University of Wisconsin Center for Wisconsin

Rural Cooperatives, November/December 1998, pp. 4-6.
Published by the Rural Business and Cooperative Development Service 

The Rural Connection: Answering the call to bring Internet access, cellular service, and more to rural America

Catherine Merlo


The Big Sky Country between the Yellowstone and Missouri Rivers is Mid-Rivers Telephone Cooperative territory, a sparsely populated area covering 28,000 square miles of eastern Montana and a small portion of North Dakota

The Big Sky Country between the Yellowstone and Missouri Rivers is Mid-Rivers Telephone Cooperative territory, a sparsely populated area covering 28,000 square miles of eastern Montana and a small portion of North Dakota.

It's an area so large, it could hold West Virginia with room to spare. It also makes Mid-Rivers Telephone the largest landmass telephone cooperative in the continental United States.

For many people, these wide-open spaces of Montana represent peace, freedom and room to breathe. But if you're one of the state's mostly rural residents, that remoteness could pose tremendous disadvantages, especially when it comes to business, hospital or firefighting needs.

Thanks, however, to the presence of Mid-Rivers Telephone Co-op—and hundreds of rural telephone cooperatives like it—the residents of rural America have as much access to telecommunications technology and the information network as anyone in New York, Los Angeles or Chicago.

"If we weren't out there providing telephone and other telecommunications services, our people would be information have-nots by virtue of where they live,2' says Gerry Anderson, general manager of Mid-Rivers Telephone, based in Circle, Mont.

That's because the expense of building telephone 'end telecommunications facilities, of laying cable and purchasing equipment—when compared to the revenue generated by an area's sparse population—tends to discourage commercial and investor-owned utilities from bringing service to rural areas.

Telephone cooperatives, however, have answered the call to keep rural America connected by providing vital services at affordable rates. Today, more than 1.2 million rural Americans receive their local telephone service—including Internet access, cellular service, caller ID, call waiting and all the latest features—from a cooperative. There are 260 telephone cooperatives in 31 states.

"Without modern telecommunications, rural areas are extremely disadvantaged,2' says Earl Owens, general manager of Blackfoot Telephone Cooperative, which services 6,500 members over 4,500 square miles in western Montana. "Providing state-of-the-art telecommunications services doesn't make people move to rural areas but it enables them to move there if they want to. They can still be connected and competitive."

Birth of the telephone co-ops

This year, in particular, telephone cooperatives and their members are reaffirming their purpose by recognizing the 50th anniversary of the legislation that brought them into being.

In 1949, Congress passed the Telephone Amendment to the Rural Electrification Act, making Rural Electrification Administration (REA) loan funds available to finance rural telephone systems.

In the years just after the 1949 legislation, men and women in hundreds of rural communities joined together to develop, finance and build their own telephone systems. They knocked on doors and talked their neighbors into signing up and paying a small equity fee, often five dollars. The new members held organizational meetings, elected directors, and drew up articles of incorporation and bylaws.

With organizational details completed, a cooperative could apply for an REA loan, hire a manager, construct a telephone network and offer service to the community. In many cases, this was the first time such service was made available to rural people.

"The REA gave birth to telephone cooperatives," says Anderson, whose Mid-Rivers co-op was formed in 1952. "Without that financing, most of us would not be in existence. The low-cost money has helped us provide service and build facilities in rural areas where some people did not have it before. Without the RUS, there would be major portions of the rural United States without telephone service."

In 1994, the REA became the Rural Utilities Service (RUS), an agency of USDA Rural Development.

"Hardy Telecommunications wouldn't exist without the RUS," says Dwight Welch, general manager of the 2,850-member telephone cooperative in Hardy County, W. Va. "They've funded our every construction project since our inception in 1956. We've always worked very closely with them."

RUS offers low-cost loans that enable telephone cooperatives to build and maintain the networks that connect customer members. These networks increasingly include new digital switches and hundreds of miles of fiber optic cable, which can cost $15,000 a mile—and that's low compared to the $50,000-a-mile figure a commercial telecommunications carrier like AT & T might invest.

At the same time, there are fewer customers to absorb costs. Among Blackfoot Telephone Co-op's 13 exchanges, for example, one has only 50 access lines. They include a USDA ranger station, a highway maintenance crew and a fish hatchery. In fact, Blackfoot's territory averages only three customers per mile of line.

"Taking telephone and telecommunications services to rural areas is very expensive," says Owens.

Technical expertise

While the REA/RUS program has been bringing much-needed funds to rural telephone co-ops for 50 years, it's also provided them with something else of great value: the expertise of technical engineers.

"Getting an REA loan gave the telephone co-ops access to people who could tell them how best to use their limited resources and what technology to use," says Shirley Bloomfield, vice president of government affairs and association services for the National Telephone Cooperative Association (NTCA). "That was a godsend."

That technical expertise has proven its value repeatedly in the half-century since that funding became available.

"We often fight a stereotype of not having new, state-of-the-art services because we're rural, but the reverse is true," says Rick Vergin, general manager of Chibardun Telephone Cooperative of Dallas, Wis. Chibardun is a 6,000-member system formed in 1957. It serves 450 square miles.

"We have any and all of the communications services available that you would find in a metro area," Vergin adds.

The access to REA/RUS technological expertise has helped rural telephone coops advance through the enormous change the telecommunications industry has seen, particularly over the past decade.

"Ten years ago, all we were providing was basic telephone service," says Mid-Rivers'Anderson, whose co-op has 12,000 access lines and employs 93 people. "Now we're providing services not even thought of 10 years ago."

Those services include everything from Internet access to cable TV, cellular and security systems, paging, video conferencing, three-way calling and voice mail.

Vying for the airwaves

"The Internet is a big driver of change," says Blackfoot's Owens. "It's put huge demands on our network. Everyone wants speed."

The Internet is one major change, but other technological advances, from digital switches to wireless service, have swept the industry. Many telephone co-ops also have purchased licenses through a bidding system from the Federal Communications Commission (FCC). The licenses allow them to own a piece of the airwaves in expanded geographic areas and for new technologies like Personal Communications Services (PCS), Local Multi-Point Distribution (LMDS) and cellular service.

Many telephone co-ops have formed wholly-owned subsidiaries to handle the newly licensed side of their industry, which often falls outside of the normal structure of a small telephone company and therefore must be kept separate. Accordingly, Hardy Telecommunications has Hardy Net, and Chibardun has CTC Telcom. Blackfoot Telephone Co-op has four subsidiaries: Clark Fork Telecommunications, Blackfoot Communications, Blackfoot TelCom, and Blackfoot Fiber Systems.

Even though not all telephone co-ops currently are providing these new services, or have yet developed plans to build out PCS networks, most still are pursuing the FCC licenses.

"If we don't become a partner with another consortium or own a piece of wireless licenses, we won't be positioned to meet the demands of customers in the future," Welch says.

High cost of change

Although most telephone co-ops view the industry's changes in a positive light, they have been forced to reckon with resulting large expenditures. Investment in new equipment and technology has come with the industry's march toward higher-quality, speedier telecommunications.

"In 1987, we cut a new digital switch into service which replaced our old step-by-step mechanical switch," says Welch. "This year, we had to cut a new digital switch with 110 miles of fiber optic cable at a cost of $1.5 million. It's difficult for a small company to build out its facilities, but it's necessary."

"Our cooperative has been investing heavily in the infrastructure that allows us to bring new services—Internet, cellular, distance learning—to our customers," says Vergin. "We've been buying a lot of fiber optic cables and putting remote electronics in the rural areas."

In fact, RUS requires that all borrowers develop a State Telecommunications Modernization Plan (STMP). In the STMP, they must explain how they will provide higher quality, speedier service. For this industry, that means a move to carrierserving areas (CSAs) and digital loop service that essentially shortens the travel distance between key telephone facilities and customers.

"The problem is that digital loop carriers restrict modem speeds for Internet access," says Owens. "We're having to push equipment manufacturers to provide higher speed capabilities."

Dealing with deregulation

Besides advances in technology, the telephone industry has been dealing with deregulation over the past decade or more. It's a change that has not only brought competition and consumer choice, but differences in people's mind set.

"Deregulation has helped us stay contemporary with others in the telecommunications field because it gives the customer a choice in whom to receive services from," says Anderson. "It has also provided opportunities for Mid-Rivers because it allows us to compete in other geographic areas. That can help us spread our costs among more customers."

For Chibardun Telephone Co-op, deregulation has had a positive effect. "If we can grow into larger cities and spread our costs to a larger group of subscribers, we can continue to offer cooperative members reasonable rates and quality service."

Chibardun, through its subsidiary, recently expanded its service into a neighboring GTE area, adding an additional 3,000 customers to its subscriber base. Chibardun's employee numbers increased from 28 to 50.

Deregulation, however, is not right for every location. According to Blackfoot's Owens, consumer choice and competition will work in most of the United States, but it can be a burden and an uneconomical concept for many rural areas.

"Blackfoot Telephone Co-op has 13 telephone exchanges and only one in an incorporated town," says Owens, who's based in Missoula, Mont. "Most of the communities we serve have only one gas station and many don't even have a grocery store because it's not economically viable. Does it make sense to have two telephone companies there?"

1996's landmark legislation

Another major impact on rural telephone businesses stems from the Telecommunications Act of 1996.

"That was landmark legislation because Congress had not rewritten the law since the Communications Act of 1934," says NTCA's BloomBield. "The world had changed so much in that time and the number of players had increased. It was a major undertaking."

The 1996 law also was significant because it appeared in an atmosphere of deregulation, which opened up the industry to competition and consumer choice.

"The 1934 law had been written in a monopoly environment," Bloomfield says. "With the 1996 Act, Congress wanted to increase competition, lower prices and increase advanced services."

The 1996 Telecommunications Act, however, is still being interpreted. One segment of the legislation that continues to fuel debate involves a concept called universal service. This is a national social policy first adopted under the Communications Act of 1934. The objective of universal service was—and remains today—to ensure that all Americans, regardless of where they live, receive quality telephone service at reasonable rates. Congress reaffirmed the nation's commitment to the policy and social value of universal service in passing the Telecommunications Act of 1996.

"The 1996 Act tried to balance deregulation and competition with universal service," says Owens. "But how can we insure comparable service and rates for rural areas? There's an inherent conflict between competition and universal service. Our concern is that competition is the new paradigm, and that competition will win out and rural people will suffer."

Telephone companies—large and small, urban and rural—contribute to the universal service fund that helps balance the cost of bringing telephone service to rural America. The funds that make their way to a rural telephone company can reach a significant amount, as in the case of Hardy Telecommunications.

"Our contribution from the universal service fund exceeds our retained earnings by 200 percent," Welch says.

"Without universal service, we would be operating at a serious loss," he adds. "We wouldn't be able to build out any new service, get a new loan or even service our current debt. Our telephone rates would triple."

"The future of universal service is the one dismal spot," says Mid-Rivers' Anderson. "The way the FCC is going, we're concerned that universal service will be discarded. Without adequate fimding through universal service, contemporary phone service in rural America will again become unaffordable and unavailable, just as it was in 1952."

Local benefits

Despite these challenges—and the current push by commercial carriers to get rural telephone cooperatives to lower their access rates—these small businesses offer what few competitors can or do.

"We offer a strong local presence and quality of service," says Welch. "Our offices are right here in the community and you can walk right in and get a response. That's not available from other telephone companies. We're the ones that wire local schools for the Internet. Other companies don't do that."

In addition, the boards of telephone cooperatives are composed of local residents. "Our 7-member board also sets us apart from competitors," Welch says. "They're neighbors in the community and they look out for the best interests of our telephone customers."

"Companies like ours have enabled people to move from the city to the country and have the same telephone and telecommunications services," says Chibardun's Vergin. "Without companies like ours, rural America would not be as modern as it is."

Rural telephone cooperatives remain optimistic about the future, even as they approach the millennium hurdle, newer technology and ambiguous legislation. Just as the 1949 Telephone Amendment created new opportunity for the people of rural America, so has the progress of the 1990s made country dwellers as computer literate, cellular savvy and technology

dependent as their urban counterparts. For rural telephone cooperatives, that remains both an achievement and an ongoing challenge.

"Deregulation, changes in technology and the regulatory and legislative changes have opened up a whole new world of the things that we can provide," says Mid-Rivers' Anderson.

Hardy Telecommunications' Welch may agree, but all the same, he maintains a personal point of view. "All these changes have turned my hair white," he says ruefully. "Regulatory matters, Y2K compliance, FCC regulations, questionnaires, reports—everything's been compounded ten-fold."

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