[Senate Hearing 109-799]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-799

 TO REVIEW THE UNITED STATES DEPARTMENT OF AGRICULTURE RURAL UTILITIES 
                       SERVICE BROADBAND PROGRAM

=======================================================================

                                HEARING

                               before the

                       COMMITTEE ON AGRICULTURE,
                        NUTRITION, AND FORESTRY

                          UNITED STATES SENATE


                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION


                               __________

                              MAY 17, 2006

                               __________

                       Printed for the use of the
           Committee on Agriculture, Nutrition, and Forestry


  Available via the World Wide Web: http://www.agriculture.senate.gov


                               ----------


                    U.S. GOVERNMENT PRINTING OFFICE

30-424 PDF                  WASHINGTON : 2006
------------------------------------------------------------------
For sale by Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800;
DC area (202) 512-1800 Fax:  (202) 512-2250. Mail:  Stop SSOP, 
Washington, DC 20402-0001














           COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY



                   SAXBY CHAMBLISS, Georgia, Chairman

RICHARD G. LUGAR, Indiana            TOM HARKIN, Iowa
THAD COCHRAN, Mississippi            PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky            KENT CONRAD, North Dakota
PAT ROBERTS, Kansas                  MAX BAUCUS, Montana
JAMES M. TALENT, Missouri            BLANCHE L. LINCOLN, Arkansas
CRAIG THOMAS, Wyoming                DEBBIE A. STABENOW, Michigan
RICK SANTORUM, Pennsylvania          E. BENJAMIN NELSON, Nebraska
NORM COLEMAN, Minnesota              MARK DAYTON, Minnesota
MICHEAL D. CRAPO, Idaho              KEN SALAZAR, Colorado
CHARLES E. GRASSLEY, Iowa

            Martha Scott Poindexter, Majority Staff Director
                David L. Johnson, Majority Chief Counsel
              Vernie Hubert, Majority Deputy Chief Counsel
                      Robert E. Sturm, Chief Clerk
                Mark Halverson, Minority Staff Director

                                  (ii)





















                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing(s):

To Review the United States Department of Agriculture Rural 
  Utilities Service Broadband Program............................     1

                              ----------                              

                        Wednesday, May 17, 2006
                    STATEMENTS PRESENTED BY SENATORS

Chambliss, Hon. Saxby, a U.S. Senator from Georgia, Chairman, 
  Committee on Agriculture, Nutrition, and Forestry..............     1
                              ----------                              

                               WITNESSES
                                Panel I

Andrew, Jim, Administrator, Rural Utilities Service, United 
  States Department of Agriculture, Washington, DC...............     3

                                Panel II

Pagon, Mark, Chief Executive Officer, Pegasus Communications, 
  Bala Cynwyd, Pennsylvania......................................    17
Sevier, Larry, General Manager and Chief Executive Officer, Rural 
  Telephone Service, Lenora, Kansas..............................    15
Simmons, Tom, Vice President for Public Policy, Midcontinent 
  Communications, Sioux Falls, South Dakota......................    20
                              ----------                              

                                APPENDIX

Prepared Statements:
    Salazar, Hon. Ken (with attachment)..........................    34
    Andrew, Jim..................................................    37
    Pagon, Mark..................................................    48
    Sevier, Larry................................................    52
    Simmons, Tom.................................................    57
Questions and Answers Submitted for the Record:
    Coleman, Hon. Norm...........................................    68
    Grassley, Hon. Charles.......................................    69
    Harkin, Hon. Tom.............................................    70
    Linclon, Hon. Blanche L......................................    74
    Salazar, Hon. Ken............................................    75
Servier, Larry:..................................................
    Written responses to questions from Hon. Tom Harkin and Hon. 
      Ken Salazar................................................    78

























 
 TO REVIEW THE UNITED STATES DEPARTMENT OF AGRICULTURE RURAL UTILITIES 
                       SERVICE BROADBAND PROGRAM

                              ----------                              


                        WEDNESDAY, MAY 17, 2006

                                       U.S. Senate,
         Committee on Agriculture, Nutrition, and Forestry,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:34 a.m., in 
Room SR-328A, Russell Senate Office Building, Hon. Saxby 
Chambliss, Chairman, presiding.
    Present: Senators Chambliss, Coleman, Harkin, Lincoln, 
Salazar, and Dayton.

       OPENING STATEMENT OF HON. SAXBY CHAMBLISS, A U.S. 
         SENATOR FROM GEORGIA, CHAIRMAN, COMMITTEE ON 
              AGRICULTURE, NUTRITION, AND FORESTRY

    Chairman Chambliss. The Committee will come to order, and I 
welcome you to this hearing to review the United States 
Department of Agriculture Rural Utilities Service Broadband 
Program.
    I appreciate our witnesses and members of the public being 
here to review this very important topic as well as those who 
are listening through our Website. Over 3 years ago, President 
Bush set forth an ambitious goal of universal, affordable 
access to broadband technology by 2007. While bold, the goal is 
necessary, and universality is fast becoming a key objective to 
ensure that geography does not become a barrier to entry into 
the information economy.
    Agriculture has always been at the forefront in the 
adoption of new technologies. In the 20th Century, tractors, 
combines, hybrid seed, and new tillage methods defined 
improvements in yield, quality, and efficiency. The innovations 
of the past are fast being eclipsed by those of the future, 
with biotechnology and information services helping to define 
how farmers and ranchers will be profitable.
    While the agriculture sector is an important constituent, 
rural America also includes small businesses, local 
governments, health care providers, first responders, and 
residents in our communities. All of these stakeholders have a 
strong demand for broadband access, and it is already clear to 
policymakers in the United States and around the world that 
broadband access can help facilitate economic development and 
civic participation.
    The success of the Rural Electrification and Telephone 
programs over the past 70 years demonstrates the long-term 
impact of extending utilities that were once thought to be too 
expensive for rural Americans. The Tennessee Valley Authority 
is a good example of the impact that extending utility service 
can have on a single State and region. These experiences are 
helping foster a new debate: how the Federal, State, and local 
governments can help rural America bridge the digital divide.
    Data from the Pew Internet and American Life Project 
indicate that the broadband gap between rural and non-rural 
Americans at work is small, but gaps persist at home. While 
rural areas lag their urban counterparts in access, deployment 
of broadband presents different challenges and obstacles 
compared to traditional utilities services.
    To help bridge this divide, the 2002 Farm Bill authorized a 
loan and loan guarantee program to help ensure that rural 
consumers benefit from the same quality and range of 
telecommunications services that are available in urban and 
suburban communities. Complementing the loan program, the Rural 
Utilities Service manages the Community Connect Grant Program 
targeting broadband services to schools, libraries, education 
centers, law enforcement, and other customers in rural areas.
    These two programs are part of an overall national effort 
to help promote connectivity and rollout of the broadband 
access. However, as with any new technology or service, there 
will be occasional problems with its application and program 
management. The Broadband Program has been the subject of two 
recent reports from the Government Accountability Office and 
the Department of Agriculture's Office of Inspector General.
    The purpose of this hearing is to engage the Department and 
key stakeholders in a dialog. I am eager to listen to how the 
program is working and what improvements have been made to the 
management structure since the start of Administrator Andrew's 
tenure. This is a good opportunity to hear what recommendations 
were made in both reports, which ones are being implemented, 
and how problems in the beginning years of implementation can 
be avoided in the future.
    These lessons will be critical as we move into 
reauthorization of the Farm Bill next year. We need to 
recognize that the Broadband Program is just one part of a more 
complex puzzle on promoting the deployment of equipment and 
facilities. New technologies like satellite and wireless 
systems are redefining how high speed access is delivered to 
homes and businesses across the country. It is important to 
note that other Federal agencies like the Department of 
Commerce and the Federal Communications Commission are key 
actors in this issue.
    Together, we can successfully reach the President's goal of 
universal access, and I look forward to working with my 
colleagues in the Senate to help make this a reality. When my 
colleague, Senator Harkin, arrives, we will obviously be happy 
to have him make any opening comments he wishes to make. We are 
going to have two panels today. The first panel is Mr. Jim 
Andrew, Administrator, Rural Utilities Service, U.S. Department 
of Agriculture here in Washington. Jim has been a long-time 
personal friend of mine. He and I have come up through the 
electric cooperative business together. He is the right man at 
the right time for the RUS position, and I'm very pleased to 
have Jim in that position and obviously very pleased to have 
you here this morning.
    Our second panel is Mr. Larry Sevier, General Manager and 
Chief Executive Officer, Rural Telephone Service, Lenore, 
Kansas; Mr. Mark Pagon, Chief Executive Officer, Pegasus 
Communications, Bala Cynwyd, Pennsylvania; and Mr. Tom Simmons, 
Vice President for Public Policy, Mid Continent Communications, 
Sioux Falls, South Dakota.
    Jim, we look forward to any opening comments you wish to 
make and to a discussion on this issue.
    Welcome.

    STATEMENT OF JIM ANDREW, ADMINISTRATOR, RURAL UTILITIES 
            SERVICE, U.S. DEPARTMENT OF AGRICULTURE

    Mr. Andrew. Thank you, Senator Chambliss.
    Since being confirmed and sworn into office, this is my 
first opportunity to offer testimony before you, and I 
appreciate the time. As this is the first time to be with you 
since my confirmation, I wish again to express my appreciation 
for the courteous and speedy manner in which I was confirmed. 
Then, to be sworn in soon after allowed me to get on with the 
work at hand.
    During that confirmation hearing, the prevailing theme was 
broadband to rural areas of America. Community members 
expressed great interest and desire to see the deployment of 
this high speed connectivity. I, too, expressed my conviction 
that broadband might well be the next railroad or high speed 
highway that could connect rural areas with the commerce of the 
rest of the Nation and the world.
    Without it, some of our rural communities might very well 
not survive or at the least not realize the prosperity that can 
be derived from such connections. At that time, I also even 
shared the frustration I and my wife feel when trying to get 
into the Web from our home in rural Georgia.
    The conclusion of that day was the desire issued by the 
Committee and accepted by me to improve and speed the 
deployment of the Broadband Program as assigned to the Rural 
Utilities Service. I and the broadband staff at RUS are working 
very hard toward satisfying that desire.
    It must be noted that RUS is responsible for the Rural 
Electric Program the Rural Telephone Program, and the Water and 
Waste program. I will tell you, however, that over 50 percent 
of my time is spent on the Broadband Program. With that in 
mind, to say that the Broadband Program is a challenge is an 
understatement. The Rural Electric Program has over 70 years of 
experience in the development of that program. In that time, a 
track has been laid that is easy to follow with basically the 
same participants, with the same needs year after year. Rural 
Telephone and Water and Waste have the same history.
    Broadband, on the other hand, does not have the benefit of 
that history. Every application is new in terms of the 
applicants, the business plans, the financing arrangements, 
which I must add are sometimes very creative, the locations, 
the technology, the scope of their plan, the time to deploy, 
the area to be served, and the surveys projecting service 
already in place.
    Each of these factors are being considered as we continue 
to develop better ways to analyze the ever- changing and 
different applications. The key word there is continuing. 
Shortly after my swearing in, we had a meeting of a large group 
of staff that had extensive knowledge of the RUS programs and 
how they were managed. We identified the areas of the Broadband 
Program that we felt needed improvement and in order to be 
effective in the deployment.
    With that information, the process of refinement began with 
a smaller group of staff with skill sets needed to develop a 
product that could be implemented. There were legal, technical, 
business, and policy members of that committee. The main issues 
needing refinement were more precise definition of rural, 
consideration of credit support requirements, speeds to be 
provided in the application offerings, and the time to deploy.
    Each time we thought we had an agreement on the issue, a 
new question would be raised, either by a new application or 
some further research by the committee members or the industry. 
An example of industry input is the suggestion from the Cable 
Association that pointed out that our announcement in the 
newspapers was not sufficient notification that one of our 
applicants intended to deploy in a particular area. We accepted 
their suggestion to post the announcement on our Webpage. 
Further, at their suggestion, and with a visit to and the 
consent of the Chairman of the FCC, a link to their site will 
be sent interested parties to an announcement on our site.
    This is why I describe the process as continuing. The 
product is almost to the point of being rolled out once 
cleared. To say that it is the final word on broadband as 
pertains to the mission of RUS would be a mistake. As 
applicants change, as technology changes, as needed information 
from the Web changes, as the need for rural constituents 
change, so must we adapt. I've compared it to hauling a load of 
frogs in a wheelbarrow: we must stop from time to time and 
adjust our load.
    With that picture in your mind, I also want you to know we 
have a plaque in the office that states: the answer is yes, 
somehow. In summary, we at RUS believe in the value of 
broadband to rural America and are working hard to do our part 
in this deployment. We believe our work is vital to the 
economic development of rural America. We believe that the 
loans made are investments in that economic development.
    A deployment in Iowa or Colorado that creates economic 
growth also benefits taxpayers in Georgia and the rest of 
America. I have opportunities to speak to groups around the 
country, and I begin each presentation with I am from the 
Government, and I am here to help you. It always creates 
smiles, but I firmly believe it is our mission and our driving 
force. Thank you again, Senator, for your time, and that 
concludes my opening remarks.
    [The prepared statement of Mr. Andrew can be found on page 
37 in the appendix.]
    Chairman Chambliss. Well, thank you, and as I mentioned in 
my opening statement, USDA's Office of Inspector General 
released a report critical of the program management. Namely, 
OIG states that RUS has shifted the program's focus away from 
those rural communities that would not, without assistance, 
have access to broadband technologies. Can you address this 
core critique and explain what specific steps your agency has 
taken to address this concern since you've been there?
    Mr. Andrew. Yes, Senator; excuse me. In the IG report, it 
refers to some communities that are rather large and some 
applications we had in house that served some areas that met 
the original criteria of 20,000 population or less and that was 
basically underserved. It also mentioned one that was in Los 
Angeles County, California, which we did turn down and was not 
approved.
    In my statement, I've made the comment that we have had 
some--we have appointed a group of people who have been 
studying this issue, and one of the issues has to do with the 
final definition of what rural actually is. Senator just for 
your information, one of the applications we had listed 
Snellville, Georgia. Now, you know, Snellville sounds like a 
rural community, but it's a suburb of Atlanta, and it met all 
of the qualifications. But it was turned down. So we have been 
doing that, and we are now working to better define what rural 
areas really are.
    Chairman Chambliss. Very good. One of the better known 
critiques of the OIG report is the finding that suburban 
developments receive loans, and your example of Snellville is a 
good example of that. As you know, most suburbs of our major 
metropolitan centers were at one time either farmland or 
pasture. Suburban and urban encroachment constantly redefines 
if a community is rural or rapidly developing. Can you describe 
how RUS manages this reality, and how do we make sure that the 
program resources are efficiently and optimally targeted to 
those communities most in need?
    Mr. Andrew. Yes, as I pointed out, we are trying to really 
define what rural means. As you restated, Snellville was 
listed, and I might tell you that Fairfax County, Virginia, was 
one that was listed once as being a qualified applicant, 
because it had cities and towns of less than 20,000. You're 
right; the urban centers have grown out there. Now, in our 
case, for example, in my case, Millen, Georgia, is listed as an 
urban cluster. So how do we describe that based on the census 
report? We are working very hard to arrive at a conclusion of 
what urban really is and how we are going to serve that area.
    Chairman Chambliss. Managing risk is perhaps one of the 
most difficult issues to deal with in a loan program. The 
higher the risks taken on by a lender, the more likely the 
default risk will increase. Lowering the risk in areas that 
don't have ready access to private capital will not be helped 
much by a lender of last resort like the Federal Government. 
Can you explain how RUS determines the level of risk it will 
manage, and what are the specific tradeoffs you have seen in 
the management of the Broadband Program? Also, what are the 
dangers of increasing the risk level in the lending program in 
terms of long-term viability?
    Mr. Andrew. As you pointed out, this was designed for 
economic development to help rural areas of America, and we 
consider that when we look at the risks. For example, we 
require a credit support of 20 percent at this point. We're 
considering that right now. But if someone has interest in the 
program and has some skin in the game, so to speak, we think if 
their application has a business plan that will meet our 
requirements, we are willing to accept that risk if he is 
willing to accept that risk. Now, we still continue to keep the 
vision in mind that we are supposed to be developing rural 
America. That is what a risk we are willing to take.
    Chairman Chambliss. In a change from the infrastructure 
program, the Broadband Program now allows for loans to entities 
that are competing with existing service. This has been one of 
the program's most controversial provisions. How will RUS 
respond to an entity default on an RUS loan due to a 
competitive loan through the Broadband Program, should this 
aspect of the loan program continue, and does RUS plan to focus 
or refocus future loans on areas that do not already have 
existing service?
    Mr. Andrew. Senator, you mentioned infrastructure. Are you 
talking about a telecom infrastructure now, or are you just 
talking about general applications?
    Chairman Chambliss. Telecommunications infrastructure.
    Mr. Andrew. Infrastructure. First of all, the 
infrastructure, when this program came out, they were all 
offered the opportunity to get into broadband. They were 
offered that opportunity before we ever got started. If it was 
never offered by the infrastructure organizations, then, we 
would go in there. Now, the question was if they default on 
their loan, I am not sure that having broadband in there was 
the reason for the default.
    I will tell you, Senator, that in visiting with some of 
these infrastructure organizations, we are finding that they 
are losing some of their load, some of their members because of 
cell phones. But we are encouraging them to get into the 
broadband business. We are encouraging them to expand their 
offerings, and if they have not, it was offered to them. Now, 
what we would do about that is we would continue to offer this 
service in those areas.
    Chairman Chambliss. The formal title of the program is the 
Rural Broadband Access Loan and Loan Guarantee Program. What 
has been the agency's experience with the loan guarantee side 
of the program, and has RUS worked with telecommunications 
sector lenders to garner interest in this provision?
    Mr. Andrew. We have no applications for loan guarantees. We 
would like very much to have them, Senator, but the application 
is an 80-20 loan, and the private sector lending agencies are 
not interested in getting into this business. But we very much 
would like to have it, because it eases our job in that they 
would do the back office work; they would do the testing of the 
loan, and we would very much like to do it, and we are still 
encouraging it. We would like to still have it in the program.
    Chairman Chambliss. I hope we can really give some emphasis 
to this, Jim, because history has shown that the Federal 
Government's involvement in the lending business is not in the 
best long-term interest of the taxpayers. We do much better 
when we work hand-in-hand with the private sector allowing the 
private sector to do the making of the loan and allowing us to 
guarantee it when they think it's appropriate for us to do so. 
I really do hope you will give some strong emphasis to this 
guarantee section in appropriate legislation.
    Mr. Andrew. As I understand it, when this program was 
started up, it was recommended that there be an 80-20, meaning 
80 percent private sector and 20 percent guarantees. Of course, 
that would not do anything for the deployment of this business. 
But we are having a hard time finding private sector lenders 
who will participate in these loans. We very much would like to 
have it that way; very much would like to have it that way.
    Chairman Chambliss. And perhaps it should be--we should 
look at that as we move into the Farm Bill. Instead of 20-80, 
perhaps it should be 80-20, which is the case in most of our 
guarantee programs.
    Senator Lincoln?
    Senator Lincoln. Thank you, Mr. Chairman. Thank you, 
Administrator Andrew. We appreciate your being here and to help 
provide our Members of the Committee with an update on your 
effort to manage what I and I know others really recognize a as 
a very complex but extremely important set of programs that 
help provide many of our rural areas the tools they need to 
compete in a global economy.
    I grew up in rural America in a seventh-generation Arkansas 
farm family, and rural America is still my home, and it's so 
important that they don't get left out, and I think that these 
are some critical issues that allow them to participate. I was 
home in Arkansas, oh, a couple of weeks ago, and I ran into a 
gentleman who had bought a considerable amount of real estate 
in one of our smaller communities and restored these old 
structures and was helping the town capitalize on some of its 
tourism.
    And he had purchased his first property back in 1996, but 
he owned businesses that were located in Annapolis and San 
Francisco and I think Chicago. He said we're finally able to 
move here in 1999, when we were able to get the kind of 
connections to the rest of the world that we needed to enjoy 
living in rural America but running our businesses in a global 
sense. That's what this is about is returning the capacity to 
Americans to live in a quality of life that they know and enjoy 
and want to but to still be able to participate in the global 
economy. I think we all agree that expanded deployment of 
broadband technology across the country and especially in our 
currently underserved areas is key to our nation's overall 
ability to compete in the digital age.
    So the ways that we can improve the quality of life and 
opportunity in some of our more economically distressed parts 
of the country is a critical issue for me and many other 
members, I know, and we appreciate your efforts in, as I said, 
trying to implement what is a very complicated set of programs. 
We want to work with you and Members of the Committee to ensure 
that the USDA's Broadband Program functions efficiently and 
effectively for rural America, and I think there are a couple 
of interconnecting programs that are important in order to be 
able to utilize what you try to do.
    And I have got a couple of questions, Mr. Chairman. 
Particularly interested in the Community Connect Grant Program. 
We have a special projects team on our staff in the State, and 
they have been looking at the scoring criteria for this 
program, where it gives the maximum points of 40 to a community 
with a population of 499, and by the time you reach a community 
with a population of 2,000 to 3,000, the score is only 20, 
which makes it really difficult for a community of that size to 
compete, which they are the more likely, actually, community at 
that point to compete. I guess given that fact that many of our 
tiniest of communities with populations under 499 often lack 
the capacity to maintain the program once it is installed, in 
your opinion or your viewpoint, would it make sense to 
reevaluate the scoring criteria to allow those slightly larger 
communities but still very much rural, small communities and 
isolated in many instances to be more competitive?
    Mr. Andrew. I thank you for that, Senator, and that's not 
been in our discussions, but we will certainly add that, 
because that's certainly a criteria we ought to look at, and I 
appreciate that, and we will.
    Senator Lincoln. Well, I hope that you will.
    Mr. Andrew. Yes, we will.
    Senator Lincoln. Because I think that in terms of the 
viability and the sustainability, looking at the size of the 
community and the way that the scoring is attributed to those 
communities would be helpful in reflecting some success in the 
program.
    Mr. Andrew. It is a good program.
    Senator Lincoln. So if we need to follow up with you on any 
of that, or if you've got ideas, I hope you'll----
    Mr. Andrew. We are making a note right now.
    Senator Lincoln. Great. I hope you will stay in contact 
with us.
    The last question I have, Mr. Chairman, is your 
interpretation of how important other programs are to the 
sustainability of what you do with your program. I know for us, 
health care and telemedicine are critical, but much of the 
resources dedicated to programs like AHEC and the outreach 
programs, health care initiatives, particularly preventive care 
in our smaller communities have been zeroed out, along with 
some of the I guess debate as to how important the Universal 
Service Fund is, which allows much of our smaller 
telecommunications companies to operate.
    Do those types of programs have--what kind of a direct 
relationship or indirect relationship do they have to the 
success of your program?
    Mr. Andrew. You are speaking of health care?
    Senator Lincoln. Well, the telemedicine and the AHEC, which 
is the Area Health Education that's run mostly through the 
medical schools, and its outreach into the small rural areas, 
and they use a lot of telemedicine through those programs, 
connecting, you know, medical schools and larger city hospitals 
and doctors with the smaller communities and then, also, the 
Universal Service Fund, as we all know, which allows smaller 
telecommunications that operate in rural areas to serve their 
constituency.
    Mr. Andrew. Well, I have the experience, Senator, of twice 
being able, in the short time I've been there, twice being able 
to go and present checks, awards, to hospitals. I've been 
completely awed by what they're doing with it. I mean, we know 
of one case in Pennsylvania I went to that have got people 
online at home, where the doctors, the nurses are able to 
monitor their progress. It cut their recidivism back into the 
hospital from about 70 percent down to about 20 percent.
    Senator Lincoln. Right.
    Mr. Andrew. And is saving the hospital over $500,000 a 
year. So we are extremely interested in that. We promote that 
rather heavily, because we do see what it is doing. Now, I am 
not sure I have answered your question entirely, but 
telemedicine and also, I might say, distance learning----
    Senator Lincoln. Right.
    Mr. Andrew [continuing]. Has been a real critical thing 
with this, too. You know, I think we've done a real good job 
with that.
    Senator Lincoln. Well, we know, you know, and again, the 
efforts that you've made and these programs, the importance of 
them. I guess my question is really how they dovetail with 
other programs and how those other programs and resources 
actually support the overall sustainability of what you are 
initiating or what you are doing through both Universal Service 
Funds, AHEC programs, and other types of health care outreach 
for rural areas. So we will look at that and might send you a 
question there that you can kind of expand on, if you'd like 
to, at a later date.
    Mr. Andrew. I would be glad to do that, and I think it's 
something I should answer, and I will.
    Senator Lincoln. Great, thank you, Mr. Andrew.
    Thank you, Mr. Chairman.
    Chairman Chambliss. Senator Harkin.
    Senator Harkin. Thank you very much, Mr. Chairman. I 
apologize for being late. I had a previous longstanding 
engagement I had to attend to off the Hill.
    But, Mr. Chairman, let me thank you for calling this 
hearing. Broadband Internet access is crucial for the success 
of our rural communities. I keep saying my hometown, we still 
do not have broadband, and a lot of rural communities do not. I 
remember, Mr. Andrew, when you appeared here before us earlier, 
we talked about this. So, I'm delighted to see you here. I hope 
that after half a year in Washington that you will see our 
approval of your nomination as a blessing and not a curse after 
being here for half a year.
    Mr. Andrew. No comment.
    [Laughter.]
    Senator Harkin. You are all right.
    [Laughter.]
    Senator Harkin. Well, there have been some signs of some 
broadband access around. The GAO issued a report on this 
earlier; maybe someone talked about that. They said that while 
29 percent of urban households and 28 percent of suburban had 
Internet, only 19 percent in rural America, and that is a big 
gap. The problem that we see in Iowa, while they say that 95 
percent of our communities have access, what happens is a town 
will have access in a small pocket, but the rest of the town 
will not have access. That's the big problem. So, it's not 
really universal access. They say 95 percent have access. Well, 
that means a small town downtown area might have access but not 
out to the houses and stuff like that that's in the community.
    The loan program that we put in the Farm Bill has not been 
carried out as it was written and intended. Broadband loan 
applications are rejected out of sort of a we don't want to 
have any risk at all. Well, that is why we have the program. 
You know, if you are just going to avoid the risk, well, if we 
were just going to avoid risk, we never would have had the 
Rural Electrification Corporation, either. So what RUS, I would 
hope that what the legislation would do would be to work with 
borrowers to manage risk, to minimize losses.
    And I think RUS set an inflexible 20 percent cash on hand 
rule that ignores future recurring income from subscribers. 
I've had instances of my own where they may not have had the 20 
percent cash on hand, but they had enough subscribers that they 
could show on a business plan that they would be able to handle 
the cash-flow and the payment requirements. But they had to 
have 20 percent on hand, and they did not have it. So I think 
that is just way too inflexible, and I think that has had a 
chilling aspect on this.
    So again, I know you have been there a short time. I know 
from having spoken with you before that you are a proponent of 
this. Again, I am sorry I am late. I just am interested in 
hearing again from you, Mr. Andrew, just what steps in the 
short time you have been there have you taken? And what are you 
doing right now to get over some of these hurdles? Just address 
the 20 percent rule, if you could. Is there any way we can get 
around that, or do we have to change it legislatively?
    Mr. Andrew. In my opening statement, Senator, I made the 
comment that we formed a committee made up of some legal 
people, policy people, technical people on our staff who have 
got a lot of experience in all of these RUS programs. That is 
under consideration. We have discussed it at length, and it is 
under consideration, and we are going to be writing the 
proposals of how it would be considered, whether it is less 
than 20, how much less than 20. If the business plan should 
call for more than that, would the plan have access to--be able 
to increase it or decrease it?
    So, yes, Senator, we are working with that, because you're 
not the only one. We have heard it from other places.
    Senator Harkin. Well, I am sure you have.
    But, see, time really is of the essence here.
    Mr. Andrew. We know that.
    Senator Harkin. Because by September, you know what happens 
to that money if it's not obligated. I do not know how much it 
is right now, around $900 million that we have on hand for loan 
capacity, my staff tells me on this. I don't know it 
particularly, but that would be a shame to lose this, because 
we are tied up trying to get through some of these onerous 
rules and regulations. So I hope you can assure us that you 
recognize that time is of the essence and we have to move on 
this expeditiously.
    The other thing, Mr. Andrew, is that there are a lot of 
companies out there, and again, I know just a few of them; I'm 
sure it's true in every other rural State represented here, 
where they applied for these, were turned down for one reason 
or another, and yet, if they were to get these loans could 
immediately begin to put broadband lines in communities that 
have access but to get the lines out to the rest of the 
community. Do you know what I'm saying?
    Mr. Andrew. Yes, sir.
    Senator Harkin. I think a lot of times, RUS has looked at 
how do we just get it to a community? Well, if a community has 
access, then, they don't consider it. It should be considered 
if the community just has access but not the entire community, 
if you know what I mean, has access.
    Mr. Andrew. Yes.
    Senator Harkin. So I am hopeful that if you get through 
this, if you can get these rules changed, can you go back and 
look at those that were turned down to see if they are still 
willing and able to partake of this program? I would think that 
might be one of the fastest ways of getting that money out 
before September 30th.
    Mr. Andrew. Well, that is an interesting concept. The 
answer, I guess, somehow. As I pointed out earlier, we've got 
the answer is yes, somehow. I would think that they would have 
to reapply, obviously, but we could do that. We could take the 
applications and consider it on its merits; be sure nothing has 
changed in the community since that time also. We need to do 
that.
    Senator Harkin. I think this change has been made, but I 
cannot specifically say so. But both Senator Grassley and I had 
a small company in Iowa that we knew about--we did not own it; 
we knew about this company; we worked together on it where they 
happened to be owned by a woman. She had dealings with other 
communities, and I think she had, like, maybe--I'm pulling it 
out of my head here--I think maybe eight different communities 
that she could serve with her business.
    But the paperwork was such that every community she had to 
serve, she had to have a full application for each one. Yet, it 
was the same company. These were all communities within a small 
radius of one another, and yet, she had to fill out hundreds 
and hundreds of pages of application, because each community 
required it rather than just saying, well, you're one company; 
you're going out there; just fill out one application for all 
the communities. I do not know if that has been taken care of, 
but I wish you'd look at that for me.
    Mr. Andrew. We will, Senator.
    Senator Harkin. Thank you very much, Mr. Chairman.
    Chairman Chambliss. Senator Salazar.
    Senator Salazar. Thank you very much, Chairman Chambliss 
and Ranking Member Harkin, for holding this hearing, and 
Administrator Andrew, thank you for being here today as well. I 
have a more formal opening statement that I will submit for the 
record, but I will just make this comment and then have a 
couple of questions.
    It seems to me, Mr. Chairman, and to my colleagues on this 
Committee, that as we move forward and try to figure out how we 
deal with the revitalization of rural America that there are 
two things that perhaps are going to be the most significant 
opportunities that we face in our country today. One of those 
is renewable energy, and we have had a hearing in this 
Committee, and I know many of us are working on the renewable 
energy opportunities for rural America.
    I think the second will be the opportunities that come 
along with making sure that we move forward with the full 
advancement, as we can, of broadband out into rural America. I 
have been impressed in my own State that in places that I have 
gone, we have seen tele-health now coming out, available out in 
the rural parts of Colorado, and yet, there are many places out 
in the Eastern plains, on the Western Slope of my State where 
we do not have that kind of capacity available.
    And I guess I would ask, following up on the questions of 
some of my colleagues, Administrator Andrew, this question: you 
know, given the disparity that we have between the availability 
of broadband in the urban areas, suburban areas versus rural 
areas, what would be the two most important things that you 
would think we could do as a Senate to try to further penetrate 
the rural broadband availability out into the rural areas? What 
would be the one or two things that you would say would be the 
most important things that we could do to help you get the job 
done on the vision that I know you share with us?
    Mr. Andrew. Well, I do share that vision, and if I might 
say so, Senator, I know there has been a lot of deployment of 
fiber optics in your State. I know of a couple of electric co-
ops that did it, and you wrote me a letter concerning can we 
deploy fiber optics on the transmission lines, which we can and 
so forth, and I have studied your State well quite a bit.
    The one thing I think is just stay with us, because we're 
working on it, and I believe we are going to be able to have a 
program soon that will be able to be able to answer some of 
these questions. Now, I will tell you this: when I had this 
hearing, I was up, commented to Senator Harkin, I, myself live 
so far in the country, the gentleman back here says you have to 
go back toward town to go hunting, and I do. I live 14 miles 
from the nearest town, and I am not sure how anybody can 
rationalize running a cable out there to me or running any 
other service other than maybe satellite, which is there now.
    So we are working on that, trying to figure out who will be 
the players, how they're going to fit together, how they're 
going to do--what position they are going to take in this, and 
we are getting very close, real close, to having a product that 
we can announce to you that, as I pointed out in my earlier 
statement, every time we think we've got it, something changes 
a little bit to make us come back and regroup again.
    But we're working very hard toward correcting anything that 
needs to be done that we have learned. We have learned some 
lessons over the last several years. But since December, we've 
been working very hard, trying to arrive at a conclusion as to 
what to do next. Now, directly answering your question, just 
stick with us. I think we'll come up with something that will 
be satisfactory.
    Senator Salazar. Let me ask you just a question regarding 
your place 14 miles out in a very isolated area. You know, our 
family farm is in a similar situation, and I think broadband 
has come maybe within a couple of miles of our farm house, but 
it is not out there.
    In terms of your exploration through RUS of alternative 
ways of getting high speed Internet out into some of these 
communities, what kinds of services is it that RUS is 
sponsoring and promoting to get to places like your place, so 
that even a place that is so far out in the back woods is going 
to have access to this new technology?
    Mr. Andrew. I did not say backwards, Senator, but anyway--
--
    [Laughter.]
    Senator Salazar. Back woods, not backwards.
    [Laughter.]
    Senator Salazar. I would never call anybody from the back 
woods backwards.
    [Laughter.]
    Mr. Andrew. Our program is technology-neutral. Every day, 
somebody is walking into my office. Once a week, somebody walks 
into my office with a new idea about technology, how to 
deliver. We are looking at all of it; and we are neutral. We do 
have some concerns about some of them, however. You know 
yourself that when you got your first computer in about a 
year's time, it was obsolete. We are concerned about some of 
these----deploy some of these things, how secure our loan is 
going to be, but we don't need to worry about that. We need to 
worry about getting it out.
    Senator Harkin was talking about in Iowa; I know that at 
least I have studied about something in Iowa. I believe most of 
the farmers, not most but many live in town and have their 
farms out in the country so that they could receive broadband 
in town. In our case, we live in the country. We live out on 
the farm. So it's a different story for us. In my case, I think 
right now, we could get it. We can get it with satellite.
    There are some proposals, and we've got some applications 
in-house right now that would start with either a fiber in town 
or a Wi-Max, as it is called, that will hit the perimeter of 
the town and reach out as far as 18, 20, maybe 30 miles, 
depending on the terrain.
    So it will be like a rock in a pond. It will start to 
expand and grow. As the technology comes along, as the 
technology gets better, I think that wave will get broader and 
broader. I hope it will; that's what I'm counting on anyway, 
sir.
    Senator Salazar. Well, I sure hope that we see broadband 
out in your place.
    One final question if I may, Mr. Chairman, and that is with 
respect to the $900 million or so that currently still is 
available for lending, if you look at the timeframe that we 
have ahead of us, and this was clear; I think it's an 
additional four or 5 months, what is the plan that you have in 
terms of at least making that, the information of the 
availability available out there to applicants?
    Mr. Andrew. We have in house, if you will excuse me 1 
minute, right now, we have applications approaching $800 
million, so we are getting close to that now. We've got several 
applications in house that we're working now. That will take 
up--if we can get it done in time, and we are working very hard 
to get these applications completed and the money deployed. So 
we are working toward it. We're getting there.
    Senator Salazar. Thank you very much.
    Mr. Andrew. Thank you, sir.
    Chairman Chambliss. Senator Coleman.
    Senator Coleman. Thank you, Mr. Chairman, and thank you for 
this hearing. I have a great passion about rural 
infrastructure, and infrastructure is not only wastewater, but 
these are the roads and highways of the future. Administrator 
Andrew says it well in his testimony: with the correct 
technology and connectivity, you can do business anywhere in 
the world, and you can live anywhere in the world. I've been on 
Minnesota farms and been impressed with the technology; I've 
been in small towns and seen how technology can move us 
forward, but we need help, and we have some challenges.
    But one concern that I have is government cannot do this by 
ourselves. We are not the only game in town, and in fact, you 
know, there are folks out there making investment and trying to 
bring technology to rural communities. My concern is about that 
playing field, Mr. Andrew. One of the witnesses who will 
testify later has raised two concerns that I wanted to run by 
you. One is this issue of whether we should be providing 
support in areas where there is already existing broadband 
service. As I understand the mission, it's to go to those 
places that are not served. But that does not always appear to 
be the case. Can you respond to that, I mean, how you look at 
that and how you factor in whether, in fact, service is already 
there and how that impacts a loan application?
    Let me give you both, in fact, because they're really tied 
together. The other issue, then, is, and I presume in order to 
get some of that information, you would want to check to see 
who's already out there, who's serving, what's going on there? 
The other concern that a later witness will add, it really has 
to do with transparency in the process. The concern is, and I 
will just kind of----this is from testimony that will come 
later--but I want to lay it in front of you now so that I can 
get a response. The RUS does not disclose when an application 
has been filed, the name of the applicant, the communities the 
specific applicant proposes to serve, or the assertions made 
about existing broadband service in a community.
    It does provide an update on online lists of towns and 
unincorporated rural areas in a State that are covered by a 
pending approved application, but there is, however no true 
public notice and comment period that ensures the public is 
heard prior to a loan being granted. I will just read one more 
sentence. In fact, the only way an applicant can find out, the 
only way anyone can find out how an applicant is characterizing 
a market is through a Freedom of Information request, and to 
the best of our knowledge, such requests are usually fulfilled 
after the application is approved.
    So can you talk to me a little bit about the transparency 
issue in the process and what efforts we make to kind of work 
in partnership with the private sector, so sort of being 
filled, we'll kind of focus on those places that don't have 
service?
    Mr. Andrew. Let me ask you the second one first. I am aware 
of who that is. We invited them to come into our office and 
discuss these very issues. We have already taken one of their 
suggestions, which I mentioned in my opening remarks, that our 
announcement as to the towns that are going to be covered was 
not an adequate announcement.
    And we agreed with that, and we are going to post this on 
our Website, and we have also worked with the Chairman of the 
FCC, and he has agreed to let us post a link on their Website 
over to ours, because the suggestion was that a lot of these 
people come in and check the FCC Website every day, but they do 
not check the local newspaper, because that's where we 
advertise and where we're required to advertise is the legal 
section of the local newspaper. So that was one step, and we 
are going to do that.
    Now, as to the other step, when an application comes in, 
the person has to present a business plan: let's make this 
thing pay. If they come in, and they say they can get a certain 
percentage, they have to conduct a survey. If the survey says 
that they can do a certain percentage of take if they go into 
that town, even though there are other providers there, if that 
take will cash-flow and make a business plan work, then, we 
will make the loan there.
    Now, what does that do? It just offers more to other 
people. We are not trying to run other people out of business. 
We'd like them to increase their services. But if a person can 
show in their application that they can take enough to make 
their business plan work, we will consider their application, 
and all things being equal, then, they will be awarded.
    Senator Coleman. OK; well, Mr. Chairman, I am a huge fan of 
this program, and I appreciate the great leadership, Mr. 
Andrew, that you are providing. My concern is that we take 
advantage. A public-private partnership is a good thing. I 
learned that as a mayor. I think there are some opportunities 
here. We have limited resources. We have communities that have 
great needs that aren't being served, and I would hope that 
would be a first priority.
    And in those areas where there is--competition is a good 
thing, but I would hope that first and foremost, the priority 
would be go to those places that for whatever reason, the 
economics are not there, but the need is there for folks who 
live 14 miles from the nearest town.
    So I appreciate what you're doing, and I appreciate the 
opportunity that some of my constituents have had to have these 
conversations and your responsiveness. Thank you.
    Mr. Andrew. Thank you, Senator.
    Chairman Chambliss. OK; Mr. Andrew, thanks very much for 
being here today. We are very much appreciative of your 
testimony and the work you're doing. There will be some 
additional questions maybe that will be submitted to you in 
writing, and we will get those, and I hope you'll respond to 
those very quickly, please.
    Mr. Andrew. Thank you, Mr. Chairman, Senators.
    Chairman Chambliss. Thank you very much.
    Chairman Chambliss. Our second panel, Mr. Sevier, Mr. 
Pagon, Mr. Simmons, if you will come forward, please.
    Gentlemen, again, welcome, and thank you for taking time to 
be here this morning. We look forward to your opening comments. 
Mr. Sevier, we'll start with you; Mr. Pagon; then, Mr. Simmons. 
Welcome.

STATEMENT OF LARRY SEVIER, GENERAL MANAGER AND CHIEF EXECUTIVE 
        OFFICER, RURAL TELEPHONE SERVICE, LENORE, KANSAS

    Mr. Sevier. Thank you, Senator. My name is Larry Sevier. 
I'm the CEO and General Manager of Rural Telephone Service 
Company and our subsidiary, Nex-Tech. We live in the remote 
regions of Northwest Kansas. We provide voice, video, and data 
services to 10,000 customers, spanning over 5,000 square miles. 
So you can see that the density is rather small, at two per 
square mile.
    We've been using the traditional RUS loan program for over 
50 years to bring the traditional triple-play services, voice, 
video, and data to our service area, and we began providing the 
high speed Internet service in 1998. We have done it through a 
variety of technologies. We've used DSL; we've used fiber to 
the home; and we're also using wireless. Currently, we provide 
telephony services and high speed Internet service to over 85 
percent of our service area, and we continue to push fiber 
further out into the remote rural areas every year, so that we 
are hoping we will get 100 percent out in the next five to 10 
years.
    Our penetration rate for high speed is very high in our 
traditional service area, where we're providing the fiber. It's 
over 40 percent per household for the high speed. The remainder 
of the service area, we are handling with satellite service 
through NRTCA with a service called Wild Blue.
    Until recently, many of the neighboring communities served 
by the larger companies were without broadband service or 
perhaps inadequate broadband service, and obviously, this 
stifled economic development in Western Kansas. Seeing the need 
and the despair of the neighboring communities, Rural Telephone 
wanted to help bring economic stability to Western Kansas. We 
could do so through our deregulated subsidiary Nex-Tech if we 
could find the funding. Funding is not adequately available 
through the local sources, and some other funding streams dried 
up as well.
    When we learned about the pilot program through RUS, we 
immediately applied for a loan for two of the communities in 
northwest Kansas, Norton and Almena. We received a $6 million 
loan to bring broadband service to these communities. They're 
not large communities. Norton is 3,000, and Almena is only 500.
    So with the funding of the RUS Broadband Program, we 
brought fiber to the home to these communities. We held 
community events, we went door-to-door, we had sign-up events 
prior to actually starting construction and signed up 70 
percent to telephony services prior to construction, and 25 
percent signed up for the high speed Internet service. Today, 
we have a 96 percent take rate for telephony services in those 
communities and a 50 percent take rate for the high speed. I 
know the local newspaper editor said that was one of the 
biggest events that he had seen in Norton in quite some time, 
so it showed that the need was there, and the people were 
hungry for broadband services. I think this illustrates the 
good purpose of the RUS Broadband Program.
    Nex-Tech has since received three additional loans for over 
$15 million to bring broadband service to five additional 
communities in Western Kansas, and the population is 1,500 to 
2,700 in these communities as well. We have a penetration rate 
of over 80 percent and a 47 percent broadband penetration rate 
in those communities today.
    Through the National Rural Telecommunications Cooperative, 
Nex-Tech has also used a satellite program, Wild Blue. While it 
is a good program to reach the last mile of customers, the 
price and speed limitations do make a difference on the 
penetration rates, and so, our rates there are not as high, but 
I would quickly add that the service has been a very useful 
tool to reach the areas that we cannot reach with a traditional 
program.
    Rural Telephone is currently in the process of acquiring 12 
Sprint exchanges in Western Kansas. Some of these communities 
still do not have Internet service, and other areas have very 
limited service. Rural Telephone will be utilizing the 
traditional RUS program for the acquisition and the rebuild of 
these communities with fiber to the home.
    We look forward to closing on this transaction and 
providing high speed Internet service to these communities to 
help stabilize the area even further. We are passionate about 
these areas because we live and work there. These are our 
neighbors. Our young families are moving back into the areas of 
Western Kansas. We have provided at least 300 jobs internally 
with Rural Telephone and Nex-Tech over the last few years, and 
hundreds of other jobs have been created, as small businesses 
move back into Western Kansas, and so, we think we have 
stabilized the economy through the RUS broadband program.
    I see I am running out of time. Do you want me to continue? 
I've got just a few more comments.
    Chairman Chambliss. Go ahead with your comments.
    Mr. Sevier. OK; I know there has been some criticism that 
the program is not getting the money out the door fast enough, 
but in my opinion, you know, it is a loan program, so there 
must be relative assurance that the loans will be repaid, and 
this requires a very solid business plan and due diligence. I 
know some of the new borrowers probably did not know what to 
expect from this program. We've been in the program for over 50 
years, and we did not have a problem meeting and satisfying the 
requirements.
    You know, RUS has loaned out billions of dollars in rural 
America and operated a very relatively inexpensive program at 
little risk. So I guess in summary, I would just say that we 
are excited about bringing young families back to Western 
Kansas. We're getting small businesses back because of the RUS 
Broadband Program that has helped us bring broadband to some of 
these communities, and I hope it will help us bring broadband 
to more of the communities.
    I'd like to enter into the record, and I can pass this 
around; this is a map of the broadband coverage that we are 
serving in Western Kansas, showing that we're serving 100 
percent of our area and the different technologies that we're 
using to do that.
    Chairman Chambliss. Good. We will submit that and attach it 
to your statement, Mr. Sevier.
    Mr. Sevier. OK; thank you.
    [The prepared statement of Mr. Sevier can be found on page 
52 in the appendix.]
    Chairman Chambliss. Thank you very much. Mr. Pagon.

 STATEMENT OF MR. MARK PAGON, CHIEF EXECUTIVE OFFICER, PEGASUS 
           COMMUNICATIONS, BALA CYNWYD, PENNSYLVANIA

    Mr. Pagon. Good morning, Mr. Chairman and Ranking Member 
Harkin and Members of the Committee. I'm grateful for your 
invitation to provide testimony to the Committee in its review 
of the Rural Development Broadband Loan and Loan Guarantee 
Program. My name is Mark Pagon. I'm the CEO and founder of 
Pegasus Communications Corporation and of its subsidiary, 
Pegasus Rural Broadband. Pegasus Rural Broadband is a 
facilities-based provider of wireless high speed Internet 
services to residential, small business, and enterprise 
subscribers in underserved and rural communities.
    Pegasus Rural Broadband was approved in 2005 for a $13 
million loan under the Rural Development Broadband Loan and 
Loan Guarantee Program in support of our efforts to provide 
wireless high speed Internet services to approximately 100 
rural communities and 400,000 people in the State of Texas.
    I have been an entrepreneur for substantially all of my 
professional life. My strategy has always been to focus on 
underserved and rural communities, to introduce attractive new 
services and to price them affordably. In the eighties and 
early nineties, I started companies providing cable TV and Fox 
Television in Mississippi, Tennessee, Florida, Alabama, 
Pennsylvania, Massachusetts, New Hampshire, Connecticut, and 
the Commonwealth of Puerto Rico. In the nineties, I started a 
company introducing Direct TV to rural areas in 42 States.
    Collectively these companies grew to serve over 1.5 million 
subscribers, in almost all cases providing new services not 
previously available in the communities we served. While there 
are a variety of means to measure success in business, the 
measure that I believe takes precedence over all others is 
whether your company has made a difference to the communities 
it serves. My companies have always striven to meet that goal, 
and I believe that we have.
    Pegasus Rural Broadband was formed with a simple objective: 
to offer wireless high speed Internet services to rural and 
underserved communities at an affordable price. We began 
commercial operation approximately 2 years ago. We are 
operational in 50 communities in West and Central Texas, and we 
currently serve approximately 2,500 subscribers. We offer 
connection speeds up to 1.5 megabits per second and price our 
services at between $30 and $40 per month. While we have been 
authorized for a $13 million loan from the RUS under the Rural 
Development Broadband Loan and Loan Guarantee Program, to date, 
the capital required to build and operate our business has been 
wholly contributed by Pegasus Communications.
    My experience as an entrepreneur building companies, 
introducing new services to underserved and rural communities 
provides me a perspective on the challenges of providing 
broadband Internet access to rural communities and the 
importance of the Rural Development Broadband Loan and Loan 
Guarantee program to meeting this important objective. My 
observations are, of course, limited by my own experience. I 
hope you will find them useful.
    No. 1, affordable high speed always on Internet access is a 
necessary element of community health and development in the 
21st Century. Communities that lack such services will be 
severely at risk. Rural communities present two specific 
challenges to building a financially self-sustaining high speed 
Internet access service: small population size and low home 
density.
    Small population makes it very difficult to generate the 
revenues necessary to cover the fixed costs attendant on 
providing such services, and low home density disadvantages 
Internet access services whose capital investment is 
proportional to the geography covered, as the revenue per unit 
of capital investment shrinks as home density declines.
    This is a problem for both wireless and wire line services 
but is especially problematic for wire line services. For this 
reason, we believe that wireless high speed Internet services 
represent an efficient and promising means for providing 
financially self sustaining high speed Internet services in 
rural communities.
    Wireless technologies have now been introduced that allow 
for the delivery of commercially viable wireless high speed 
Internet access services. These include both proprietary 
technologies and open standard technologies using unlicensed 
spectrum as well as so-called fourth generation or 4G 
technologies such as Wi-Max, designed for use in licensed 
frequency bands. As compared with wire line alternatives, these 
technologies are relatively inexpensive to build and are 
efficient for serving low- density geographies.
    Companies serving rural communities have traditionally had 
more limited access to the capital markets than those serving 
larger metropolitan areas. This is, of course, also true for 
companies providing services based on newly introduced 
technologies. As a result, wireless high speed Internet access 
service providers have to date had great difficulty in securing 
the capital to launch wireless high- speed Internet services, 
especially in rural communities.
    The Rural Development Broadband Loan and Loan Guarantee 
Program is one of the few sources of long-term capital 
available for such wireless high speed access service 
providers. For Pegasus Rural Broadband, our loan authorization 
provides an essential supplement to our own investment capital 
and will enable us to expand our high speed rural Internet 
services throughout Central and West Texas.
    Now, just to provide some background on our experience, we 
filed our initial application for loan authorization with the 
RUS in February of 2003. Our application outlined plans to 
serve approximately 100 eligible communities in Texas. 
Preparation of our application required substantial commitments 
of time from six members of our management and financial staff. 
It took approximately 3 months to complete.
    In March of 2003, the RUS deemed our application incomplete 
and returned it to us. We submitted a revised application in 
April 2003, and in June 2003, the RUS notified that a revised 
application had been deemed complete. In June of 2005, we 
executed definitive loan documentation for our $13 million loan 
authorization. While we have not yet submitted an initial draw 
on this loan authorization, we expect to do so within the 90 
days.
    I would just offer up two observations, comments in support 
of the program and in improving the program if I might, Mr. 
Chairman.
    Chairman Chambliss. Certainly.
    Mr. Pagon. Observation No. 1, suggestion No. 1 is the 
process of submitting our application, having our application 
deemed complete, and negotiating and completing loan 
documentation was considerably more time consuming than we 
initially expected. Much of our experience is attributable to 
the fact that we are a first time borrower from the RUS, 
without prior familiarity with RUS processes or documentation. 
We believe that our experience will enable us to submit 
complete and document future loan applications more quickly. 
However, we suggest that simplification of the loan application 
process by RUS would also be beneficial to expediting review of 
loan applications under the loan program.
    No. 2, currently, the Rural Development Broadband Loan and 
Loan Guarantee Program prohibits loans to companies proposing 
services competitive to other applicants or RUS borrowers. The 
submission of an application for an eligible community blocks 
the ability of subsequent applicants to file for the same 
community until such time as the earliest application is deemed 
complete or is rejected. This imposes some hardship on 
applicants, as it is difficult to anticipate which communities 
will be the subject of alternative, competing applications, and 
when a competing application has been filed, how quickly RUS 
will make a decision to accept the competing application as 
complete or to reject it.
    We suggest that the Broadband Loan Program would be 
improved if applicants were allowed to submit applications for 
any eligible community at any time up to the point that RUS and 
a competing applicant enter into a definitive loan 
authorization covering that community. This will enable 
applicants to file an application for eligible communities at 
any time and to have their application considered in the order 
in which the applications were submitted to RUS.
    In summary, I believe that the Rural Development Broadband 
Loan and Loan Guarantee Program is a good program as well as a 
necessary element to facilitating provision of high speed 
Internet access services in underserved and rural communities. 
I also believe that certain modest changes can be made in the 
existing program to ensure that its promise is fully realized.
    Mr. Chairman, Ranking Member Harkin, Members, again, thank 
you for the invitation to speak to you today.
    [The prepared statement of Mr. Pagon can be found on page 
48 in the appendix.]
    Chairman Chambliss. Thank you very much.
    Mr. Simmons.

  STATEMENT OF TOM SIMMONS, VICE PRESIDENT FOR PUBLIC POLICY, 
    MID-CONTINENT COMMUNICATIONS, SIOUX FALLS, SOUTH DAKOTA

    Mr. Simmons. Chairman Chambliss and Members of the 
Committee, thank you for inviting me to testify today. My name 
is Tom Simmons, and I am the Vice President of Public Policy 
for Mid-Continent Communications, a leading provider of cable 
telecommunications services in rural America, including analog 
and digital cable television, broadband Internet, local and 
long distance telephone services. We serve over 200,000 
customers in approximately 200 communities in North and South 
Dakota, in Western Minnesota and northern Nebraska, generally 
classified as small or rural.
    The size of our communities range from densities of five to 
116 homes per mile of cable plant and populations ranging from 
less than 30, in Barlow, North Dakota, to our largest 
community, which is Sioux Falls, South Dakota. That population 
is just a little over 140,000. Mid----Continent launched its 
broadband Internet service over 10 years ago on April 15, 1996, 
in Aberdeen, South Dakota, and made a pledge then to bring 
advanced broadband services to as many customers as possible 
regardless of the size of the community.
    By the end of last year, we completed a project to rebuild 
our cable plants to 750 megahertz or better in 50 more Mid-
Continent communities. That brings our total of upgraded 
systems to 152, now serving over 95 percent of Mid-Continent's 
customers.
    All of this has required Mid-Continent, a privately held 
company, to invest over $90 million in private risk capital to 
bring advanced services to our customers in rural America 
without the assistance of public funds. We hope to continue 
doing so. We are proud of our ability to deliver the services 
our customers demand, which are no less than those desired and 
expected in suburban and major metropolitan areas. As a 
provider of broadband service in rural America, Mid-Continent 
strongly supports the fundamental, primary goal of the RUS 
Broadband Loan Program: to deploy broadband to consumers living 
in unserved areas of rural America. We believe that quality 
broadband services should be available to all regions of the 
country and to all consumers, including those in the least 
densely populated areas of the country.
    However, we have two concerns regarding the RUS Broadband 
Loan Program which we would encourage the Committee to examine 
further. First, in many instances, RUS loans are being used to 
subsidize broadband deployment in areas already served by 
companies that deployed broadband service without a Government 
subsidy. This runs counter to the stated purpose of the 
program: to bring broadband to consumers living in areas where 
it is unavailable.
    A September 2005 USDA Inspector General's report found that 
the RUS Broadband Loan Program was, and I quote, not maintained 
its focus on rural communities without preexisting service, 
unquote. Mr. Chairman, we concur with the IG's report. There 
are numerous examples of RUS loans being granted in areas 
already served by one or more providers. In fact, not long ago, 
the RUS granted a $13 million loan to a company to overbuild 
Mid-Continent in Mitchell, South Dakota, a small city of a 
little over 14,500 residents, despite the fact that we faced 
vibrant competition and invested millions of dollars in risk 
capital to upgrade our system in Mitchell in order to provide 
our customers there a variety of advanced services, including 
high speed Internet services, high definition television, and 
telephony.
    And Mitchell was not the only town overbuilt in South 
Dakota. As an RUS official reported at a 2004 South Dakota PUC 
conference, the RUS had approved $37 million in loans to South 
Dakota companies by that time, but none of that money was 
targeted to provide broadband service to any of the more than 
70 communities in South Dakota that had no access to broadband 
service.
    Mr. Chairman, providing broadband service in high cost 
rural areas is economically risky at best. That risk could 
become unbearable if we are faced with a competitor subsidized 
by the Government. Subsidizing a company to overbuild an 
existing provider could have the perverse effect of making it 
increasingly difficult if not impossible for a company that 
entered the market first using private risk capital to continue 
to provide quality service in that market. Furthermore, the 
threat of Government-subsidized competition in rural markets 
also creates a disincentive for a company that does not receive 
Federal support to extend support to rural communities, and 
importantly, subsidizing deployment in a competitive market 
diverts scarce revenues from areas where a market based 
solution has not developed.
    We are concerned that while the RUS is required to assess 
the status of broadband service in markets where an applicant 
is seeking a loan, the existing rules can make it difficult for 
the RUS to make an accurate assessment. Existing providers 
often have little or no opportunity to effectively challenge 
assertions made by an applicant that seeks a loan to overbuild 
incumbent providers. By not having a clear picture of the 
marketplace, it may be difficult for the RUS to determine 
whether it is appropriate to approve the application. A more 
transparent, open process allowing for disclosure of 
nonproprietary information to the public would assist RUS staff 
evaluating loans and benefit the public, whose tax money 
supports this program. To this end, and reflecting on the two 
principal concerns, we recommend the following: first, the 
program should be revamped to carefully and strictly target 
assistance to support broadband deployment in unserved areas 
only; and second, the RUS should take steps to, one, ensure 
that it getting the information it needs to assess the 
feasibility of loan applications; and two, ensure the public 
understands the basis on which the loans are made.
    In closing, Mr. Chairman, let me reiterate that Mid----
Continent supports the goals of the Federal Government to 
assure that all Americans have access to broadband services. 
Our industry has invested hundreds of millions of dollars to 
help that goal become a reality, and we recognize that 
Government subsidies may be the only answer in some rural 
areas. However, that program should be designed to promote 
broadband deployment; and must be carefully defined and 
targeted to those areas that lack broadband service.
    And let me also, sir, add a word of thanks publicly to Mr. 
Andrew and the members of the RUS who have been willing to meet 
with our industry to discuss these concerns and work on mutual 
goals to do right by our customers and your constituents.
    Mr. Chairman, thank you for inviting me to testify today. 
I'd be happy to answer any questions you or Members of the 
Committee may have.
    [The prepared statement of Mr. Simmons can be found on page 
57 in the appendix.]
    Chairman Chambliss. Well, thanks to all three of you for 
that information that you respectively provided there.
    Mr. Sevier, what is your consumer per mile ratio on your 
telephone line versus your broadband service line?
    Mr. Sevier. Well, it depends on which program. In our 
traditional program, we have probably a ratio of 80 percent of 
broadband customers to our telephony customers. We have around 
6,000 to 8,000 broadband customers and 10,000----
    Chairman Chambliss. What I meant to ask was how many 
consumers per mile are on your telephone lines versus your 
broadband line?
    Mr. Sevier. We have two consumers per mile on the telephone 
project, and I am not sure that we have done a per mile; I 
could figure it out relatively easy. It would probably be 
about----
    Chairman Chambliss. Do you think it is more or less than 
two?
    Mr. Sevier. It is less; it is maybe one, one-half to one 
per mile. There are a lot of consumers who do not have 
computers yet, and it is difficult to know how many consumers 
are out there that do not have computers to be able to get a 
good ratio of what our penetration is to the number of 
computers.
    Chairman Chambliss. Yes; I hear what Mr. Simmons is saying, 
and I empathize with his position. Anytime we can encourage the 
private sector to invest in markets like the expansion of 
broadband, I think it is important that we do so. But I know 
from my experience with the rural electric cooperatives that in 
terms of the customer per mile, two customers per mile makes it 
difficult to support your telephone operation. If you have less 
than that on broadband, there's not a lot of incentive for 
capital investment in the private market.
    At the same time, I hear you saying, Mr. Simmons, that you 
support the program, but it should be going to underserved 
areas. I think that's a good statement, and that is a fair 
statement. What effect, from a competition 
standpoint, does someone who has a government subsidized loan 
or a government loan come into your market area? What effect 
does that have on your business on a day-to-day basis?
    Mr. Simmons. Well, in that particular market, that market, 
which is already very small, now has been split. Regardless of 
whatever number of customers that we have or what our market 
share has been, the pro forma that we built the operation on no 
longer exists. There will be more players in the marketplace, 
so obviously, it has an impact on what our margins may be, an 
impact on our ability to provide services in that particular 
market.
    It might be a different situation if the competitor came 
into the marketplace and was providing services that were 
different from ours. But in the example that I offered in my 
testimony, in Mitchell, South Dakota, the competitor came into 
the market, provided exactly the same services that were 
provided in exactly the same service area. So it was purely a 
competitor to that market.
    There is a secondary, unintended consequence of this, 
however, that may not be apparent. We found in our company that 
when we take a look at our operation companywide, that's all 
the communities we serve, it has impacted us in some of the 
other communities. There may be some communities out there that 
basically have been upside down for quite some time.
    We continue to provide the services there until such time 
that we're able to build services into that or advance services 
into that community. But we have found ourselves making a 
decision in a few of those markets that it no longer makes 
sense for us to provide any services there. We have, in fact, 
in a few small towns not renewed our cable franchise. We can't 
continue serving even the level of services that we provide now 
in some of those communities, because we have a competitive 
assault going on in some of our other communities.
    So we talk about competition being good, and it is in 
almost all cases. Competition is important. It is really 
important for the people who receive the competition. But if 
money is allocated from the Federal Government into those 
community areas that might divert it from those unserved areas, 
it is a failure of the program to serve those people. Even in 
our case, if we are having to divert our resources to compete 
in some of these markets, there might be some other smaller 
communities out there that will also be unserved now even by 
our cable services.
    So this is a very complicated issue, sir, and it goes well 
beyond the obvious: there are, in fact, unintended 
consequences.
    Chairman Chambliss. When a competitor comes into your 
market, and let us just use your South Dakota example. Did the 
Government-subsidized entity that came into that market serve 
or compete with you with lower rates than what you were able to 
provide at that point in time?
    Mr. Simmons. Not necessarily; in some cases, perhaps. But 
what we have done, you know, the application was made, and 
again, there's quite a lag time between when the application 
was made and when the service provision begins. They have to go 
through an extensive application process, as I understand it, 
but there is a period of time, usually a year, to build out 
those services.
    From the time that the application was made to the time of 
deployment, we have a competitor providing all those services, 
but during that time we have modified our services as well. 
We've ramped them up substantially; not because of the 
competition; we have done that throughout our entire service 
area.
    But we have added most recently digital telephone service, 
VoIP, if you please, to that particular market. So we'll have 
additional services. Since the time the application was made on 
our cable plant, we were offering both analog and digital video 
services, high definition television in those markets, digital 
video recording capability in those markets, and we will be 
about to add video on demand in those markets as well, not 
necessarily because of the competition but as a standard rampup 
that we do in those particular markets.
    And one great concern that I have, Mr. Chairman, with the 
program is that I'm assuming that the only reason the city of 
Mitchell received that loan grant was because the RUS had 
determined Mitchell to be underserved. I do not understand how 
the city of Mitchell could have been considered underserved 
with all of those offerings.
    Chairman Chambliss. Were any questions asked of you by 
anyone from RUS at the time that application was under 
consideration?
    Mr. Simmons. Mr. Chairman, I have never received a 
telephone call from anyone at the RUS: not for any information 
regarding the application or for any matter.
    Chairman Chambliss. Mr. Sevier, you have had experience 
with filing an application for loans both on the telephone side 
and the broadband side. Again, going back to Mr. Pagon's 
testimony regarding the significant difficulty his company 
encountered in filing this application, is there a major 
difference in the application and the requirements thereof for 
a telephone loan versus a broadband loan?
    Mr. Sevier. Mr. Chairman, I do not see much of a 
difference. We have made loans on both of the programs. In 
fact, we are currently doing a loan application for the Sprint 
acquisition and rebuild that I mentioned, and the requirements 
are very thorough. They are very thorough about what they 
expect us to have in there.
    But they are both about the same from what I can tell. One 
requires a market survey under the Broadband Program, while 
they do an area coverage survey under the traditional program, 
so typically, they would be about the same. You have to do your 
engineering design prior to submitting for the loan, and the 
differences that I see might be that in the traditional 
program, there might be more required of an A-loan borrower, 
which would be the first time a borrower has borrowed from the 
RUS program.
    And so, you're seeing many first-time borrowers in the 
Broadband Program right now. So I can see a difference in what 
would be required for that first-time borrower as opposed to an 
incumbent borrower who has been in several times and that 
they're familiar with.
    Chairman Chambliss. Mr. Pagon, again, along that same line, 
was that the first loan application you had submitted under 
this program?
    Mr. Pagon. Yes, it was.
    Chairman Chambliss. Have you subsequently submitted any 
additional applications?
    Mr. Pagon. We submitted a second application a year and a 
half ago, and it was returned to us as incomplete, and we have 
not resubmitted it at this point.
    Chairman Chambliss. Again, I empathize with your position, 
having gone through a number of applications in the electric 
cooperative business. Those things are a couple of feet thick, 
as I remember. I think that your concern there has a lot of 
merit to it. Perhaps we need to emphasize to RUS that we want 
to make that process a little bit easier to go through. Senator 
Harkin and I were just talking about this: we have $900 million 
sitting there, and much of it is not being accessed just 
because of the difficulty that you encountered in that loan 
application process.
    So, Senator Harkin.
    Senator Harkin. Mr. Chairman, you are right on that, and as 
we were discussing, we want to get the money out, but we want 
to make sure that it is reasonable and that we do not make bad 
loans and everything.
    But in that regard, I would just say to each of you that, 
you know, under the REA, sort of the history of what I have 
looked at here when we put this in the bill, in the REA, when 
they started making their loans for extending lines and things 
like that and even up to the present time, they didn't just 
take a loan application, process it, and say goodbye. They 
worked with the applicants to design, to organize, establish a 
system, provide the services out there. It was a whole service 
entity. It was not just getting the loan. It was providing a 
lot of support and help and stuff to get the job done.
    I don't detect that in RUS right now. It is sort of we will 
look at the paperwork and make the loan and good- bye. I'm 
thinking that there ought to be more of an active involvement 
with that program than what we have right now. I do not think 
we set it up in the Farm Bill just as a lender, just as a 
specific lender but as someone who would work with entities and 
help them out.
    With regard to getting--Mr. Simmons, in many cases in the 
Midwest, cable does a very good job. They got their communities 
wired. They provide a lot of good services. But there's a kind 
of conundrum here. There's a problem. In many cases, cable will 
serve a community; does a great job, but then, they reach 
beyond the community. Now, we get a place where Mr. Pagon comes 
in here, and he says, well, we want to serve a rural area out 
there, but in order to make it cost-effective, to make sure 
that we can make the plan work, we need to be able to serve 
some of the community also.
    So here I am. I want to be able to get service out to 
people who live beyond the community limits. Cable won't do it. 
Here comes along a borrower; they say they can do it, but they 
need to have access, perhaps, to some of that community also. 
So, then, what do you say to our constituents who say, yes, we 
have cable, and it provides good service, but we don't have any 
competition? It's the only thing we got? And when they raise 
their prices, we do not have any other place to go.
    So you see, we are in a bit of a problem here. We want to 
get it to rural areas. Cable can't do it, and I understand the 
monetary reasons; but they can, but they need to have access to 
the community. How do you solve that problem?
    Mr. Simmons. Well, Senator, there are a couple of issues in 
that statement. On the cable competition issue, every market 
already has satellite competition, so there are choices in the 
markets right now, and frankly, there is another debate going 
on within both Commerce Committees in the House and Senate on 
how we're going to be extending franchises for new providers, 
presumably in the individual markets. But maybe the core of the 
question you are asking----
    Senator Harkin. Excuse me, Mr. Simmons; satellite is only 
downstream.
    Mr. Simmons. That is correct.
    Senator Harkin. We want to get broadband so people can do 
both.
    Mr. Simmons. When we have a provider who is asking for an 
RUS loan grant into the market that's going to extend well 
beyond that particular market, the position of my company, if 
not our industry but certainly for my company, is go for it. 
That is quite all right. We would not resist that for a minute.
    The issue we have is when a broadband, quote unquote, 
provider is asking for the RUS to provide millions of dollars 
for a full market overbuild that will be providing not only the 
broadband component but will be providing all the services of 
advanced video, cable television services that we provide now, 
telephony as well, with the broadband component of that, the 
Internet per se, being just a small piece of that. But they're 
providing that infrastructure in a community that matches our 
service area. It is not going outside of that area. It is 
exactly the same area that we're serving now. We have a problem 
with that.
    Senator Harkin. I can understand that. That's why I say--
and we do have a problem with that. But what if they want to 
beyond that area, though?
    Mr. Simmons. Then, they should be allowed to go beyond that 
area. If they want to be able to serve that community and tie 
it all into a bundled package, I believe that would be fine.
    Senator Harkin. Well, that would be fine. I think that 
solves the problem.
    Mr. Simmons. Senator, I think the question that we're 
asking with all of this is that we clearly understand----and I 
honestly do not understand, perhaps; I thought the purpose of 
the program was to get--to provide service to unserved areas 
primarily.
    Senator Harkin. That is right.
    Mr. Simmons. And that the primary job of the program is to 
take care of that as opposed to just allocating money. I look 
at the RUS Website, and all the successes are about, ``this is 
how much money we have allocated'', and I guess there is cause 
for celebration in all of that. But I think the real story 
should be about how many unserved customers have been taken 
care of?
    Senator Harkin. So you are right on that. You are right on 
on that, and that is exactly what we intended to do when we put 
this in the bill, and that preference is listed in law. There 
is a preference in the law.
    The other thing that we might think about here; I didn't 
bring it up with Mr. Andrew, but some of his people may still 
be here is that perhaps, Mr. Simmons, you might suggest that 
when these loan applications come in, there is a preference in 
the law for underserved areas. But the way the RUS handles the 
loans now, as I understand, Mr. Chairman is it is first come, 
first served. You put in your loan application; that is what 
they look at. Then, if you came in later, that is what they 
look at.
    Perhaps those loan applications that truly serve unserved 
areas ought to get to the head of the line. Maybe they ought to 
be considered first. What do you think of that?
    Mr. Simmons. Well, Senator, I would agree.
    Senator Harkin. I assumed you would. That is why I asked 
the question.
    Mr. Simmons. And also, a statement that Mr. Andrew said 
early on caught my attention when he said about the plaque that 
said, you know, something to the effect that we will find a 
way. When we talk about serving areas outside of a community, 
it doesn't mean that all you need to do is have one household 
outside the area. We have now found a way to backdoor the 
situation that says we would provide services beyond.
    I would hope that an applicant into a market, if they need 
to serve this market, at least the majority of it is going to 
go beyond, outside of that particular market, and it's not 
going to be one or two or a housing development over here that 
we will inadvertently pick up in order to say that we have 
served outside of this primary community. I would hope that 
would be the case.
    Senator Harkin. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Chambliss. Senator Coleman.
    Senator Coleman. Thank you. I was encouraged to hear from 
Mr. Andrew, and get Mr. Simmons to respond, is that there has 
been a level of cooperation involved in those conversations, 
and I think that is a positive. I still----I am going to follow 
up with some questions for Mr. Andrew. I'm wondering if we 
don't have a little kind of a debate here between, you know, 
whether we're focusing on underserved or unserved and a 
distinction between the two.
    My sense from Mr. Andrew was that--and I thought I heard 
him say this that, you know, this is about competition, that it 
is underserved, and so, we could provide more competition. I 
think, though, the law is pretty clear on this, and for good 
reason, that we look to areas that are unserved. In fact, I 
would think that the loan application process, the suggestion 
of the Senator from Iowa is a good common sense one. If the 
mission, if the law dictates that we are looking at unserved 
areas, then, I would suggest that applications should be 
focused first on unserved areas.
    If, for whatever reason, the unserved areas are all filled, 
and the money has been allocated, and you have some additional 
applications, I presume there is not an absolute ban on 
underserved, but the focus really should be on served. My sense 
is, and even the response to Mr. Andrew, I am not sure that is 
even as we sit here today a clear focus of what the 
understanding should be.
    And Mr. Pagon, let me ask you a question: if the RUS were 
to change their policy and concurrently consider multiple 
broadband applications, are you concerned about how this might 
affect, slow down the application process?
    Mr. Pagon. I am not sure I understand the thrust of your 
question.
    Senator Coleman. You were saying that one of your concerns 
was that you don't get a chance to file the application, to get 
yours in front of the RUS until they have either processed or 
gone through the applications in front of you. It's kind of a 
singular order. I thought you were suggesting, in fact, that 
the agency should be, you know, kind of processing 
applications, you know, all at one time, not doing it kind of 
waiting until one is finished before you go to the next.
    Mr. Pagon. No, that was not my intent. What I was speaking 
to was the process of preparing an application is very involved 
and very time consuming, and you need to prepare, as I think 
was the testimony of someone else, that actually, I think it 
was in Senator Harkin's comments that you have to file separate 
applications for each community that you propose to serve.
    And one of the hardships is that at any point prior to the 
submission of your application, it may be the case that another 
applicant files an application for the same community and has 
the effect of blocking your ability to file for that community. 
So essentially, all of that effort becomes potentially wasted. 
There is really not any transparency as to once a competing 
application is filed for a community, where the RUS is in its 
review of that application.
    So I think sort of succinctly put, what we would propose is 
greater transparency in the process of applications. I was not 
suggesting that the RUS should either approve competing 
applications for the same community under the loan program or 
that they should propose to consider them concurrently. Having 
heard some of the back and forth here just in the past few 
minutes, I think prioritization, having some type of scoring 
criteria beyond just first, you know, first come, first served 
would be something that we would support. I think that would 
be, you know, would be a real improvement.
    Senator Coleman. I raised the question of transparency with 
Mr. Andrew today, and he indicated an understanding that needs 
to be done. Just to anyone on the panel, would the transparency 
actions that he talked about today, does that address some of 
the problems you have had, problems with anticipation of 
competing applications and some of the other concerns? Anybody 
want to respond to that?
    Mr. Sevier. I think they are developing a Website of 
communities that do have broadband service or have loans from 
the RUS and so that they can ensure that they are not making 
loans against themselves. So, I think that is getting much 
clearer today if you look at the communities that they have 
listed: where have loans been made? Where is broadband being 
served by a borrower, whether it be with loan funds or other 
loan funds, so that they, in essence, are not loaning against 
themselves in this program.
    So I think that has gotten much better. I just want to make 
a comment to the multiple applications: they do accept multiple 
communities in one application. It is not a separate 
application for each community. So if have 10 or 15 communities 
that need broadband service, and you can support those 
communities in your business model and feasibility study, then, 
they will accept that.
    Senator Coleman. Anybody else want to respond to whether 
the transparency actions talked about are sufficient or whether 
more needs to be done?
    Mr. Pagon. From what I understood of Mr. Andrew's comments, 
I think what he was suggesting would be definite improvements. 
It was a little bit unclear to me how far along, how thorough 
that transparency would be with respect to filed applications 
and the review, but in general, I think they would be good 
steps.
    Senator Coleman. Mr. Simmons.
    Mr. Simmons. Senator, we have had discussions with the RUS 
through our industry group, and most of those discussions were, 
frankly, about disclosure, making it a little bit more 
transparent. Mr. Andrew mentioned the Website changes. He 
mentioned that to us as well. We haven't seen them yet. They're 
promised. So it will be interesting to see what they look like.
    We also had made a variety of other recommendations. One 
was that perhaps loan applicants could identify existing 
broadband providers in the proposed service area and notify 
them of their activities, so that we can have a dialog. As I 
mentioned earlier in one of the questions, to one of the 
questions, I have not ever been contacted by a member of the 
RUS. Now, supposedly, field agents are out reviewing the 
market, trying to understand what is happening in those 
particular communities. Yet, we have never heard from them.
    And in response to a FOIA request, I learned that an 
applicant had learned about our company from our Website. Yet, 
our Website contained no information that would be probably 
useful in that particular application. There are just better 
ways of obtaining that information. We'd be more than happy to 
cooperate on any calls made on any of our members by, you know, 
field offices or members of the Rural Utilities Service.
    Senator Coleman. Well, I hope this hearing today will 
foster a review, then, of those procedures. Certainly, my 
follow-up questions to Mr. Andrew, I'll take some of these 
suggestions and see what we get at the RUS.
    We want this program to succeed. It is an important 
program. It is a critical issue. Again, my concern is that we 
are not focusing enough on the areas that are unserved, and 
that should be the principal focus. I am sympathetic, Mr. 
Simmons, to the concern about the difficulty of raising capital 
for rural investment. The last thing government needs to be 
doing is to make it more difficult to scare capital away. 
Capital grows jobs and builds communities, and so, hopefully, 
this will be a positive public-private partnership, which I 
think was intended to meet the needs of rural communities so 
they can be connected to 21st Century technology.
    So thank you, Mr. Chairman.
    Chairman Chambliss. I think you are exactly right, Senator 
Coleman. The last thing we want to do is have Government-
subsidized entities competing with the private sector. There is 
kind of a delicate balance. I don't know how we totally 
eliminate the overlap that might be here, but all three of you 
raise some good points relative not only to competition but 
also relative to the need for this program to exist, and what 
we have got to figure out is how we achieve that balance.
    Gentlemen, thank you very much. You've been very 
informative.
    Mr. Sevier, you had something else you wanted to add?
    Mr. Sevier. Just wondered if I could make two last 
comments, if you don't mind, Mr. Chairman.
    Chairman Chambliss. Sure.
    Mr. Sevier. One is to perhaps address Senator Harkin's 
comments about how RUS used to, in the old REA days, go out and 
provide the assistance in the field to help these new borrowers 
through the process. I'm not trying to defend the RUS program, 
because they can do an adequate job of that themselves, but I 
am just observing what I have seen.
    They have taken tremendous budget cuts over the years and 
probably have a third or a fourth of the personnel today that 
they used to have in the days when they were doing that, and an 
example would be the field person that Mr. Simmons has not 
seen. They have one field man now for maybe two or three 
States; maybe more, when they used to have two field men per 
State, an operations man and an engineer, that had more time, 
each of them, to kind of help walk these borrowers through. 
They're spread pretty thin today. They're an extremely hard 
working bunch of individuals, and I have experienced that first 
hand. So that is one comment.
    The other would be something that I would just like to get 
on the record, I guess, as far as a traditional borrower 
through the traditional RUS infrastructure program and now a 
borrower through our subsidiary through the Broadband Program, 
we are still one company: we consolidate our audit, and we 
submit an audit to the RUS folks every year, which is a 
requirement of theirs, and in that audit, we do spell out what 
our subsidiary, Nex-Tech, is doing, as well as what our rural 
telephone service company parent is doing, and then, we 
consolidate the two, and they have required that we send in a 
separate audit report to the Broadband Program, which we found 
to be a little expensive and maybe something that might not be 
necessary. Since they are 50 feet down the hall, they have 
access to an audit that we've done on both of our 
organizations.
    And then, second, we have a very diverse subsidiary that is 
in multiple businesses, and at the time we made our first loan, 
for example, we had $20 million in assets in other pieces of 
our business, and they do take a mortgage on the entire 
property and have the first lien on everything in your 
business. Perhaps they could consider taking a mortgage on the 
communities that are financed by the Broadband Program, leaving 
the rest of the subsidiary available to get some local funding 
for business expansion for some of the local needs.
    Now, it is very onerous to try to get a lien accommodation 
so that you can get funding elsewhere through a local bank to 
build a new building or something that you might need for other 
parts of your business. So those are a couple of suggestions 
that I'd like to make.
    Chairman Chambliss. Very good. Thank you. Your comment 
relative to a reduction in personnel is an argument in favor of 
all that paperwork that is required to be submitted for a loan 
application.
    [Laughter.]
    Chairman Chambliss. We will leave the record open for 5 
days for anyone who wishes to submit questions, and there may 
very well be some written questions coming to any one or all 
three of you. I would appreciate your prompt attention to all 
of those and get them back for the record. Again, I thank you 
for taking time to come to Washington to participate in this 
hearing. The information you have provided has been very 
informative. Thank you, and this hearing is concluded.
    [Whereupon, at 12:12 p.m., the Committee adjourned.]
      
=======================================================================


                            A P P E N D I X

                              May 17, 2006



      
=======================================================================

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


=======================================================================


             QUESTIONS AND ANSWERS SUBMITTED FOR THE RECORD

                              May 17, 2006




=======================================================================

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


                                 
