[Federal Register Volume 78, Number 25 (Wednesday, February 6, 2013)]
[Rules and Regulations]
[Pages 8353-8360]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-02390]



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  Federal Register / Vol. 78, No. 25 / Wednesday, February 6, 2013 / 
Rules and Regulations  

[[Page 8353]]



DEPARTMENT OF AGRICULTURE

Rural Utilities Service

7 CFR Part 1738

RIN 0572-AC06


Rural Broadband Access Loans and Loan Guarantees

AGENCY: Rural Utilities Service, USDA.

ACTION: Final rule.

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SUMMARY: The Rural Utilities Service, an agency delivering the United 
States Department of Agriculture's (USDA's) Rural Development Utilities 
Programs, hereinafter referred to as the Agency, is adopting as final, 
with change, an interim rule (published at 76 FR 13770 on March 14, 
2011) for its regulation for the Rural Broadband Access Loan and Loan 
Guarantee Program (Broadband Loan Program).

DATES: This final rule is effective on February 6, 2013.

FOR FURTHER INFORMATION CONTACT: David Villano, Assistant 
Administrator, Telecommunications Program, Rural Development, U.S. 
Department of Agriculture, 1400 Independence Avenue SW., STOP 1590, 
Room 5151-S, Washington, DC 20250-1590. Telephone number: (202) 720-
9554, Facsimile: (202) 720-0810.

SUPPLEMENTARY INFORMATION: 

Executive Order 12866

    This rule has been determined to be economically significant and 
was reviewed by the Office of Management and Budget under Executive 
Order 12866. In accordance with Executive Order 12866, an Economic 
Impact Analysis was completed, outlining the costs and benefits of 
implementing this program in rural America. The complete analysis is 
available from the Agency upon request. The following is the discussion 
of the Economic Benefits section of the Analysis.

Economic Benefits of Broadband Deployment In Rural Areas

    Bringing broadband services to rural areas does present some 
challenges. Because rural systems must contend with lower household 
density than urban systems, the cost to deploy fiber-to-the-home (FTTH) 
and digital subscriber line (DSL) systems in urban communities is 
considerably lower on a per household basis, making urban systems more 
economical to construct. Other associated rural issues, such as 
environmental challenges or providing wireless service through 
mountainous areas, also can add to the cost of deployment. 
Notwithstanding these challenges and obstacles, a recent analysis by 
USDA's Economic Research Service concluded that broadband investment in 
rural areas yields significant economic and socio-economic gains:
    Analysis suggests that rural economies benefit generally from 
broadband availability. In comparing counties that had broadband access 
relatively early (by 2000) with similarly situated counties that had 
little or no broadband access as of 2000, employment growth was higher 
and nonfarm private earnings greater in counties with a longer history 
of broadband availability. By 2007, most households (82 percent) with 
in-home Internet access had a broadband connection. A marked difference 
exists, however, between urban and rural broadband use--only 70 percent 
of rural households with in-home Internet access had a broadband 
connection in 2007, compared with 84 percent of urban households. The 
rural-urban difference in in-home broadband adoption among households 
with similar income levels reflects the more limited availability and 
affordability of broadband in rural settings.
    Areas with low population size, locations that have experienced 
persistent population loss and an aging population, or places where 
population is widely dispersed over demanding terrain generally have 
difficulty attracting broadband service providers. These 
characteristics can make the fixed cost of providing broadband access 
too high, or limit potential demand, thus depressing the profitability 
of providing service. Clusters of lower service exist in sparsely 
populated areas, such as the Dakotas, eastern Montana, northern 
Minnesota, and eastern Oregon. Other low-service areas, such as the 
Missouri-Iowa border and Appalachia, have aging and declining numbers 
of residents. Nonetheless, rural areas in some States (such as 
Nebraska, Kansas, and Vermont) have higher-than expected broadband 
service, given their population characteristics, suggesting that 
policy, economic, and social factors can overcome common barriers to 
broadband expansion.
    In general, rural America has shared in the growth of the Internet 
economy. Online course offerings for students in primary, secondary, 
post-secondary, and continuing education programs have improved 
educational opportunities, especially in small, isolated rural areas. 
And interaction among students, parents, teachers, and school 
administrators has been enhanced via online forums, which is especially 
significant given the importance of ongoing parental involvement in 
children's education.
    Telemedicine and telehealth have been hailed as vital to health 
care provision in rural communities, whether simply improving the 
perception of locally provided health care quality or expanding the 
menu of medical services. More accessible health information, products, 
and services confer real economic benefits on rural communities: 
reducing transportation time and expenses, treating emergencies more 
effectively, reducing time missed at work, increasing local lab and 
pharmacy work, and providing savings to health facilities from 
outsourcing specialized medical procedures. One study of 24 rural 
hospitals placed the annual cost of not having telemedicine at $370,000 
per hospital. (See http://www.ers.usda.gov/Publications/ERR78/ERR78.pdf, at pages iv and 24.)
    Most employment growth in the U.S. over the last several decades 
has been in the service sector, a sector especially conducive for 
broadband applications. Broadband allows rural areas to compete for 
low- and high-end service jobs, from call centers to software 
development, but does not guarantee that rural communities will get 
them. Rural businesses have been adopting more e-commerce and Internet 
practices, improving efficiency and expanding market reach. Some rural 
retailers use the Internet to satisfy supplier requirements. The farm 
sector,

[[Page 8354]]

a pioneer in rural Internet use, is increasingly comprised of farm 
businesses that purchase inputs and make sales online. Farm household 
characteristics such as age, education, presence of children, and 
household income are significant factors in adopting broadband Internet 
use, whereas distance from urban centers was not a factor. Larger farm 
businesses are more apt to use broadband in managing their operation; 
the more multifaceted the farm business, the more the farm used the 
Internet.\1\
---------------------------------------------------------------------------

    \1\ Broadband Internet's Value for Rural America. Peter 
Stenberg, Mitch Morehart, Stephen Vogel, John Cromartie,Vince 
Breneman, and Dennis Brown.
---------------------------------------------------------------------------

    An analysis based on approximately $1.8 billion in approved loans 
in the Farm Bill Broadband Program (based on multiple technology 
platforms) yielded the following results (numbers have been rounded):
 Number of communities funded: 2,800
 Average cost per community: $640,000
 Total subscribers: 1.3 million
    Most recently, the agency has concluded funding the American 
Recovery and Reinvestment Act (Recovery Act) Broadband Initiatives 
Program (BIP) that financed the same types of facilities and entities 
that are funded under this Farm Bill program. The Recovery Act 
authorized RUS to issue loans and grants to projects that extend 
broadband service to unserved and underserved rural areas. The funding 
provided by the Recovery Act is increasing the availability of 
broadband and stimulating both short- and long-term economic progress. 
RUS BIP completed two funding rounds, making a significant investment 
in projects that will enhance broadband infrastructure in scores of 
rural communities. This represents a critical investment, designed to 
rebuild and revitalize rural communities. Without this funding, many 
communities could not cover the costs of providing broadband service to 
homes, schools, libraries, healthcare providers, colleges, and other 
anchor institutions.
    RUS awarded $3.4 billion to 297 recipients in 45 States and 1 U.S. 
territory for infrastructure projects. Eighty-nine percent of the 
awards and 92 percent of the total dollars awarded are for 285 last-
mile projects ($3.25 billion), which will provide broadband service to 
households and other end users. Four percent of the awards and five 
percent of the total dollars awarded are for 12 middle-mile projects 
($173 million) that will provide necessary backbone services such as 
interoffice transport, backhaul, Internet connectivity, or special 
access to rural areas. The projects funded will bring broadband service 
to 2.8 million households, reaching nearly 7 million people, 364,000 
businesses, and 32,000 anchor institutions across more than 300,000 
square miles. These projects also overlap with 31 tribal lands and 124 
persistent poverty counties, traditionally the most costly to serve 
areas.
    As noted in the ERS study, rural areas with dispersed populations 
or demanding terrain generally have difficulty attracting broadband 
service providers because the fixed cost of delivering broadband 
service can be too high. Yet broadband is a key to economic growth. For 
rural businesses, broadband gives access to national and international 
markets and enables new, small, and home-based businesses to thrive. 
Broadband access affords rural residents the connectivity they need to 
obtain healthcare, education, financial, and many other essential goods 
and services.

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance (CFDA) number assigned 
to this program is 10.886, Rural Broadband Access Loans and Loan 
Guarantees. The Catalog is available on the Internet and the General 
Services Administration's (GSA's) free CFDA Web site at http://www.cfda.gov.

Executive Order 12372

    This rule is excluded from the scope of Executive Order 12372, 
Intergovernmental Consultation, which may require a consultation with 
State and local officials. See the final rule related notice entitled, 
``Department Programs and Activities Excluded from Executive Order 
12372'' (50 FR 47034).

Information Collection and Recordkeeping Requirements

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
Chapter 35, as amended), the information collection for this program 
has been approved by the Office of Management and Budget under OMB 
Control Number: 0572-0130.

National Environmental Policy Act Certification

    The Administrator has determined that this rule will not 
significantly affect the quality of the human environment as defined by 
the National Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.). 
Therefore, this action does not require an environmental impact 
statement or assessment.

Regulatory Flexibility Act Certification

    It has been determined that the Regulatory Flexibility Act is not 
applicable to this rule because the Agency is not required by 5 U.S.C. 
551 et seq. or any other provision of law to publish a notice of 
proposed rulemaking with respect to the subject matter of this rule.

Executive Order 12988

    This rule has been reviewed under Executive Order 12988, Civil 
Justice Reform. The Agency has determined that this rule meets the 
applicable standards provided in section 3 of the Executive Order. In 
addition, all state and local laws and regulations that are in conflict 
with this rule will be preempted, no retroactive effort will be given 
to this rule, and, in accordance with Sec. 212(e) of the Department of 
Agriculture Reorganization Act of 1994 (7 U.S.C. Sec. 6912(e)), 
administrative appeal procedures, if any, must be exhausted before an 
action against the Department or its agencies may be initiated.

Unfunded Mandates

    This rule contains no Federal mandates (under the regulatory 
provisions of Title II of the Unfunded Mandates Reform Act of 1995) for 
State, local, and tribal governments for the private sector. Thus, this 
rule is not subject to the requirements of section 202 and 205 of the 
Unfunded Mandates Reform Act of 1995.

Executive Order 13132, Federalism

    The policies contained in this rule do not have any substantial 
direct effect on states, on the relationship between the national 
government and the states, or on the distribution of power and 
responsibilities among the various levels of government. Nor does this 
rule impose substantial direct compliance costs on state and local 
governments. Therefore, consultation with the states is not required.

Executive Order 13175, Consultation and Coordination With Indian Tribal 
Governments

    USDA has undertaken a series of regulation Tribal consultation 
sessions to gain input by Tribal officials concerning the impact of 
this rule on Tribal governments, communities, and individuals. These 
sessions will establish a baseline of consultation for future actions, 
should any become necessary, regarding this rule. Reports from these 
sessions for consultation will

[[Page 8355]]

be made part of the USDA annual reporting on Tribal Consultation and 
Collaboration. USDA will respond in a timely and meaningful manner to 
all Tribal government requests for consultation concerning this rule 
and will provide additional venues, such as webinars and 
teleconferences, to periodically host collaborative conversations with 
Tribal leaders and their representatives concerning ways to improve 
this rule in Indian country.

E-Government Act Compliance

    The Agency is committed to the E-Government Act, which requires 
Government agencies in general to provide the public the option of 
submitting information or transacting business electronically to the 
maximum extent possible.

Background

A. Introduction

    The Agency improves the quality of life in rural America by 
providing investment capital for deployment of rural telecommunications 
infrastructure. Financial assistance is provided to rural utilities; 
municipalities; commercial corporations; limited liability companies; 
public utility districts; Indian tribes; and cooperative, nonprofit, 
limited-dividend, or mutual associations. In order to achieve the goal 
of increasing economic opportunity in rural America, the Agency 
finances infrastructure that enables access to a seamless, nationwide 
telecommunications network. With access to the same advanced 
telecommunications networks as its urban counterparts, especially 
broadband networks designed to accommodate distance learning, telework, 
and telemedicine, rural America will eventually see improving 
educational opportunities, health care, economies, safety and security, 
and ultimately higher employment. The Agency shares the assessment of 
Congress, State and local officials, industry representatives, and 
rural residents that broadband service is a critical component to the 
future of rural America. The Agency is committed to ensuring that rural 
America will have access to affordable, reliable, broadband services 
and to provide a healthy, safe, and prosperous place to live and work.

B. Regulatory History

    On May 13, 2002, the Farm Security and Rural Investment Act of 
2002, Public Law 107-171 (2002 Farm Bill) was signed into law. The 2002 
Farm Bill amended the Rural Electrification Act of 1936 to include 
Title VI, the Rural Broadband Access Loan and Loan Guarantee Program 
(Broadband Loan Program), to be administered by the Agency. Title VI 
authorized the Agency to approve loans and loan guarantees for the 
costs of construction, improvement, and acquisition of facilities and 
equipment for broadband service in eligible rural communities. Under 
the 2002 Farm Bill, the Agency was directed to promulgate regulations 
without public comment. Implementing the program required a different 
lending approach for the Agency than it employed in its earlier 
telephone program because of the unregulated, competitive, and 
technologically diverse nature of the broadband market. Those 
regulations were published on January 30, 2003.
    In an attempt to enhance the Broadband Loan Program and to 
acknowledge growing criticism of funding competitive areas, the Agency 
proposed to amend the program's regulations on May 11, 2007 at 72 FR 
26742 to make eligibility of certain service areas more restrictive 
than set out in the 2002 Farm Bill. In addition to eligibility changes, 
the proposed rule included, among others, changes to persistent 
problems the Agency had encountered while implementing the program over 
the years, especially regarding equity requirements, the market survey, 
and the legal notice requirements. As the Agency began analysis of the 
public comments it received on the proposed regulations, the Food, 
Conservation, and Energy Act of 2008, more commonly known as the 2008 
Farm Bill, was working its way through Congress. The proposed rule and 
key aspects of the public comments were shared with Congress during its 
deliberations, and the majority of the proposed changes in the proposed 
rule were incorporated into the legislation, with some modifications. 
For instance, the proposed rule lowered the equity requirement from 20 
percent of the loan value to 10 percent. Congress enacted that change.
    Other changes the Congress incorporated included several new 
restrictions not found in the 2002 Farm Bill. These were in response to 
growing public criticism of federally funded competition. First, 
funding is restricted in areas that contain 3 or more incumbent service 
providers, which is defined as serving not less than 5 percent of the 
proposed service area for each existing service provider. Second, a 
requirement was added that at least 25 percent of the households in the 
proposed service area do not have access to more than one incumbent 
service provider. And third, for incumbent service providers that were 
merely upgrading the quality of broadband service in their existing 
service territory, the prior restrictions on competition (ie., 3 or 
more providers) would be waived.
    In response to the debate on what was rural, the 2008 Farm Bill 
relaxed the restriction to allow urbanized areas that were not adjacent 
and contiguous to areas with a population of more than 50,000 
inhabitants to be eligible for funding. And lastly, the 2008 Farm Bill 
incorporated the concept of not requiring market studies for applicants 
that relied on a penetration rate of less than 20 percent for the loan 
to be feasible.
    In the public interest of having a Broadband Program in place to 
quickly address the needs of the hundreds of applications that were not 
funded under the Recovery Act, and in light of the fact that the great 
majority of changes herein are mandated by the 2008 Farm Bill, or have 
been proposed in the Agency's prior rule, put out for comment, the 
Agency proceeded forward with certain changes to the Broadband Loan 
Program by publishing an interim rule in the Federal Register at 76 FR 
13770, on March 14, 2011.

C. Comments and Responses

    In its Interim Rule, published in the Federal Register March 14, 
2011 at 76 FR 13770, the agency requested comments regarding the new 
procedures implementing the 2008 Farm Bill. The agency received seven 
sets of comments from the following organizations/individuals:

 National Cable & Telecommunications Association
 Eastern Rural Telecom Association
 United States Telecom Association
 The Associations (Western Telecommunications Alliance; 
Organization for the Promotion and Advancement of Small 
Telecommunications Companies; and National Telecommunications 
Cooperative Association)
 Monte R. Lee and Company
 XATel Communications
 Jaclyn Bee

    These comments have been summarized and addressed below:
Broadband Lending Speed
    Comment: Several respondents took issue with the definition of 
Broadband Lending Speed. The respondents asserted that the 
differentiation in speeds proposed between wireline and wireless 
technologies is in violation of the agency's ``technology neutral'' 
mandate and should be eliminated.

[[Page 8356]]

Several respondents also stated that the initial speeds set forth in 
the Notice of Funds Availability (NOFA) are too low and must be 
increased to keep pace with the rapidly growing need for increased 
consumer bandwidth demands. One respondent said the bifurcation between 
wireline speed and wireless speed would create a ``rural--rural 
divide,'' subjecting some areas, mainly the most rural, to a lower 
standard.
    Response: With regard to the charge that the agency is in violation 
of its ``technology neutral'' mandate, RUS believes, in fact, that it 
is protecting this mandate by establishing different performance 
thresholds based on the limitations of different technologies. 
Specifically, in the preamble to the interim rule published in the 
Federal Register March 14, 2011 (76 FR 13770), the agency states: ``In 
order to treat all emerging technologies equally, the Agency may 
designate a different broadband lending speed for fixed and mobile 
broadband service.'' Further, this policy is consistent with the 
statutory directive provided in the 2008 Farm Bill (Pub. L. 110-234): 
``The Secretary shall not establish requirements for bandwidth or speed 
that have the effect of precluding the use of evolving technologies 
appropriate for rural areas.'' One of the intents of this provision, as 
interpreted by the agency, is to allow financing in areas where it is 
financially unfeasible to build wireline facilities, by allowing the 
agency to fund a more economical (if shorter term) solution, such as 
the expansion of mobile broadband service. To leave these areas 
stranded will clearly produce the undesirable effect of a ``rural--
rural divide.''
    With regard to the overall Broadband Lending Speeds being set to 
low (or slow), this definition establishes a minimum threshold, not a 
maximum. Further, the agency will continue to monitor and assess 
technological advances and bandwidth demands and adjust the definition 
accordingly.
Prioritization of Application Processing
    Comment: One respondent recommended that the projects that 
exhibited the greatest ``scalability'' should be given the greatest 
priority in the processing queue--defining scalability as ``those 
[projects] that can be easily and relatively inexpensively upgraded to 
reflect increased consumer demand for more bandwidth.'' Another 
respondent objected to the prioritization section of the rule, stating 
that ``RUS should narrow the scope of the program by providing funding 
for only areas that are Priority 1 or 2.'' In addition, the respondent 
requests that RUS count all providers in a proposed service territory 
when determining eligibility and prioritization, not just those 
providers that responded to the public notice. Further, this respondent 
said ``RUS also should count new broadband services that plan [emphasis 
added] to launch within the next 12 months, e.g., 4G wireless 
services.''
    Response: Achieving a fair and unbiased prioritization method is 
difficult at best, particularly in an industry as diverse in service 
providers and technologies as the broadband industry is. The agency has 
clearly placed the highest priority on applications proposing to serve 
unserved areas. Further, those areas where three-quarters of the 
households do not have access to broadband service are the 2nd level of 
priority. Beyond that, applications with a varying mix of unserved and 
served households and that are within the statutory requirements 
(between 25 percent and 74 percent served) will be processed as 
received. As can be seen, the agency has clearly established a 
prioritization regime that targets the greatest proportion of unserved 
households.
    Regarding the issue of factoring ``scalability'' into 
prioritization process, the agency does not believe this is practicable 
in keeping with its ``technology neutral'' mandate. Specifically, 
different technologies have different degrees of evolution capabilities 
and hence different ``scalability'' requirements that are not 
comparable.
    With regard to the number of incumbent service providers within a 
proposed service area, the agency intends to use all available 
resources to identify incumbents, including knowledge of the existing 
territory through field staff visits, as well as state and federal 
mapping resources, such as the National Broadband Map. When determining 
whether an area is eligible for financing, the agency will rely on 
responses to the applicants' proposed funded service area maps from 
incumbents. The agency through its own competitive analysis may 
identify other providers that did not respond to the public notice. In 
determining the feasibility of a project in such a situation, the 
agency would of course factor in all identified, non-respondent service 
providers.
    Finally, attempting to consider future deployment of a certain 
level of broadband service is not practical. Relying on advertised 
deployment has proven to be inaccurate in many instances.
Public Notice Process (Notification)
    Comment: One respondent objected to the 30-day notification window 
within which existing service providers can provide notice that they 
are providing services in the applicant's proposed service territory. 
Specifically, the respondent stated that 30 days was not sufficient 
enough time to conduct a manual search of the agency's database to 
determine on an ongoing basis if indeed an application had been filed 
to serve an existing entity's territory. The respondent recommends that 
either the agency increase the timeframe to 45 to 60 days or create an 
internet-based subscription service that would automatically alert 
subscribers to that service that an application had been filed in a 
particular service territory.
    Response: The agency has established a subscription service. See 
www.http://broadbandsearch.sc.egov.usda.gov/.
RUS Protection of Previously Funded Entities
    Comment: One respondent was supportive of the policy of ``not 
loaning against'' existing RUS borrowers. One respondent strongly 
opposed this policy, stating this ``* * * prohibition on funding areas 
served by existing RUS recipients demonstrates that the agency 
recognizes that subsidized entry has negative consequences for 
incumbent providers serving the same area.''
    Response: The agency's policy of ``not lending against itself'' is 
primarily designed to protect taxpayer investment in publicly funded 
areas. However, borrowers are expected to maintain investment levels 
sufficient to ensure that borrowers provide modern broadband services. 
If it becomes apparent that previously funded borrowers are not 
providing adequate broadband service and meeting customer demands, the 
agency will revisit this policy. So, if necessary in order to expand 
access to an area where an RUS borrower is not providing adequate 
broadband service, the Agency may lend against its borrower. Similarly, 
this is the reason why the Agency may make loans where an existing 
entity is providing some broadband service but limits its service 
territory only to the more dense areas (in town). A loan that leverages 
in town customers revenues in order to expand service beyond town 
limits can achieve greater access for more sparsely populated rural 
areas.
Prompt Review of Loan Applications
    Comment: One respondent called on the agency to ``review 
applications in a timely fashion.'' Specifically, the

[[Page 8357]]

respondent supported a 180-day deadline for application processing.
    Response: The quality and ``completeness'' of applications play a 
vital role in the ability of the agency to promptly process loans. 
Those applications that are complete and contain all of the required 
supporting information and documentation can be processed more quickly. 
Applications with missing information, for example, cause major delays.
    The Agency, through this rulemaking, has clearly established what 
constitutes a complete application. All other applications will be 
promptly returned. RUS strives to offer the best customer service and 
will continue its goal to provide shorter application processing times. 
Both the agency and the applicants share the responsibility for 
ensuring prompt application processing.
Additional Cash Requirement
    Comment: One respondent, while recognizing ``the need to require 
additional constraints on newly formed and under performing 
companies,'' stated that allowing only 50 percent of the projected 
revenues as a contribution to the ``Additional Cash Requirement'' 
provision was too burdensome and most likely would result in infeasible 
applications. The respondent recommended that a leniency test should be 
established for existing companies that project negative cash flow for 
material reasons (such as tax planning, cash used for other businesses, 
etc.). In addition, the respondent expressed concern regarding the 
costs of video content, arguing that, for many rural providers, video 
service is not a revenue producer, but rather is offered as a means to 
increase overall subscriber penetration rates. As such the respondent 
proposed eliminating 50 percent of the expense projection associated 
with providing video service when determining the additional cash 
requirements.
    Response: Rather than penalizing start-ups or companies 
experiencing shortages of cash flow, the additional cash requirement 
provision allows applicants that are in a weak financial situation to 
maintain eligibility by providing a method for augmenting their 
security for the project and increasing the likelihood that the project 
can be completed. Hence, it provides an avenue for moving less stable 
projects forward.
    With regard to video expenses, the agency sees no reason to 
arbitrarily ``reduce'' any expense category. In fact, for the reason 
offered by the respondent, if revenues to be derived by the incurrence 
of such an expense are insufficient to cover that expense, decreasing 
the expense category in the pro forma only inflates or overstates 
profits in what may be an otherwise unprofitable proposal.
Government Subsidized Competition
    Comment: One respondent objected strongly to what it referred to as 
the ``continuing problem of RUS subsidizing broadband deployment in 
areas where other providers already offer broadband service.'' The 
respondent argues that in a competitive environment, ``a program in 
which a government agency funds one set of competitors against other 
companies that have invested private capital to provide the same 
service in the same geographic areas is wholly inappropriate and should 
be terminated.'' The respondent recommended that a competitive award 
process be used to target unserved areas with grant funds--those being 
areas that cannot on their own support a business case to attract 
investment. The respondent also noted that loans were allowed to be 
made in areas where two existing providers are offering service, 
because the statute (Farm Bill) provides for such a scenario. Citing an 
extreme, hypothetical example, the respondent noted that even though 
one provider may be currently offering service to 100 percent of an 
area and the other provider is offering service to 25 percent of the 
same area, the provisions of the Farm Bill would enable a third 
provider to be funded in the same area. Finally, the respondent stated 
that ``RUS should amend the rules to make clear that [loans to 
companies for] upgrades [as opposed to new service territory] are 
subject to the same requirements as [for loans for] initial builds.'' 
The respondent requested that this perceived ``loophole'' be closed.
    Response: At its base, the number of incumbent service providers 
merely establishes whether a proposed service territory is eligible or 
not. It in no way implies that funds would be awarded, since other 
factors affecting feasibility (like competition and service offerings) 
must also be considered. In the example offered (however 
impracticable), most likely a loan would not be feasible unless the 
incumbents' services were of such poor quality that a new entrant would 
be welcome and would easily take away subscribers. The respondent also 
recommends that the agency use grant funds to target those areas deemed 
undesirable and left unserved by incumbents, noting that a ``business 
case'' cannot be made for these areas. First, the 2008 Farm Bill does 
not provide any grant authority for the Broadband Program. This is 
precisely why it is permissible for applicants to be able to provide 
service where some service already exists. The Treasury rate government 
financing provides for continued, long-term investment while leveraging 
private capital in a fiscally responsible manner. The ability of an 
applicant to reach out to long ignored, unserved households outside 
``the business case'' of incumbents relies on those applicants finding 
a balance between low cost and high cost service territories, which 
will create some duplicative (but necessary) service areas.
    With regard to upgrades within an incumbent's own service 
territory, this allows those areas to keep pace with technology 
improvements and to upgrade facilities based on customer demand. Again, 
this (like the number of service providers) is an eligibility 
criterion. It does not guarantee funding. Should the competitive 
environment not support a new loan, the loan would not be made.
Discount USF and ICC Revenues in Feasibility Analysis
    Comment: One respondent encourages the agency to ``reconsider how 
it evaluates the business case for applicants that are heavily 
dependent on high-cost universal service support and intercarrier 
compensation'' revenues. The respondent argued that ``the way that RUS 
considers USF receipts takes on even more urgency in light of the FCC's 
proposals to reform the high-cost universal service support regime.'' 
The respondent encourages RUS to discount the amount of any high-cost 
support when assessing financial feasibility. The respondent had 
similar concerns with respect to intercarrier compensation revenues. 
Further, the respondent encouraged RUS not to award any new loans until 
the interim rule is final and the FCC moves forward and presumably 
resolves the USF/ICC reforms.
    Response: The Agency is working closely with the FCC to ensure that 
rural communities continue to receive access to broadband services. In 
light of recent actions by the FCC, the Agency is revising its 
underwriting procedures to correspond with new FCC principals regarding 
universal service revenues.
Navigant Study
    Comment: One respondent asserts that ``the interim rules perpetuate 
many of the same problems that have plagued the Broadband Loan Program 
for the last decade and, absent changes, will not be an effective 
mechanism for achieving the national goal of universal broadband

[[Page 8358]]

activity.'' The respondent claims documentation in support of this in a 
report prepared by Dr. Jeffery Eisenach and Kevin Caves of Navigant 
Economics. The report was issued as an assessment of the American Re-
investment and Recovery Act (Recovery Act) Broadband Initiatives 
Program (BIP). The respondent, in referencing the report, claims that 
``RUS consistently has provided broadband funding to entities in areas 
where broadband already is made available by cable operators and other 
broadband providers without government subsidy.'' In addition, the 
report states that RUS, in its Recovery Act program, defined 
eligibility for BIP funding based on the percentage of geographic area 
that was unserved, rather than the percentage of households that were 
unserved.
    Response: As the study was related to the BIP program, its findings 
are not applicable to this final rule proceeding. The BIP program was a 
one-time funding opportunity under the Recovery Act and has concluded. 
No new applications or financing will occur under that program. 
However, since the issues raised imply that the RUS, in its 
implementation of this final rule, is acting in a manner inconsistent 
with its statute implementing the Farm Bill program, we address the 
concerns raised in the report below.
    The study, Evaluating the Cost-Effectiveness of RUS Broadband 
Subsidies: Three Case Studies, suffers from a number of fundamental 
flaws:
    1. The study frequently misquotes, misinterprets, or misattributes 
statutory and regulatory language associated with rural broadband 
development.
    2. The study creates a more lenient definition of what it considers 
``served'' than is used by RUS, or the FCC to support its claim that 
BIP projects provide duplicative service.
    3. The study relies heavily on data that became available only 
after the BIP application evaluation process had to be completed.
    4. The study employs questionable metrics to determine key 
statistical data. These flaws, individually and when taken together, 
produce meaningful inaccuracies in both the evidence and arguments in 
the study. When claims within the study are compared to the relevant 
legislation and/or information, it is clear that the study's 
conclusion--that RUS' ARRA broadband program served areas that it 
should not have--is inaccurate. RUS complied with all applicable 
legislation using information available at the time of the application 
assessments.
1. Misrepresentation of ARRA's Goals
    The study claims: ``ARRA requires that NTIA and RUS limit funding 
to `unserved' or `underserved' areas, and specifically instructs RUS to 
give priority to unserved areas'' (p. 2). The study goes on to state 
that BIP provides duplicative service to areas that already have 
broadband access, and therefore RUS did not limit funding to unserved 
and underserved areas.
    The claim above misrepresents ARRA's requirements regarding 
broadband development and RUS' administrative role under BIP. ARRA does 
require that BIP funds be used to serve areas with limited access to 
broadband service, requiring that ``at least 75 percent of the area to 
be served by a project receiving funds, grants, or loan guarantees 
shall be in a rural area without sufficient access to high speed 
broadband service to facilitate rural economic development'' However, 
it does not limit funding to unserved and underserved areas.\2\ In 
fact, ARRA explicitly allows up to 25 percent of the project area to be 
in areas that have broadband service. When evaluating BIP applications, 
RUS used available information to follow ARRA guidelines to ensure that 
all service areas complied with this requirement.
---------------------------------------------------------------------------

    \2\ Unserved and underserved are not, as the report implies, 
Recovery Act terms. They were defined and used by RUS in BIP NOFAs 1 
and 2.
---------------------------------------------------------------------------

    In addition, ARRA provides ``that priority for awarding such funds 
shall be given to project applications for broadband systems that will 
deliver end users a choice of more than one service provider.'' 
Awarding funds to provide a choice of more than one service provider 
will, by definition, involve funding projects in areas where some 
service already exists.
2. Lenient and Misattributed Definition of Unserved
    The study exaggerates the extent of duplicative services by using a 
definition of broadband speed that is not consistent with ARRA's 
economic development goals.
    The study applies a misleading label of ``RUS definition'' to the 
notion that an unserved housing unit is:

``an occupied housing unit not passed by (a) wireline-based 
broadband services (cable or DSL); or (b) fixed wireless broadband 
services.'' (p. 19) \3\
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    \3\ The study's mislabeling of the ``RUS definition'' of 
``unserved'' does not reference either NOFA, both of which 
explicitly define the term. Instead, this misattributed definition 
is supported in footnote 7 of p. 3 of the study: ``The fixed 
wireless broadband services upon which we base coverage estimates 
satisfy the 768 kbps/200 kbps standard, and therefore are included 
in our analyses of households served under the RUS definition''.

However, this definition is incorrect. BIP NOFAs 1 and 
2 (74 FR 33104, 7/9/09 and 75 FR 3820, 1/22/10, respectively) 
offer different definitions of ``unserved'', but neither excludes 
---------------------------------------------------------------------------
mobile broadband:

    NOFA #1 definition: ``composed of one or more contiguous census 
blocks where at least 90% of households lack access to facilities-
based, terrestrial broadband service, either fixed or mobile, at the 
minimum broadband speed: [at least 768 kbps downstream and at least 
200 kbps upstream to end users, or providing sufficient capacity in 
a middle mile project to support the provision of broadband service 
to end users].'' \4\
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    \4\ See Federal Register, 74 FR 33104, Notices, Department of 
Agriculture Rural Utilities Service RIN 0572-ZA01, Broadband 
Initiatives Program, definitions for ``unserved'' and ``broadband''. 
Hereafter referred to as NOFA 1.
---------------------------------------------------------------------------

    NOFA #2 definition: ``a service area with no access to 
facilities-based terrestrial broadband service, either fixed or 
mobile, at the minimum broadband transmission speed [at least 768 
kbps downstream and at least 200 kbps upstream to end users, or 
providing sufficient capacity in a middle mile project to support 
the provision of broadband service to end users]. A premises has 
access to broadband service if it can readily subscribe to that 
service upon request.'' \5\
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    \5\ See Federal Register, 75 FR 3820, Notices, Department of 
Agriculture Rural Utilities Service RIN 0572-ZA01, Broadband 
Initiatives Program, definitions for ``unserved'' and ``broadband''. 
Hereafter referred to as NOFA 2.

    RUS' definitions of unserved are not based on technology, as 
implied by the incorrect definition stated in the study. Instead, RUS's 
funding decisions were based on a minimum broadband speed, below which 
an area is considered to be without ``sufficient access to high speed 
broadband service to facilitate rural economic development.'' \6\
---------------------------------------------------------------------------

    \6\ See the American Recovery and Reinvestment Act of 2009.
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    In developing the BIP program, RUS determined that broadband speeds 
below 768 kbps downstream and 200 kbps upstream to end users would not 
be suitable for economic development purposes.\7\ BIP funding decisions 
were made using information available at the time of application review 
on the existence of service availability at speeds reaching at least 
this minimum level of service. The study's analyses, however, do not 
utilize data for service availability at this minimum speed. Instead, 
the study's analyses accept a 600 kbps threshold that does not meet the 
minimum speed determined to be suitable for economic development 
purposes. Tables Four, Six, and Eight of

[[Page 8359]]

the study and the associated Figures Three, Seven, and Ten are thereby 
all inaccurate because they count services at speeds under 768/200 
kbps.
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    \7\ This standard was established following the FCC's definition 
of ``Basic Broadband'' service, defined as a connection speed tier 
of between 768Kbps and 1.5Mbps. See FCC 08-88, June 12, 2008, 
Statement of Chairman Kevin J. Martin, Pg. 43.
---------------------------------------------------------------------------

    The study further asserts that 3G technology will soon be updated 
to exceed the FCC established 768 kbps threshold, and therefore should 
have been included in RUS' considerations regardless of the 
technology's current speed. However, a fair and reasonable evaluation 
of applications by RUS could not have been made using future, proposed, 
uncommitted investment possibilities.
3. Information Available After the BIP Application Evaluation Process
    The following tables and figures cite information that became 
available after the BIP application evaluation process; these graphics 
are the foundation for the study's arguments and conclusions:
     Tables Four, Six, and Eight of the study make use of data 
from NTIA's National Broadband Map (NBM), which was not available at 
the time of the BIP application evaluation process.
     Figure Six cites the Kansas Corporation Commission, Report 
to the Legislature Regarding the Availability of Broadband Services in 
the State of Kansas (January 2011), which is after the BIP application 
evaluation process was complete.
     Warren's Cable Factbook is cited for Figures 2, 3, 5, and 
7. The study does not include the date of the edition used. The latest 
edition for 2011 was released in December 2010.
    Information that became available after completion of the 
application evaluation process is not relevant for comparison to BIP 
funding decisions, which were made using the information available at 
the time of application review. The latest information can help inform 
future funding decisions under other programs, but are not relevant for 
assessing the quality or results of the BIP decision making processes.
4. Questionable Analytical Methodologies
    In order to estimate the cost of the BIP program to the taxpayer, 
the report uses a ``cost per incremental home passed'' metric. Costs 
did not involve only extensions of existing networks, for which a cost 
per incremental home passed metric might be appropriate. Instead, the 
entire scope of the BIP-funded network's coverage must be considered to 
accurately evaluate the cost per home passed. The ``cost per 
incremental home passed'' metric would only be appropriate if an 
applicant were an incumbent provider applying for funding to extend 
and/or enhance its network to reach unserved or underserved areas. 
However, none of the three awards examined in the study meet this 
condition.
    Another approach the study uses to calculate the ``actual taxpayer 
cost'' is based on the interest rates charged to the awardees on the 
BIP loans. The study argues that the taxpayer is losing the difference 
in interest revenue between what could have been charged at the market 
rate and the actual interest rate being charged to awardees. The 
interest rate charged by RUS is ``equal to the cost of borrowing to the 
Department of Treasury for obligations of comparable maturity''.\8\ 
This adheres to the ARRA requirement that loans carry the interest rate 
as defined in the Farm Bill 2008. The study's approach reinterprets the 
law and suggests that RUS could behave like a commercial lending 
institution by charging market rates on the BIP loans. By using a much 
higher interest rate to calculate the total taxpayer cost, the study 
thereby inflates the cost per household passed in Tables Five, Seven, 
and Nine. As it is, the cost per total household passed of each project 
in the study is lower than both the RUS and FCC benchmarks.
---------------------------------------------------------------------------

    \8\ See NOFA 1 and NOFA 2.
---------------------------------------------------------------------------

    The study's method for estimating DSL boundaries is similarly 
faulty. Appendix 1 explains that DSL boundaries were determined by 
``generating a 12,000 foot radius'' around ``the location of the 
dominant central office of each wirecenter.'' Such a projected radius 
model cannot be used to predict estimate the number of DSL subscribers 
that can be supported by in-place equipment. The 12,000 foot radius is 
technically arbitrary and no useful conclusions about potential service 
availability can be drawn from it alone. The study supplies no facts 
about DSL service availability, penetration rates, or connection 
speeds, nor does it supply any facts about route mileage, wire gauge, 
line bridging and tapping, or any other influencing technical elements.
    To estimate service coverage for fixed wireless broadband and 
mobile wireless broadband, the study relies exclusively on carriers' 
advertised coverage maps. RUS opened and advertised a public comment 
period for any and all existing providers and other stakeholders to 
provide information on coverage within the areas proposed by BIP 
applicants. RUS received many public comment responses, however it did 
not take those comments from carrier providers or other stakeholders 
purely at face value. Instead, RUS also gathered on-the-ground data and 
observations. Moreover, the study's analytical approach did not 
differentiate between a service provided via a wireless carrier's 
owned-and-operated network and service that is provided through roaming 
agreements with third-party owned networks. This flaw undermines the 
study's conclusions that depend on various mobile wireless carriers' 
statements that 3G and 4G upgrades are a fait accompli; many of these 
rural networks' owners would likely have to find funding and develop 
business cases on their own before they could (or would) be upgraded.
5. Conclusion and Summary
    The study's critique is seriously flawed. Despite an obvious effort 
to ``cherry pick'' three extreme case studies, the source material 
cited in this response demonstrates that the study did not successfully 
identify any inconsistencies between RUS' administrative decisions and 
the ARRA legislation or broadband availability data at the time of 
application evaluations.
Miscellaneous
    Comment: One respondent, while noting the benefits of internet 
access, stated that they are benefits ``of a more affluent society that 
is not currently in trillions of dollars in debt.'' The respondent 
requests that, considering the high costs of program administration, 
implementation should be delayed.
    Response: The agency appreciates the respondent's concerns. 
However, broadband deployment will increase economic development, raise 
revenues and create jobs. These benefits far outweigh the initial 
capital expenditures of building this critical infrastructure today.
    Comment: One respondent took issue with MEConnect Authority in 
Maine.
    Response: The respondent should contact the appropriate state 
officials responsible for administering that program. The Rural 
Utilities Service is not a regulatory agency.

List of Subjects in 7 CFR Part 1738

    Broadband, Loan programs--communications, Rural areas, Telephone, 
Telecommunications.

    Accordingly, the interim rule amending 7 CFR part 1738, which was 
published at 76 FR 13770 on March 14, 2011, is adopted as a final rule 
with the following change:

[[Page 8360]]

PART 1738--RURAL BROADBAND ACCESS LOANS AND LOAN GUARANTEES

0
1. The authority citation for part 1738 continues to read as follows:

    Authority: Pub. L. 107-171, 7 U.S.C. 901 et seq.


0
2. Amend Sec.  1738.153 by revising paragraph (a) and the third 
sentence of paragraph (b) to read as follows:


Sec.  1738.153  Loan terms and conditions.

* * * * *
    (a) Unless requested to be shorter by the applicant, broadband 
loans must be repaid with interest within a period that, rounded to the 
nearest whole year, is equal to the expected composite economic life of 
the assets to be financed, as determined by the Agency based upon 
acceptable depreciation rates. Expected composite economic life means 
the depreciated life plus three years.
    (b) * * * Principal payments will be deferred until two years after 
the date of the first advance of loan funds.
* * * * *

    Dated: January 29, 2013.
John Charles Padalino,
Acting Administrator, Rural Utilities Service.
[FR Doc. 2013-02390 Filed 2-5-13; 8:45 am]
BILLING CODE P