Broadband pilot program: RUS celebrates second anniversary.

Accompanying President George W. Bush's May signature on the Farm Bill was the media's laser-like focus on the tremendous costs of new price support systems for America's farmers. While pundits, columnists and editorial boards across the country lambasted Congress and Bush for the shift toward more governmental involvement in agriculture, and responded with an almost unanimous labeling of the bill as an election-year boondoggle, almost all media overlooked the tremendous new investment in rural broadband deployment.

As rural America continues to see a loss in population and economic development, communities long have seen deployment of broadband technology as a way to assist businesses and spur economic opportunities in communities. And while Congress continues to debate major changes to the 1996 Telecommunications Act, the Farm Bill and its authorization of the Rural Utilities Service (RUS) broadband pilot loan program most likely will be the 107th Congress's best and only effort at increasing broadband deployment.

Although the program is only in its infancy, some communities and businesses already are experiencing the tremendous potential associated with broadband technology. As some NTCA members have realized, the broadband pilot program has emerged as RUS's latest endeavor to continue to meet the demand for advanced communications services in rural America.

Closing the Gaps

Many people involved with broadband deployment in the late 1990s realized that existing RUS loan programs were not flexible enough to meet the demand, nor the various broadband needs of rural communities, and that a new approach had to be developed. And while other RUS programs--telephone, water and electricity--do a good job of assisting rural communities with their basic infrastructure needs, RUS officials realized that significant gaps in broadband deployment existed for communities with populations between 5,000 and 20,000.

As former RUS Administrator Chris McLean said, "We needed to develop a program directly specific to expanding bandwidth and broadband opportunities." As RUS officials worked to form a new strategy, they realized that flexibility would be of paramount importance.

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In 2000, Congress and President Bill Clinton agreed to provide $100 million in loans for broadband deployment as part of a one-year pilot program included in the fiscal year (FY) 2001 budget, allowing both Congress and the Clinton administration the opportunity to measure demand.

Soon after the initial notice was published in the Federal Register that $100 million would be available at cost-of-money rates, RUS found itself inundated with more than $350 million in loan applications.

By allowing funds to be used to finance improvement, expansion and construction, RUS was able to improve on existing loan programs, while providing an even better financial incentive to offer broadband technology. With these funds, telcos could make a sound business decision to move forward with broadband deployment in an economically feasible way.

A Textbook Example

In that first year, RUS made 12 loans for the full $100 million. One of these loans went to NTCA member, Rural Telephone Service Co. (RTSC) in Lenora, Kan. Led by Chief Executive Officer and General Manager Larry Sevier, RTSC serves more than 12,000 access lines in 15 counties in northwest and north central Kansas.

Through the traditional RUS loan programs, RTSC provides broadband access to more than 70% of its customers. With the help of the RUS broadband loan program, the telco, through its subsidiary Nex-Tech, is taking the next step and installing fiber-to-the-home (FTTH) in several communities outside its certified service area.

According to Communications Industry Researchers (CIR), a telecommunications research firm in Charlottesville, Va., 16,000 U.S. households (or .000056%) have FTTH connectivity. With average costs for a mile of fiber optic cable topping $150,000, recouping initial investments can take a tremendous amount of time, making fiber's abundant bandwidth capacity and reliability extremely cost prohibitive.

Serving several rural communities ranging in size from 50 to 2,400 people, RTSC has a system density of 2.37 access lines per square mile. With the assistance from the RUS broadband loan program, RTSC and Nex-Tech have overcome this enormous cost and are providing FTTH to two Southwestern Bell communities: Norton and Almena, Kan. (population 517 and 3,400, respectively).

Grass-roots Efforts Pay Off

Through its business model, Nex-Tech discovered that 70% market penetration in each community would be needed for the project to be feasible.

Taking a grass-roots approach, the company combined the strategy of having marketers going door-to-door to talk to potential customers with soup-and-sandwich sign-up events to meet its mark. The result: Nex-Tech surpassed 70% sign-up rates in each community and secured 96% of the access lines through its competitive local exchange carrier (CLEC) service.

The company offered discounted bundled services, including local telephone, video, Internet, long-distance, high-speed data and "Lightning Jack" high-speed Internet service. By ensuring that each community would have a local office, staffed with local people, Nex-Tech affirmed its focus on community involvement.

Nex-Tech has started overbuilding in the community of Osborne, Kan. (population 2,100), which currently is a Sprint/United community. Securing an additional RUS broadband loan, the company again used the same formula of soup-and sandwich-events and knocking on doors to achieve its targeted 70% sign-up rate.

Legislative Results

Seeing the success of the first round of loans under the program, Congress provided an additional $80 million in loan funds for fiscal year 2002. RUS noted in the Federal Register that it had completed applications in excess of $150 million for the FY 2002 funds, bringing the total applications received for the life of the program to more than $500 million. During the 107th Congress, Reps. Lamar Smith (R-Texas) and Jerry Moran (R-Kan.) introduced separate legislation to permanently authorize the broadband pilot program.

The 107th Congress also brought about the debate over a new Farm Bill, which reauthorizes U.S. Department of Agriculture (USDA) programs, including the RUS Broadband Pilot Program. The bills introduced by Smith and Moran provided the impetus that ultimately helped lead House and Senate negotiators to authorize $100 million in loans and loan guarantees at cost-of-money rates.

Under this funding mechanism, Congress has authorized $20 million annually until FY 2005, and $10 million for FY 2006-2007. Currently, RUS officials believe the $20 million for FY 2003 will support $350 million to $400 million in actual loans. While the funding mechanism is set and the program will remain technologically neutral, USDA officials will determine the amount of loan authority and other details in a formal order that is expected to come out in November.

Speaking Out

In an effort to receive input on the formulation of regulations that will govern the program, RUS held a public forum in June on the broadband loan program at which NTCA Executive Vice President Michael E. Brunner testified. This forum was the only opportunity for public input before final regulations are released in November.

One contentious issue that has yet to be resolved is the eligibility of state and local governments to receive loans under the program, if no other eligible entity is offering or has committed to offer broadband to the communities no later than 90 days after the RUS administrator has issued rules.

NTCA and others were successful in removing language that would have allowed governments to have immediate access to the program. This issue remains one of contention and was a primary issue that NTCA and others focused on as part of their testimony before RUS public forum.

While the broadband pilot program has gotten off to a strong start and has provided much needed investment for broadband deployment, RUS will remain under the watchful eye of Congress. The RUS's 50-year record of no defaults stands as a tribute to the prudence of the agency and the business ethics of borrowers like Rural Telephone Service Co. and Larry Sevier.

The RUS Broadband Loan Program, in combination with determination, a good business model and smart marketing, has proven again that the latest in broadband technology, including fiber-to-the-home, can be a reality in every part of the country.

Darren Pittman is government affairs representative at NTCA. He can be reached at [e-mail].