Meet the System–Mitchell, S.D.: Piling On in Corn Country…Feds Attack Local S.D. Cable Op

Mitchell, S.D., has a rather odd claim to fame. "It’s home to the world’s largest corn palace," says Tom Simmons, VP of public policy for Mitchell’s cable provider, Midcontinent Communications. "It actually goes back to the 1800s, and remarkably it hasn’t changed that much since then. The question is, why did they build it?" Midcontinent is asking why something else is being built in Mitchell these days: a rival broadband system that a rural telephone cooperative is creating by overbuilding Midcontinent’s franchised footprint in the small city of 14,558 residents. The cable operator isn’t questioning the competition. Midcontinent already competes with Qwest for telephone customers. It offers circuit-switched telephony as part of its local bundle, and it is planning to test VoIP digital phone service in markets including Mitchell in the near future. As John Adams, Midcontinent’s local service manager for Mitchell, says: "The satellite guys have been very aggressive here. They have wonderful get-in-the-door campaigns, but it hurts them badly [that] they cannot provide the level of service that people have come to expect in this market." What’s irking Midcontinent about the new overbuild in this market is that it’s being funded by a federal loan to the tune of approximately $20 million through a loan program created by President Bush to bring broadband to rural areas where no broadband service is available. Hard-to-Find Fine Print Even more disturbing, Midcontinent wasn’t aware that the Sanborn Telephone Cooperative, operating as Sancom Inc., had applied for one of the rural broadband loans administered by the U.S. Department of Agriculture’s Rural Utilities Service (RUS) to create a rival voice/video/data service in Mitchell. If the company had known, it could have appealed—or otherwise become involved in—the use of taxpayer dollars to overbuild Mitchell, one of 11 communities in its regional cluster headquartered in Sioux Falls, S.D. But it didn’t see the notification that Sancom had applied for one of the RUS loans. "It was all kind of cryptic," says Simmons. "The RUS requires an applicant to post a notification to allow other providers to respond to the RUS about their services within a 30-day window. The minimum requirement is only one notice. So this notice appeared one time only in the legal section of the local newspaper in tiny print, and it did not say what the services are, so we didn’t know if this was for video service or Internet services——it just simply says `broadband.’ In the case of broadband, the rural telcos have been doing all kinds of things over the years, some of them offering Wi-Fi, some offering point-to-point 2-gig stuff. So I don’t know that this one-time notice would have raised any flags even if we had noticed it. Which we didn’t." Sancom applied for—and received—two separate loans (the other for approximately $13 million, or $33 million total) to overbuild Midcontinent Communications in two markets where the cable operator already provides an extensive array of broadband services. "This situation has also happened to our company in a small town called Carrington, N.D.," says Simmons. "The [RUS loan] red flags were also raised by another cable provider [Cable Services Inc.] in Jamestown, N.D. We finally contacted a common resource at the NCTA, and they told us that [they’ve] been hearing this from a lot of folks." Midcontinent asked the Rural Utilities Service to see Sancom’s application for Mitchell, so it could learn what information it included about its local broadband service; but the cable operator was told it had to make a Freedom of Information Act (FOIA) request. Sancom had the right to veto this request, which is exactly what it did. Gene Kroell, general manager of Sancom Inc./Mitchell Telecom, defends the veto of Midcontinent’s request. "Our broadband loan application to RUS was an all-inclusive package that contained all of our financial data for the parent company and included a marketing survey plus our business plan for the projects," he says. "This information is proprietary to our company and I cannot understand why anybody should have an opportunity to review it. I just do not remember any of the other area providers calling to tell me they were sending us their business plan for our review…We have applied for a loan, not a grant. Every entity in the telecommunications industry nationwide had the same opportunity." (See accompanying sidebar, "Sancom Makes Its Case.") Broadband Plan Fandango "This all came to a head this summer when a lot of these grants were approved and red flags were popping up all over the place," says Simmons. "Hence my question at a PUC meeting in September, when I asked, `Well, we’re hearing about all these grants, and how much money has actually been allocated to areas that aren’t served by broadband?" And the answer was zero. All of the money, at least in South Dakota up to that point, had gone for overbuilds or rebuilds, but none of it was going to where it was intended to go, by providing broadband services to people who don’t currently have it." While the RUS had approved more than $37 million in loans to South Dakota companies, none of that money was targeted to provide broadband service to any of the more than 70 communities in the state that have no access to broadband service, the RUS reported at that meeting of the South Dakota Public Utilities Commission Wireless Conference (held Sept. 27-28 in Spearfish, S.D.). The National Cable & Telecommunications Association and the American Cable Association have been responding to this hot-button issue affecting cable operators across the country. In November, ACA president and CEO Matt Polka and NCTA senior director of association affairs and office of rural/small systems Lisa Schoenthaler led a delegation of rural cable operators to meet with RUS administrator Hilda Gay Legg at the U.S. Department of Agriculture headquarters in Washington, D.C. "We have been hearing from cable companies, like Midcontinent, that have invested their private risk capital to provide broadband service in rural communities across America," says Schoenthaler. (Besides Midcontinent, the delegation attending the RUS meeting in November included representatives of Bresnan, Cebridge, Cox, Eagle, Mediacom, and Millennium Digital Media.) "These companies are proud of their investment, and support the primary objective of the RUS broadband loan program, which is to spur the deployment of broadband in areas of the country without service," she continues. "However, they are extremely concerned that this objective is not being met, and that instead the program is being used primarily to subsidize second and third broadband providers in the rural communities they serve." "While ACA and its members encourage efforts in Washington to find ways to extend broadband services into unserved rural areas, we question how federal funds and loan guarantees are currently being provided into areas already served with broadband by multiple cable companies and other competitors," says Polka. "Such practices not only are a misdirected use of federal funds, but also they will create a chilling effect on further deployment of broadband and advanced services in smaller markets and rural areas. Why would a company take the risk on its own initiative to find private capital or equity to deploy broadband in their smaller markets?" "If the reward for being a risk taker in rural communities is to be penalized by having to face a government-subsidized competitor, private sector companies may become increasingly unwilling to invest in rural America," adds Schoenthaler. "We’ve therefore asked the RUS to make changes to its program to ensure that the program is meeting its primary objective and, if it is not receiving applications to deploy broadband to areas without broadband, to let Congress know that the program in its current form simply does not work." While the ball is in the RUS’ court for addressing the process and implementation of the rural broadband loan program, and the ACA has been educating its members about what’s going on, there’s nothing at the local level that Midcontinent can do. The loans can’t be appealed. But Simmons and the rest of the management team for Mitchell—which besides Adams, includes regional general manager Todd Curtis and customer service director Kris Viggers—aren’t letting the threat of increased competition slow them down. Bigger Bundle, Better Value In February, the company launches DVR service in Mitchell, to be followed shortly by high-definition service. Both services are proving to be a hit 75 miles away in Sioux Falls. "For about $105 you can get your high-speed data, all your digital channels with analog and one premium selection plus basic phone line and two features," says Viggers. "You already get your caller, name and number ID and you can pick your other phone feature. All for $105. It’s been wildly popular for the three years now that we’ve been bundling, and we can’t sell it fast enough. It gets premium into the home, phone and high-speed data. And if you combine all those services, it’s over a $20 discount than if we were to a la carte those services." The company has been ramping up its customer service operations by introducing its Sioux Falls model of walk-in retail/customer service centers across the region, enhancing its call center performance. "We have about 150 customer service representatives between two locations that answer our customer questions, sales questions or service questions, seven days a week, 24 hours a day," says Viggers. "We don’t outsource our phone calls, we handle them ourselves locally. We average about 95,000 phone calls a month and we are answering them in a 90% or greater answered rate." Midcontinent is looking at expanding its business services across its markets this year, and evolving its circuit-switched phone business. "We’ve been in the commercial business for quite some time," says Simmons. "In fact, Midcontinent has been in the telephone business as a long-distance reseller since 1982. We’re looking to expand that again this year into more communities…and VoIP or packet cable may be the vehicle to do that." Simmons says the impact of a competitor in all of Midcontinent’s markets probably is less of an issue than the company’s competitors would like it to be. "This really hasn’t caused us to jump through any extraordinary hoops," he says. "Extraordinary hoops are, for us, ordinary hoops. We do that every day." RUS Loans: What Cable Systems Should Know What is it: The Department of Agriculture’s Rural Utilities Service administers the broadband loan program—a result of a commitment made by President Bush in 2002 to help rural areas, including communities of up to 20,000 residents, that are "unserved" (not underserved) gain Internet access. Or, as the RUS website states, the loan program is intended "to increase the rate of deployment of technology to small towns in rural areas." Who’s applying: The loans are intended to be technologyneutral, meaning that any broadband provider (cable, telephone, wireless, etc.) can apply for a loan provided they will allow the RUS to take a lien on their company if they default—a requirement that has discouraged cable companies from applying for these loans, along with the ineligibility of limited partnerships. The RUS is not obliged to disclose the applicants or recipients of these loans—just the communities where loans are pending or have been approved, which is surprising given that the multimillion dollar loans are funded with taxpayers’ dollars. The problem: Contrary to its stated intention, the RUS broadband program is funding the launch of broadband service providers in communities where broadband is being provided by cable and/or other providers—sometimes by two or more companies—while rural communities with no service are being bypassed by the loans program. For example, a $22.7 million RUS loan was granted to ETS Telephone & Subsidiaries to provide broadband services in affluent suburbs of Houston; not exactly rural and unserved. The RUS argued that the ETS loan met both population and "rural" requirements. Critics such as the National Farmers Union countered: "It doesn’t seem…bedroom communities would be the highest priority." $600 million in RUS loans had been approved as of December, with many still pending. Take action: While the NCTA and the American Cable Association met with RUS administrator Hilda Gay Legg and her team in November and have followed up with letters and phone calls since then, cable operators need to get involved. Learn about the program and its requirements on its website, http://www.usda.gov/rus/telecom/ Find out if your communities are targeted by downloading the PDF file—click on "Broadband Communities Listing of Approved & Pending Applications." This list appears to be updated every few weeks, so review it often. Keep your associations informed about any red flags in your markets, and get involved in their efforts on this issue. Click here for a copy of a Dec. 1, 2004, letter (sent by ACA and NCTA to RUS administrator Hilda Legg) that outlines the issues facing cable systems where RUS broadband loans have been approved. ACA and NCTA will be contacting members of Congress this year on the RUS broadband issues, and request that any questions on specific congressional activity should be directed to ACA and NCTA. And click here to copy a sample form letter that ACA is suggesting cable operators use if they choose to alert their elected officials. A suggestion to the RUS: Make your broadband loan website interactive (i.e., not a 46-page PDF); list details on the applicants, link to their company websites and post copies of their applications; and allow members of the community, including existing broadband providers, to file comments on the pending loans. More outreach, disclosure and due diligence can only help make sure the loans are helping the communities they’reintended to help. And we trust you will reply to the NCTA and ACA and their members who took the time to meet with you in D.C.—ASAP. —Shirley Brady Sancom Makes Its Case "Contrary to popular belief, Sancom did not have a priority to overbuild cable television companies," says Sancom Inc./Mitchell Telecom general manager Gene Kroell. "Our plan was to compete against the incumbent local exchange carrier, who in this case happens to be Qwest. Qwest has not been active in providing broadband services to rural South Dakota." Kroell says Sancom has been providing services to area businesses, including motels, since 1986. In the early 1990s the company began providing dial-up Internet services to surrounding Qwest communities based on demand from consumers. "The most frequently asked question over the last several years from the Qwest communities has been, `When are you going to provide us with other telecommunications services?’ We ran some studies as to the feasibility of this type of project. Our numbers showed that a fiber-tothe- premise deployment would fit the local communities well and provide services consumers want, not just what was available. It will allow us to provide voice, high-speed Internet and video services over a pure digital network. It appears this is what consumers want. The broadband loan program is tied to the Farm Bill of 2002."—S.B.