The Rural Exemption

FCC_New_LogoI was recently surprised when I saw a small telco in Minnesota invoke the rural exemption. This is a set of rules that was created by the Telecommunications Act of 1996. In those days the rural telephone industry had an effective presence in Congress and this was added to that legislation as a protection for small rural telephone companies.

The Act created CLECs and made it possible for anybody to create a competitive telephone company and compete against the incumbent providers, who were all heavily regulated monopolies at the time.

The purpose of the rural exemption was to provide a pause in the process of allowing a competitor telephone provider into rural markets. The big fear was that there would be markets where a competitor would come in and cherry pick the market and make the remaining company unviable. This was a real concern. For instance, I had one client at the time that made over 60% of their revenues from one very large factory. They didn’t think that if they lost that factory as a customer that they could remain viable and continue to serve everybody else. Their fear was that competition would wipe out the only telephone company in their small community.

This was a legitimate fear. But it turns out the rural exemption was not really the right answer to their problem. It became quickly obvious that they would eventually lose that customer and that the rural exemption wouldn’t really protect them. So I helped that company to branch out into the surrounding towns to offer their own competitive product. They needed to have a customer base that was big enough to survive losing the big factory.

And sure enough, it worked. They lost that factory as a customer a few years later when a competitor offered cheap broadband to the factory that they couldn’t match. But when they lost the factory they didn’t fold. In fact, they are doing better today than they were before they lost the big customer. They beat competition by becoming competitive themselves.

In the 90s there were a number of small companies that invoked the rural exemption. This forced the the state regulatory commission to have a formal hearing before allowing in a competitor. The small companies were in the unenviable position of having to argue that competition was bad for their community. And as you might guess, I don’t think a small company ever won a rural exemption case and the competitors were always granted the ability to serve their markets.

Over the next decade there was a huge increase in competition in the rural areas as cable companies got the technology that allowed them into the telephone and data business. Competition from the cable companies was so inevitable that almost nobody wasted the legal fees needed to invoke the rural exemption. And I think that after enough of these cases were filed and always lost I think small companies got the message that being against competition sent the wrong message to their customers. There were still a few rural exemptions invoked into the 00s but most of these were nothing more than a feeble attempt to keep competitors at bay for a few extra months.

It’s possible that there have been some cases filed in the last few years that I missed, but I can’t recall having heard of a rural exemption being claimed for many years. The law is still on the FCC rulebooks, but it’s obvious by now that every regulatory body is pro-competition. There is basically zero chance of a rural telco convincing a regulator that they should be exempt from competition. Particularly since the rural exemption only looks at voice competition and we have move to a world where it’s all about broadband.

This current case is a perfect example of why the rural exemption ought to be obsolete. The competitor in this case is a new cooperative that is building gigabit fiber optics to everybody in the community including the farms. The farmers in this area either had very slow DSL, or if they were too far from town they had no broadband at all other than dial-up or satellite. The telco that filed the rural exemption has known about this coming competition for at least five years.

This small telco should have taken the same advice I gave my small client with the factory in 1997 – they should have found a way to participate in the innovation. This telco could have taken a lesson from the hundreds of other rural telcos that have built their own fiber to customers. Nobody is going to build a second fiber network in a rural community and this company could have built fiber and ensured their prosperity for decades to come by being the first with fiber. But instead, they now are going to have to go to the state regulatory Commission and tell the citizens of their community why they would be better off without fiber and faster broadband. I’m glad I’m not their consultant or lawyer because I don’t think anybody can make that argument these days with a straight face.