This article excerpted from the report “Bringing Broadband to Rural America,” which was produced by the Federal Reserve Bank of Richmond.
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High-speed broadband internet service has transitioned from a luxury good to an increasingly necessary utility. Rural regions are particularly susceptible to poor broadband infrastructure coverage, however, because they pose a costly business case for providers. The economic case for rural broadband infrastructure, though, is compelling despite its cost: Broadband access and adoption in rural areas is linked to increased job and population growth, higher rates of new business formation and home values, and lower unemployment rates. Unlike with many other types of infrastructure, the long-run benefits of broadband access could grow exponentially, given the potential for innovation and productivity gains it provides.
Local Economic Impacts of Broadband Access and Adoption
Access to broadband internet service holds the potential for boosting overall economic growth. Can large-scale economic gains translate down to the local level in rural areas? Overall, despite the limitations of data on broadband access and methodological challenges, the research suggests potentially positive impacts of broadband on local economies. Effects tend to be stronger in rural areas that are closer to metropolitan areas than in more remote regions, and the use of broadband (adoption) rather than access alone is more powerful.
Studies of the economic impacts of broadband expansion into rural areas can be broadly categorized into local labor market effects, benefits accruing to consumers, benefits accruing to businesses and homeowners, and benefits accruing to participants in telemedicine and distance learning.
Economic multiplier studies pull all these economic effects together to gauge the potential overall economic impact of broadband access on a local economy. Two studies from Purdue University’s Center for Regional Development estimated the economic impacts of expanding broadband in the areas served by seven rural electrical cooperatives in Indiana and compared it to the cost of expansion. Benefit-cost ratios for expansion in each electrical cooperative’s footprint ranged from three to four, meaning every dollar spent on expansion would result in about three to four dollars in economic benefits to Indiana. The per-member net economic benefits in the coverage area amounted to $24,293, which was used to extrapolate an estimated $12 billion in net benefits to the state of Indiana for universal broadband access.
The Cost-Funding Gap for Broadband Infrastructure
Given the long-term economic benefits of broadband accessibility, why is broadband service not universally available? At the heart of the issue are low returns on investment for providers. As discussed earlier, high upfront capital costs and few potential customers make it less profitable to provide broadband service to many rural areas. Rural areas faced a similar problem with access to electricity in the early part of the 20th century. Only one in 10 farmers had electricity in 1930, compared with nine in 10 urban and rural non-farm residents. The Rural Electrification Administration was created in 1935, and significant public resources were spent to achieve nearly universal access within 25 years.
How do broadband infrastructure subsidies available today compare with the need? Federal and state governments have programs to subsidize broadband infrastructure investment.
- The FCC’s Rural Digital Opportunity Fund (RDOF) is by far the largest source of funding available. It is comprised of a $20.4 billion investment in broadband infrastructure over 10 years, from 2020 until 2030. Funds are made available through a reverse auction, where providers compete in two auctions. The first auction occurred in late October with $16 billion available, with the remaining $4.4 billion available for a second auction at a time to be determined. Eligible locations for the Phase I auction were areas with no service, with the Phase II auction opening up to partially served locations and locations that received no funding in the Phase I auction. Results from the Phase I auction were released in early December 2020, showing 180 bidders winning $9.2 billion in nearly all locations eligible. The remaining $6.8 billion from Phase I will be reallocated to Phase II, bringing the total support available in that auction to $11.2 billion. Another source of funds allocated by the FCC is the Alternative Connect America Fund, providing $4.9 billion.
- The second-largest source of broadband infrastructure support is from the USDA’s eConnectivity Pilot Program. Also known as the ReConnect Program, funds have been allocated under two auctions to provide loans, grants, and loan/grant combinations to broadband service providers for infrastructure projects. Among other criteria, the program requires an area to show that at least 90% of households in the proposed funding area lack access to broadband service, unlike the first phase of the FCC’s RDOF program, which requires areas to demonstrate that all households in the proposed funding area lack broadband service. This difference allows the ReConnect program to provide relief to those areas that are essentially unserved for the vast majority of residents but are not eligible for the FCC’s RDOF subsidies available in Phase I. As of the writing of this article, over $1.3 billion has been allocated through the ReConnect program. Combined with other programs in the USDA’s Rural Utilities Service, total broadband infrastructure support is about $2.3 billion.
- States spend money on broadband infrastructure, some with dedicated funding streams and others on an ad hoc basis. The National Telecommunications and Information Administration conducted a survey of state broadband programs showing that less than $2 billion was spent in 2018-2019 by states to expand broadband infrastructure.
- The CARES Act in response to the Covid-19 pandemic allocated funds to be used for broadband infrastructure expansion. A survey of states’ uses of these funds by the National Governors Association shows that, at most, about $600 million of CARES Act funding went to broadband infrastructure projects.
Reliable estimates of the cost of the infrastructure required for universal broadband coverage are hampered by poor data on existing coverage and existing infrastructure. However, a 2019 paper from the FCC put the size of upfront capital investment needed for ubiquitous broadband coverage at $80 billion. An industry study conducted by the consulting firm Cartesian estimated that the total cost of laying fiber to all households currently unserved would be $85.6 billion. As with the FCC’s coverage numbers, both figures are likely an underestimate of the true size of the problem, but they are a useful starting point to judge if current funds are sufficient. Once the upfront capital costs are covered, revenues from internet subscribers will most likely cover network maintenance costs.
Summing the major sources of government funds for broadband infrastructure leads to a rough total of $30 billion available. Thus, what emerges from these rough figures is a sizeable gap of $50 billion to provide broadband infrastructure to every American household.
Approaches to Accomplishing Rural Broadband Expansion
Are there promising approaches to expanding broadband infrastructure? One approach is using electric cooperatives to provide the service. Electrical cooperatives often have a fiber “backbone,” which transmits data from the smart grid back to the operations center. Using the fiber backbone for smart grid applications as well as retail broadband service is an example of economies of scope, the term used to describe the savings achieved by having one firm produce multiple products. Electrical cooperatives also have easements and utility poles that can yield substantial cost savings. An industry study estimated that 60% of unserved households are in the service area of electrical cooperatives that do not currently offer broadband service. Using cost estimates from that study and from an electric cooperative broadband expansion multiplier study conducted by Purdue University, we estimate that using electric cooperatives to provide broadband service could save between $8 billion and$15 billion from the $80 billion total cost of providing fiber to every currently unserved home.
The biggest challenge to the electrical cooperative approach is that many states have ambiguous laws regarding broadband provision by electrical cooperatives. In some cases, state laws prohibit electrical cooperatives from providing broadband service entirely. The rationale behind these laws is concern over the cross-subsidization of broadband service by electrical service – that is, the possibility that electricity consumers could end up paying for broadband infrastructure even if they do not plan to use it. There are also legal issues surrounding the use of easements and providing service outside of an electrical cooperative’s service area. Some states are resolving these issues in favor of electrical cooperatives in the interest of providing service where investor-owned utilities show no interest in providing service. Within the Fifth Federal Reserve District, the Choptank Electric Cooperative on Maryland’s Eastern Shore successfully lobbied the state legislature to allow the cooperative to provide broadband within its electricity service area – about 54,000 customers in nine counties.
A second approach is to use less expensive technologies that sidestep the need for wired connections. The main options are fixed wireless and satellite service. Fixed wireless uses line of sight connections between a central tower and the end user, meaning there is no need to go through the time and expense of laying fiber to every home. The approach is significantly less expensive – at least initially. Satellite is another option, although it can be expensive and provides service that is generally slower. Using these approaches has the potential to reach the remaining 40% of households without broadband infrastructure coverage provided by the electrical cooperative option at a cost savings of $8 billion to $15 billion.
An example of this approach at work in the Fifth Federal Reserve District is a project of Shenandoah Telecommunications Co. (“Shentel”) that is beginning to offer fixed wireless service called “Beam Internet.” Shentel invested $17 million in spectrum licenses in Virginia, West Virginia, and Ohio and is providing 25 Mbps download speed service. The technology can support speeds up to 100 Mbps, which bodes well for the future as speed demands rise. The technology can be deployed in a matter of months rather than the years it takes to lay fiber. Each tower can serve customers within a five-mile radius if there are no significant obstacles in the way.
A third area where action can be taken is in the creation of public-private partnerships (PPPs) to build broadband infrastructure when there are no existing providers in a locality. With PPPs, the key is to create a coalition of interested parties – typically a local government or economic development agency along with a private source for matching funds – that can create a broadband infrastructure project ready to apply for federal subsidies. There are many varieties of broadband PPPs, which makes evaluating the PPP approach as a whole difficult. They range from the public facilitation of private investment through economic development incentives, to public funding with private execution, to hybrid models where the locality and private partner share the costs and benefits.
The PPP approach is gaining traction in West Virginia, where pockets of the state lack broadband service, have inadequate service, or lack a willing provider. The Claude Worthington Benedum Foundation – a foundation serving West Virginia and southwestern Pennsylvania with initiatives in economic and community development, among others — has studied this approach closely as a way to get broadband projects started in the state, with an eye toward helping partnerships connect with the funding and technical assistance they need to get off the ground and running. The Thundercloud project is an effort to connect anchor institutions and businesses with high-speed fiber service in Huntington and a broader nine-county region. It was created by a nonprofit organization formed by local institutions: Marshall University, Marshall Health, and Mountain Health Network. The project received a $2.35 million POWER grant from the Appalachian Regional Commission and from the CDFI Appalachian Community Capital as seed money.
Conclusion
It can be costly to get broadband to rural areas, but the potential payoff is high. The Covid-19 pandemic underscores the necessity of high-speed internet access for almost all Americans. As a combination of factors make rural areas too expensive for many providers, subsidies play an important role in making rural areas economically feasible for service. Comparing the costs of expansion against the subsidies available today shows that more subsidies are needed to close the gap. Engaging electrical cooperatives, using alternative technologies, and, in some instances, public-private partnerships work best for getting the job done.
Alex Marré is a regional economist at the Baltimore branch of the Federal Reserve Bank of Richmond.
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