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Policy

Haywire

9/19/2011 12:01 AM Eastern

The federal government’s decision in 2010 to pump $7.5 billion into bringing broadband service to rural areas was a universally noble goal.

In far-flung places too expensive to wire — even for the
most customer-hungry distributors — roughly 19 million
rural Americans currently have little or no access to highspeed
Internet service. They are families isolated in an
economy where broadband-connectivity is a necessity,
not a luxury.

Cover_Story_Image_09/19But less than a year after the books were closed on the federal
government’s broadband stimulus program, there are mounting questions concerning
its efficiency, with some critics calling out certain projects for excessive waste and the government
defending what it sees as the only path for rur al communities to take full advantage of
the information age.

While the stimulus plan has its share of success stories, tales are emerging of government
funding gone haywire, with millions of dollars awarded to finance video overbuilds of existing
operators in non-rural towns and money awarded to municipalities to provide service to
schools and hospitals that have had broadband for years. In one case, a state was given $40 million
more than was needed for its project, based on early numbers.

Why all the crossed signals? For some of the projects that have been called into question, it
has been a mix of misinterpretations, miscalculations and good, old-fashioned bureaucracy.

Originally carved out of the $787 billion American Recovery & Reinvestment Act of 2009,
the broadband stimulus set aside $7.5 billion to help build out state-of-the-art broadband networks
in unserved and underserved communities. The money was split between the National
Telecommunications Information Administration’s Broadband Technologies Opportunities
Program ($4 billion) and the U.S. Dept. of Agriculture Rural Utilities Service’s Broadband Initiative
Program ($3.5 billion). After a lengthy review process, both agencies made their final
award decisions on Sept. 30, 2010.

The cable industry has been skeptical of the program almost from the beginning, fearing
that government subsidies would only benefit its competition, which would focus
on overbuilding established markets while leaving less populated areas fallow. The industry’s
leading lobbying organization, the National Cable & Telecommunications Association,
has even funded a study to point out what it sees as glaring examples of the
program’s inefficiency.

Commission proposal to use the Universal Service Fund, a pool of money used by
phone companies to extend telephone service to rural areas, for broadband. The RUS has
claimed that using the fund for broadband would harm its existing loan programs. The
NCTA has countered that the RUS loan programs are a model of inefficiency, wasting taxpayer
money on unnecessary projects.

GOVERNMENT-SPONSORED COMPETITORS?

Many incumbent cable operators criticize the broadband stimulus program as a factory for
government-sponsored competitors. Eagle Communications, an employee-owned cable, telephone
and high-speed data provider in Hays, Kan., with about 18,000 customers, has been operating
radio stations in the area since 1948 and began providing cable TV service in 1965. The
company applied for a RUS loan and grant in 2010 to extend its broadband reach to unserved
areas, but was rejected by the agency.

Instead, RUS awarded rival telco Rural Telephone Service $101 million in grants and loans
to build out a high-speed data network in what it claimed was an area with 23,000 homes that
were 99.5% underserved or unserved by broadband.

But after some considerable sleuthing, Eagle discovered that more the 50% of those 23,000
homes were located in Hays, which already has broadband access. When Eagle objected —
CEO Gary Shorman testified in Congress on the matter in February — it mostly fell on deaf ears.

Today, RTS, through its Nex-Tech subsidiary, has started to upgrade parts of its Hays network
and has announced plans to offer a new video service in the area — in direct competition
with Eagle.

In an interview, Shorman said that Nex-Tech has been heavily marketing a triple play in Hays.

“I have a picture of them putting fiber up next to our fiber next to AT&T’s fiber,” Shorman said.
“I’m not sure that’s what the stimulus plan and the broadband plan was all about.”

Shorman said that he will feel an impact from the RTS overbuild — especially since it will
likely severely undercut Eagle on price. According to its website, RTS is offering broadband
speeds between 1 Megabits per second and 75 Mbps for prices ranging from $19.95 to $199.95
per month, after the fiber buildout. The products also have a two-month free promotional period
when bundled with either phone or cable service.

Eagle, which is in the process of rolling out its own 100 Mbps data service in Hays, is fighting
back with products, customer service and a local presence (RTS is based in Lenora, Kan., about
85 miles away) that it hopes will differentiate it from RTS.

“We’re not going to roll over and go backwards,” Shorman said. “But it is going to be a very competitive
environment with us competing against the government and an RUS-funded competitor.”

RTS chief executive Larry Sevier disputed Shorman’s claims in an interview last week,
adding that the phone company has already completed building out
more than 60% of the area covered under the RUS award, most of that
outside of the Hays area.

Sevier acknowledged that RTS is building fiber in Hays in competition
with Eagle, but added that the project is well within RUS guidelines that state
up to 25% of a project’s total coverage area can already have access to broadband
service.

Including the Hays market made the economic case more feasible, Sevier
added, and allowed RTS to expand the area where it could provide service.

“There are a lot more rural consumers that can have broadband service
that wouldn’t have had it,” Sevier said. Sevier and the Agriculture Department
have argued that Hays makes up less than 1% of the total RTS project
and that about 99% of the total project area (4,600 square miles) is unserved
by broadband. The agency claims to have received more than 100 letters in
support of the RTS project.

While the RUS is correct, its logic underscores one of the reasons for Shorman’s
frustration. Hays represents only 1% (7.98 square miles) of the total
coverage area of the project, but contains about 50% of the homes. If Nex-
Tech had no intention of overbuilding Eagle in Hays, then the bulk of the
money awarded by the government is being used to bring broadband to
Eagle chief executive Gary Shorman testifies before the House Subcommittee on Communications and Technology in February. homes that don’t yet exist.

Shorman said he has no problem with federal
help to provide broadband service to
unserved areas. His argument is that RTS
is receiving government money to provide
broadband service to an area that already
has it.

WASTED WIRES

Cable operators in general passed on stimulus
funding because of the lengthy approval
process and what they perceived as onerous
restrictions on the money. Still, a handful
of small operators sought out and received
BTOP funding, including BlueBird Media
(a public/private partnership, including
BoyCom Cable) which received $45.1 million
for a fiber project in Missouri; Zito Media,
which received $6.1 million to build a fiber
ring in Northeast Ohio and Northwestern
Pennsylvania; and BendBroadband, which
received $4.4 million in funding for the Central
Oregon Fiber Alliance.

Others, like Bulldog Cable, received about
$11.4 million in grants and loans from the RUS
to provide broadband in rural Georgia. Mid-
Hudson Cablevision was awarded $3.5 million
in RUS grants and loans to extend its fiber network
in upstate New York.

For the most part, those cable projects appear
to be models of efficiency — they range
from $45 per home for Zito Media (the project
will create a fiber ring network to which other
providers can connect) to about $4,000 per
home for the BendBroadband project.

In a study released in April, Washington,
D.C.-based think tank Navigant Economics
looked at three RUS-funded stimulus projects
— including the Kansas project — and
found that more than 85% of the homes involved
were passed by existing cable broadband,
digital subscriber line and/or fixed
wireless broadband service.

The study, Evaluating the Cost-Effectiveness
of RUS Broadband Subsidies
— Three
Case Studies, was written by Navigant managing
director and principal Jeffrey Eisenach
and George Mason University Law School adjunct
professor Kevin Case. It was funded by
the NCTA.

In the Kansas project, Navigant estimated
that fewer han 2,500 homes were unserved by
broadband. For the rest of the area, there were
four broadband providers offering wireline
and wireless service — AT&T, Verizon Communications,
Eagle and RTS.

The same held true for projects in Minnesota
and Montana, Navigant said. Overall,
the RUS awarded $231.7 million (about 7% of
the total amount distributed through the program)
for projects in the three states that provide
mostly duplicative service. Navigant sees
similarities to the USDA’s 2002 Rural Broadband
Access program, when it was discovered
that about 12% of the loans through that $1.2
billion program ($144 million) went to companies
in densely populated areas.

“The evidence indicates that RUS’ history
of funding duplicative service has continued
under BIP, and that the current program is not
a
cost-effective means of achieving universal
broadband availability,” Navigant wrote.

Navigant pointed to wide variances in the
cost per household for each project. The FCC,
in its Omnibus Broadband Initiative, determined
that it should cost about $9,200 to
bring broadband service to an unserved rural
household, based on a sophisticated model
developed in concert with the National Broadband
Plan.

According to Navigant, the simple average
cost per home of the three projects is $4,428,
about twice the value of a rural cable system.
That figure balloons to $30,104 per unserved
home and when broadband wireless coverage
is taken into account — the Federal Communications
Commission has said it considers
an area covered by a wireless 3G network as
having access to broadband — it skyrockets to
$
349,234, according to Navigant.

“In fairness, at the end of the day, it is a very
tough call exactly where to draw the line,”
Eisenach said, adding that most projects are
less cut and dried than trying to determine
whether to fund a project that passes 10,000
unserved homes and 10 served homes, versus
one where the reverse is true.

“Drawing the line between those two extremes
is tough,” Eisenach said.

Eisenach also noted that the FCC, using its
own model, determined that building out only
unserved homes across the country would
cost about $23.5 billion, as long as duplicative
service is not funded.

“Funding duplicative service (as RUS has
done under BIP) increases the cost of a nationwide
build out by $63.7 billion, to $87.2 billion,”
Eisenach wrote in his report.

During a period where government agencies
are scrambling to find ways to cut budgets

and the president and Congress squabble
over such issues as whether to increase the
federal debt ceiling — Eisenach said it was unusual
that this program wasn’t being looked at
with a closer eye.

“I find it interesting that something as obvious
as clawing back this money isn’t being
considered,” he said. “$350,000 is too much to
pay to bring broadband to a home.”

$
40M ‘OVERPAYMENT’

Not all the criticism is heaped on private projects.
In some other cases, municipalities that
had been awarded money and loans are finding
they grossly overestimated the number of underserved
or unserved areas of their territories.

Case in point: the Executive Office of the
State of West Virginia was awarded $126 million
in BTOP grants last year to build a 2,400
mile fiber-optic network to several rural communities
in the state. In July, it realized that
most of that territory already has access to
broadband service.

According to a July 13 report in the Charleston
Gazette
newspaper, West Virginia officials
determined that they would only need to build
out about 900 miles of fiber, and that could be
cut back by even more.

As a result, West Virginia will have roughly $40 million in
grant money left over, the paper said.

According to the NTIA, in cases where awardees do not
use all the money they receive, it could be returned to the U.S.
Treasury or used to buy additional equipment or extend service
farther than originally planned. Once the money is returned
to the Treasury, it cannot be transferred to another
awardee or used for a new award.

There is some debate, however, as to
whether the West Virginia projects will
actually come in under budget. And if it
does, NTIA acting director Angela Simpson
said the agency has several options.

“If we see that a grantee is saving dollars
as it builds out its project, we would
want to work with the grantee to take advantage
of those savings to increase the
overall benefits of the project, for example,
by connecting more anchor institutions,”
Simpson said. “However, at the
end of the buildout, whatever funds are
not used must be returned to the Treasury.”

The majority of those programs are
moving ahead and hitting their targets — both BTOP and BIP
require awardees to hit regular milestones and the projects
must be completed within three years of receiving funding.

According to the National Telecommunications Information
Administration, the Broadband Technologies Opportunity
Program awarded $4 billion to 233 projects and so far about
8,000 route miles of fiber have been built in rural communities
as a result. The U.S. Department of Agriculture’s Broadband
Initiative Program parsed out $3.5 billion in loans and
grants for 320 projects across the country which it says will affect
7 million Americans, 364,000 businesses and 32,000 anchor
institutions like schools, hospitals and libraries. BIP also
claims its programs will create about 25,000 jobs.

MONTANA’S ‘SILVER FLEECE’ AWARD

The Montana USDA project drew the attention of U.S. Sen.
Mark Kirk (R-Ill.), who gave the project his July Silver
Fleece Award, citing it as the most egregious example
of government waste in that period.

Montana also was one of the top recipients of RUS
money — according to the Bozeman Daily Chronicle,
Montana projects received eight loans totaling $192
million. Included in that package is a $70 million loan
that will allow the 3 Rivers Telephone Cooperative
to build a 1,700-mile fiber-optic network in northern
Montana, including boosting Internet speeds of 5,000
of its current customers from 6 Mbps currently to between
40 Mbps and 50 Mbps.

The $64 million project to bring high-speed service
to Gallatin County, according to Navigant, covers an
area that is already 93% served by broadband.

“The fact that tens of millions of taxpayer dollars
were spent to subsidize broadband service in an area
with already strong private sector representation is reprehensible,”
Sen. Kirk said in a statement announcing the
award. “Perhaps even more staggering, though, is the taxpayer
cost of these services per unserved household.”

Kirk cited the Navigant estimate that the cost per unserved
household was about $349,000, but he added that
when 3G wireless service is considered, the number of unserved
households drops to just seven. That boosts the price
per unserved household to more than $7 million, Kirk said.

Kirk, who opposed the broadband stimulus funding
from the start, pointed to RUS problems in the past. He
cited a 2009 U.S. Inspector General Report critical of past
RUS broadband loan programs, that found only 2% of federal
broadband buildout funds provided between 2005
and 2008 went to unserved communities. The Inspector
General also found that about 148 of the communities
funded through the program during that time were within
30 miles of cities with at least 200,000 inhabitants.

“We continued to see this occur in the stimulus funding,
where in my home state, Cook County, home of Chicago
with a population of 2.79 million, and suburban Will
County received funds,” Kirk said. “Ensuring connectivity
in rural America is a worthy endeavor that will bring
much needed economic development to small communities
around the country. But as we face budget shortfalls
and a crippling debt, we cannot afford to subsidize duplicative
broadband service to urban and suburban areas.”

Massillon Cable president Robert Gessner said that
these projects shine a spotlight on
the problem most cable operators
have with the federal finding process.

“These concerns exist for anyone
trying to compete with a federally-
funded competitor,” Gessner
said. “Huge amounts of money are being
given to companies that claim they
will build broadband to unserved areas.
Then, the majority of the money is
used to upgrade or rebuild existing areas
that are served by competing, privately
financed companies. That’s not
an appropriate use of the funds, but no
one is willing to try to take the money
back.”

Many stimulus award winners built their original networks
with the help of government loans and subsidies,
but in some cases allowed their plant to become outdated,
Gessner added. Meanwhile, privately financed competitors
arrived to fill the void caused by no or poor service.

For their parts, both government agencies defend their
respective programs, citing the millions of homes that will
receive access to the Internet through those efforts and the
tens of thousands of jobs that will be created.

At BTOP, which has a large number of middle-mile programs,
Simpson said there haven’t been a lot of complaints
so far about awardees.

“First of all, each grantee underwent a rigorous due diligence
process and demonstrated that its project will help to
address a clear need in the communities it will serve,” Simpson
said. “Second, our program has open network access and
interconnection requirements. We’ve been seeing a good level
of interest from local providers to tap into our awardees’ projects.
It’s something we try to turn into a win-win for everyone.”

Simpson pointed to several of the program’s successes
— a $17.5 million grant to build a fiber network in innercity
areas in Washington, D.C. (DC-Community Access
Network) that will give 250 anchor institutions access to
broadband at 10 Gigabits per second and outside ISPs access
to a 100 Gbps middle-mile fiber ring; the Three Ring
Binder Project, a middle-mile network in Maine that will
connect 110,000 homes and 600 anchor institutions to
three fiber rings totaling 1,100 route miles; and MCNC, a
$146 million middle-mile project run by the North Carolina
General Assembly providing low-cost broadband to
colleges, school districts and other municipal institutions.

Gessner added that many of the program participants
are using the federal money properly and fulfilling the
spirit of the program. “There certainly are companies that
properly use federal money. However, there are others that
do not. The problem is the inability of the federal agencies to
know the difference or to recognize that times have changed.”
One of the most efficient projects is the RUS’s biggest
awardee — Windstream Communications. Windstream, a
$4 billion a year rural telco based in Little Rock, Ark., won
$181.3 million in RUS grants for 18 projects in 13 states.
Windstream also agreed to kick in $60.4 million of its own
money for those projects.

Those projects are expected to bring service to 361,311
homes, making the cost per home passed a paltry $501.

Windstream broke ground on its first RUS project in
June in Prentiss, Miss., and started construction on its second
project in Bemus Point, N.Y., (Chautauqua County) on
July 19. Windstream vice president of state government affairs
J.T. Meister said in all of its projects, Windstream targeted
areas where it had existing phone service and where
broadband was unavailable. There are no plans to introduce
video in those markets.

U.S. SUCCESS STORIES

Windstream took pains to apply for grants only in areas
that were unserved by broadband, not underserved,
he added. And it started with relatively small projects in
Mississippi and rural upstate New York for two reasons —
they were on a smaller scale and were the first to pass the
lengthy environmental approval process.

The Prentiss project, slated for completion in July, will
cost about $555,000 and will extend fiber to about 170
potential customers. The Bemus Point project has a $1
million price tag and will reach 200 homes. In contrast,
Windstream has two projects in Kentucky worth $59 million
and passing nearly 220,000 homes; a $38.3 million
project in Florida that will pass 50,026 households and
4,765 businesses; and about $17 million in projects in
Georgia involving almost 35,000 homes.

In August and September, the company broke ground
on four additional projects in Young Harris, Ga.; Garrison,
Texas; Shepherdsville, Ky.; and Protivin, Iowa.

All four of the projects involve upgrading and extending
existing networks. In Young Harris, Windstream will add
about 12 miles of fiber to its networks reaching 280 customers.
In Garrison, Windstream will extend its network with 11
miles of fiber to reach about 200 customers. Its total Texas
awards amount to about $1.6 million.

The Shepherdsville project is an extension of Windstream’s
existing network in the area and is part of the
larger Kentucky grant. Construction should be completed
in February with service available in May. The Protivin
project, involving upgrading an existing network
and reaching about 30 customers, is part of a larger $17.4
million grant in the state.

Meister said that according to the RUS program, Windstream
has three years to complete the projects mapped
out in the grants. He hopes to be finished much sooner.

“Our goal is to be substantially complete by the end
of next year,” Meister said. “We’re going to work really
hard to get it done.”

Meanwhile, the Rural Utilities Service has at least
three other longstanding broadband loan programs —
the $325.6 million Rural Broadband Access Loans and Loan
Guarantee Program (established in 2002), the $25 million
Community Connect Program (established in 2002) and the
Telecommunications Infrastructure Program. Applications
for the Broadband Access Loan and the Telecom Infrastructure
Loan program are accepted on an ongoing basis. The
agency is scheduled to make its selections for awardees of
Community Connect grants on Sept. 30.

 

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