually that competition will inevitably reach rural areas also. In the long run, telecommunications competition may bring benefits to rural areas. During the lengthy transition period, rural telecommunications, and consequently the economies of rural communities, are at risk. This is ironic considering the potential of advanced telecommunications infrastructure to uplift rural economies by spreading economic development benefits outside the populated corridors linked by interstate freeways.

New technologies provide both a promise and a threat for rural telephone users. Newer satellite and wireless technologies provide opportunities to reach currently unserved rural customers and to provide telephone service with lower costs than those of traditional telephone carriers. However, new competitors are more likely to address more densely populated markets first. The subsidized prices of incumbent carriers provide a formidable entry barrier for potential rural competitors. State monopoly telephone franchises traditionally provided a regulatory barrier to competitive entry, but the new Federal legislation now prohibits such franchises.

Current carriers have sunk costs in existing physical plant and have commitments to be the “carrier of last resort,” that is, to provide service to every household within their franchised territory. Competitive entrants might not be able to accept that responsibility to serve the most distant or most remote users. In some rural areas there may not be sufficient market to support multiple competitors. Full competition implies that businesses may fail if they are not competitive. Failure of a rural telephone carrier could wreak havoc on the rural communities they serve.

These are somewhat more distant problems for telecommunications policy makers and local community leaders. The nearer term problem will be the impact of urban competition on rural telecommunications. Urban competition will put increasing pressure on the subsidy mechanisms used to support rural telephony. Carriers with both urban and rural properties, for understandable competitive reasons, will focus their new investments on markets where they must respond to competitive threats rather than on markets where they have a protected monopoly. The result of these two trends may be higher prices and deteriorating service for rural users, with consequent damage to fragile rural economies.

Whatever the eventual long term outcome with respect to rural competition, the short and medium term prospects are bleak for rural communities because their fragile economies are at risk during a difficult transition. Communities served by carriers that also have urban telecommunications franchises are likely to be hurt most. Many smaller rural independent telephone carriers, using the current subsidy mechanisms and a lower cost of capital available through government subsidized Rural Utilities Service loans, have been aggressively modernizing their telecommunications infrastructure. Many independent rural carriers brought digital switching and fiber optic trunk lines to their service areas before larger carriers brought such enhancements to their rural properties. Larger carriers with both rural and urban franchises are not eligible to receive all of the subsidies that smaller independents get. Furthermore, the larger carriers will be facing competition first in their urban areas. Therefore they will understandably focus their investments on urban areas where they are vulnerable to competition. This does not bode well for rural areas with a monopoly telephone franchise held by major telephone companies gearing up for urban competition.

Eventually, we may reach a point where competition provides alternate technologies and services to rural communities at costs that do not require the massive subsidies of current rural wireline telephony. Meanwhile, even if wireless costs were below wireline costs, wireless carriers may not find it profitable to compete against the subsidized wireline prices. To permit such lower cost competition to emerge, it will be necessary to modify the current system of cost-plus rural subsidies to provide incentives for rural carriers to use least cost technologies. The current subsidy mechanism is arcane. Appendix A provides a summary of the current Federal subsidy mechanisms for rural telephone service. In addition, most states have their own arrangements for providing further subsidies to rural telephone carriers. If the current Federal subsidies were removed and the resulting loss of revenues by independent rural telephone carriers was all passed on to subscribers, rural telephone rates would increase by 72 percent, from a current average of $43.20 to $74.53 per month.

The transition from monopoly to competition may eventually help rural communities, but the transition will be a difficult one. If state and Federal regulators do not manage the transition carefully, they could severely harm fragile rural economies. The potential of enhanced rural telecommunications to improve rural economies is considerable, but the risks in the transition are also very great. Regulators should change rural subsidy mechanisms slowly enough to avoid severe economic shock to rural communities. Meanwhile, the best defense for rural communities at risk is to begin active local planning for modernized local telecommunications facilities and broadband connections from their communities to the rest of the country. Rural communities that adopt a passive wait and see approach may find themselves in serious economic difficulty. Minor inadvertent side effects of well-intentioned Federal and state regulations could have disastrous unintended consequences for some rural communities.

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