University of Wisconsin–Madison

Rural Telecommunications Cooperatives

Overview


Telecommunications cooperatives are part of the independent, community-based group of providers that serve less than 5% of the nation’s telecom subscribers through coverage of over 40% of the nation’s landmass.

Telecom cooperatives provide local telephone exchange services, long distance telephone operations, high speed or broadband internet access, as well other direct broadcast satellite, wireless, and TV services.

History


The lack of telephone service in rural areas in the early 20th century spurred the development of small telephone companies. In areas where farmers were already familiar with agricultural cooperatives, the model was often used to provide telephone service to their communities. Many small cooperatives, mutuals, and private telephone companies companies were providing service by the 1920’s. However, the lack of capital investments and poor business practices, as well as the Great Depression, caused many to fail.

Major changes came to rural telephone companies with the advent of the New Deal. The 1934 Communications Act created the Federal Communications Commission (FCC) to provide quality telephone service to all Americans at reasonable rates. However, rural telephone service availability and quality remained poor until long-term, low-interest loans for rural telephone companies became available as part of the REA loan program in 1949. In 1961, the definition of telephone service was expanded to include provision of educational television, and in 1971, the Rural Telephone Bank (RTB) was created to supplement direct loans from REA. RTB was jointly owned by the Federal government and rural telephone companies, including cooperatives, until 2008, when the availability of other sources of capital made it obsolete.

Between 1934 and 1982, American Telephone and Telegraph (AT&T) dominated the entire telecommunications sector. Independent local carriers, many of which were cooperatives, provided local wiring to end users and purchased access to long distance calling from AT&T. The 1982 breakup of AT&T created the seven regional carriers known as the “Baby Bells,” but demands to completely deregulate the industry continued until passage of the Telecommunications Act of 1996. This Act was the first major overhaul of the 1934 Communication Act. It promoted competition in formerly regulated service areas, and set new standards with it sprovisions for competition and universal service.

High speed internet now supports significant portions of the daily activities for individuals, businesses, and communities. The federal and state regulatory landscape continues to change in response to issues such as net neutrality and the lack of broadband access in rural areas.

 

Industry Niche


The telecommunications industry provides business, government, and retail consumer with voice, internet, and data services through fiber, fixed wire lines and wireless systems. The industry is characterized by substantial and fast-paced change in structure, technology, customer preferences, and government regulations, and is dominated by very large investor-owned firms.

Telecom cooperatives provide these services to sparsely populated rural areas where investor-owned telecommunications firms have been unwilling to make the needed capital-intensive infrastructure investment.

Telephone cooperatives and independent private providers have had to adapt to major changes in the market. The 1984 break-up of the Bell System and the Telecommunications Act of 1996 promoted competition into formerly regulated service areas. Federal and state regulations have also contributed to changes in the market that continue to the present.

The advent of internet delivery over telephone lines has provided a more recent and significant challenge and opportunity to provide service to cooperative member owners. The largest competitive threat to the telecom cooperatives has been from cell phone providers, although in some cases cable and satellite may also compete.

Small rural telecom cooperatives need to respond to market opportunity and competitive challenges in meeting demand for broadband services, but their resources for raising the needed upfront capital investment may be limited.

An important source of funding for innovation, including broadband, comes from mandatory contributions made by international and interstate communications carriers to the Universal Service Fund. The fund was established by the FCC to assure that reliable, affordable, advanced telecommunications services are available to all consumers. However, changes in Universal Service Fund requirements and fees from inter-carrier compensation to small rural telecommunication companies may negatively affect the fund, placing pressure on subscriber rates.

To support the delivery of services to rural areas in this competitive environment, telecom cooperatives are eligible through USDA Rural Utility Service (RUS) loans, which are available for voice telephone service, broadband access, distance learning, and telemedicine. RUS also makes loans to telephone cooperatives to facilitate third-party lending for rural economic development job creation, and provides significant technical assistance.

Many cooperatives have been clients of RUS for 50 to 60 years, having received and paid back loans multiple times. The program also includes requirements for financial, engineering, and other planning and assessment work. Very favorable interest rates are based on the federal rate and are significantly lower than commercial bank loans. RUS will make loans in overlapping areas, but won’t finance competition to existing loans.

Organizational Structure


Telecom cooperatives are incorporated under state statutes specific to telephone cooperatives, or under the state’s general cooperative or corporate laws. Telephone cooperatives are considered nonprofit corporations and are granted Federal tax-exempt status under IRC section 501(c)(12), which requires that they be a cooperative, provide telecommunications services, and meet the 85% income from members rule.

Each telecom cooperative customer becomes a member-owner of the cooperative, which includes both individuals and organizations. Although telephone cooperatives were originally monopoly providers, many residents in their service areas can now choose among several telecommunications suppliers.

Members elect a board of directors from among the membership on a one-member/one vote basis. The number of directors on the board varies, depending on the size of the cooperative. Bylaws may provide that directors be selected from specified territorial districts and may further limit voting for any director to members located in the territorial district that a director represents. Directors are not compensated for their service.

Rural telephone cooperatives strive to operate at cost. However, like other businesses, telephone cooperatives must accumulate equity capital to support their operations and new initiatives. Net earnings allocated to each member based on patronage are called “capital credits”, and the underlying value is retained by the cooperative for a period of time. Most telephone cooperatives have capital credit retirement programs in which the value of past allocated capital credits is returned to members, most frequently as a credit on their telephone bill.

Telecommunication cooperatives, as well as commercial telephone companies, are subject to regulation by the FCC, the Interstate Commerce Commission, state public utility commissions, and county and local regulators. In many states, however, cooperatives are not subject to state regulation because they are consumer-owned, and considered self-regulating organizations. In addition, like other RUS borrowers, telephone cooperatives are subject to regulations and guidelines established by RUS.