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Contents
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To order a copy of this paper, please contact Marianne Taillon at Coop.Centre@usask.ca or write to: Centre for the Study of Co-operatives, 101 Diefenbaker Centre, University of Saskatchewan, Saskatoon SK S7N 5B8 Phone: (306) 966-8507; Fax: (306) 966-8517. If you have comments on the paper, please contact Murray
Fulton at
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Telecommunications is a vital part of business and society. Businesses the world over spend more money on telecommunications today than they do on oil. The global market for telecommunications services is estimated at $US 600 billion today, a value that is expected to double or even triple in the next ten years (Maass). This growth in telecommunications is being fueled by deregulation of telecommunications markets in all parts of the world, a desire to connect people and machines (e.g., telephone, faxes, ATMs, Interac), and falling prices of telecommunications services.
Of these factors, deregulation has been getting the most attention. Recent decisions by the federal regulatory agency, the Canadian Radio-Television and Telecommunication Commission (CRTC) have promoted competition in not only long-distance telecommunications services, but also in local network services. With the advent of convergence, such competition is not limited to telephone service providers, but includes broadcasting firms, such as cable companies, as well. A key component of this deregulation is the reduction and elimination of the cross-subsidizations that were inherent in the system historically. Local rates will no longer be subsidized by long distance rates; and the costs of providing telecommunications services to geographically isolated, high-cost areas, such as rural and northern regions of the country, may no longer be subsidized by urban customers.
These changes in the telecommunications industry raise important questions for rural and northern residents across Canada and around the world. Will the combination of competition and new technologies mean increased, affordable, and improved services or will rural and northern communities be left behind in the information age? What strategies can communities develop to deal with these potential outcomes?
The purpose of this paper is to examine future possibilities for communication services in rural communities. Historically, a deregulated market in telecommunications has meant a lack of service in those areas of Canada and the United States with low demand densities &endash; i.e., rural and northern regions. The response of these communities was to provide these services themselves. In Canada, independent telcos &endash; often organized by local businesses and residents &endash; were formed. In the United States, co-operatives were formed, many of them with financial assistance from the federal government. The formation of companies and co-ops at the local level was not enough, however. In both Canada and the United States, the independents formed associations to provide common services (these services included such things as lobbying activities and joint purchasing) to all members.
If a deregulated telecommunications industry has similar effects on rural and northern regions today as it did historically, communities in these areas will likely have to take initiatives similar to those of the past. Whether history will repeat itself or whether new technologies will make service provision profitable in all areas of the country is unknown. Nevertheless, the importance of telecommunications to rural and northern areas means that communities within these areas must start to develop an understanding of the changes that are occurring and what strategies they may need to take.
For a better sense of the possible implications of deregulation on rural communities, we begin by looking at the role telecommunications play in rural economic development. We then examine the historical origins of the regulatory concepts and industry structures that are currently being deregulated. Finally we summarize the recent round of decisions implemented by the CRTC and the views which support these decisions.
To begin the dialog on ways in which communities can respond and
develop strategies to deal with the impact of deregulation on the
provision of telecommunications services, we examine alternative ways
in which communities have addressed this issue. Specifically, we look
at the history and current role of the independent telephone
companies in Canada, the history and current role of the rural
telephone co-operatives in the United States, and the community
initiatives undertaken to encourage private investment in
telecommunications. 
Since it's very beginnings, telephony has played an important role in the social and economic development of rural Canada, and in particular, the prairie provinces. As Winseck reports "By the turn of the century the utility of telephone communication for homes, businesses, and communities had already been observed. Canadians were among the world's heaviest users of the telephone, with some of the more sparsely populated prairie provinces, like Manitoba and Saskatchewan, leading the world in the number of calls per telephone by a large margin." The existence of telecommunications infrastructure has helped create economic development in rural areas by reducing the differences between rural and urban economies, increasing the productivity of firms and individuals, and attracting relocating firms who place a high priority on such infrastructure (Read and Youtie).
In their book, "Telecommunications Strategy for Economic Development" Read and Youtie examine five current obstacles to rural economic development and discuss how telecommunications can address these obstacles and what limitations may continue to apply. They conclude the following:
1. Geographic Isolation - Physical distance, social isolation, and small community sizes pose numerous obstacles to rural economic development. Telecommunications link rural communities with urban communities and resources. However, long distances and a low population base can make advanced telecommunication infrastructure costly and an investment risk in rural areas. Rural communities often lack sufficient demand to justify upgrading working, but outdated, telecommunications technology. Private providers find less risk in upgrading high volume, high-profit urban areas. The increased use and the development of new technologies (for example wireless service) may reduce or nullify this drawback.
2. Declining Job Opportunities - In the 1980's the traditional industries (e.g., agriculture, resource extraction) of many rural and northern economies' experienced significant decline. Improvements in productivity and the relocation of low-skill plants to lower-wage developing countries have eliminated numerous jobs in these industries. In addition, rural areas have not been able to benefit from rapidly growing services and high-tech manufacturing sectors to the same extent as metropolitan centres. Advances in telecommunications can have the effect of enabling service companies to relocate back-office operations (i.e., data processing, inbound and outbound telemarketing) to a facility remote from the central office. However, competitive pressures from abroad may be as much a threat to back-office employment opportunities involving routine data processing as they are to low-skill manufacturing.
3. Lack of Human Capital - Improved human capital through education and training can allow rural communities to take advantage of possible employment opportunities. Distance learning programs can link rural schools with universities and provide ongoing training for rural workers. However, the high cost of distance learning and the complexity of using new technologies can limit implementation of such applications. These factors pose a risk of increasing the gap between information-rich urban telecommunications users and the underserved rural poor.
4. Lack of Services - Rural communities often lack the ability to support important institutional services due to a diminishing tax base. Telecommunications can provide access to better medical services, particularly access to specialists required for medical diagnosis. Telecommunications can also improve the efficiency of government services such as emergency medical services. The ability of telecommunications to improve institutional services depends on cost, skill, and initiative.
5. Lack of Urban Amenities - Telephone and television have linked rural areas to entertainment opportunities available to urban dwellers; this will continue with new technology advances. However, options for non-electronic entertainment forms (e.g., restaurants and live plays) will likely continue to be limited in rural areas.
Recognition of the links between telecommunications services and economic and social development has had an important influence on public policy decisions within Canada. Over time the concern about the ability of telecommunications services to advance as well as hinder economic development has led Canadian policy makers to adopt three very different approaches: regulation of private companies providing telecommunications services; public ownership of telecommunications infrastructure; and, most recently, the deregulation of the industry.
The call for government intervention began early on in the history of telephony. In the interest of developing a national telephone network, the Bell Telephone Company of Canada, through the Bell charter of 1880, was given a virtual monopoly to provide telephone service across the Dominion. However, the potential for a national telephone network was marred as disparities soon became evident between rural and urban communities, business and residential users, large and small communities, eastern versus western regions, and corporate-sized (namely Bell and subsidiaries) versus independent providers of telephone service. After incorporation in 1880 Bell immediately embarked on a program of providing telephone service in the larger urban centres of Eastern Canada. Bell was more interested in "serving areas of substantial economic development and easily accessible by water or railways, rather than undeveloped and less lucrative areas" (Winseck, pg. 148). In retaliation to Bell's strategy, municipalities and farm communities began lobbying for greater government control over the system in earnest by 1898 (Winseck). In addition to neglecting high cost rural areas, Bell was criticized for excessive rates, anti-competitive practices by way of establishing exclusive contracts with public places such as railway premises (often the hub of commercial activity), and a refusal to interconnect with independent telephone companies. The refusal of Bell to interconnect with independent telephone companies was a particularly contentious issue as the independents had often been formed by communities as a result of Bell passing them by.
The call for government control was heeded in two ways. First, the telephone system became a part of an extensive regulatory regime, which included the chartering of the large corporate service providers to determine the terms of compensation for interconnection between local and long distance networks, setting technical standards, and regulating tolls and tariffs. Eventually the regime evolved to incorporate a system of cross subsidization, the primary policy tool used to encourage the universal provision of basic telephone service. The dominant telephone companies (i.e., those owning long-distance networks) were allowed to set their long-distance prices higher than the actual cost in order to subsidize local service in high-cost regions.
Noam (1995) notes that the regulation of the telecommunications industry is viewed by some as the outcome of rent-seeking by powerful interest groups; to others, regulation is the outcome of underlying public policy goals, such as the restriction of market power. He points out there is truth in both views: "despite the misuse to which regulation is subjected, it has also definite public policy goals, including: universal coverage under affordable rates; free flow of information; restriction of market power and monopoly pricing; effectiveness of business transactions; support of high technology; interconnectivity in society; interconnectivity of equipment; high technical quality of service; privacy and security of communications; and revenues for government."
These same objectives also lay behind the second form of policy approach: public ownership. In 1905 the Manitoba government announced that the
"telephone is ƒ one of the natural monopolies, and yet is one of the most.. necessary facilities for the dispatch of business and for the convenience and pleasure of the people.. the price.. should be so low that laboring men and artisans can have convenience and advantage of the telephone, as well as the merchant, the professional man and the gentleman of wealth and leisure.." (As quoted in Winseck, pg. 152).
Three years later Manitoba purchased Bell's system. Originally, the province had planned to only manage the long-distance network, preferring to allocate the operation of local exchanges to the municipalities. However with many municipalities balking at such an undertaking, the province ended up operating and managing the entire system. In 1907 Alberta followed Manitoba's lead purchasing several independent systems and subsequently the Bell system, resulting in the establishment of the Alberta Government Telephone system. The formation of the Saskatchewan Telephone Company in 1909 made the move to provincial public ownership a prairie-wide phenomena (Winseck).
Both regulation and public ownership were seen as a way to achieve the same objective: to ensure universal availability of affordable, quality telephone service. In addition, both approaches signaled the acceptance of the natural monopoly concept&endash; where the economies of scale associated with the development of telephone networks, specifically long-distance networks, were deemed so significant that the existence of monopolies (at the provincial level) were justified in the interest of efficiency (Winseck, Schultz). As a result, Canadian telecommunications evolved into a highly concentrated industry dominated by small number of players with a virtual monopoly in provincial markets (Raboy). Table 1 lists the major telecommunications carriers, or telcos, as of 1985, the profits or net revenue generated in 1985, the geographic area served, the type of ownership (private or public), and the major shareholder.
It is important to note that the dominance of Bell Canada is understated in the above table due to the fact that Bell Canada has a significant ownership position in a number of other major telcos. During the 1980s Bell held 31 percent of the outstanding common shares of Maritime Telephone and Telegraph, which had majority ownership of Island Tel; owned 31 percent of Bruncor, which in turn is 100 percent owner of New Brunswick Telephone Company; and owned 53 percent of the common shares of Newtel Enterprises Ltd., which in turn owns 100 percent of Newfoundland Telephone Company's shares. In addition, Bell Canada Enterprises, the holding company for Bell Canada, owned approximately 90 percent of Northern Telephone Ltd. and wholly owned Telebec Limitee. Consequently, in 1985 Bell Canada directly or indirectly accounted for about 57 percent of the revenues earned by Canada's leading telcos. Combined, Bell Canada and BC Tel accounted for approximately 68 percent of revenue earned in the telephone carrier sector in 1985 (Globerman).
Table 1. Major Canadian Telephone Carriers, 1985
|
Company |
|
Geographic Area Served |
Ownership |
Major Shareholder |
|
Bell Canada British Columbia Tel Alberta Government Tel Saskatchewan Tel Maritime Tel & Tel New Brunswick Telephone Quebec Telephone Newfoundland Telephone CNCP Telecommunications Manitoba Tel. System Telebec Limitee Northwestel Inc. Thunder Bay Tel Island Telephone Co. Northern Telephone Ltd. |
652,100 115,900 48,200 36,984 34,009 27,505 21,663 20,447 15,584 15,192 11,656 5,985 5,788 4,423 4,151 |
Ont., Que., and Eastern NWT British Coumbia Alberta Saskatchewan Nova Scotia New Brunswick Region of Quebec Newfoundland Ont., Que., BC (primarily) Manitoba Portions of Quebec NWT; Yukon; Northern BC Thunder Bay P.E.I. Northeastern Ontario |
Private Private Public Public Private Private Private Private Private/Public Public Private Public Public Private Private |
Bell Canada GTE Corp. Alberta Gov't Sasktachewan Gov't Bell Canada Bruncor GTE Corp. Newtel Enterprises 50% CP / 50% CN Manitoba Gov't Bell Canada Canadian National City of Thunder Bay Maritime Tel & Tel Bell Canada |
In table 1 the companies highlighted in bold were part of Telcom
Canada, a voluntary association of the dominant telephone carriers
which operate two of the three nation-spanning microwave networks.
During the 1980's the Telcom companies accounted for about 95 percent
of total carrier revenue and held a de facto monopoly in the
inter-city voice market (Globerman). CNCP operated the third
microwave network and held a de facto monopoly in the domestic
telegraph market. Telcom Canada had responsibility for managing
trans-national telecommunications facilities, including sharing of
revenues from inter-provincial traffic. Today, the association still
exists but under a new name, the Stentor Alliance (named after a
greek god with a loud voice). The members of the "Stentor" group
remain essentially the same as the members of Telcom Canada. However,
the interests of Alberta are now represented by Telus, the company
which grew out of the recent privatization of the Alberta Government
Telephones. Those telephone carriers which are not part of the
Stentor Alliance are commonly referred to as the "independents".
As recent as 1990, most people continued to believe that local telephone services would be the last bastion of natural monopoly (Schultz, 1996). However, with the advances in telecommunications technology it is difficult to describe any segment of the telecommunications industry as exhibiting the characteristics of a natural monopoly. The challenges of "convergence" and "bypass" are blurring the traditional divisions between service providers, creating pressure for competition within the industry and a new approach to telecommunications policy (Angus). "Convergence" is defined as "the confluence of distinct communications technologies into a single, electronic, computer-driven environment, specifically the blending of telecommunications and computers" (Bonnett). "Bypass" refers to the ability of an entity to avoid using the services provided by the local telephone exchange network. This can be accomplished through the use of dedicated access facilities owned by the entity itself or, as a result of convergence, by using alternative services such as cellular radio, two-way cable TV, short-haul microwave, or direct satellite to rooftop antennae (Bonnett). In the Canadian context, bypass also refers to the interest shown, particularly by businesses, in "bypassing" the Canadian telecommunications network in favour of the U.S. network. This interest was brought about by increased competition in the long-distance segment of the U.S. market, resulting in substantially lower long-distance rates in the U.S. than Canada (Globerman).
Schultz (1996) identifies the CRTC's 1992 decision to open up the long-distance market to public competition as the beginning of a clear switch in policy approaches &endash; from the "old" paradigm, whose underlying premise was the concept of natural monopoly, and which he characterizes as the "era of producer sovereignty", to the "new" paradigm, based on the premise of competition, both fostering and fostered by technological innovation, and characterized by "consumer sovereignty". In 1994, the "new" paradigm spread to the local service sector, with the announcement of Telecom Decision 94-19, "Review of Regulatory Framework". With this decision the CRTC initiated a proceeding to bring residential service rates more closely in line with costs. In the same year, a Supreme Court decision ruled that all companies providing basic telephone service, including the independents, must operate under and be guided by the regulations of the CRTC, effectively streamlining the regulation of the industry (Stanbury, 1996a). On May 1, 1997, the CRTC announced a series of decisions intended to further open up the Canadian telecommunications market to competition by facilitating the entry of new service providers, including broadcasting companies, into the residential and business local service market (CRTC).
The plan to "rebalance" telephone rates, bringing residential service rates more closely in line with costs, will effectively reduce and perhaps eliminate the subsidy of local services with long-distance revenues. The CRTC maintains that, primarily due to changes in technology, the subsidy from long distance to local services has become "substantially greater than required to keep telecommunications affordable for Canadians". In addition, the CRTC echoes the sentiments of numerous economists that the subsidy is inequitable and inefficient because it is directed to all telephone subscribers, regardless of their economic need (Schultz (1995), Fuss and Waverman). Monthly rates for local exchange service, which were increased on January 1, 1996, and January 1, 1997, will be subjected to a final increase of up to $3.00, scheduled for January 1, 1998. The CRTC also ruled that the savings telephone companies make from reducing subsidy payments will be used to reduce rates for those basic long-distance services used primarily by residence and small business customers. Hence, the telephone companies will not keep the additional revenue savings from a lower subsidy requirement. Telephone companies may continue to apply for other local increases, if they can prove to the CRTC that they are justified.
Accompanying rate rebalancing, the CRTC has instituted a price cap regime. A price cap, based on inflation, will limit future rate increases for an initial period of four years after the last controlled rate increase in 1998. The price cap regulation will apply to the dominant (Stentor) telephone companies and consumer rates charged by the new entrants will not be regulated. The CRTC hopes to further promote local competition by ordering the existing telephone companies to "unbundle" components of their local networks so that new entrants can have access to these components at reasonable rates thus allowing local calls to be completed between two or more networks in the same market. Although it wishes to encourage new entrants to invest in their own network, the CRTC maintains that it will permit the resale of certain facilities to allow early competitive entry. In an effort to promote convergence in the telecommunications and broadcasting distribution industries the CRTC has ruled that cable companies are now able to enter the local telephone market and that telephone companies are allowed to apply for broadcasting licenses to enter the distribution market as of January 1, 1998.
The current outcome of the regulatory changes is perhaps best characterized by the term "regulated competition", a term which Stanbury (1996b) maintains is not an oxymoron. Control over the industry by the government has been maintained due to the fear that the dominant telcos could use their monopoly and vertically integrated position to cross-subsidize their activities in competitive markets (i.e., using captive revenues to cross-subsidize investment in new technologies), and/or exploit their control over essential facilities &endash; notably access to the local exchange network &endash; to discriminate against competitors in long-distance services. Whether such controls will be an effective deterrent remains to be seen. What the current policy approach of "regulated competition" and the future of a deregulated industry will imply for rural communities is also difficult to predict.
On the one hand, the CRTC maintains restructuring the long distance/local relationship will:
The argument is that the more robust and genuine the competition, the greater the incentive for the industry to offer new services. These new services will be better able to respond to the needs of consumers. Consumers who use long-distance services will benefit as prices for these services come down. Consumers will also be expected to benefit in the long run from new and lower-cost local service packages resulting from competition in the local telephone market. However, will these benefits reach rural and northern residents? Will the economics of new technologies make it profitable for companies to provide services to communities previously deemed unprofitable without the subsidy? Or, will consumers in these areas feel "like road kill on the information highway" to borrow an analogy used by a group of activists lobbying BC Tel for access to basic telephone service in an area deemed unprofitable ƒ even with the subsidy in place (Vancouver Sun).
In light of the importance of telecommunications and rural development, the current period of transition in the industry can perhaps offer communities a chance to develop strategies to deal with the possibility of reduced telecommunications service. In the following section we examine some of the ways in which geographically isolated, high-cost communities have dealt with issues surrounding the provision of telecommunications services.
The Canadian Independent Telephone System
Although few are aware that telephone companies outside of the Stentor Alliance exist, a number of geographically distant Canadian communities, namely in Ontario and Quebec, rely on locally owned, independent telephone companies for their service. The history of the Canadian independent telephone system takes us back to the turn of the century and the beginning of the telecommunications industry, before the advent of industry regulation and the public prairie telcos. At the time, Bell Canada was pursuing a strategy of rapid urban development and had little interest in investing in high-cost rural and northern areas. As a result of being bypassed by the dominant service providers, many geographically distant communities had to rely on their own devices to meet their need for basic telephone service. Small, independent companies began to form as local networks were being built, usually by the doctors, veterinarians, or businessmen operating in the area (Hurontel). Once the systems were up and running a number of these companies were then purchased by the municipalities in which they operated.
Before the Second World War there were approximately 600 independents operating in Ontario alone. However, after the war, telephone technology changed to the extent that many of the independent telephone companies could no longer afford the capital investment required to modernize and update their networks. At this time Bell Canada and the other dominant telephone companies, interested in expanding their operations and increasing their monopoly positions, purchased many of the independent phone companies (Globerman, Winseck). This resulted in a rapid reduction in the independent system and by the early 1960's only 35 independent telecos remained in Ontario.
Today, there are approximately 44 independent telephone companies in Canada with the majority operating in rural and northern regions of Quebec and Ontario. Fifteen independent telephone companies operate in Quebec. Although the number of independent companies in Ontario has dropped to 28 in the last 40 years, the communities served by independent providers has remained relatively unchanged. This is because many of the independents have merged with others to achieve economies of scale associated with new technologies in the industry. On average the independents serve about 3000 subscribers, although the number of subscribers ranges broadly, from 300 to 60,000 (Ontario Telephone Assocation).
Of the 28 companies operating in Ontario, 16 are investor-owned stock companies. The majority of these are tightly owned by a small group of shareholders, often family members. One investor-owned company trades shares on the Toronto stock exchange and another is a subsidiary of Bell Canada. Of the remaining independent service providers, one is a true public utility (with a commissioner appointed by the municipality), five are owned directly by the municipality, and six are newly incorporated co-operative businesses. In Quebec, the independents are characterized by a similar mixture of ownership structures, including family and municipal ownership, as well as newly formed co-operatives.
The co-operative telephone companies are newly incorporated as a result of the 1994 judgment of the Supreme Court of Canada in Telephone Guevremont Inc. vs. Quebec. The judgment held that all telecommunication common carriers fall within the exclusive regulatory jurisdiction of the CRTC and within the meaning of the Telecom Act. Previous to this judgment the independent telephone systems were regulated by the Ontario and the Quebec Telephone Service Commissions. The Telecom Act requires that, in order to be eligible to operate as a telecommunication common carrier, a business must be a Canadian owned and controlled corporation with share capital incorporated under the laws of Canada or a province. Previous to this decision, the co-operative telephone companies were subscriber-owned telephone systems, operating with a structure similar to co-operative businesses, but not incorporated as such. Because of this loose structure these independents did not have to pay certain taxes nor incorporation or registration fees. Of the systems that were not incorporated under the laws of Canada or a province, a number of them held public consultations and then incorporated as co-operatives in order to maintain the broad public character of these systems (Mornington Communication Co-operative, Quadro Communications Co-operative).
Back when the independent telephone companies were formed, a major obstacle in their ability to provide long-distance services to their subscribers was the need to interconnect with the long-distance networks. As was mentioned earlier, before the federal government began regulating the industry, many of the independents were refused access to long-distance networks owned by the dominant telcos, such as Bell Canada. Today the independents provide long-distance services to their subscribers through interconnection agreements with the Stentor companies. The negotiation of these agreements are often negotiated on behalf of the independents by two second tier associations, the Ontario Telephone Association and the Association des Compagnies de Téléphone du Québec, which are non-profit corporations representing most of the independent local exchange carriers. The agreements usually stipulate that the independent service providers agree to collect long distance revenues for the long-distance service providers and both agree not to compete within each other's respective areas. With the current changes in regulation, these types of agreements are likely to change in the future.
In addition to negotiating interconnection agreements, the Ontario Telephone Association and the Association des Compagnies de Téléphone du Québec negotiate Directory and Cellular agreements, arranging technical and management seminars and represent the independents at regulatory proceedings. The Associations are also involved in directing the implementation of the CRTC's Phase III Costing plan, administering settlement fund arrangements, and coordinating implementation of toll service introductions.
Glenn O'Brien, the executive director of the Ontario Telephone Association which represents independent telephone companies within the province, notes that one of the primary benefits of having a system of independent telephone companies is that they are foil from which the performance of the Stentor companies can be measured. For example, the rural communities served by the independents have had digital switching for a longer period of time than similarly sized rural communities served by Bell Canada. He maintains that the independents provide world class service to their subscribers, with 80 percent having access to Internet connections and 90 percent on single line service.
City Tel - Prince Rupert, B.C.
An anomaly within the Canadian independent telephone system is Prince Rupert City Telephones (City Tel) &endash; the only independent telephone carrier in western Canada. City Tel provides telecommunications services to the residents of Prince Rupert, a small city along the Northern tip of British Columbia, known as the "Gateway to Alaska". The city recently gained notoriety for the blockade of an American ferry boat over the current fisheries dispute with the U.S. Prince Rupert has also been in the news for another reason &endash; the city is on its way to becoming one of the first fibre optic communities in Canada. The driving force behind Prince Rupert's "Broad Band Initiative" is not BC Tel, but City Tel.
Like the other independent telephone companies in Ontario and Quebec, City Tel's roots lie in the early 1900s, when some local business men invested in and built a local telephone network to meet the demand for telephone service not being met by existing phone companies. A few years later the city of Prince Rupert saw that the company was a profitable venture, bought it and has been running it ever since. Until 1994, City Tel was regulated by the city of Prince Rupert. For example, if City Tel wanted to increase its rates, such a proposal went before the mayor and council. Since 1994, City Tel has been regulated by the CRTC. Today, City Tel serves around 17,500 people and owns between 9 and 10 thousand telephone lines.
Bruce Kerr, the General Manager of City Tel, notes that there are at least two important benefits from the organizational structure of City Tel for the city and its residents &endash; increased revenues and greater responsiveness to community needs. City Tel generates about $1.5 million a year in revenues which are returned to the city. The revenues generated by City Tel therefore remain in the community and are passed on to the citizens of Prince Rupert in the form of reduced municipal taxes (which are estimated to be 10% lower than they would be without City Tel). This contrasts significantly with the revenue generated by BC Tel, which is returned to its shareholders, the largest of which is the foreign owned GTE corporation. Kerr points out that much of the success of City Tel to generate revenue for the city is contingent on the number of subscribers. The company serves around 17,500 people &endash; a profitable population base. He notes that a similar arrangement with a lower population base may not be as profitable, or even possible, and, for this reason, feels that the current rate rebalancing (i.e., subsidy reduction) may mean reduced services for smaller rural and northern communities.
Because City Tel is based in Prince Rupert, the company is very aware of the needs of the community. Kerr maintains that City Tel service, in terms of turn-around time, is better when compared to service provided by BC Tel to communities of a similar sized. City Tel provides cellular service and Internet access, which not only meet the needs of its subscribers but also generate additional revenue for the city. The independent status of City Tel means that the company is also able to undertake initiatives, like the Broad Band Initiative, without having to go through an extensive bureaucratic process. However, Kerr also notes that being an independent telecommunications provider means that the resources available, in terms of capital and information, are limited. For example, the amount of resources available to City Tel to fund the research and development of new technologies are insignificant relative to the budgets of companies like BC Tel.
Up until now BC Tel has been the only long-distance supplier to Prince Rupert. On a number of occasions BC Tel has offered to purchase City Tel. However, the city of Prince Rupert has refused. Instead, BC Tel had an agreement with City Tel to provide services to the community. Under this agreement, City Tel operates the local switch, owns the local infrastructure and rents access to long-distance lines from BC Tel. However, this agreement has run out and the two companies need to negotiate a new agreement. City Tel is in the process of applying to the CRTC to have a Carrier Access Tariff put in place which would open up the long distance market to greater competition. However, it remains to be seen if any other long-distance provider will want to enter the market. While it is a profitable market for one long-distance provider, it is not clear if such the market could support another.
The U.S. Independent Telephone System
Like Canada, America's independent telephone industry began to develop in the early 1890s, with rural telephone systems developing in sparsely populated areas which larger, privately owned companies were not willing to service, due to the lack of profits. By 1912 the nation had more than 3,200 rural telephone systems. Unlike Canada, however, a number of these systems were organized as co-operative businesses at the outset. The oldest telephone co-operative still operating today is Garden Valley Telephone Company of Erskine, Minnesota, which was chartered in 1912 and has 12,000 member-customers.
The number of farmer lines continued to increase after World Way I. At its high point in 1927, the rural telephone industry included some 6,000 co-operatives, mutual systems and other organizations. But even as the industry grew, rural systems began to deteriorate. By the 1930s, most of America's rural telephone systems came to be known for their poor service, and the systems continued to deteriorate into the 1940s. The small companies that owned the systems simply didn't have the capital to upgrade their operations. By the late 1940s, it was clear that rural telephone systems had reached an impasse. The country's massive war effort had exerted significant pressure on manpower and equipment. In addition, telephone rates were low, and capital was inadequate to maintain or upgrade the systems. The farmer systems continued to disappear, and as a result, fewer farmers had telephones in 1940 than had them in 1920.
In 1949 the federal government, recognizing the importance of a national phone system, renewed a commitment it had made in 1934 when it created the Federal Communications Commission (FCC), established by the Communications Act. The act made the concept of "universal service" the law of the land. This cornerstone of national social policy called for making "available, so far as possible, to all the people of the United States a rapid, efficient, nationwide and worldwide wire and radio communication service with adequate facilities at reasonable charges..." The objective of universal service was to ensure that all Americans, regardless of where they live, receive quality telephone service at reasonable rates.
Many telephone co-operatives came into being after the 1949 passage of the Telephone Amendment to the Rural Electrification Act, which made Rural Electrification Administration (REA) loan funds available to finance rural telephone systems. (In 1994, the REA became the Rural Utilities Service (RUS), an agency of the U.S. Department of Agriculture.) The Bell companies and other large telephone companies were already well established in the nation's cities and growing suburban areas, but most were not interested in serving sparsely populated rural areas without imposing expensive line-extension charges. The unfulfilled need for telephone service led men and women in hundreds of rural communities to join together to develop, finance, and build their own telephone systems. Citizens canvassed the countryside, 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 the organizational details completed, a co-operative could apply for an REA loan, hire a manager, construct a telephone network, and offer service — in many cases, for the first time — to the community.
Today the independent telephone system provides service in more than 40 percent of the United States' land mass. More than 1.2 million rural Americans (5% of the country's population) receive their local telephone service from a telephone co-operative . Approximately 260 telephone co-operatives provide service in 31 states. Telephone co-operatives are most heavily concentrated in the farm belt and other areas with a strong co-operative tradition and presence. Ten states are home to half the nation's telephone co-ops: Illinois, Indiana, Iowa, Kansas, Minnesota, Missouri, North Dakota, South Dakota, Texas, and Wisconsin. In the Southeast, the Carolinas, Tennessee, and Kentucky are also co-operative strongholds.
Telephone co-operatives vary tremendously in size, but the average telco has approximately 4,000 subscribers, 23 employees, and annual revenues of between $1 million and $2 million. Customer bases range from less than 100 subscribers to more than 50,000. The highest customer density, approximately seven subscribers per line mile, is in the rural Southeast. One Texas company serves, on average, one person per 10 line miles. By contrast, the Bell operating companies, on average, serve 130 customers per line mile. Telephone co-operatives' annual operating revenues range from less than $100,000 to more than $40 million. Telephone co-operatives are subject to FCC regulation, similar to commercial telephone companies. In many states, however, co-ops are not subject to state regulation because they are consumer-owned, self-regulating organizations. In addition, like other RUS borrowers, telephone co-ops are subject to regulations and guidelines established by that agency.
Telephone co-operatives share a common goal: to provide their members and their communities with the best telecommunications service available at the lowest possible price. The subscribers/members actually own the company and elect a board of directors that sets policy to represent members' interests and ensure the company's success. Like other co-operative organizations, telephone co-ops may charge new members a small fee. This establishes the member's equity interest in the co-operative. The co-op structure provides member-subscribers with a number of benefits, including access to high quality service, a share of the revenues generated by the telco, the involvement of the telco in rural development initiatives, and an opportunity to coordinate strategies with communities and organizations with similar mandates.
High Quality Service
Even though they each run lines to only a few thousand homes, rural co-ops and other small independents have introduced new technology far more aggressively than the giant regional Bell companies. Besides regular phone service, they provide their customers with such enhanced services as caller ID, call forwarding, conference calling, voice-mail messaging, electronic bulletin boards and Internet access. Two important factors contributing to the co-operatives ability to be on the cutting edge of technology are: (a) they have funding sources available to finance their growth; and (b) they have consolidated and formed strategic alliances with other companies and co-operatives to achieve economies of scale.
Funding Sources
In addition to member equity fees, funding for telephone co-operatives is available from several sources. Subsidized capital for rural systems is provided through low-interest RUS loans to independent telephone companies and co-operatives in jurisdictions with fewer than 10,000 residents. These loans are used to replace outdated equipment as well as invest in new technologies to provide enhanced services, such as Internet access. It is interesting to note, that since its inception in 1948, there has never been a default on a RUS loan by rural service providers. Financing for co-operatives is also available from: the Rural Telephone Bank, a quasi-government agency; private supplemental lending institutions, such as CoBank and the Rural Telephone Finance Cooperative, owned by the borrowing co-operatives; and commercial lenders. The CoBank &endash; The Bank for Cooperatives, a Denver, Colorado-based institution that was created to provide farm co-ops with financing &endash; has loaned $1 billion to more than 120 rural telephone co-ops and related businesses, enabling them to fund acquisitions or form strategic alliances with other businesses.
In addition, approximately 675 telephone companies receive funds from the Universal Service Fund (USF). The USF is administered by the National Exchange Carrier Association (NECA) and funded by a charge against long-distance carriers. The fund provides support to customers in high-cost areas (due to factors such as geography, population density and growth rates) to keep local rates affordable (Bonnett).
Consolidation and Strategic Alliances
Among the non-Bell companies today, the key words are consolidation and strategic alliances. Although the number of independents has been dropping, the average independent is getting larger. The independents are merging and forming alliances to achieve the economies of scale that will enable them to provide services in addition to their switching and transmission facilities including Internet access, cellular phone service, cable and direct-broadcast satellite television, long-distance service, security systems, and other services.
The National Rural Telecommunications Cooperative (NRTC) is an example of such an alliance. The NRTC links nearly 800 rural utilities and affiliated organizations, including 88 rural telephone cooperatives, 178 rural telephone companies, 253 DBS (direct broadcast satellite) members, 172 C-band members, and 431 rural electric cooperatives. As the telecommunications cooperative of the nation's rural utilities, NRTC's mission is to find ways to enhance the level of service that its members provide to their rural member customers. To address rural market needs, NRTC is pursuing business related to satellite television, the Internet, automated electric meter reading and agricultural data transmission via satellite. A key NRTC goal is to ensure that rural Americans have affordable, ready access to the latest advances in such technologies and services. NRTC and its members worked toward passage of the 1992 Cable Act and the 1996 Telecommunications Act to ensure that there is a level playing field in the delivery of video programming (NRTC).
Revenues Returned to the Community
As nonprofit organizations, telephone co-operatives seek to provide their patrons the highest quality service at the most affordable rates. It is not always possible, however, to establish rates that ensure that money collected exactly equals money spent. Revenues earned above operating expenses are called margins (in a commercial business, these funds are called net income, or profits). At the end of each fiscal year, the co-op allocates a percentage of the margins to each patron on a pro-rated basis, according to the total amount paid for telephone services. These allocations to patrons are known as capital credits. Upon approval of the board of directors, these allocations are refunded to co-op patrons in arrears. Capital credits are typically paid in cycles specified in the bylaws. The exact formulas used to retire patrons' capital credits are determined by the board based on policy expressed in the bylaws.
Patronage allocation and the retirement of capital credits represent the proportional allocation of co-operative margins based on patrons' individual use of telco services. RUS guidelines specify that capital credits "should be based on the total dollar volume of business done with the co-operative, or on a fair and reasonable variation of this method where it will be more equitable to the consumers...." Thus, co-ops generally base patronage on revenues from local and toll access services. Income from nonrecurring or one-time service charges, membership fees, and aid to construction are usually not included because they do not constitute a continuing revenue stream for the co-operative. Telephone co-ops with subsidiaries or those that offer services other than switched access; e.g., cable TV, wireless cable, or DBS, may establish distinct capital-credit systems for each non-telephone-service-related activity if such activities are conducted within the co-operative itself.
The retirement of capital credits enables the board of directors to reinforce the members' inherent ownership rights. Since the co-operative has "used" more member dollars than necessary to operate the telco, it has "borrowed" funds from the patrons, the co-operative owners. The retirement of capital credits also constitutes an essential part of the co-operative's public relations effort. With an actual stake in the co-op's business operations &endash; evidenced in its margins &endash; members participate actively in the telco's success; i.e., they share in the co-op's success. Each time the directors declare a capital-credit retirement, they demonstrate to the members/owners that the co-op cares about its current members, who see co-operative principles at work, and its former patrons, whose equity has helped the system succeed. If a co-operative member moves or discontinues service, the member still receives the capital credit allocation for the year or years he or she was a member. Capital credits may also be paid to a deceased member's estate upon request.
Community Involvement
Rural telephone co-ops tend to be deeply involved in the life of their communities. They recognize that they are integral parts of the communities they serve, and, as a result, they are often at the forefront of local economic development efforts. As community-based organizations, telephone co-operatives play an active role in encouraging economic development. They help attract and retain businesses that provide employment opportunities for the community, as well as, provide well-paid, stable jobs and advancement opportunities. They support local community service organizations and causes. Many telephone co-ops provide high-tech services, such as distance learning, telemedicine, video teleconferencing, and Internet access facilities for local schools, libraries, and health care centers. Some even offer low-cost computer training to allow local residents to take full advantage of the benefits of information-age technology.
Rural Telephone Service Company of Lenora, Kansas, for example, has helped to put an economy that was devastated by the farm crisis of the 1980s back on its feet. In recent years the co-op, which has provided phone service to a 15-county area since the 1950s, took a proactive strategy to growth, improving its community's quality of life as well as its own bottom line. RTSC created jobs by performing many services (such as publishing a directory) on its own instead of contracting out with out-of-state providers, and it attracted IntelliSell Telemarketing Corporation, a major telemarketing firm that employs 85 people, to Victoria, Kansas. The co-op also invested in education, creating an interactive video network that now links eight local high schools and Fort Hays State University. And it hired an economic development specialist who's been involved in a number of growth-minded projects, including the development of affordable housing. Many other telephone co-operatives have engaged in similar development efforts and brought about similar results.
National Telephone Cooperative Association
Most of the co-ops, along with several hundred rural independents, are members of the Washington, DC-based National Telephone Cooperative Association (NTCA). The NTCA, "the voice of rural telecommunications," is a nonprofit association that represents nearly 500 small and rural telephone co-operatives and commercial companies. Its goal is to ensure than rural Americans receive telecommunications services on a par with those available to urban residents, and at a reasonable cost. Since its founding in 1954, the NTCA has been an aggressive advocate for the interests of its members. The NTCA offers its members an array of services, including an effective government affairs program; expert legal and industry representation; a broad range of educational services; a comprehensive assortment of regular and special publications; and a well-rounded complement of national and regional meetings.
NTCA also calls upon four related organizations to better serve its members:
In 1994, NTCA established the Foundation for Rural Service (FRS),
a nonprofit foundation. Its mission is to inform and educate the
public on the rural telecommunications industry and to improve the
quality of life throughout rural America. To meet this mission, the
foundation is involved in gathering information and undertaking
research on alternative financing options for the rural telcos in the
event of a reduction in federal government support. The foundation
has also established a resource center at NTCA headquarters in
Washington, D.C. to collect and disseminate information about rural
America and its telecommunications infrastructure.
So far we have focused our discussion on how communities and their members have provided themselves with telecommunications services. Another strategy for communities faced with the prospect of declining service is to encourage outside investment in their area by reducing the investment risk to service providers. The investment risk facing telecommunications companies is lower if community members demand advanced telecommunications services and have the skills needed to employ advanced telecommunications applications (Read and Youtie). Essentially this approach allows interested communities to initiate efforts to develop a market for advanced telecommunications services. By the same token this approach also allows communities that do not desire advanced telecommunications services avoid having to pay for these services (e.g., through taxes levied to fund provincially owned telcos). The obvious disadvantage of such an approach is the inequitable distribution of benefits from these services and the further entrenchment of regional economic divisions. The other drawback is that communities may also have to bear the risk of initiatives that do not work.
Community based initiatives to develop markets for telecommunications services include attracting telecommunications users to the community, developing coalitions between service providers to develop skills within the community, promoting public service applications of enhanced telecommunications networks, and linking with broadcasting firms to explore alternative technologies.
Attracting Telecommunications Users
One way to build the demand for telecommunications in a particular area is to attract organizations and people who rely heavily on telecommunications to that area. Read and Youtie observe some ways in which communities can do this is by being involved in the building of information buildings or parks, encouraging telecommuting or through the provision of tax incentives. Businesses that have the need but not the financial resources or know-how to develop proprietary sophisticated communications networks may be attracted to communities which have buildings or office parks featuring advanced telecommunications capabilities (e.g. the control of lighting, climate, security and alarm systems through a computerized communications system and connections to networks that support voice, data and video communications). However, studies suggest that the effectiveness of these information parks depends more on economic and real estate market conditions and the locational attractiveness of the parks than on technological attributes of the facility. Telecommuting allows employees greater flexibility in choosing where they would like to live and work. Encouraging telecommuters to settle in high-cost areas (in terms of telecommunications service) can help generate demand for enhanced telecommunications services in those areas. Although taxes are often a small part of the overall cost of doing business, the local taxes placed on telecommunications firms may be a factor impeding infrastructure investment (Read and Youtie).
Developing Skills
The degree to which community residents are familiar with telecommunications technology and the range of applications employed in a community are also important influences on the demand for telecommunications services. Coalitions between telecommunications providers and users can offer a medium for sharing skills as well as aggregating demand (Read and Youtie). As an example, Read and Youtie point to the COMM-Net project of the West Georgia Telecommunications Alliance in Carrollton, Georgia. The project provides a limited number of ISDN (Integrated Services Digital Network) telephone lines with terminal equipment to its sponsors &endash; K-12 schools, West Georgia College, the Carroll Technical Institute, the public library, and two local businesses. This type of network provides simultaneous transmissions of voice, data, image and text over a single pair of ordinary telephone wires. Applications being tested include audio and visual linkages between a home-bound student and his school, videoconferencing, document and graphics file sharing, and Internet access. Tours are conducted for civic and community groups to expose residents to these applications. Read and Youtie note that in this case, and in many similar cases, economic development organizations may serve as catalysts to initiate coalitions between service providers and users, as well as facilitate their ongoing operations.
Another example cited by Read and Youtie is Scandinavia's Telecottage program, providing residents with a venue to try out new telecommunications technologies. "Telecottages" were set up in central municipal buildings equipped with modern communications and computer technology and administered by a computer expert who teaches courses and offers advice. Telecottages can be organized as stock companies with rural resident shareholders, or set up as foundations or co-op associations. Because they create demand for personal or business services, the telecottages are intended to be self-supporting after the initial capital expenditure. If sufficient demand is generated, the market takes over and supplies the enhanced telecommunications infrastructure and services.
Public Service Applications
Community organizations can work with the public service sector to establish telecommunications applications which not only promote the use of an enhanced network beyond its basic service, but which also aim to make public service functions more efficient and widespread. Such programs include distance learning, telemedicine, and video/audio/data-conferencing (Read and Youtie). Distance learning involves providing instruction in courses for which local teachers are unavailable. The ability of two-way interactive features to simulate the student-teacher relationship and entertaining multimedia presentations gives the new telecommunications technologies advantages over more conventional networks. Telemedicine employs communications networks to transport and display medical images and data. Applications include patient exams, clinical trials, monitoring of patients with chronic diseases, and continuing education for doctors. For example, telemedicine applications enable hospital specialists to conduct diagnostic procedures, such as X-rays and heart palpation, on remote patients by using special devices at the local doctor's office to collect and transfer patient information. Many applications can be run on conventional telecommunications networks, but diagnostic applications, in particular, appear to run better with advanced telecommunications technologies.
The benefit from telecommunications applications such as distance learning and telemedicine include: increased efficiency of service delivery; more equitable access to quality education, training, and medical care; lower public health costs due to a reduced number of hospitalizations and less need for recruiting specialists into rural communities; and a reduced need to travel. The drawbacks include the risks associated with: the investment in hardware, software and training to support advanced applications; the potential for an increased gap between the "information-rich" &endash; those with access to supporting hardware, software and training &endash; and the "information poor" without such access; and the dampening of private-sector usage by designing networks geared towards public-sector applications (Read and Youtie).
Alternative Service Provision
The push towards convergence also suggests that coalitions among community groups and non-traditional telecommunications providers, such broadcasting and cable firms, may offer a meaningful way to address concerns regarding rural service. In Canada, the broadcasting sector is characterized by a much broader ownership mix than the telecommunications industry and a variety of community radio and television services exist across the country. These services are funded by various sources and organized to serve specific communities ranging from northern native settlements to urban college campuses (Raboy). In addition, although telecommunications policy is increasingly characterized by competition, the regulatory regime for broadcasting continues to remain focused on the production and dissemination of Canadian content in an effort to protect Canadian cultural identity and sovereignty (Globerman, Janisch, and Stanbury).
The combination of an established network, a mandate to protect
cultural identity, and the technical ability (if they reconfigure
their networks and add switches) make community cable-TV distributors
contenders in offering local telephone services to geographically
distant communities (Angus). However, it would appear that under the
current system of regulated competition a number of bugs need to be
sorted out before this option becomes a truly feasible one
(Globerman, et. al.). For example, the Regina Cablevision
Co-operative (Cable Regina) has expressed some interest in entering
the local telecommunications service sector. Cable Regina is a
non-profit service co-operative (the earnings are not returned to the
membership as dividends, but are retained by the Co-operative to
improve the service to subscribers or to increase and broaden
community channel programming) which provides cable service to Regina
and the outlying communities of Estevan and Weyburn. However, the
current regulatory structure prevents such a move, due to a
moratorium which allows Sask Tel (which has a monopoly on local
service throughout Saskatchewan) to be exempt from the CRTC's recent
rulings which would open up the local market to competition. The
Saskatchewan government is currently lobbying to have this moratorium
extended.
Telecommunications services can provide geographically isolated communities with a number of opportunities for economic development by linking them with urban areas and resources, attracting businesses and industry, and increasing local skills and services. In turn, public policy towards the telecommunications sector can have a strong influence the ability of communities to take advantage of these opportunities. Traditionally Canadian policy approaches have focused on regulations based on protecting consumers from the exploitation by suppliers of services with market power. Recently, primarily due to changes in technology and economic imperatives, the telecommunications regulation has been driven toward deregulation and increased competition (Stanbury). Potential benefits from deregulation include increased competition, precipitating rate reductions, infrastructure investments, new services, and increased productivity (Read and Youtie). The risks associated with deregulation are a reduction of service to high-cost communities and rate increases for local services previously subsidized by long-distance tolls. Whether the potential benefits associated with the recent decisions by the CRTC will outweigh the risks in rural and northern communities remains to be seen. Some say that technological and economic changes are bringing about the "death of distance" in telecommunications (Stanbury), while others, perhaps recalling the early days of telephony, are more skeptical.
The current period of transition can perhaps offer communities concerned with future access to telecommunications services an opportunity to consider alternative ways in which communities have responded in similar situations. The development of the independent telecommunications systems in Canada and the United States offer numerous examples of communities which, after being passed over by the dominant telecos, responded by developing their own networks. A number of these networks are still controlled by area residents, either through municipal ownership, co-operative businesses owned by subscribers, or family-owned companies. Independent service providers can offer a foil from which to compare the service of the dominant telcos. The revenues generated by the independents often remain within the community and independent providers, in particular the rural co-operatives in the U.S., are often involved in community economic development initiatives.
Another strategy for communities faced with the prospect of declining service is to encourage investment in their area by reducing the investment risk to service providers. The investment risk facing telecommunications companies is lower if community members demand advanced telecommunications services and have the skills needed to employ advanced telecommunications applications (Read and Youtie). Attracting users of telecommunications services to the community, increasing residents skills and familiarity with telecommunications technology, establishing application programs for use in the public service sector, and forming linkages with community cable networks are all examples community based initiatives focused on developing a market for telecommunications services in their area.
Both types of strategies discussed in this paper: a) depend on
local initiative; and b) benefit from the development of strategic
alliances between related organizations. Economic development
organizations within geographically isolated communities may serve as
catalysts to promote a greater understanding of the changes that are
occurring within the telecommunications industry, initiate coalitions
and alliances among related organizations, and develop strategies to
address concerns surrounding access to affordable, modern
telecommunications services.
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Personal Interviews:
Alex Hall, Vice-president Marketing, Regina Cablevision Co-operative, Regina, Saskatchewan.
Bruce Kerr, General Manager, Prince Rupert City Telephones, Prince Rupert, British Columbia.
Glenn O'Brien, Executive Director, Ontario Telephone Association, Orleans, Ontario.
Aaryn Slafky, Public Affairs Representative, National Telephone Cooperative Association, Washington, DC.