The Electric Co-ops Pumping Connectivity Lifeblood to Rural Communities
Episode ID S2E08
June 14, 2023
With rigorous experience, commitment and strong balance sheets behind them, rural electric co-ops are doing for broadband today what they did for electricity last century. In this episode of All Day Digital, CoBank Regional Vice President of Electric Distribution Tamra Reynolds discusses how those co-ops providing the connectivity lifeblood to rural communities are also finding a revenue opportunity in the smart grid.
Tamra Reynolds: Those are types of things that I think were really top of mind for electric cooperatives when they looked around and said, "How do we keep people in these communities? How do we keep our communities thriving, keep people coming back after they go to college and how do we sustain the life that we all appreciate and enjoy in these rural communities?" I think that was really first and foremost, the motivation there.
Jeff Johnston: That was Tamra Reynolds, regional VP, electric distribution, for CoBank on why electric cooperatives are building broadband networks in rural America.
Hi, I’m Jeff Johnston and welcome to the All Day Digital podcast, where we talk to industry executives and thought leaders to get their perspective on a wide range of factors shaping the communications industry. This podcast is brought to you by CoBank’s Knowledge Exchange group.
Electric cooperatives are playing an important role in bridging the digital divide. Their strong balance sheets, experience in building complex energy networks and commitment to serving their communities are just some of the reasons why they are active in this market.
Tamra has extensive experience in working with and financing numerous electric cooperatives and understands how these organizations think about the importance of broadband in rural America, and how they plan to address the unserved and underserved.
So, without any further ado, pitter patter, let’s see what Tamra has to say.
Johnston: Tamra Reynolds, welcome to the podcast. It's a pleasure to have you here with us today.
Reynolds: Hey, thanks, Jeff. Happy to be here.
Johnston: I'm really excited to have you on because there's so much going on in the electric cooperative broadband space. They seem to be very actively involved in building out broadband networks, I think playing a very critical role in bridging the digital divide in rural America. I really want to drill down on a lot of things that are going on in that space. Maybe before we get into a lot of the specifics, perhaps you can just give us a little bit of a high-level overview of what exactly the electric cooperatives are doing in broadband.
Reynolds: Absolutely, Jeff and I appreciate the time and focus on what co-ops are doing. I think it's an exciting time to be in the industry for a lot of reasons. But one of those primary reasons is the broadband aspect and what co-ops are trying to do to bridge the digital divide. One of the things that CoBank has been partnering with co-ops on for going on nine years now, we really started seeing some of these requests come through back in 2014, 2015, looking for ways to support their membership from both an economic development perspective.
Also just a connectivity perspective, getting them on par and equal with what we're seeing in urban areas, from an aspect of just being able to do and conduct business the same way. That's really been what I would say is the key drivers, giving those rural areas the opportunities to thrive, just like we've seen in some of those urban and suburban areas. It's been an exciting journey so far. Like I mentioned, started seeing that come to fruition 2014 and 2015. Some co-ops were doing it before then. Back in 2009, we started to see some folks test the waters a little bit when the ARRA funds came out and some of the RBIC funds came about.
Those were what we would consider the really, really early movers and a lot was learned from that process, but it really was foundational in terms of co-ops thinking about how do we do what those folks have done? How do we make that feasible and how do we do it? How do we bring that to our territory in a way that is cost-effective for our membership?
Johnston: Great. That's a wonderful overview. I guess too, just thinking about electric cooperatives financially, I mean, correct me if I'm wrong, but I think they're in a pretty good position from a balance sheet perspective and from a cash flow perspective to play a critical role in building out these networks.
Reynolds: Absolutely. Yes. When you think about why co-ops are maybe fit for deploying broadband, they're used to investing in long-term infrastructure. They've got huge balance sheets. They know how to build things. They know how to access funds for 30-plus years. When you think about fiber and you think about the useful life of that asset, we know it's at least 30 years. Maybe more. We've seen fiber networks out there for 40+ years now. It really makes a lot of sense in terms of how it fits within their regular asset base. That's been a real key for them to find ways to make it fit.
I think the other aspect that's important that people are maybe not necessarily penciling in when they build their feasibility studies, but the smart grid aspect really is a revenue enhancer and an incremental value for the electric side. We're starting to see people think about building systems a little bit differently to take advantage of that. Not that it was ignored at first, but I don't know that it was necessarily fully utilized to their greatest capability.
We've seen things like technology changes come to fruition, particularly with distributed energy resources. You think about EVs, solar batteries, that wave of customers making choices about how they do their energy side of the business or even at a residential situation. Those smart grid networks really do play into how those co-ops can be effective and really nimble going forward.
Johnston: Hey, let's dig into a little bit about, and you've touched on it here and there, but the motives behind building these broadband networks. I guess the way I think about it is, I think about it in two parts. On the one hand, I think about these investments from a membership perspective and an economic sustainability standpoint for these communities.
There's been numerous studies done around what broadband can do and what broadband means for communities that are unserved or underserved from an economic perspective. Then I would think also, and this is definitely where my ignorance is, but from an electric cooperative operations perspective as you think about smart grid or other ways and how they manage their networks, I would think broadband probably plays a role in that as well or has a benefit to that to their core network operations. Would love to get your thoughts on some of the motives behind why they're doing this.
Reynolds: Jeff, a common theme I think CoBank tends to address and talk about is the fact that rural America is really failing to keep pace with urban areas when it comes to economic development, economic health in general, but most importantly connectivity.
Those are types of things that I think were really top of mind for electric cooperatives when they looked around and said, "How do we keep people in these communities? How do we keep our communities thriving, keep people coming back after they go to college and how do we sustain the life that we all appreciate and enjoy in these rural communities?" I think that was really first and foremost, the motivation there.
Beyond that, I think you look around and you see all the opportunities that present itself when you think about being able to connect with all of other parts of the world. You think about telemedicine and this predates COVID first and foremost. You think about telemedicine and healthcare. Rural communities age at a much faster pace than you see in urban areas, and so that was a real concern, online education and having equal opportunities with urban areas to educate children, to educate adults maybe that wanted to go back to school or get a second degree.
You think about employment, e-commerce, all of those types of things that are really valuable and that is all before you think about entertainment and the things that people enjoy being able to do when they're home. Netflix, and all the other stuff.
Johnston: Great. That's really helpful. When I think about the energy complex, it just feels like we're going through a significant transformation to renewables and I think the energy complex has always been pretty complicated, but my guess is with renewables, it's getting even more complicated to manage this whole thing. Does broadband at all help play a role in this to manage all of these different sources of energy?
Reynolds: Yes. I definitely think so. We talked a little bit about the smart grid benefits, and I think those sometimes are hard to quantify. They haven't historically been something that you've been able to necessarily track, but you know that having the ability to have high-speed communications between different parts of your system really lends itself to resiliency and support for a network where across the energy space, right now, we're seeing more disruptions than ever in history in terms of service and reliability. That doesn't even touch the power supply side that just talks about purely the transmission and distribution system.
When you think about how important that is and how much we rely on electricity but maybe don't even think about it, we just think, "It's going to be there," and a lot of times we think the same thing about communications. Unfortunately, but it does take a lot of work and a lot of investment. I think the smart grid aspect is really critical when you start thinking about transactional energy, which is a new concept that a lot of people are starting to talk about but how does a consumer work with a utility or other consumers within their network or their subdivision to sell solar from their roof, that they're not using, excess solar. How do we think about electric vehicles and crediting the grid for the energy that your battery may be in your electric vehicle provides to the utility? There's a lot of future-looking opportunities that I think are improved by high-speed communications like fiber.
Johnston: That's fascinating. I love it. It's so many moving parts here with how we generate, store, transact energy. It's just fascinating space. Cool. Back to these fiber investments, I'd love to get your thoughts based on what you're seeing around how electric cooperatives who have deployed fiber to the home. How are they thinking about leveraging those investments for other opportunities more in a wholesale capacity, whether it's providing fiber transport to enterprises, or backhaul for wireless towers, or connecting edge computing locations? It would seem to me that there are other derivative plays off these investments. I'd love to hear from you if that's something these folks are thinking about.
Reynolds: That's a great question. I think we're starting to see some maturity in some of these systems that CoBank has helped finance over time. I talked about 2014 and 2015 being the starting point for a lot of these networks. I wouldn't say that they're necessarily built out at this point. I think that's an ongoing process but I do think that their rings are built. I think they're just doing connections and new drops and taking customers, if they're in a competitive area but the thing that is really top of mind for most of these guys right now are a few things. What can you leverage from a grant's perspective?
I think people are excited about that opportunity because it gives them some new ways to look at edging out and that edge-out strategy. That's one aspect that's really important for our co-ops. I think the next piece that's really intriguing that we're seeing a lot of interest in, and part of that's driven by grants too, is the middle mile aspect.
When we think about electric co-ops, they're typically the flyover territories. They're not places that people have wanted to serve or needed to invest in assets like this. When you think about that middle mile network and how critical it is. These co-ops are looking for ways to connect to NFL cities, so to speak. That's how they frame it up is, how do we connect there and create this redundancy and backhaul? What value does that provide to not only our residential takers of service but commercial loads, banks, anybody that can be a client or a customer of some of these networks?
Finally, I think a couple of unique trends we're seeing in some places and not consistently as an up-tier of services, what I mean by that is moving from like a gigabit residential service to two-and-a-half gig. Some people say you don't even need one gig but if people are interested in paying for it, if they want that service, if they need it for some reason going forward, they have the comfort and peace of mind that it's there for them.
Lastly, co-location. I think those are all opportunities we're seeing co-ops look at taking advantage of, and some are doing it better than others. For example, one co-op that we've been financing since 2016 on their broadband buildout, they're done now. They're going out of their territory and doing some really lucrative projects and hotspots that are not served, is they generate ARPU of around $140 on average. Of that $140, about $30 are those ancillary or extra benefits or extra services that we're talking about there, which is surprising, we didn't think it would be that high. That's been a real change in how they've approached the business. I do think that will continue to evolve and maybe take root in some other utilities across the country, especially in the electric co-op side.
Johnston: Hey, you mentioned edge-out and that jumped out at me. I got a couple of questions on that. It sounds like electric cooperatives are starting to think beyond just, "Hey, this is a thing we need to do to service our communities is now maybe this is something-- This is more of a true business opportunity." If they're edging out, are they edging out into markets where they don't provide power? Is that what you're suggesting, because they see a business opportunity to do so?
Reynolds: Yes, great question, Jeff. Co-ops and utilities in general, tend to lean into territorial protection when you think about electric service. You don't compete for electric service in most places across the country. They really have a one-track mind when it comes to doing that business. They've had to think differently with communications being a competitive business and thinking beyond their borders, if that makes sense. You've got their territory that maybe they've served all of their members, and now they're starting to think about, where else do we go? How else do we continue to generate cash flow that supports paying off this network faster?
One co-op, in particular, in northwest Arkansas has really thought about this well. They've gone into areas where there's no incumbent service, and they've picked up towns where there's some density pockets. It's still rural by nature, but they don't serve it on the electric side. That's been really valuable, not only for those people in those communities that are being left out, but also for their membership in that they're not necessarily waiting 30 years to pay off that debt. It's a win-win-win when we think about what that brings to the table for some of these communities.
Johnston: I think about that in relation to the cable operators because for the longest time, there was like the cable mafia. They would never compete against each other in their respective markets, and everyone had their little islands, and that was all fine and good. It's interesting because more recently, small, but we've seen some transactions where cable operators are buying overbuilders, broadband overbuilders and becoming more of a direct threat to their cable mafia brother. It feels like it's maybe a similar thing that's going on here as well. That's an interesting development.
Reynolds: I guess I would also add, Jeff, the thing that it's not necessarily non-co-op territories are going into either, right? It's also their co-op neighbors that maybe they don't want to build. They don't see the reason to build a network and don't want to operate a retail broadband business. They've partnered in some ways, and I say partnered loosely, they've given them permission to come in and serve their customers because they trust them and their reputation. In some ways, it's also a really great partnership amongst co-ops to say, "Hey, you run with this. You're doing a great job."
Johnston: No, that's a good point. It's more collaborative in nature as opposed to competitive threats. Yes, that's a good point. Is it only fiber, Tamra? Are these guys looking at fixed wireless at all? I'm sure it's a fiber-first strategy for obvious reasons, but in some of these markets that are sparsely populated, are they looking at alternative technologies?
Reynolds: They are. I would say that trend has changed over time. We started to see early on, co-ops with densities above 4.5 people per mile were good candidates for some higher speed internet, whether it was a wireless plus a fiber build or fiber only. If you had some dense pockets or a combination, you could do a blended network. I think with the amount of money that's come out and with the low cost of financing over the last several years, particularly through COVID, I think people have reevaluated this strategy and looked at, "If I'm going to deploy wireless for $40 million, and I could do fiber for 70, and 25% of it is getting paid by grants, why not?"
They've-- I would say, retailored their strategy on how they build, or they've taken a pause and said, "Do we really need wireless? Let's see where we get." I think that that's been actually pretty valuable. As you know, wireless technology is improving, but I don't think that it promises, it's the same sort of service and dependability that I think co-ops expect when they think about reliable service and that's a big aspect for them.
Johnston: Cool. Hey, just something came to mind. Think about the current economic environment right now. In the telecom market we've seen a slowdown in mergers and acquisitions here in the last 12 months or so and we believe that that's a combination of higher interest rates that are impacting borrowing costs and change the business model a little bit. On the supply chain side of things, we're seeing and things are getting much better, but from an equipment standpoint, there's been delays in getting equipment in.
On the labor side of course, that continues to be an ongoing challenge where you've got 1.7 of jobs open for every one person looking for a job. Just across the economy, obviously, there's a lot of challenges from a labor standpoint. All of these sort of factors have impacted build schedules for a number of telecom operators and pushed things out. We suspect that's having a role on why we're seeing a little bit less M&A. I guess from a supply chain and a labor standpoint and the current economic environment, have you seen any of that impact builds and plans in the electric cooperative space?
Reynolds: Yes, it's certainly a consideration. I think when you look at what we would consider standard electric infrastructure investment, that's maybe, softened a little bit. People are maybe not necessarily taking the same approach to maintenance capex and they're really thinking a little bit harder about how they deploy capital to do the right things for their system. All at the same time we've seen recorded investments from an infrastructure standpoint when it comes to grants and government support. I think people are sort of saying, "Wait a second, we really need to think about how we spend our money and are we really considering all the things that are at our disposal right now?"
From just the electric side alone, I think people are sort of saying, "Okay, we need to think about this," coupled with the fact that energy prices are actually higher now than they were two years ago. That's due to a number of factors, right? Natural gas continues to pose some challenges. It's not in a place where it was back in say, September. That is something that people keep in the back of their minds is how that impacts member bills and their ability to pay off their electricity bills every month. From that perspective, yes, I think people are maybe pausing on some projects and thinking about it differently.
From the fiber perspective, I think it's really interesting because yes, we've sort of been waiting on pins and needles for BEAD money guidance and how that looks and how that comes out. At the same time, they can't really wait when you think about competitive territories and how you go off after, particularly agile strategies. How you go after some of those areas in the event that they are competitive and in most cases they're not. On the rare occasion they are, it's still something that people have to think through and consider. I do think that interest rates play a big factor in that.
Supply chain has not been as big of an issue, I think on our side of the business, as maybe you see in what we would say traditional telecom. I think the way these consultants and these co-ops have partnered together and really bought up a bunch of supplies on the front end has changed sort of that dynamic. We're not seeing it there so much. Labor can be an issue from time to time. Generally, once you get rolling on a project, they don't want to let those contractors go. That's been a key strategy and sort of keeping these consultants, keeping folks busy and keeping these projects going. That's been really critical I think for having some success with continuity over time.
Johnston: Oh, good stuff. Hey, look, Tamra, we've covered a lot of material here today. It's been incredibly insightful. I want to thank you for your time. Before we wrap it up, I want to give you an opportunity to bring up anything or talk about anything that we haven't covered yet.
Reynolds: No, Jeff, I appreciate the time today. I guess the one thing I would say, and we probably could have started with it is, CoBank I think is one of the largest lenders to this space. When you think about all of the areas that we support from a broadband and fiber perspective. CoBank supports about $10 billion in commitments, in this space both through the electric side and the communication side. We're really invested in this. We've been doing it for three decades now, at least on the communication side. More recently, 8 to 10 years on the electric side. We're really proud of our commitment to the industry. We think we bring a lot of value to that. I really appreciate your investment in time and expertise in supporting our customers across the bank. Thank you.
Johnston: A special thanks goes out to Tamra for joining us on the podcast today. I think the economic benefits broadband brings to previously unserved communities is understood and appreciated. What jumped out at me was the benefits broadband brings to the energy complex. The energy market is going through an unprecedented transition to new types of renewable energy, and how this energy is stored and transacted. This makes having a reliable broadband network to manage a smart grid —and all that goes into a growing and fragmented energy market—all that more important. I don’t think I really appreciated that until I had the chance to talk with Tamra.
Hey, thanks for joining me today, and watch out for the next episode of the All Day Digital podcast.
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