Mark Goldberg

An expense gap in the rural digital divide

It costs more to provide most goods and services in rural areas than in urban settings. This isn’t just an issue for telecommunications service providers, but nearly every product and service, including basic needs like groceries.

In many of these rural communities, the price people are willing to pay for broadband service do not allow a service provider to recover its costs. That has led to the myriad of funding programs at all levels of government, attempting to off-set the shortfall in the business cases for telecommunications service providers, so that rural prices can be brought within sight of urban levels.

In recent years, we have seen some significant levels of subsidies handed out, frequently in the order of $4000 per household and higher.

Depending on the broadband funding program, applicants generally produce a plan indicating the business case to extend broadband service to a given region. The program usually covers the shortfall in the business case by subsidizing a portion of the upfront capital costs. In order to minimize disruption to the workings of marketplace, the programs usually require evidence that, absent funding, the proposed project would not be financially viable.

One of the challenges in providing service in rural territories is that the ongoing costs for installation, operations and maintenance is often higher on a per subscriber basis. Technicians experience lengthy unproductive “windshield time” driving between locations. Lower population densities and harsher geographic conditions contribute to higher capital costs on a per subscriber basis, and can also lead to higher operating expenses.

A 2017 FCC report (“Improving the Nation’s Digital Infrastructure” [pdf]) is one of the few studies I have seen recognizing that, for some of the most challenging locations, there would not be sufficient revenue available to cover ongoing costs, so it suggests a requirement for an annual subsidy program. In the US context, the report suggested that a $2B annual subsidy would be required on top of $40B in up front subsidies.

The CRTC used to operate an explicit subsidy program for High Cost Serving Areas. In 2016, when the Commission established its “Modern telecommunications services – The path forward for Canada’s digital economy” under Telecom Regulatory Policy 2016-496, it began “to phase out the subsidy that supports local telephone service.”

Was this a mistake?

As noted in “Canada’s Communications Future: Time to act” [pdf], the report of the Broadcasting and Telecommunications Legislative Review Panel, indigenous communities said they are “looking for a more inclusive consultation process in the development of any fund to support broadband buildout with more constant, stable, and accessible funding.” The report noted “Historically, the preferred approach has been to provide one-time contributions toward capital costs to build networks or the leasing of satellite capacity to serve remote communities.”

Business cases for broadband subsidies have a finite time horizon. What happens at the end of that period? Should Canada be preparing for an ongoing cross subsidy for high cost serving areas? Should one-time contributions be supplemented with a “more constant, stable” funding mechanism to account for higher ongoing operating expense for service providers operating in certain areas? The alternative is that rural areas will suffer sub-standard service levels in perpetuity.

Governments – at all levels – have responded far too slowly to the COVID19 pandemic in releasing broadband funding. There is no question that Canada’s governments could have and should have moved faster to get broadband projects launched in unserved and under-served regions. We missed the entire 2020 construction season and many companies are already in the process of setting their 2021 capital budgets.

At some point, hopefully some day soon, various federal and provincial broadband programs will be opened to for the next round of applications, funds will allocated to projects, construction will take place and more customers will be connected.

It likely won’t be long before some service providers reach the end of their original business cases and find there is an operating shortfall in remote regions. What happens then?

Some might say that we should simply accelerate the release of funds and not take time to worry about the future. I disagree. When should we start to consider how to deal with the eventuality of operating expense shortfalls?

1 comment to An expense gap in the rural digital divide

  • Mike Connolly

    An example comes to mind. Superior Wireless received $3.5M from the Northern Ontario Heritage Fund Corporation and $500K from the Federal Economic Development Initiative for Northern and rural Ontario (FedNor) to build cellular service in unserved parts of northwestern Ontario while Superior Wireless itself contributed $1.9M. Within two years between having to make further investments for new technology and ongoing operating expenses Superior Wireless was unsustainable and was bought up by TBay Tel. For its part Industry Canada had “funded” Superior Wireless with 800 MHz cellular spectrum clawed back from one of the cellular incumbents under its New Party Cellular Policy. This policy was faulty as it was premised on giving spectrum to those willing to serve with little consideration given to whether the proposition was economically viable. I recall pointing out on several occasions that if an area is unserved it is not for want of spectrum but rather for want of a business case for surely if there was a business case the cellular incumbents would be there providing service. It would have been more economically efficient to give an operating subsidy to an incumbent cellular provider. Generally the federal government’s programs were (are) more oriented to generating cheque presentation photo-ops than truly tackling the difficult economics of rural and remote service provision.