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When Feds Compete, Ops Gripe

Dick Sjoberg's effort to extend his cable plant to outlying areas never was going to be easy. But lately, banks have been raising some unusual concerns.

“They say, 'We don't want to give you a five-year note because we're not sure if the federal government will come in and compete with you,'” said the CEO of Sjoberg's Inc., which runs dozens of rural cable systems in northwest Minnesota.

Call it a sign of the times. Although the federal government hasn't actually gone into the cable business itself, it has been handing out low-interest loans to companies seeking to bring broadband services to rural areas that otherwise might be overlooked.

But small cable operators argue that rural telcos are using the loans — provided by the U.S. Department of Agriculture's Rural Utilities Service — to offer services in areas that are already served by multiple broadband providers.

“I get kind of worked up about this,” Sjoberg said.

'UNSERVED' QUANDARY

So does American Cable Association president Matt Polka. “RUS is funding competitors with government-financed, low-interest money to compete with companies that are privately funded,” he said. “This is not the purpose of the program.”

The program's primary goal is to provide loans to “unserved” areas with no broadband service at all; its secondary mission is to loan money for “underserved” areas. But when loan applications started coming in two years ago, RUS officials ran into a conundrum.

“Our preference would be to go into unserved areas,” said RUS Acting Administrator Curtis Anderson. “But we're not getting very many applications in unserved areas.”

As a result, most of the loans have gone to areas deemed “underserved,” a term with an ambiguous definition.

“'Underserved' is a broad term,” said Gary Shorman, CEO of Hays, Kan.-based operator Eagle Communications Inc. “If there are two or three providers there, is that really underserved? Probably not.”

Yet, cable operators charge that loans are in fact going to many such places.

Pete Abel, vice president of community relations at St. Louis, Mo.-based Cebridge Connections, said RUS's broad definition chills investment by operators. “It's really making us think hard about where we want to make future businesses,” he said.

INFO SHORTAGE

Operators that want to dispute whether the area is underserved have struggled to find out even what communities are in play because telcos are required only to take out a tiny legal notice in a local newspaper. But under pressure from the ACA, RUS in December started posting a list of communities for which loan applications have been received on its Web site.

According to Anderson, RUS has approved only $700 million in loans so far, even though it has authority over an additional $2 billion. Meanwhile, it only has about $200 million in loan requests outstanding, with most of those requests covering communities that have a combination of served, underserved and unserved portions.

That trend disturbs small cable operators, who charge that rural telcos' primary goal is to use the loans to finance upgrades to already-served town centers. But in order to qualify, they are including some underserved areas in the expansive regions covered by their loan applications — so “in the fine print, they're serving underserved markets,” said Shorman.

To date, the National Cable & Telecommunications Association has identified at least 200 communities where RUS loans have been approved or are pending, even though there are one or more providers already offering broadband service in those communities.

Anderson said telcos would be hard pressed to justify wiring only the outlying area without also upgrading adjacent higher-density areas — even with access to low-interest loans. “To make it viable, you're going to have to give them more than the outlying area,” he said.

'UNSERVED' IS RIGHT: TELCOS

Telcos also argue that many places covered in RUS loan applications are totally unserved by local operators.

“You're not going to find any cable companies that are going to serve people in those outlying areas,” said Darren Pittman, government affairs representative at the National Telecommunications Cooperative Association. “There's a whole segment of rural America that gets left behind if you depend on cable to offer the broadband service.”

Unlike rural co-ops, which have used government subsidies and low-interest loans for decades, cable operators generally must obtain financing from private lenders.

While operators are also eligible to apply for the loans just like rural telcos, RUS rules make that scenario somewhat impractical. For example, RUS requires that it be first in line to recover its money in the case of a default.

“No bank's going to do that,” said Polka. “That rule is an impediment to allowing other potential borrowers to take advantage of these funds.”

Citing such problems, the ACA has been advocating a grant program that would only provide money for unserved areas rather than under the current loan structure, making moot any debates over what constitutes “underserved.”

While the USDA already runs the Community Connect Broadband Grant Program to reach unserved areas, that initiative only has about $9 million in funds to dole out. And that's despite receiving some 110 grant requests that add up to between $80 million and $90 million, according to Anderson.

Some doubt Congress would free up that much money for grants. “The problem with any grant program is simple economics and budgeting,” Pittman said. “Grant authority blows your budget out of the water.”

AWAITING REPORT INFO

Polka said he hopes RUS's report to Congress on the loan program (due on Jan. 2, 2006) will shed light on problems and warm lawmakers to the idea of shifting to grants.

Anderson said the agency is trying to balance several interests while also listening to cable operators' complaints.

“I certainly understand where they're coming from,” he said. “But I'm walking a tightrope.”

He said despite the cable industry's criticism, RUS has actually denied some $1 billion worth of applications, which suggests that the agency is carefully reviewing requests.

“Some people say we're being too stingy,” he said.