Telephone Cooperative History
Telephone Cooperative History
A Lifeline for Rural America
Today more than 1.2 million rural Americans receive their local telephone service from approximately 260 telephone cooperatives in 31 states. Telephone cooperatives vary tremendously in size, but the average Telco has approximately 4,000 subscribers, 23
employees, and annual revenues of between $1 million and $2 million. Customer bases range from less than 100 subscribers to more than 50,000. The highest customer density, approximately seven subscribers per line mile, is in the rural southeast. For example, one Texas company serves, on average, one person per 10 line miles. By contrast, the Bell operating companies, on average, serve 130 customers per line mile. Telephone cooperatives’ annual operating revenues range from less than $100,000 to more than $40 million. And in addition to their state-of-the-art switching and transmission facilities, many co-ops also offer cable TV, cellular, alarm, paging, Internet, and many other information-age services. Telephone cooperatives are most heavily concentrated in the farm belt and other areas with a strong cooperative tradition and presence. Just ten states are home to half the nation’s telephone co-ops: Illinois, Indiana, Iowa, Kansas, Minnesota, Missouri, North Dakota, South Dakota, Texas, and Wisconsin. In The Southeast, the Carolinas, Virginia, Tennessee, and Kentucky are also cooperative strongholds.
- Open membership – anyone who can use a cooperative’s services and is willing to accept the responsibilities of membership is eligible to join.
- One member, one vote – power is shared equally among all members, rather than concentrated in the hands of a few. Cooperatives are based on democratic principles. Members elect a board of directors and, when necessary, vote on specific issues.
- Limited return on investment – the purpose of a cooperative is to provide a service to its members, not to make a profit.
- Surplus is returned to the members – margins above and beyond the costs required to cover operating expenses are returned to the members in proportion to their patronage. The more business a member does with the co-op in a given year, the greater the amount of the patronage refund for that year.
While membership equity fees comprise the initial foundation of a cooperative’s equity capital, additional funds are provided by the patrons contributing their patronage refunds back to the cooperative for a period of years in the form of credits in the cooperative. (See the section on capital credits for more details.) If a member moves or wishes to discontinue membership, many co-ops refund the equity fee. Each year, America’s cooperatives generate more than $100 billion in economic activity. Cooperatives serve more than 120 million people in cities, towns, suburbs, and throughout rural America. Cooperatives embody the best traditions of American self-reliance and independence. Co-ops are successful because they provide non-profit services to their communities that may not be readily available otherwise. The cooperative movement will continue to thrive because it is based on the most powerful force in the world—a good idea.
Telephone Cooperatives in Modern Rural America
The independent telephone industry developed throughout America following the expiration of Alexander Graham Bell’s patents in 1894. Independent telephone companies served small towns and cities, but most of rural America remained without telephone service. After the publication of a manual that explained to farmers how they could develop their own telephone systems on a mutual or cooperative basis, many ―farmer’s mutual systems‖ emerged during the succeeding years. By 1912, the number of rural telephone systems had grown to more than 3,200, and the U.S. telephone industry included several manufacturers that specialized in the production of rural phones. The number of farmer lines continued to increase after World War I. At its high point in 1927, the rural telephone industry included some 6,000 mutual systems and other organizations. But even as the industry grew, rural systems began to deteriorate. Many failed to keep adequate accounts; customers were lax about paying bills, and there was little maintenance or regular upkeep of the facilities. Poor service became the standard in rural America. Many small companies simply operated the equipment until it failed and then went out of business. In the 1930s, President Franklin D. Roosevelt sought to combat the effects of the Great Depression by launching the New Deal. One of FDR’s ―alphabet agencies‖ was the Federal Communications Commission (FCC), established by the Communications Act of 1934. The act made the concept of ―universal service‖ the law of the land. This cornerstone of national social policy called for making ―available, so far as possible, to all the people of the United States a rapid, efficient, nationwide and worldwide wire and radio communication service with adequate facilities at reasonable charges…‖ The objective of universal service was—and remains today—to ensure that all Americans, regardless of where they live, receive quality telephone service at reasonable rates. Congress reaffirmed the nation’s commitment to the policy and social value of universal service in passing the landmark Telecommunications Act of 1996. By late 1940s, it was clear that rural telephone systems had reached an impasse. The country’s massive war effort had exerted significant pressure on manpower and equipment. In addition, telephone rates were low, and capital was inadequate to maintain or upgrade the systems. The farmer systems continued to disappear, and as a result, fewer farmers had telephones in 1940 than they did in 1920. Many telephone cooperatives came into being after the 1949 passage of the Telephone Amendment to the Rural Electrification Administration (REA) loan funds available to finance rural telephone systems. (In 1994, the REA became the Rural Utilities Service [RUS], an agency of the U.S. Department of Agriculture.) The Bell companies and other large telephone companies were already well established in the nation’s cities and growing suburban areas, but most were not interested in serving sparsely populated rural areas without imposing expensive line extension charges. The unfulfilled need for telephone service led men and women in hundreds of rural communities to join together to develop, finance and build their own telephone systems. Citizens canvassed the countryside, knocked on doors, and talked their neighbors into signing up and paying a small equity fee, often five dollars. The new members held organizational meetings, elected directors, and drew up articles of incorporation and bylaws. With the organizational details completed, a cooperative could apply for an REA loan, hire a manager, construct a telephone network, and offer service—in many cases, for the first time—to the community. Today’s telephone cooperatives provide a wide variety of services through the most modern switching and transmission equipment available, including digital switches and fiber—optic networks. These highly reliable systems provide such enhanced features as call waiting, three-way calling, and caller identification, to name just a few. No matter how large or small, whether they’re located on the high plains or the lowlands, all telephone cooperatives share a common goal: to provide their members and their communities with the best telecommunications service available at the lowest possible price.
Telephone Cooperatives: Democracy in Action
Telephone cooperatives are a living example of democracy in action. The subscribers/members actually own the company and elect a board of directors that sets policy to represent members’ interests and ensure the company’s success. To do that, board members must be knowledgeable about the cooperative and the evolving telecommunications industry, telco management, state and federal regulation, the competitive environment, and the company’s long-range plans and future prospects. Equally important, directors must communicate that understanding to management and subscribers, and develop the relationships essential to succeed in an indispensable, multibillion-dollar business.
Authority and Accountability
A cooperative’s operating authority derives from the state’s enabling statute, the cooperative’s charter or articles of incorporation, and the bylaws. The articles of incorporation set forth the legal basis for the cooperative’s existence according to the terms of the specific state statute under which it has been organized. The bylaws are the rules and regulations established to specify the rights of the members/owners and procedures for governance of the corporation. The co-op’s articles of incorporation and bylaws grant broad authority to the board of directors and management. At the same time, most states provided that the bylaws preserve the members’ right to alter or amend that authority. Such language generally provides that bylaws changes require the membership to meet in proper assembly and with a quorum in attendance. Some of the issues addressed in the bylaws include:
- membership eligibility, definition, and termination;
- rights and liabilities of the cooperative and the members, including the telco’s obligation to provide service;
- nonprofit operation, including capital credits and patronage refunds;
- membership meetings, including quorum requirements and voting procedures;
- board policy, including director qualifications, elections, and removal;
- board meetings; and indemnification of officers, directors, and employees.
The board of directors regularly reviews the bylaws for compliance and appropriate revision. No changes are made, however, without legal review and member approval, when required. The directors conduct the business of the cooperative with the same attention and care that they exert in conducting their personal affairs, by acting carefully, honestly, and in good faith when making decisions for the cooperative.
Authorities and Responsibilities
The board of directors is legally responsible for company management to the cooperative’s members/owners. The responsibility cannot be delegated to an individual director; rather, responsibility is vested in the board as a unit. The board’s authority is subject to the members/owners, state statures and regulations, the articles of incorporation, and the bylaws. Except for the specific duties of the officers, directors share equal responsibility for the conduct of the cooperative’s affairs. The board delegates authority for day-to-day operations to a general manager. The board and the manager, together, comprise the management of a rural telephone cooperative. The board is responsible for policy making. Governed by the bylaws and resolutions adopted at member meetings, the directors decide policy to determine the company’s:
- financial control and oversight strategic, long-and short-term planning;
- business, economic, and social leadership roles in the community;
- management’s success in carrying out company plans and policies;
- achievement of the telco’s goals and objectives; and
- compliance with federal and state law.
As trustees, directors have the responsibility to ensure the future of the co-op beyond their own terms of service. The board also must maintain its functioning status as a democratic, nonprofit, membership association. In general, among its scope of duties, a cooperative board:
- selects a general manager and reviews his or her performance;
- establishes company policy to guide the manager and staff, and reviews the execution of that policy;
- ensures that authority is properly delegated;
- approves membership applications and terminations;
- ensures that all policies promote effective democratic control by the membership and reflect cooperative principles;
- keeps members informed of their rights and responsibilities, the status of the cooperative, and how it is responding to industry changes to best serve member needs;
- plans and conducts annual meetings and other membership meetings;
- establishes positive public relations and promotes the co-op’s standing in the community;
- ensures that adequate funds, in the form of equity capital and RUS and other commercial loans, are available to meet the co-op’s business and service objectives; and
- approves the use of professional consultants – legal, engineering, accounting, and financial – when demands exceed the capability of telco staff.
Board of Directors
Telephone cooperatives use membership committees to nominate directors; from these nominees, the members elect directors. The elected board then selects its officers and determines their specific duties. The board president generally is responsible for serving as the chief elected officer of the cooperative; create and appoint board committees and designate telco representatives to other organizations, industry and government forums, and community events. The vice president has the authority to carry out the duties and executes the power of the president in his or her absence. The secretary is responsible for the official records of the cooperative and for the minutes of board and membership meetings. The treasurer oversees the system’s assets, funds, and investments.
The manager oversees the day-to-day operations of the co-op, the board hires a manager who has complete responsibility and authority to select and terminate personnel needed for the successful operation of the cooperative. The manager is also accountable for the management and administration of all financial activities and may delegate specific appropriate responsibilities.
Telephone Cooperative Finances
Like other cooperative organizations, telephone co-ops may charge new members a small fee. This establishes the member’s equity interest in the cooperative; in other words, the member ―owns a piece of the business.
In addition to member equity fees, financing for telephone cooperatives is available from several sources, including low-interest RUS loans; the Rural Telephone Bank, a quasi-government agency; private supplemental lending institutions, such as CoBank and the Rural Telephone Finance Cooperative, owned by the borrowing cooperatives; and commercial lenders.
As nonprofit organizations, telephone cooperatives seek to provide their patrons the highest quality service at the most affordable rates. It is not always possible, however, to establish rates that ensure that money collected exactly equals money spent. Revenues earned above operating expenses are called margins (in a commercial business, these funds are called net income, or profits). The end of each fiscal year, the co-op allocates a percentage of the margins to each patron on a pro-rated basis, according to the total amount paid or produced for telephone services. These allocations to patrons are known as capital credits. Upon approval of the board of directors, these allocations are refunded to co-op patrons. Capital credits are typically paid in cycles specified in the bylaws. The exact formulas used to retire patrons’ capital credits are determined by the board based on policy expressed in the bylaws. Patronage allocation and the retirement of capital credits represent the proportional allocation of cooperative margins based on patrons’ individual use of Telco services. RUS guidelines specify that capital credits ―should be based on the total dollar volume of business done with the cooperative, or on a fair and reasonable variation of this method where it will be more equitable to the consumers… Thus, co-ops generally base patronage on revenues from local and toll access services. Income from nonrecurring or one-time service charges, membership fees, and aid to construction is usually not included because they do not constitute a continuing revenue stream for the cooperative. Telephone co-ops with subsidiaries or those that offer services other than switched access; e.g., cable TV, wireless cable, or DBS, may establish distinct capital credit systems for each non-telephone-service-related activity if such activities are conducted within the cooperative itself. The retirement of capital credits enables the board of directors to reinforce the members’ inherent ownership rights. Since the cooperative has ―used more member dollars than necessary to operate Telco, it has ―borrowed funds from the patrons, the cooperative owners. The retirement of capital credits also constitutes an essential part of the cooperative’s public relations effort. With an actual stake in the co-op’s business operations—evidence in its margins – members participate actively in he Telco’s success; i.e., they share in the co-op’s success. Each time the directors declare a capital credit retirement, they demonstrate to the members/owners that the co-op cares about its current members, who see cooperative principles at work, and its former patrons, whose equity has helped the system, succeed. If a cooperative member moves or discontinues service, the member still receives the capital credit allocation for the year or years he or she was a member. Capital credits may also be paid to a deceased member’s estate upon request.
As community-based organizations, telephone cooperatives play an active role in encouraging economic development. They help attract and retain businesses that provide employment opportunities for the community, as well as, provide well-paid, stable jobs and advancement opportunities. They support local community service organizations and causes. Many telephone co-ops provide high-tech services, such as distance learning, telemedicine, video teleconferencing, and Internet access facilities for local schools, libraries, and health care centers. Some even offer low-cost computer training to allow local residents to take full advantage of the benefits of information-age technology.
Telephone cooperatives are subject to FCC regulation, similar to commercial telephone companies. In many states, however, co-ops are not subject to state regulation because they are consumer-owned, self-regulating organizations. In addition, like other RUS borrowers, telephone co-ops are subject to regulations and guidelines established by that agency.
National Telephone Cooperative Association
2626 Pennsylvania Avenue
Washington, DC 20037