Bringing 21st century broadband to rural California will change a 20th century business (and subsidy) model

by Steve Blum • , , , ,

One of the legacies of state and federal 20th century universal telephone service subsidy programs is an ecosystem of small, independent telephone companies, often owned by families that live in the isolated rural communities that they serve. A California Public Utilities Commission decision, proposed by commissioner Martha Guzman Aceves and due for a vote in August, would begin to allow modern competitors into that ecosystem.

These rural local exchange carriers (RLECs) – serve isolated communities and individual customers in often rugged and sparsely populated terrain that AT&T historically avoided. Or at least that’s how they got their start decades ago, when rotary dial telephones were high tech and one “party line” circuit might serve (and entertain) half a dozen or more homes. Most of California’s independent telephone systems were swallowed up by bigger companies – Frontier Communications has the largest share – but 13 rural telcos, often collectively referred to as the “Small LECs”, remain.

As California’s population grew from 7 million people just before World War 2 to 40 million today, suburban and exurban development sprawled into the borderlands of highly subsidised RLEC territories. Cable companies followed, offering profitable television service to new, densely built homes with enough disposable income to pay for it.

Cable companies can provide broadband and video service wherever they please, but in order to offer full, facilities-based telephone service they need permission – a certificate of public convenience and necessity – from the CPUC. They are allowed to compete with AT&T and mid-sized telcos like Frontier, but not in the remaining RLEC territories where they can generate a sufficient return on their investment by cherry picking affluent new developments and ignoring communities with fewer homes and lower household incomes. The fewer profitable customers an RLEC has, the more taxpayer dollars it needs to serve the remaining ones.

Guzman Aceves’ draft decision tries to mitigate that problem by requiring any company competing with RLECs for telephone customers serve everyone within a “self-designed” service area that has “a proportional number of residential to commercial customers, and a proportional number of low-income and non-low-income customers”.

If approved, the new rules would bring the benefits of 21st century competition to a relative handful of rural Californians. Whether RLECs can do the same for the rest, or even simply survive, is a question that will have to be answered by Californian taxpayers.