Inflation, grants and A-CAM: New study spotlights rural telco trends

An annual Forvis study into the performance of the rural telecommunications sector cast a spotlight on the influence of inflation, broadband services and broadband grant programs. One key takeaway? Inflation is outpacing revenue growth.

In 2023, 167 rural telecommunications companies across 19 states participated in the Forvis study, which provides benchmark results for the 2022 fiscal year.

The infusion of federal, state and local government broadband grants in 2022 resulted in 85 rural telco companies collecting grants that in total, amounted to $600 million. That upswing from the previous year, when 69 companies accepted $336 million in grants, represents a 23% increase in companies and a 79% increase in broadband grant awards.

Grants came from various sources, including state-administered initiatives, allocations from federal Coronavirus Aid, Relief, and Economic Security (CARES) Act funds and provisions from the American Rescue Plan Act. Federal programs administered by the National Telecommunications and Information Administration (NTIA) and the Rural Utilities Service (RUS) also contributed to the funding influx.

The average broadband grant awarded was $2.7 million. Nineteen companies reported total grants of more than $10 million each, a jump from the 11 companies that did so in 2022.

Even with the uptick in funding, this year there have been calls for more grant programs specifically targeted at rural areas in the U.S. In July, Senators Deb Fischer (R-NEB) and Ben Ray Luján (D-NM) introduced a bill on the senate floor this week that if passed, would create a new U.S. Department of Agriculture (USDA) Rural Development grant program to advance broadband connectivity for agricultural producers nationwide.

The ‘‘Linking Access to Spur Technology for Agriculture Connectivity in Rural Environments Act of 2023,” or the ‘‘LAST ACRE Act,’’ would tap into USDA resources to expand high-speed broadband internet access by incorporating recommendations from the USDA-FCC Precision Ag Connectivity Task Force, established by the 2018 Farm Bill.

Rural telco operating revenues fall flat 

The report also highlighted another trend. Total operating expenses for rural telcos increased 5.1% in 2022, almost double the 2.6% increase in total operating revenues. Forvis noted the increase in operating expenses is slightly under the 6.5% rate of inflation.

The report said that while non-regulated revenues, including internet revenues, have become a bigger percentage of total revenues overall, total revenues have only shown “modest growth” over the past two decades.

It’s been almost 20 years since total operating revenues grew by more than 5%, and Forvis said it will be “interesting in this current environment of high inflation and higher interest rates whether rural telecommunications companies will see future significant growth in total operating revenues.”

Elsewhere, the study introduced a broadband rating system for each participating company, emphasizing three pivotal financial metrics:

  • Operating income as a percentage of network access revenues
  • Broadband internet revenue growth
  • Operating income growth

The goal of the rating is to focus on revenue growth while accounting for dependency on network access revenues.

Ratings were down for all revenue groups due to the decline in operating income and slower growth of broadband internet revenues in 2022. However, larger companies (exceeding $25 million) had a higher rating based on revenues, driven by less dependency on network access revenues and a higher growth rate of broadband internet revenues.

Forvis added that it was “disappointing” to see an overall decrease in operating income in 2022 as a percentage of revenues, though the firm said the drop was not unexpected with the increase in expenses experienced in that year.

A-CAM propels operating income growth

Another focal point in the report was the impact of the Alternative Connect America Cost Model (A-CAM) on operating income.

Established in 2016, A-CAM aims to support broadband deployments in eligible high-cost areas. Thus far, it’s consisted of two iterations: A-CAM I, which required providers to deploy speeds of at least 10/1 Mbps, and A-CAM II, which the FCC introduced in 2018 to increase the speed requirement to 25/3 Mbps.

A-CAM I runs through 2026, while A-CAM II extended support through 2028. The program doesn’t require providers to use a specific type of technology for deployment.

Of the 167 companies in the Forvis study, 94 elected either A-CAM I (48 companies) or A-CAM II (46 companies) as their form of regulation. The study’s findings demonstrate—"at least early on”—that companies electing A-CAM had higher operating income as a percentage of revenues than legacy rate-of-return carriers.

While rate-of-return companies fell behind A-CAM companies, the firm said “it is interesting to note that the ACAM I companies’ 2022 operating income as a percentage of revenues is less than the legacy rate-of-return carriers.”