Wiring the Rural West: La Grande, Ore.

WINDS OF CHANGE HIT OREGON TOWN

Local leaders, pushing hard for new jobs,
rewrite the rules for wiring small towns

Published: Oct. 30, 2000
Dateline: La Grande, Ore.



Spend enough time in eastern Oregon and eventually you'll hear the term ''Two Oregons.'' Those are fighting words -- shorthand for the profound political and economic divide that separates the state's rural counties from the Willamette Valley and metropolitan Portland.

Oregon's 10 easternmost counties contain nearly half of the state's land mass, yet they have just 170,000 residents. That 5 percent of the state's population has plenty to be ticked off about.


While Portland enjoys robust growth and rising wages, sometimes it can seem as if everything east of the Cascade Range languishes in some separate, forgotten state.

If eastern Oregon was a separate state, La Grande, a handsome city of 13,000 that lies on the edge of the lush Grande Ronde Valley 250 miles east of Portland, would be its natural capital. It was here that a handful of civic leaders came face-to-face with the new ''Two Oregons'' challenge: The Cascades as digital divide.

While much of the west side of the state is wired to compete in the Internet economy, most of the east lacks advanced telecommunications infrastructure. La Grande understood what was at stake: Access to the fiber-optic pipes that carry Internet traffic and other data will eventually be an economic lifeline.

The city's long campaign to secure a fiber-optic connection point became a fight for self-determination. It was a fight that ultimately led all the way to the Oregon statehouse. And when it was over, the balance of power between the ''Two Oregons'' would never be quite the same.


Farming, logging
and low wages

La Grande isn't anyone's idea of a digital oasis, but it is home to an economy that's more diverse and information-intensive than those of neighboring communities. The traditional base of timber and grain is supplemented by a lot of regional government offices and a state college, Eastern Oregon University, that's about as big as a good-sized suburban high school. This is not a college town as much as a farming-and-timber town that happens to have a college. When school's out the only way a visitor would guess there's a college here is the presence of a killer alternative-rock radio station, KEOL 91.7.

The fact that government is the largest employer in town means La Grande is relatively stable compared with those towns wholly dependent on agriculture or logging. Still, La Grande and its neighbors share a perennial problem with low wages. Union County's median household income in 1995 was $30,487 -- 27th out of Oregon's 36 counties.


POP go
the job opportunities

It was the promise of jobs that sparked La Grande's telecom prairie fire five years ago. A representative for a global company that runs tech-support and help-desk operations for large corporations, Sykes Enterprises, rolled into town, scouting potential locations for a call center. (As the labor markets in metropolitan areas have tightened over the past few years, it has become increasingly common for corporations to place their call centers in smaller towns where the pool of available workers is relatively high.)

A half-dozen local leaders from the city, the county and the college were assembled in the board room at Grande Ronde Hospital when the man from Sykes asked the question: ''Do you have a fiber-optic POP?''

No, the city did not have a fiber-optic point-of-presence -- a telecommunications junction point that would allow the local phone system to jack into a national network of high-speed lines. Worse yet, no one in the local delegation knew what a POP was and why Sykes would want one.

''That was the start -- realizing how little we knew about it,'' recalls Steve McClure, chairman of the Union County Board of Commissioners. ''Here we were, the leaders of the community, looking at each other and we didn't know what this guy was talking about. I remember walking out of there and talking to the university president, Dave Gilbert. He scolded me. 'You don't walk into a meeting like that and not have the answer to the question.' That really brought it home, that we had to engage with this.''

As La Grande's city manager, Wes Hare, remembers, ''You have a company that's looking to relocate in your area. They're in a growth industry. And they won't do it without this thing. You didn't have to be a genius to sort it out.''

Actually, sorting it out would take four years.


Like getting
the railroad to stop

The railroad has always been good to La Grande. Thanks in large part to the rails, the town flourished while onetime rivals such as Alicel, Medical Springs and Starkey faded away. Today, La Grande is still a railroad town, a crew-transfer point for Union Pacific, which employs 350 area residents. Now, this need for a fiber-optic POP was the modern equivalent of getting the train to stop in La Grande. Without a connection point for local business, La Grande was in danger of being locked out of participation in the digital economy.

The county formed an ad hoc telecom committee made up of more than two dozen representatives from the business, education and government sectors. The leaders were Hare, McClure, Gilbert (now retired), Terry Edvalson, a university administrator who'd overseen some of the school's institutional connections to the rest of eastern Oregon, and Cathy Britain, the head of a regional mental-health services network.

At the time, GTE (now Verizon) was the monopoly local phone carrier, and the only route for data moving in and out of town was via a digital microwave signal from GTE to a receiver owned by U S West (now Qwest) on a nearby hill. GTE's end of the tin-can-and-string system was fine. U S West's end was reportedly packed to capacity.

Several months after the Sykes debacle, Hare learned almost by accident from the Forest Service that the long-distance carrier WorldCom was about to run a new fiber-optic cable adjacent to the interstate that cuts through town. ''I thought well, gee, if they're gonna be coming through our town and we need a POP, maybe it's a simple trade. You get to use our land, we get access to your POP. It couldn't hurt to ask.''


High-stakes game
of 'blackmail'

Hare sat down with Edvalson, McClure and Gilbert and together they hammered out a modestly radical plan: The county would have to issue a conditional-use permit before WorldCom would be allowed to lay any pipe in La Grande. No POP, no permit.

''We were simple rural folk,'' says Hare, grinning broadly. ''This seemed plausible to us. It was a civilized form of blackmail.''

Yes, says McClure, it was a bluff. The federal government reserves the right to regulate most aspects of telecom and the county had only the very slightest of grounds to impede the company's work. ''But we had some leverage in that we could delay them significantly in the process,'' says McClure. ''These companies when they come through here are in a hurry. We could tie them up for many months.''

Predictably, the permit idea brought an immediate visit to La Grande by a WorldCom vice president and a small riding party composed of the most powerful telecom lawyers in the state. Legally speaking, they said, the town had no right to pull what it was pulling.

The La Grande leaders traveled to Seattle for a sit-down with WorldCom representatives. And again they were told: You're the only little town in the West who's trying to do this to us. Sure, the company could make a small return on its investment by putting a POP in La Grande -- or it could make a much bigger return putting that equipment somewhere else. The men from La Grande sensed the game was almost over. In the end, WorldCom got its permit by agreeing to install a POP if and when it became economically favorable to do so. The window of opportunity with WorldCom had effectively closed.

The home-schooled telecom crusaders saw a brief ray of hope in '97 when a local entrepreneur with deep pockets formed Union-Wallowa Telephone Company, a competitive local exchange carrier that could take advantage of new competitive rules laid out in the Telecommunications Act of 1996. For a brief moment, it looked as if Union-Wallowa, which would offer service over GTE's local lines, might build the fiber-optic connection. Again, it was not to be.


'It'll be on the front page
of the Oregonian'

In late '98, a new suitor arrived in La Grande. ODS Health Plans, a Portland insurance company with more than 800,000 members, was scouting potential locations for a combination call center and claims-processing facility. The promise of 50 jobs sounded good to La Grande. And in early '99 the city learned it was on the company's short list of eight communities.

For ODS to use the La Grande facility as a virtual extension of its claims-processing center in Portland, it had to have a big digital pipe for voice and data traffic -- a T-3 line in telecom parlance. GTE told them such a line was available and quoted a price of $13,000 per month. Hare was suspicious that GTE could pull it off with the existing microwave phone link. He called GTE and expressed his doubts. It would be done, they assured him.

By mid-'99, La Grande had won the ODS project and the company had dispatched a telecom consultant to the city to look over the details of the network plumbing. On the night before the consultant was to meet with city officials and GTE, Hare got the one piece of news he'd feared all along.

''The GTE guy comes into my office and says, 'Wes, I've got some bad news. We can't provide this. We don't have that much capacity,' '' Hare recalls. ''Needless to say, this was not a happy moment. Fifty-plus jobs are on the line here.'' For Hare, after four years of concerted effort, it was the Sykes nightmare all over again. He envisioned the entire deal going down the tubes.

Hare went ballistic, telling the local GTE rep, ''You're not going to tell this guy 'no.' You find a way to make this work -- or else.'' Hare had one big stick to back up the threat. Edvalson and Britain, his fellow telecom committee members, were on the brink of winning the legislative battle for Senate Bill 622, legislation they'd crafted that would allow phone companies regulated by the state to make more profit in exchange for increased investment in rural areas. (See story, below).

Television and radio around the state had been carrying the SB 622 debate for months and it was very widely known as a made-in-La Grande initiative. With that as a backdrop, the very last thing GTE wanted on the airwaves was news that its inability to provide a connection had cost La Grande 50 jobs.

''I promised them: If you can't make this work and if these jobs go away, it'll be on the front page of the Oregonian,'' says Hare. Through a little piece of 11th-hour alchemy, the ODS consultant realized the company didn't really need a full T-3 after all, and GTE cobbled together just enough bandwidth to constitute an interim solution.

The permanent solution would be a point-of-presence for GTE on an AT&T fiber-optic cable that had been in the ground, largely forgotten, out by the airport south of town since 1988. (GTE had already been working on a deal for access to the cable, based on ODS's original demand for bandwidth.) The city and county paid TouchAmerica, an upstart telecom provider that was using part of the AT&T cable, $165,000 to offset the expense of a new interconnection point. GTE did some creative financing and quickly found $200,000 for its end of the connection. And, without speeches, fanfare or so much as a bottle of champagne, La Grande's on-ramp to the digital world lit up in September of 1999.


Staying in La Grande
becomes feasible

Today, most of La Grande's residents would probably be hard-pressed to identify one way that the fiber-optic POP has directly impacted their lives. The exceptions are the 50 workers at ODS. Jeanine Rachau, who supervises six customer-service workers and six claims processors, is a former veterinary technician who more than doubled her income by signing on with ODS.

The benefits the health plan offers to its own workers were a key to deciding to join the ranks of the cubicle-bound. ''As a veterinary tech, you don't make a lot of money and by the time you get done paying for your own health insurance -- I was paying $160 a month -- you're working for less than minimum wage,'' she explains.

Rachau counts herself among the lucky few -- the thirtysomething La Grande natives who have been able to stay in town and still secure a decent standard of living. She estimates that less than 20 percent of her classmates in the Class of 1980 stayed. And of those who did, a disturbing number are stuck in dead-end service jobs. ''I love it here and I really wouldn't want to move anywhere else, but finding good jobs, quality jobs, is a struggle for anybody in this community,'' she says.


Why 50 jobs were
worth 'going to war'

Today, ODS pumps $1 million in payroll into the La Grande economy each year. The workers make an hourly wage ranging from $9.67 to $19.90, the vast majority at the low end of the scale. This is roughly on par to what a skilled manufacturing worker might make in one of the region's travel-trailer factories and slightly less than the prevailing wage at the local lumber mill.

Is it sufficient to support a family in La Grande? ODS executives say it does constitute a living wage. Others, including Hare, are not so sure. ''For the most part, most of ODS's jobs are not what I consider family wage jobs,'' he says. ''Where these jobs work -- and what makes them so important to our community -- is they give great benefits. If one parent chooses to work at ODS, the other parent has a whole range of options and the family can survive.''

The symbolic value of ODS isn't lost on Hare. ''That building sat vacant for 18 or 19 years and now I can point to that and say, 'There's 50 of your neighbors going to work every day.' To me that's what it's all about. That's why I was ready to go to war,'' he says. ''There are not too many issues that I get involved with as a city manager that are life and death.''


La Grande's POP
helps entire region

While ODS is the most visible and direct beneficiary of the fiber-optic connection, other businesses are already making use of the POP. The two local phone companies and the two ISPs that serve the region now have access to a virtually unlimited amount of network capacity. This means ample availability and competitive pricing for business-grade data lines and high-speed consumer services such as DSL. (See story, below.)

Within four years, the rural infrastructure fund created by SB 622 will be used to complete a fiber-optic ring that connects La Grande to most of the other cities in eastern Oregon.

With that ring in place, La Grande's POP (and another on the way) will benefit the entire region. The college and the health-service agencies and other social-service providers that had once relied on the state's defunct satellite network to deliver data across the east side of the state will now have fast connections for everything from paramedic training to virtual psychiatrist's visits. La Grande's leaders have organized a regional telecom consortium for eastern Oregon to get the word out on the impact of the fiber ring.

The news of La Grande's telecommunications odyssey continues to spread to other small communities well beyond Oregon, thanks in large part to a pair of papers Hare authored encouraging rural leaders to take charge of their own digital destiny.

It's important to understand that what happened in La Grande was not a technical struggle, but a political one. In this day and age, the word''politics'' has a sour, pejorative taint. But this campaign for self-determination was politics in the very best sense of the word -- a handful of very committed, very connected people leveraging every ounce of social capital the little city could muster.

''You can call it the old-boy network or whatever,'' says Hare. ''I call it New Age, cutting-edge management theory. When people know each other well enough, trust each other enough to sit down and break bread together, you find those common interests and pursue them.''

Steve McClure says that others from around Oregon who've watched La Grande's efforts have told him that the city was lucky. ''We worked real hard for five years to be lucky,'' he says. ''It's an attitude this community has had for a long time. When someone tells us no, we just think that's an introduction to a discussion.''


 

REWRITING THE RULES OF PROFIT AND LOSS

Changes spur Qwest to invest


While the leaders of La Grande struggled to win a high-speed connection for the city, two of their own were at the Oregon statehouse fighting a broader battle to bring advanced telecom to all of eastern Oregon.

Phone companies tend to build out their advanced networks where it's most economical to do so -- in densely populated cities and suburbs. La Grande telecom activists Terry Edvalson and Cathy Britain decided that the way to coerce the phone companies to make similar infrastructure investments in under-served areas of eastern Oregon was to rewrite the rules of profit and loss.


Edvalson and Britain wrote state Senate Bill 622 to give the phone companies an incentive for investing in rural areas by changing the way the companies are regulated by the state. The legislation did away with a cap on profits (the ''rate-of-return'' regulatory model that's been scrapped by many states) and substituted a cap on rates for basic services. In return for the chance to make more profits, each phone company that opted for the new scheme would agree to invest a certain percentage of its gross revenue in rural telecom infrastructure and public-interest access.

After two years of intense negotiations and multiple revisions, SB 622 was maneuvered through the statehouse by La Grande's state senator, David Nelson, and became law in July 1999. To date, only Qwest has elected to sign on. As the provider for 70 percent of Oregon's local phone market, Qwest was the biggest and most important potential participant. The company (formerly U S West) will invest $70 million over four years in advanced equipment for rural areas and $50 million to assist schools, libraries and rural health care providers.

As a direct result of SB 622 funding, Qwest is building a fiber-optic ring that will link most major population centers in eastern Oregon. This high-speed data pipeline will eventually enable businesses, non-profits and government agencies to serve some of their most geographically isolated customers via the Net.

From Qwest's point of view, SB 622 was an innovative alternative to a universal service system that had been ailing since competition entered local phone markets in 1996. As Larry Huss, former Qwest vice president for Oregon, explains, under the old universal service system of hidden subsidies the company's profitable urban and suburban operations had been carrying the rural areas, ''but that's not a sustainable model when you've got a dozen new competitors in the downtown Portland area.'' (Huss recently left Oregon to take another executive position within Qwest.)

To look at it another way, SB 622 made a compelling business case for rural investments that never would have been made in an unregulated market. The big question: Did Qwest guess correctly on the amount of profit it could pick up in exchange for its $120 million investment? The company will know in 2004, when the deal expires.


 

TELECOM REFORM BROUGHT FEW NET GAINS
TO RURAL WEST

Fast connections still slow to reach remote areas


Securing local access to big fiber-optic pipelines is only one piece of the telecom puzzle that rural communities must solve.

Regardless of how big the line is ''upstream'' from town, fast broadband access lines must extend out into a community if the Internet and other digital resources are to evolve into economic channels.

Small businesses, Internet entrepreneurs running Web servers, ''lone eagle'' professionals telecommuting to far-off cities, schools with distance-learning programs and other rural customers all need consumer broadband connections such as digital subscriber lines (DSL) and cable modems.

La Grande is one of the fortunate few rural communities to have DSL service. Overall, rural areas are much less likely than cities and suburbs to have access to broadband connections. Instead, their Internet access is constrained by the limitations of basic phone wiring.


Bill Peter to serve Paul

In much of rural America, basic phone service depends on a bill-Peter-to-serve-Paul system called ''universal service.'' If you've ever wondered who's paying for that phone in the middle of the Nevada desert, chances are it's you.

For more than 60 years, the universal service system has relied on telephone service in profitable, densely populated areas to underwrite the relatively high cost of service in sparsely populated areas through a complex set of subsidies.

With the exception of a few anomalous pockets (such as Indian reservations), the system has been overwhelmingly successful in getting basic service to the most remote areas. Ninety-four percent of all rural residents, and 92.7 percent of rural Western households, have a phone, compared with 94.7 percent of homes nationwide.

The basis for the current system was set in place by the Federal Communications Commission at the time of the AT&T breakup in 1983. While long-distance carriers used to be the sole source of universal service funds, since 1998 the FCC has required all telecom companies providing interstate service (including local phone companies and wireless firms) to pay for universal service.

Under the supervision of the FCC, a neutral body acts as a clearinghouse for a program of ''explicit'' subsidies, collecting about $2 billion to $2.5 billion each year and disbursing that back to carriers serving high-cost areas. Most of the money goes to small rural telephone companies. If this federal system were not Byzantine enough, some states also have their own universal service programs.

There's also a second, hidden layer of universal service subsidies buried within the budgets of the large telcos. The companies, under the regulatory supervision of the states and the FCC, use rate-averaging formulas and other means to even out the varying cost of delivering services across broad geographic areas. Because these hidden subsidies are all within a corporation's own accounting structure, it's impossible to say how large the universal service system is, although estimates have run as high as $20 billion a year.


New rivals cut into profits

The landmark Telecommunications Act of 1996 changed the mechanics of rural funding in a number of significant ways. The act ordered the FCC to replace hidden subsidies with explicit ones. It also opened local phone markets to competition.

With very few exceptions, the new players ignored costly rural markets and went straight for the most lucrative sectors -- high-speed services in the cities and suburbs. These new competitors cut into the pool of urban profits the large phone companies had previously used to offset the cost of their rural operations. The big phone companies, no longer able to count on those profits, were much less inclined to invest in costly rural infrastructure. Oregon's Senate Bill 622 is one attempt to create other incentives for rural investment.

Perhaps the most forward-looking rural reform in the 1996 act was the mandate that all Americans should have access to advanced telecom services and that customers in rural and high-cost areas should get these services at rates that are ''reasonably comparable'' to those of urban areas.

But the act stopped short of adding consumer broadband to the services covered by the universal service system. The only federal universal-service subsidy for broadband today is the ''E-rate'' system that assists schools, libraries and rural health clinics. (Much of the La Grande school district's telecom bill, for example, is underwritten by E-rate funding.)

In September, after years of fact-finding, a rural task force organized by the FCC board that oversees universal service finally recommended that advanced services be added to the universal service system.


Who's going to pay?

Unless the FCC acts on that recommendation, the 1996 Telecommunications Act's rural provisions amount to great intentions and no real-world results. ''Oh yeah, the words are beautiful. It gets ugly when you have to start raising that money and somebody's got to pay,'' says Glenn Brown, a telecommunications consultant and a senior fellow for the Center for the New West, a Denver think tank. When it comes to rural broadband, ''there's no magic cure to this, there's no one silver bullet. In the final analysis, if you really want to get it everywhere, some government entity has to pony up money -- which means they have to tax somebody.''


UNWIRED IN THE COUNTRY
The consumer broadband market is in its infancy. While cable modems and DSL service are widely available in cities and suburbs, few customers have chosen to sign on so far:

  9 percent of all online households have cable-modem connections or DSL.

  In the most densely populated fifth of the country -- where 52 percent of the population lives -- 99 percent of residents have access to some type of high-speed service.

  More than 65 percent of cities with populations over 250,000 have cable-modem service.

  About 87 percent of all cities with populations over 250,000 have DSL provided by a Baby Bell.

  Among towns with 10,000 or fewer residents, less than 5 percent have high-speed services.

Source: Jupiter Communications, FCC, National Telecommunications and Information Administration .


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