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Universal Service Reform - Their Two Cents

CoBank Can Increase RLEC Access to Capital by 30%-40% if CAF Structured Like USF

In this installment of “USF – Their Two Cents”, I’m taking a look at the comments filed last month by CoBank, ACB.  CoBank, based in Denver, has been financing rural telcos for more than four decades, and today has more than $3.5b in loan commitments to more than 200 rural communications companies.

CoBank’s filing emphasizes its commitment to rural America and that it supports the transition of Universal Service support from telephone to broadband service:  “Americans have prospered from the principle that universally available and affordable telephone service benefits rural, urban and suburban residents – it is now time to transition from universal telephone to universal broadband. The cost of not supporting universal service for broadband will far exceed the cost of providing it.”

The filing goes on, however, to chide the FCC’s Notice of Proposed Rulemaking (NPRM) on USF/ICC Reform, saying that it insinuates that rural telephone companies are “wasteful and inefficient.”  CoBank continues, “As a lender to this specific sector of the communications industry, we do not believe a fair assessment of the factual data bears this conclusion.”

CoBank points out that deploying broadband in rural areas can cost 10 – 20 times more than in urban markets and adds “In high-cost rural areas, subscriber densities are rarely high enough to ensure the level of cash flow needed for a return on capital from the equity and debt associated with deployment and maintenance of broadband; therefore, a sufficient and sustainable cost recovery mechanism is imperative to support the financing of ubiquitous broadband.”  The filing adds that one-time loans or grants aren’t sufficient; that ongoing maintenance costs remain high for rural broadband systems and that some form of cost-recovery program remains imperative.

The cooperative bank believes that rather than limit the size of the fund, the FCC should focus on broadening the base of contributors: “The Commission should not worry about growth in the Connect America Fund (CAF), but rather, concentrate on widening the contribution base to include companies who use rural networks to generate income, yet do not pay into the fund to support those networks. CoBank believes that the CAF should be uncapped and per-line support should not be frozen. Only by allowing the CAF to grow as needed to support investments in rural broadband networks will the goal of ubiquitous broadband at speeds and rates reasonably equivalent to urban subscribers be achieved.”

Additional points made in the CoBank filing:

  • “Access to the CAF should be limited to one fixed broadband network with both voice and broadband carrier of last resort (COLR) obligations, and one mobile broadband network in each high-cost area.”  The filing continues, “If private financing is expected to assist in deploying broadband to high-cost areas, then the Commission should tie the receipt of the CAF with the obligation of being the COLR for broadband and voice and continue the cost recovery mechanism based on rate-of-return (RoR) regulation.”  CoBank suggests that incentive regulation only works for companies with a larger subscriber base and that RoR regulation is needed for the smallest operators.  CoBank adds that it considers RoR regulation as an important component of its lending practices and that “If the Commission eliminates RoR regulation, CoBank would view that as a serious threat to an RLEC’s ability to continue to obtain access to debt capital.”
  • CoBank asserts that legacy networks need continued support, because much of existing copper infrastructure is used to deliver broadband.
  • The filing suggests that CETC support should be eliminated and that receipt of CAF should be tied to the obligations of being the COLR.
  • The bank added that it does not support reverse auction because of “concerns about the ability to finance and maintain the rural broadband backbone without a stable, consistent source of cost recovery.”

The filing concludes that the proposed CAF should be structured in a “similar fashion to the USF model to support broadband” and adds that under these circumstances, “CoBank would immediately be able to increase our rural incumbent local exchange carrier’s access to capital by 30-40%.”

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