Getting Money for Rural Broadband Called a Challenge

CoBank said an important obstacle to wider deployment is that local connections are 10 times more expensive to build in rural areas, and transit and transportation costs are 20 times higher. “In high-cost rural areas, subscriber densities are rarely high enough to ensure the level of cash flow needed to provide a return on capital (equity and debt) associated with deployment of broadband,” said the cooperative bank, which has more than $3.3 billion in rural loan commitments. “Thus a sustainable cost recovery mechanism is imperative to support the financing of ubiquitous rural broadband. There is no silver bullet to avoid this reality.” Without a sustainable cost-recovery mechanism, no financing method -- loans, loan guarantees, revolving loans or one-time grants -- “will sustain a rural broadband network in the long term,” it said.

Maintaining the Universal Service Fund is critical, CoBank said. “Don’t throw the baby out with the bath water by dismissing the effectiveness of USF and turn the valuable attention of the FCC to the creation of new financing programs,” it said. “The rural communications backbone that makes today’s rural broadband possible would not have been built without the support of USF.”

Fred Williamson & Associates said competitive forces alone won’t extend rural broadband. Rural incumbent local exchange carriers rely on low cost loans by the RUS, and they need “stable and predictable revenues” to repay lenders, said the company, a consultant to rural telcos. “These revenues come from (a) affordable customer rates, (b) intercarrier compensation for the use of the rural ILECs’ network by other carriers and (c) universal service funding,” Williamson said. Changing the intercarrier regime or USF could mean “significant and unaffordable increases in consumer rates,” a default on loan payment,” and, ultimately, “loss of jobs, economic development opportunities and public safety and educational opportunities” in rural communities, it said.

The Rural Telephone Finance Cooperative agreed that preserving the USF and the current intercarrier compensation system are critical to broadband deployment. “These revenue streams have facilitated investment in today’s network in rural America and assured rural telecommunications providers’ financial feasibility,” the co-op said. “Something like them will have to be put in place to create and sustain the broadband network of tomorrow.” Loans are made based on rural telephone companies having a stable revenue source, the group said. “We urge the Commission to modernize, not discard these essential support mechanisms. In order to stimulate private financing of the transition to a rural broadband network, there must be support mechanisms in place to assure long term financial feasibility of broadband providers.”

Questions about the future of the USF raise uncertainties for rural incumbents, said Alexicon Telecommunications Consulting. “Their ability to maintain current cash flows (on which they base investment-making decisions and borrowing funds) may be negatively impacted, affecting repayment of current loans and ability to obtain new ones,” said the firm, which works with rural phone companies. RUS loans take too long too process, it said. “Many other non-ILEC providers of broadband and IP-enabled services are currently able to obtain private source funding in shorter timeframes, thus incentivizing them to deploy broadband more efficiently.”

The Communications Finance Association said the broadband plan should lead to an “overdue reconsideration” of the FCC’s prohibition on direct liens on commission-issued licenses and authorizations. Government “financing conditions … are counter-productive to the ability of broadband projects to obtain private sector financing, as such provisions reduce the value and security of a lender’s collateral,” the group said. “The national broadband plan could do much to encourage private sector financing simply by adopting provisions that would put government and private sector financing on more equal footings.”

The association said companies have problems getting financing for any projects using unlicensed spectrum, with minimal protections against interference and displacement. The commission should “expand the availability of hybrid licensing or other low cost spectrum access schemes into the national broadband plan,” the group said. “Potential investors and lenders need to be assured that the business models for which they are asked to provide financing will not have their operations impaired by any loss or diminution of relied upon spectrum.”

New forms of public financing such as loans, grants and loan guarantees would boost broadband deployment, USTelecom and others said. “Grants are a far superior mechanism to incent rural broadband deployment and must cover at least 80 percent of project costs to overcome the high-cost of such deployment,” said USTelecom.

While Windstream supports the use of grants and other direct financing, officials discouraged the commission from turning to funding that would incur debt, especially in unserved areas. To deploy 6 Mbps service to roughly 364,000 of its unserved households, the company estimated a cost of $4,000 per household. In some areas, the cost would reach about $14,000 per household, the telco said. “These costs are prohibitive, as Windstream could not earn back that investment at affordable rates, even assuming high and steady subscription.” Windstream officials said loans through the RUS are focused on areas with existing broadband service and it doesn’t normally lend to rural areas.

Kodiak-Kenai Cable said white papers cited in the notice seemed to focus on the “lack of investment in last-mile infrastructure.” Company officials called middle-mile infrastructure a “critical missing link” for underserved areas, and urged the commission to better ensure broadband access by deploying middle-mile, backbone broadband networks throughout the country.

The National Rural Electric Cooperative Association supports the use of loans and loan guarantees for projects that can be implemented without a grant. It urged flexibility in issuing funding “to ensure that a variety of creative business models will flourish to meet the unique needs of individual communities.” The group represents about 930 non-profit, member-owned rural electric cooperatives.

USF is an incentive for investors, but some larger telecom companies don’t receive it and so don’t expand broadband services to their rural areas, Kansas Rep. Tom Sloane, a Republican, and resident Mary Galligan said. “Specific designation of broadband services as an appropriate use of USF and opening access to that support to all eligible broadband providers would develop a workable mechanism without the need to develop a new revenue source or program.”

MetroPCS said the commission should adopt bidding incentive discounts in future auctions, to encourage bids by smaller carriers: “Such a proposal would allow new entrants, and small, rural and medium-sized carriers to better attract private capital allowing them greater opportunity to acquire additional spectrum and deploy broadband. The Commission should adopt an auction design that will result in a fair distribution of additional spectrum by improving the likelihood that applicants other than the largest entrenched incumbents will compete for and win licenses for wireless spectrum.”

A small wireless carrier said USF reimbursements and RUS loans work against competition. “The USF program significantly over-subsidizes incumbent LECs in rural areas,” NTCH said. “The subsidy (uncapped in growth, unlike the comparable subsidy available to wireless carriers) permits these legacy firms to enjoy a huge competitive advantage over newcomers.” NTCH said the two together can lead to overbuilding in some markets. “Some markets simply cannot sustain more than one or two competing service providers. Yet the availability of low rate loans and USF grants to an unlimited number of competing carriers encourages multiple carriers to enter markets that could not otherwise support them.”

Sprint Nextel said the inquiry points to a need for the FCC to take up the special-access rates paid by competitive carriers without their own middle-mile facilities. “There would seem by now to be no debate that the special access market remains overwhelmingly dominated by incumbent local exchange carriers such as AT&T and Verizon,” the company said. “If incumbent LEC special access rates were adjusted to more reasonable levels -- for example, to reflect productivity gains and a reasonable rate of return … cell site operating costs might well decrease to levels that would render otherwise-marginal cell cites financially viable.”