Farming Use of Broadband

The U.S. Department of Agriculture (USDA) released its 2023 report on Technology Use (Farm Computer Usage and Ownership). USDA has released this report every two years since 2005. This year’s report was completed by surveying over 14,000 farms across the country. There are just under 2 million farms nationwide in 2023, down 9,300 since 2021.

Every report since 2005 has shown growing computer usage on farms. Following are the key statistics from the latest report and some comparisons to the past.

69% of farms now have a computer or tablet, up from 67% in 2021. This has grown from 55% in 2005.

85% of farms have some form of Internet access in 2023, up from 82% in 2021. This is up from 55% in 2005. Following are the forms of access at farms in 2021 and 2023 – note that farms can have more than one type of access.

‘                                                            2021    2023

Dial-up                                                  2%       2%

Broadband                                          50%     51%

Cellular                                                70%     75%

Satellite                                               19%     23%

Other                                                     2%       2%

The broadband category includes DSL, cable broadband, and fiber. The report doesn’t mention if the cellular category includes the new FWA cellular broadband offered by big cellular companies like T-Mobile and Verizon. It likely does since an additional 5% of all farms nationwide claim to have cellular connections in 2023 compared to 2021. It’s also likely that the increase in satellite usage is from Starlink, with 4% of all farms adding a satellite connection from 2021 to 2023. It seems likely that the Other category is mostly fixed wireless, but the 2% penetration seems low to me – I encounter a lot of farms using the technology.

31% of farms used the Internet to buy farm inputs (raw materials) in 2023, up from 29% in 2021.

23% of farms use the Internet to market and sell agricultural activity, up from 21% in 2021.

27% of farms in 2023 use precision agriculture, up from 25% in 2021. In some midwestern states – Illinois, Nebraska, North Dakota, and South Dakota – the percentage of farms that use precision agriculture has grown to over 50% of all farms.

What this report doesn’t talk about is the percentage of farms that want broadband and can’t get it. A huge amount of the areas covered by BEAD grants are in agricultural areas. My consulting firm does surveys and interviews, and we’ve heard from a lot of farmers who would do more with broadband if they had a better broadband connection.

A report at this high level also doesn’t discuss the creativity that we see with farmers. Many farmers have used a landline broadband connection and have extended it using homemade wireless networks to reach barns, silos, and structures around the farm.

The report also doesn’t talk about the complex software being used by many farms. I’ve interviewed several farmers over the last year who say that. many days. they feel more like an IT professional than a farmer.

It’s going to be interesting in another four or five years to see how many farmers are using broadband after rural grant broadband networks have been constructed.

Reinventing ReConnect

Your guess is as good as mine about whether Congress will ever pass the draft annual Agriculture Reauthorization Bill as written. It’s my understanding that the legislation includes new money for the ReConnect grant program that is administered by the Rural Utility Service (RUS), which is part of the Department of Agriculture.

This has been a successful grant program, and I know of quite a few rural projects that have been funded through these grants. The ReConnect grants only fund areas that are remote and include a test that gives priorities to grant areas that are the farthest distance from towns and cities.

There have been changes in the broadband industry that have made it harder each year to define a ReConnect grant area. The RUS grant rules favor grant requests that cover large contiguous areas. You can cobble together grant service areas that include multiple different geographic pockets of homes and businesses, but this involves a lot more paperwork.

It’s getting quickly harder to find big contiguous unserved areas. This started with the CAF II reverse auction and really came to fruition with the Rural Digital Opportunity Fund (RDOF). That subsidy program awarded subsidies by Census blocks, often widely scattered across a county. When I saw the first RDOF map, I quickly started thinking of RDOF as the Swiss cheese program. RDOF often chops rural areas into small pieces and leaves behind scattered pockets of homes that are not easy to aggregate into a grant like ReConnect.

This chopping up of grant areas continued as States and counties have been awarding broadband grants, often for grant areas that cherry pick the densest pockets of homes. This not only breaks the remaining unserved areas into more Swiss cheese, but it also makes it harder to justify somebody asking for a grant to serve the areas that are left over.

It’s going to get hard to find grant areas after BEAD grants start being awarded. The BEAD grants are supposed to bring broadband to all unserved locations in each state and hopefully also to the underserved. But I think everybody who understands the industry knows this will not happen as planned. There are already states that are saying that BEAD funding won’t cover everybody. There will be ISPs that don’t build everything they promised. There will be ISPs using technologies that won’t reach everybody as promised. There will be ISPs that financially fail and don’t finish the grant projects. And this won’t just be for BEAD – there are going to be plenty of areas supposedly covered by RDOF that won’t get the broadband they have been promised.

The biggest pile of places that won’t get broadband from BEAD are the millions of places that are still incorrectly identified on the FCC maps as served but which aren’t. These places won’t start to become apparent until after the BEAD grants are awarded and mapped and people living in areas with no good broadband start to make noise.

It’s very unlikely that the locations that get missed by RDOF and BEAD will easily fit into the current ReConnect grant template. ReConnect might be the only major ongoing grant program, and if ReConnect is going to reach the places left over from other federal grants, the RUS is going to have to make some significant changes.

First, it has to become easier to ask for funding for small pockets of homes. The RUS has purposefully given out a small number of large grants in each grant cycle to reduce its burden of monitoring the grant construction. But there are even more significant changes needed. For example, the RUS requires a substantial pledge of other assets to get an RUS grant. Unless somebody is already an RUS borrower, they are not likely to accept draconian collateral pledges for small grants.

Currently, the ReConnect grant is totally reliant on the FCC maps, and that has to change as well – because many of the places that will be missed with broadband will be incorrectly labeled as served by the FCC. The ReConnect process is complicated, it’s a challenge to input grant requests that must tie to penny while doing so in financial formats that nobody outside of the RUS understands.

In a post-BEAD world, any future grants are going to have to be creative, nimble, and able to bring solutions to small grant areas without a huge amount of paperwork. Unless the RUS is willing or able to change how it awards grants, this could be a grant program with very few future takers – and that would be a shame.

ReConnect Grants – Not for Everybody

Yesterday’s blog listed the major rules for eligibility for this year’s ReConnect grant. Today’s blog is going to point out important aspects of the programs that you should be aware of before deciding to apply.

Grant Application is a Bear. These grants require far more effort than any other broadband grant program. The required paperwork for filing is more like a formal loan application than a simple grant application. You cannot casually file for these grants, and if you omit documentation, you will likely quickly fall out of consideration.

Probably Large Awards. Past experience with this program would suggest that the RUS tends to make a small number of larger grants rather than a large number of smaller grants.

Awards Will Likely Include RUS Loans. Awards can be made as 100% grants, 50% grants/50% loans, or 100% loans. Applicants should be aware that 100% grants will be exceedingly difficult to win, so grant applicants should be prepared to accept an RUS loan. While RUS loans are at a good interest rate, many applicants cannot accept RUS loans. RUS loans will likely require a full asset pledge from a borrower, which is often impossible if you have other non-RUS debt. While these grants favor local governments, many local governments are unable to accept RUS loans because they can’t meet the pledge requirements. Standalone entities like government-owned utilities have a better chance. The loans are also made on the same basis as any bank loan, and an applicant must have a solid and solvent balance sheet and financial history.

Grant Scoring Will Eliminate Most Projects. Most potential applicants aren’t going to get out of the gate due to not scoring high on the grant rating scale. An applicant that fails in even a few scoring categories will likely not be considered. Study this scoring list carefully and be honest about your eligibility:

  • Rurality. 25 Points. Grant areas must be at specified distances from existing towns.
  • 25/3 Mbps. 25 Points. The grant allows serving areas that have existing speeds greater than 25/3 Mbps, but you are penalized in this scoring for serving underserved locations.
  • Poverty. 20 points. Points awarded based upon the level of poverty in the grant area as measured by the U.S. Census Small Area Income and Poverty Estimates (SAIPE) program.
  • Affordability. 20 points. Retail broadband rates must be affordable compared to existing area rates. Participants must offer a low-income product and be willing and able to participate in both the FCC Lifeline and Congress’s EBB programs. Note that an ISP must become an Eligible Telecommunications Carrier (ETC) to participate in Lifeline – not everybody is able or willing to do that.
  • Labor Standards. 20 Points. While the grants don’t require paying Davis-Bacon prevailing wages, there is a hefty scoring penalty for not doing so.
  • Tribal Lands. (15 points). Tribal entities or projects that are at least 50% on Tribal land will get the 15 points.
  • Non-Profit Entities. (15 points) Governments, non-profits, and cooperatives get extra scoring points. For public-private partnerships to get these points, the applicant must be one of these entities and be willing to own the assets and take on any RUS loans. You can’t partner with a city in name only.
  • Socially Vulnerable Community. (15 points) 75% of the proposed service area must meet the RUS’s definition of Socially Vulnerable Communities. This is related to poverty but favors communities that are economically stressed for reasons other than poverty.
  • Net Neutrality. (10 points) To get these points the applicant must pledge to accept the definition of net neutrality that the FCC scrapped in 2017.
  • Wholesale Services. (10 points). This is awarded to grant recipients willing to sell wholesale access to the network to other ISPs. This is generally described as open access.

That’s 175 total points to determine the most eligible projects. If you are not a tribe, aren’t partnered with a non-profit entity, or aren’t willing to offer open-access you’d already be 40 points down on the scale. If your project is too close to an existing city or town or includes some homes that have speeds greater than 25/3 Mbps, you could be down 50 more points. If you want to serve farmers instead of poor communities, you could be down 35 more points. These grants are definitely not for everybody. I recommend a realistic assessment of your likely score before you do any work towards chasing this grant. As is usual with federal grants, there will be desperate communities that will spend the time and money to pursue this grant with no chance of winning.

Require Extra Effort. These grants will also require an environmental and historic preservation review.

Farm Access to Broadband

The US Department of Agriculture has been measuring computer usage on farms and publishes the results every two years in its Farm Computer Usage and Ownership report. The most recently released report for 2019 was compiled by asking questions to 20,000 farmers. This is a large sample from the more than 2 million farms in the country.

One of the key findings of the report is that 75% of farms reported having access to to the Internet in 2019, up from 73% in 2017. The breakdown of farms by type of connection is as follows:

2017 2019
Satellite 23% 26%
DSL 28% 22%
Cellphone 19% 18%
Cable 16% 16%
Fiber 9% 12%
Dial-up 3% 3%
Other 2% 3%

There are a few notable highlights in these numbers.

  • First, farms are abandoning rural DSL, as are many other customers. If CAF II upgrades had been done right, the DSL category ought to at least be holding even.
  • I also find it surprising that fixed-wireless isn’t listed as a choice. Fixed wireless is now available in many parts of the country. While many WISPs today offer slow broadband speeds, this category of connections should grow as speeds improve significantly over the next few years.
  • It’s a national shame that 3% of farms are still stuck with dial-up.
  • Far too many farms still use their cellphone for Internet access.

The report is also an interesting way to look at general broadband availability in rural America. For example, a few states have a high fiber coverage rate to farms, such as North Dakota (61%), Montana (39%), and South Dakota (36%). Other states have practically no broadband to farms, such as California and Louisiana at 1%, and other states below 5% including Georgia, Michigan, New York, Ohio, Pennsylvania, and South Carolina.

The states with the biggest reliance on cellphones for farm broadband include Louisiana (52%), Michigan (37%), and Florida (34%).

The poor penetration rate of real broadband is further evidenced by the way that farmers conduct business. 49% of farmers used a desktop or laptop to conduct business in 2019 while 52% used their cellphone. 24% of farmers buy agricultural inputs over the Internet and only 19% use the Internet to sell their goods.

There has been a lot of press in the last few years talking about how technology is transforming farming. However, these innovations are not coming to farms that are stuck with dial-up, satellite or rural DSL technology.

We’ve seen that better broadband can come to farms by looking at the high fiber coverage of farms with fiber in Montana and the Dakotas. That fiber has been built using a combination of subsidies from the Universal Service Fund and low-cost loans from the USDA and cooperative banks. We know how to fix rural broadband – we just don’t have the national will yet to get it done.

Does the Farm Bill Kill USDA Loans?

Today I feel like the Grinch, because I see the broadband provisions in the Farm Bill largely killing the USDA loan program and I don’t see anybody else writing about it. I’ve seen dozens of articles praising the new broadband programs created last week by the passage of the Farm Bill. To be fair, three of the announced programs are good news. The legislation created the following outright grants that, while small, are going to bring some solutions for rural broadband. The bill funds these three programs through 2023:

  • Funds the Community Connect grants at $50 million annually. These grants have been around for many years and distribute grants based upon an economic test, with grants intended for the poorest areas getting preference;
  • $10 million annually in a new program to fund middle mile fiber in rural areas;
  • $10 million annually for the grant program that was formerly called the “Rural Gigabit Network Pilot Program” but which has been relabeled as the “Innovative Broadband Advancement Program”. These grants are to be awarded to programs that demonstrate innovative technologies or methods of broadband deployment.

I’ve seen estimates that it might take as much as $60 billion in federal assistance to bring broadband everywhere in rural America and these three grants are barely a blip against the huge rural broadband shortfall – but they are better than nothing.

The flagship broadband announcement in the Farm Bill is the announcement that $350 million a per year will be given the existing USDA loan program, and that the loan awards can now also contain some portion of broadband grants, which might make it easier to build in high-cost areas.

But there is one killer provision of that new funding which I think might make it almost impossible to use. Any area receiving this funding can’t have more than 10% of households that can receive 10/1 Mbps broadband. That’s the same speed test that is being applied to the $600 million e-Connectivity grant program that I discussed in yesterday’s blog. This is a drastic change for USDA loans that currently can be awarded for areas where up to 85% of households can already get 10/1 Mbps broadband. Congress has decided to provide federal funding in the future only for those areas that have no broadband rather than spending money to upgrade inadequate broadband.

If the USDA strictly applies this 10% test I think it will become nearly impossible to get a USDA broadband loan starting in 2019. The 10% test will work for the e-Connectivity grants because ISPs can request funding for small pockets of homes that meet the 10% test. Companies that use the e-Connectivity grants to fund unserved homes can still use other funds to build the rest of a rural area.

But outright USDA loans don’t work that way. Anybody getting one of these loans has to pledge 100% of their company’s assets to the USDA and also give the USDA first lien over all other debt. Since other lenders won’t accept a second lien, then anybody going after a future loan from the program will have to get 100% of the funding from the USDA. And that’s where the 10% test will kill the loan program. There are very few places that still meet the 10% test – at least on paper. The big telcos are going to be claiming good DSL throughout rural America and in most places the big telco DSL is just good enough to cover more than 10% of homes in an area.

I’ve seen this legislation touted as a boon to rural electric cooperatives since many of them are considering building fiber to cover their whole service area. I would venture to say that there is no electric coop in the country that will pass the 10% test for their whole service area – and most of them don’t come even close.

An electric coop won’t be able to use the USDA money to build fiber everywhere – if they carve out USDA money to cover the areas that pass the 10% test, then nobody will loan them the money to build the rest. The 100% pledge and lien provisions of the USDA don’t allow for a secondary lender.

Huge swaths of rural America are now theoretically covered by the various CAF II programs, so those areas either now have 10/1 Mbps or are supposed to get it sometime over the next six years from the reverse auction awards. I believe all areas covered by CAF will be considered ineligible for these USDA loans.

I went back and read the law several times because I saw articles that got the facts of the new loan program wrong. The specific rules for the new programs can be found in the latest copy of the Farm bill, starting at Section 6101.

It’s obvious that the big telcos have gotten to the legislators who are writing this legislation. It looks like the 10% and 10/1 test will be the new norm for getting federal broadband funding. As each year goes by fewer and fewer places will qualify for this funding and monies will go unclaimed. Meanwhile, areas that have really crappy broadband, but where more than 10% of homes have fully inadequate 10/1 Mbps speeds will not be eligible for this funding. I saw articles where members of Congress are claiming that this bill will help to solve the rural broadband problem – but the actual provisions of the new USDA loan program tell a different story. This feels more like a sham than a plan to me.

Please see the attached comment that softens these comments. Turns out that 100 USDA loans in the future won’t have to pass the 10% test – that applies if an applicants wants any grant funding.

Gotchas in the e-Connectivity Grant Program

The high-level rules came out on Thursday for the USDA e-Connectivity grants being administered by the RUS. This is $560 million of grants and loans that were authorized by Congress last spring – this was first announced as a $600 million program and I’m not sure where the other $40 million went. I’m not going to list all of the rules of the grants – I’ve seen a dozen websites already that have summarized the key grant requirements. Instead I’m going to talk about a few requirements that I think will be show stoppers for many potential applicants.

RUS Loans are Still Draconian. Only 1/3 of the funding will be outright grants, with the other 2/3 being outright loans or 50/50 loans and grants. This means that most of funding can only go to those who are already RUS borrowers or who are willing and able to accept the draconian RUS loan provisions.

Anybody accepting an RUS loan must pledge 100% of their existing assets to the RUS and also give the RUS an exclusive first lien position on the company. What this means is that anybody that already has a loan elsewhere is not going to be able to take these loans. Existing lenders like CFC. CoBank, or any commercial bank will not accept a second loan position to these new awards. A huge number of telcos and electric cooperatives that borrow elsewhere won’t be able to accept RUS loans, eliminating them from consideration for anything but the 100% grant portion of the program.

These same loan restrictions also make it unlikely that any government entity can accept an award that includes am RUS loan. I’ve worked with nearly a dozen government entities that have pursued RUS loans and none of them have successfully been able to overcome the pledge and other lending hurdles.

The 10% Test. The program has a gotcha slipped in by Congress that no more than 10% of the locations covered by the program can already have existing broadband 10/1 Mbps or greater speeds. This is a giant change from past RUS award programs that allowed up to 85% to have 10/1 speeds. Applicants need to take this requirement seriously and I expect any applications that can’t the lack of existing broadband will be quickly tossed out of consideration. This is not a flexible rule and was inserted into the grant rules by big telco lobbyists who don’t want to see any competition.

This means that any parts of the country previously covered by any federal funding program that required 10/1 Mbps speeds will not be eligible – including past award areas that haven’t yet been upgraded, like the areas recently awarded under the CAF II reverse auction. Applicants are going to have to be extremely careful in defining study areas, almost on a home by home basis. I fully expect RUS to test the study areas hard and I’m positive that outside parties (like incumbent telcos) will be able to intervene if they think an applicant fails this test.

The worst part of this is that we know that the rural broadband maps suck and that there are many places that the FCC considers to have 10/1 broadband that doesn’t have it. Applicants will have a big uphill battle to get funding in these areas.

Requires Two Years of Sound Audits. Applicants need to produce two years of audited solid historical financial performance – meaning start-ups need not bother with the grants. The RUS hasn’t forgotten the big problems they had with start-up companies during the stimulus grant program.

Environmental Impacts. Applicants must analyze the environmental and national historic preservation impacts of a grant request. It’s possible to get out of this requirement if a state official will declare that these tests aren’t required for applicants from their state. Applicants are also going to need affidavits from a state official to describe state broadband grant programs and to describe any conflicts with a grant filing.

Record Keeping. In order to meet the 10% rule I expect study areas to be disjointed –pocket of homes here and there scattered over a larger area. Applicants will somehow have to track costs of construction in these small pockets and not mingle costs with other nearby areas that were not included in a grant supplication. It’s going to be hard to show an audit trail of invoices that are just for the study area.

Prevailing Wage. The announcement doesn’t mention prevailing wage, but I expect this to apply. In past RUS grants this requirement has been included in the detailed descriptions of the grant process that hasn’t yet been released. Prevailing wage means paying construction labor at rates determine by each state, and which in many states reflect the cost of building in the largest cities and not in the rural areas. Prevailing wages can sometimes be so much higher than actual construction company rates that the difference in the wages can wipe out most of the benefit if getting a 50% grant.

Matching Funds Spent First. The grants require that matching funds must be 100% spent before any RUS money. That means the funding sources that incur the highest interest rates must be spent first, adding to the cost of the project. The source of the matching funds needs to be identified by the time of the grant filings.

I’m positive that many will be excited about a new large broadband grant program, but the above grant requirements are going to scare off or disqualify many potential applicants. These hurdles are not by accident – the big telcos really don’t want anybody competing against them and have stacked the deck with the nuances of the rules.

The New e-Connectivity Pilot Grants

In March Congress passed a new $600 million grant/loan program to build rural broadband. The project has been labeled as the e-Connectivity Pilot and it’s expected that the specific rules for seeking the funding will be released early on 2019. The USDA sought public comments on the program in September and is now working out the details of how the awards will be made.

Anybody interested in these grants should get serious about it now, since it’s likely that the grant application window might not be any longer than 60 to 90 days. Getting ready means having a detailed and solid business plan as well as already having a source of funding for any parts of a project not covered by these grants. The grants are also likely to include provisions like getting a professional engineer to approve the network design – so designs need to be specific and not generic. It’s likely that the USDA will stick with their existing grant application process – and those forms have always been a bear to complete.

There is one huge hurdle to overcome for this program since an application can’t cover an area that has more than 10% of households with access to broadband speeds of at least 10/1 Mbps. Considering that the CAF II awards and more recent CAF II reverse auctions awards already will supposedly provide this kind of speed to huge swaths of the country, there are not a lot of areas left that will meet this requirement.

Claiming that an area meets the 90% unserved threshold will be also be difficult because grant applications can be challenged by carriers that serves the grant area today. I have to assume that CAF II reverse auction winners will also be able to challenge. The big rub is that the original CAF II award winners still have until 2020 to complete their build-out and they will certainly challenge awards for any CAF II area that has not yet been updated. The CAF II reverse auction winners have ten more years to complete their buildout. The USDA will likely be obligated to reject an application that encroaches on any of the CAF II footprint – even if those areas don’t have broadband today.

This gets even more complicated since the CAF II reverse auction awarded funding to fixed wireless and satellite providers. They were funded to serve specific little pockets of unserved homes, but it won’t be hard for them to claim that the CAF II award dollars will allow them to serve much larger areas than the tiny boundaries they bid on.

The process of proving a study area isn’t served will be further complicated by the USDA’s reliance on the FCC’s broadband maps, which we all know to be highly inaccurate in rural America. This all adds up to mean that an applicant needs to prove the area doesn’t have broadband today and will not be getting it over the next decade from one of the CAF winners. They will also need to overcome any errors in the FCC maps. This is going to be hard to prove. I expect the challenge process to be brutal.

From the instant I saw the 90% unserved test, I’ve assumed that the most likely candidates for these grants will be somebody that is already planning on building broadband across a large footprint. If such an applicant is careful to only identify the scattered homes that meet these grant rules, then this funding can help to pay for a project they were going to build anyway. The other natural set of applicants might be those companies that already took CAF II funding – they could use these grants to fill in unserved homes around those build-out areas. The industry is going to be in an uproar if a lot of this funding goes to the big incumbent telcos (who won’t challenge their own applications).

Another issue to consider is that the USDA can award funding as a combination of grants and loans. These awards will surely require matching funding from an applicant. Anybody that is already planning on funding that matching with bank or other financing might find it impossible to accept USDA loans for a portion of a project. USDA loan covenants are draconian – for example, USDA loans usually require first priority for a default, which will conflict with commercial lenders. It’s always been nearly impossible to marry USDA debt with other debt.

rant applicants should also be aware that the USDA is going to be highly leery of awarding money to start-ups or somebody that is not already an ISP. The agency got burned on such grants awarded with the stimulus grants and has indicated that they are looking for grant award winners to have a strong balance sheet and a track record of being an ISP. This will make it nearly impossible for local governments to go after the money on their own. Chances of winning will be greatly enhanced by public/private partnerships with an existing ISP.

I know my take on the grants sound highly pessimistic. Congress saddled these grants with the 90% unserved test at the coaxing of the big telcos who wanted to make sure these funds weren’t used to compete against them. Past USDA grants had the opposite requirement and could consider awards to areas that didn’t have more than 10% of houses with broadband. However, if you are able to identify a service area that can survive the challenge process, and if you have the matching funded lined up, these grants can provide some nice funding. I’m not taking any bets, though, on the USDA’s ability to award all of the money – there might not be enough grant applications that can make it through the gauntlet.

Using USDA’s New $600 Million

Earlier this year Congress passed an Omnibus Budget bill that okayed the US budget until this September. Buried in that bill was $600 million for rural broadband expansion, to be administered by the USDA. The USDA has dressed this up as an ‘E-Connectivity pilot program’ and is asking current borrowers and others for feedback on how to use the money. Comments are due to them by September 10.

This new program will be allowed to supply grants for up to 85% of the cost of building in an area. That might create a viable business case in rural areas if the loan recipient only has to come up with 15% matching funds.

However, Congress made it challenging for the USDA to use the money. Normal USDA programs broadband loans can be used to cover areas where as few as 15% of the homes in the coverage area don’t have access today to 10/1 Mbps broadband. It looks like big ISP lobbyists got to the author of the bill and this new $600 million flips that around and can only be used in areas where 90% of homes don’t have access to 10/1 Mbps.

That’s a difficult hurdle to overcome for a number of reasons. First, the big cellular companies report widespread coverage of cellular broadband that meets that threshold. Many such areas don’t really have that speed, and in many cases can’t even get a cell signal, but the presumption will be that such areas can get broadband. Second, the big telcos are supposedly busy implementing the CAF II program which will bring 10/1 Mbps speeds to millions of rural homes. Those homes will be counted as having sufficient broadband.

The CAF II reverse auction is underway and it’s going to fund building in the most remote places that were not covered by the CAF II program. Most of the reverse auction census blocks will not pass the 90% no-broadband test.

In most places in the country it’s going to be challenging to draw a contiguous study area that meets the 90% test. It doesn’t take too many homes with good cellular broadband or with a CAF II upgrade to fail the eligibility test. I’m sure such areas exist, but almost by definition somebody is going to have to ask for funding for small pockets of homes, or else jerry-rig a service footprint to try to meet the 90% test.

I have a hard time even seeing the big incumbent telcos meeting the 90% test in many places. There might be small telcos that didn’t accept ACAM money that might still have such pockets – but most small telcos upgraded to speeds greater than 10.1 Mbps many years ago.

The USDA is asking for the following feedback:

  • How to evaluate if rural homes have sufficient access to 10/1 Mbps speeds today. I think this gets at the heart of the FCC databases where homes are incorrectly shown to have broadband availability.
  • How to consider affordability and pricing.
  • How to demonstrate the benefits of projects using publicly available data.

The USDA didn’t ask about the speeds that must be provided to customers and I’d be surprised if they exceed the 10/1 Mbps speeds required by CAF II.

It’s possible I’m being pessimistic. It’s possible that this funding will make sense for building to small pockets of rural homes that meet the 90% no-broadband test. Perhaps the right strategy for an applicant is to apply for the funds for small clusters of ten or twenty homes – although that makes it hard to justify the overwhelming paperwork that must accompany a federal funding request.

Anybody that knows of areas that will meet this test ought to consider asking for the funds. I imagine the USDA will issue the rules near the end of this year. Getting what is effectively an 85% grant sounds attractive – but anybody who has asked for federal funding knows there will be nothing easy about the application process.

Taking Federal Broadband Funding

USDAThe USDA recently announced a new round of loan financing for the Rural Broadband Loan and Loan Guarantee Program as authorized by the 2014 Farm Bill. The loans are administered by the Rural Utility Service (RUS), a part of USDA.

The loans are available to bring or improve broadband in areas where at least 15% of the households do not have broadband today. The loans can be used to build technologies that are as slow as the old FCC definition of broadband – 4 Mbps download and 1 Mbps upload, although the RUS will strongly encourage building technology capable of meeting the new broadband definition of 25 Mbps down and 3 Mbps up. The projects can range between $100,000 and $20 million.

Over the years I have helped numerous clients acquire these loans, but I have seen more and more reluctance to use them in recent years for a variety of reasons. Following are some of the issues my various clients have with this loan program:

Slow Response Time. I don’t know what the current backlog is, but there have been times over the last five years when a loan application might wait 18 months or more for a decision from the RUS. Those kinds of wait times might have been acceptable back in the days of all-regulated telephony, when companies worked slowly on five and ten year capital plans. But the world has gotten more competitive for everybody and nobody is willing to wait that long for a yes or no answer on a major capital program.

Paperwork. The loans take a lot of paperwork. The application itself is like writing a book and my firm has historically charged up to $20k for writing one of these applications – it’s that much work. And the paperwork doesn’t stop with the application. Once you’ve taken the loan there is major annual compliance paperwork that can overwhelm the staff of smaller borrowers.

Engineering. The loan applications for larger projects must be signed by a professional engineer, and this means that projects must be nearly fully engineered just to apply for funding. That differs from the rest of the industry where projects typically are done with ‘pre-engineering,’ which means that an engineer has made a very good estimate of the cost of the project, and in my experience those pre-engineered estimates are usually pretty reliable.

Extra Costs. Sometimes the loans require extra steps that are not required for other financing. For example, I’ve seen federally-funded loans require an expensive environmental study. Nobody else ever does this because fiber is almost always built into existing public rights-of-way, which by definition have already been cleared for these purposes. Depending on the size of the loan there can also be some kind of customer survey required.

Mostly Still for Regulated LECs. Most of the loans still go to regulated telephone companies for a variety of reasons. For instance, the projects usually require 10% to 20% equity from the borrower and also first lien against the assets built with the loan. These requirements have largely stopped government entities from using these loans. Another issue that these loans entail is that they have loan covenants that can be burdensome. As an example, there might be limits on dividends that can be paid to company owners while one of these loans is outstanding.

Rates are Not that Attractive. There have been times in the past when the RUS interest rates were significantly lower than commercial bank rates and thus were very attractive. But with today’s low interest rates there is currently not a lot of difference between the government rates and commercial rates. By the time you factor in all of the extra costs of applying for and complying with these loans, the RUS loans might be more expensive.

At times in recent years the RUS has built up billions of uncommitted funds because not enough borrowers have been interested in the money. Over the last decade I have helped more clients refinance RUS loans with other lenders than I have helped people get new RUS loans. I’ve read other articles that say that the RUS is too conservative. That may or may not be true, because for the carriers I know it’s generally one or more of the above factors that have turned them off government money.

I don’t want to sound like I am trashing the program, because RUS loans have helped to fund many worthwhile projects. But a lender needs to weigh all of their options and consider all of the costs of borrowing money from different sources. Borrowing money is about a whole lot more than just the interest rate and you need to take all of the other aspects of any loan into consideration.