An Idea for Funding Rural Fiber

eyeballI’ve been working for a long time with rural broadband and it has become clear to me that there is no way on our current path that we can build fiber everywhere in the US. The borrowing capacity of all of the small telcos and coops is not nearly large enough to fund fiber everywhere. It’s often difficult to have a business case for rural fiber that you can get funded at a bank. It certainly doesn’t look like the federal government has any plans to fund fiber, and even if they did they would probably spend too much by imposing unreasonable rules that would drive up construction costs.

But there are other ways that we could fund fiber everywhere. For example, consider the utility model. Utilities are generally able to get funded because they are guaranteed a rate of return of perhaps something like 10% on their investment. It has been the guaranteed returns that have allowed rural telephone to borrow the money needed to operate.

If fiber networks had a guaranteed return there would be many commercial lenders and other investors willing to provide the money to build rural fiber networks. There is a huge amount of money available from pension funds, insurance companies, and other large pots of money that would be attracted to a steady 10% return.

There is no reason the utility model can’t be applied to rural fiber. The primary characteristic of a regulated utility is that it is a monopoly, or nearly a monopoly. In rural America today there is no real broadband competition. Rural areas are served by a combination of dial-up, satellite, cell phone data, very poor DSL or fixed wireless systems. There are many millions of households with no other options other than dial-up or satellite.

There are two keys to making this idea work – how to pay for it and how to monitor and regulate the earnings of these new broadband fiber monopolies. We already have a historical model of how to pay for this. Rural telephone companies for years were regulated in this manner and there was a combination of funding mechanisms used to fund rural telephony. Most obvious was local revenues collected from customers. I know of rural fiber networks today with 70% to 80% broadband penetration rates, so these networks would get a significant number of customers and local revenue.

Telephone companies have also pooled some of their revenues nationally in process called cost separations. Phone companies throw all of their interstate revenues into a pot and divvy up the money according to need. There is no reason that some of the broadband revenues couldn’t be pooled.

Finally, the telcos had direct subsidies from the Universal Service Fund to make up any shortfall. The biggest complaint about the Universal Service Fund is that it isn’t paid to companies on the same basis as other revenues, and thus it enriches some companies unfairly and doesn’t give enough to others. But if USF revenues were put into the same pool as other revenues then it would be allocated each year where the financial need warrants it.

The process of pooling revenues has always been a bit complicated in practice, but simple in concept. Each company in a pool calculates their costs according to a specific formula – in the case of telcos, using rules proscribed by the FCC. Then, some external pooling body examines those calculations and administers the collection and distribution of pooled monies. This whole process of administering a pool adds only a tiny fractional additional cost onto the process – and is necessary to make sure everybody plays fair and that there is no fraud.

The basic concept of pooled revenues and some kind of broadband USF could provide the economic basis for obtaining the funding needed to build rural broadband. I would expect that rural telcos and cooperatives would jump onto this idea immediately and build more rural fiber. And there is no reason that the large telcos wouldn’t at least consider this. But since they are driven by Wall Street earnings they might pass on regulated returns.

We know this process can work because it has been in place for decades for rural telephony. The only alternative to this that I can think of is for the federal government to hand out grants to build rural broadband. But I just don’t see that happening in today’s political environment. So rather than wait for the federal government to finally decide to hand out huge grants we ought to take the model we know and get going with it.

This concept would need a boost from the federal government to get going. It would probably require an act of Congress, but this is something that is probably easier to get enacted than a huge grant program. And it is a lot more attractive politically since it provides a way for private investment to fund rural broadband rather than the government. We have too try something because the rural areas are falling quickly onto the wrong sie of the digital divide, and that is not good for any of us.