When Congress passed and the President signed the American Recovery and Reinvestment Act (ARRA), or the stimulus bill, in February 2009, $7.2 billion was allocated to expand broadband in the United States.  Of that amount, $2.5 billion was slated to go to the Rural Utilities Service (RUS) for its Broadband Initiatives Program (BIP). This program supplements an existing RUS program aimed at underwriting broadband projects, the Rural Broadband Access Loan and Loan Guarantee Program.  That program was established by Congress as part of the 2002 Farm Bill, and modified as part of the 2008 Farm Bill.  Its primary goal is to provide loans to help bring Internet broadband service to unserved rural communities, which are generally defined as communities with populations of less than 20,000.

Allocating such a large amount of money before the Federal Communications Commission (FCC) had even completed a “Broadband Map” designating unserved areas may have been premature.  The awarding of one grant in particular in western Kansas may do more harm than good.

RUS had a difficult time in managing its broadband program, even before the stimulus bill was passed.  According to a February 12, 2009 Washington Post article about the RUS broadband program:

“Since it began 6 years ago, $1.8 billion in loans have been distributed. Of the 68 projects funded, 21 are nearly complete and about half have not begun. An Agriculture spokesman could not confirm whether the rural utilities service program has completed any projects.”

The ineffectiveness of the RUS’ broadband program is troubling in and of itself.  But the management problems are of equal concern, as more than $30 million in broadband loans have gone into default.

The RUS has been under scrutiny for directing its loans to areas which are neither rural nor unserved.  In fact, the U.S. Department of Agriculture’s (USDA) Inspector General observed in a September 2005 Audit Report that “the agency…issued over $103.4 million in grants and loans (nearly 12 percent of $895 million in total program funds) to communities near metropolitan areas” because its definition of “rural area” was too broad.  It found that RUS had not maintained its focus on rural communities and had instead funded communities near large metropolitan cities. 

Subsequently, a March 2009 follow-up IG Audit Report found that in the period between the publication of its 2005 report and the 2008 Farm Bill modifying the broadband program and narrowing the definition of “rural area,” RUS continued to issue loans in exurban and suburban areas. Instead of funding deployment in unserved rural areas, the RUS had funded service in 148 communities which were within 30 miles of cities with 200,000 inhabitants, including communities near very large urban areas such as Chicago and Las Vegas. That same report reiterated that the Office of Inspector General (OIG) remained concerned that the existing broadband program may not meet the Recovery Act’s objective of awarding funds “to projects that provide service to the most rural residents that do not have access to broadband service.”

ARRA’s funding broadband in areas where there is already broadband service is also a problem for RUS.  In 2005, the OIG questioned the agency’s decision to issue loans to providers that were intending to service communities that already had preexisting, private providers, since this could disadvantage providers operating without government assistance.  In this regard, the 2005 OIG Report observed that while “[t]he law does not explicitly forbid issuing loans to communities with preexisting service, we question whether the Broadband Loan Program should be providing funds for competition in many of the communities served, while other communities go entirely without service.”

In a March 2009 follow-up report, the OIG found that instead of allowing the free market to flourish, the RUS’s practices had not changed, as the agency had continued to subsidize private companies to provide broadband in neighborhoods that already had service. The report noted:

“[s]ince the publication of [its] 2005 report, RUS has continued providing loans to providers in markets where there is already competing service.  Of the 37 applications approved by RUS since September 2005, 34 were granted to applicants in areas where one or more private broadband providers already offered service.  These 34 borrowers received $873 million to service 1,448 communities…”

Consequently, the OIG remained concerned because “the overwhelming majority of communities (77 percent) receiving service through the broadband program already have access to the technology, without RUS’ loan program.”

Despite these warnings RUS has not gotten the message.  Unfortunately, things may have gotten considerably worse. 

For example, a healthy employee-owned cable system in Kansas is at risk because of an ill-advised RUS loan and grant award from the stimulus.

Mike Corn of the Hayes Daily News reported on February 1, 2010 that “Lenora-based Rural Telephone Service Co. will be receiving a grant and loan package worth nearly $100 million from the U.S. Department of Agriculture to expand broadband in northwest Kansas.”  The problem is that the area is already served by another company, Eagle Communications, which employs 277 employees, 212 of which are employee-owners.

Eagle claims that Hayes is among the best-served communities in western Kansas.  Eagle provided data to the RUS regarding its broadband network and subscribership to demonstrate that the overall proposed service area could not be classified as “underserved,” and this information was verified by RUS’ field representative in an on-site visit with Eagle.

The employee-owned Eagle also urged RUS to seek out information regarding the broadband services of AT&T, Nex-Tech and others either directly from those carriers or by obtaining access to the FCC’s confidential broadband Form 477 data for these communities, as NTIA announced it was doing, to determine that they are not underserved.

To add insult to injury, it appears that Eagle Communications will have to submit a Freedom of Information Act request merely to obtain information as to the rationale behind RUS’ award.  This is contrary to the stimulus bill’s promoters’ dedication to transparency.

The most disturbing news to taxpayers is that this may not be an isolated incident. According to a March 5, 2010 article on eWeek.com, Rep. Cliff Stearns (R-Fla.), Ranking Member of the House Committee on Energy and Commerce Subcommittee on Communications, Technology, and the Internet, is also concerned about the awards, “‘It has come to my attention that there have been some specific complaints about the overbuilding of existing networks,’ Stearns said in his prepared remarks. “In north Georgia, NTIA awarded a $33.5 million grant to an area that already has extensive broadband service.’”

When a government program like RUS’s broadband initiative is struggling to manage a multi-billion dollar portfolio, taxpayers have every reason to demand greater transparency and oversight especially when government grants start to crowd out private enterprise.

-- David Williams