Congress Investigating Cable Operator Allegations Around Minnesota Fiber Network Funded by BIP Loan

"I'm aware of the allegations regarding the Lake County, Minnesota broadband stimulus project, and the Subcommittee on Oversight and Investigations is investigating the issue,” said Rep. Cliff Stearns, R-Fla., the subcommittee’s chairman. The project has also attracted criticism from elsewhere in the cable industry. This month an NCTA-commissioned analysis of three RUS-funded broadband projects found that the Lake County proposal will provide service to areas that largely already have it or are uninhabited (http://xrl.us/bm5a24).

Lake County officials and the project’s managers defend the project, saying they're doing a job that incumbent telecom companies including Mediacom have refused to do, and that local businesses, many of which cater to tourists, need the service. Lake County Commissioner Paul Bergman also pointed out that Mediacom could have applied for the same funds but did not. Congressional investigators are welcome to visit the project, which is “full speed ahead,” said Jeffrey Roiland, CEO of Lake Communications, the company that will manage the fiber network and other aspects of the project for the county.

Some Lake County residents are eagerly awaiting a fiber network. “Our Internet here is awful,” said Patricia Byrnes, owner of the Inn at Palisade, a bed and breakfast in eastern Lake County. She said she buys Internet access from a satellite provider but it isn’t fast enough to manage her business’s reservations online.

At the root of the dispute is a $56 million BIP loan and $10 million grant Mediacom believes were potentially fraudulently obtained. The county’s initial loan application under the broadband stimulus program was rejected because too high a percentage of the proposed service area already had access to broadband services from companies including Mediacom. But after the county redrew the project boundaries to include large areas of sparsely populated national and state forest land in a neighboring county, RUS approved the loan. Even then, the project would have failed to qualify for the BIP program had the applicant used the most up-to-date census data about the population covered, according to Mediacom’s attorneys.

Moreover, attorneys for Mediacom and the Minnesota Cable Association (MCA) say the subscriber and revenue assumptions included in the loan application aren’t realistic. The project would have to win the business of nearly 100 percent of the occupied homes in its service area to be able to pay back the loans, according to Mediacom’s analyses. “It requires every existing cable company, every existing broadband provider and every telephone company [in the area] to go out of business,” said Eric Breisach, a former CPA and now an attorney with Womble Carlyle who is representing Mediacom. Furthermore, the area is full of second homes and vacation rentals, many of which are unoccupied much of the year, Mediacom’s attorneys said.

The county also allegedly hadn’t lined up financing for the part of the network it would be responsible for funding at the time it submitted the loan, according to Mediacom. That should have been another trigger for not granting the loan, according to Mediacom and MCA lawyers. The RUS investment in Lake County’s project was made according to the requirements of the American Recovery and Reinvestment Act and Notices of Funding Availability, according to the U.S. Department of Agriculture. In cases where awardees fail to meet those requirements the agency has rescinded funding, according to USDA. RUS is working closely with Lake County, as it does with all projects, to ensure its success, according to a USDA spokesman.

Now Mediacom and the MCA are hoping to stop the project from being built and simultaneously stave off a wave of competition to other broadband and pay-TV operators in Minnesota.

As it stands, Minnesota law prevents municipal governments from owning a telephone exchange without a referendum from voters. The MCA has argued that Lake County doesn’t qualify as a “municipality” and therefore couldn’t offer the services even with a referendum. Either way, documents obtained by the MCA indicate the county has taken several steps to avoid actually owning the phone exchange, said Anthony Mendoza, an attorney for the association. Instead of providing the services themselves, Lake Communications would manage that part of the network after leasing dial tone services from another entity, documents indicate. Cable officials in Minnesota are worried that other local governments will follow Lake County’s lead. Already Minnesota cable operators are hearing about other counties in the state exploring similar options as Lake County, Mendoza said.

Local laws allow the county to operate a broadband network, and a third party will operate the network’s voice services, Lake Communications’ Roiland said. Several states require approval by voter referendum to re-establish a city’s right to provide advanced services including telecom and cable to its residents and business, municipal network consultant Craig Settles said. In Lake County’s case, the telcos are upset because they can’t fight if the entity operating the network isn’t a government entity, he said. It’s a legitimate strategy by communities seeking to offer their own networks when service providers refuse to do so, he said. A referendum vote could be a time-consuming process and opponents often use various strategies to sway the vote, he said. In Longmont, Colo., it took more than two years to pass a referendum to let the town offer broadband services either directly or via a partnership, he said.

Mediacom’s and Lake Communications’ revenue projections differ. Roiland said Lake Communications’ projections call for a 50-60 percent penetration rate, and the network could be profitable with even less. If the loan application or network buildout had any legitimate problems, Mediacom would have sued, he said. “We're doing something Mediacom refused to do,” by building out to unserved areas, he said. He said the project should be completed in 2014 and that the RUS loan will be repaid with revenue from the broadband portion of the network.

But Mediacom officials predict a default and said they worry that RUS has given assurances to Lake County that it wouldn’t be responsible to repay the debt beyond the proceeds of a foreclosure auction on the network. “When I met with Lake County representatives in January 2011, they seemed unconcerned about the possibility of defaulting on a $55.6 million loan,” Breisach said. “They claimed to have received assurances from a high-ranking RUS official that RUS would not seek repayment in the event of a default,” he said. According to the USDA, defaults on federal funding are handled under the Debt Collection Improvement Act of 1996.

Emails and other documents obtained by the MCA and Mediacom through local open records laws and reviewed by Communications Daily describe a back-and-forth between Minnesota’s Senate delegation and RUS Administrator Jonathan Adelstein and other RUS officials over the loan application process, in which Adelstein raised concerns about project. That occurred around the time Lake County fired its initial consultants, National Public Broadband, and handed the project over to Lake Communications, Mendoza said. According to the USDA, the RUS responds to all congressional inquiries about its projects, and Minnesota’s congressional delegation had no influence over decisions to fund the Lake County project.

Other documents indicate county consultants were in regular contact with Adelstein and other government officials -- one refers to a “Deep Throat” within the government who was providing advice on the timing of RUS decisions (http://xrl.us/bm583d). And emails between RUS and the county indicate the agency had some concerns about the project following Mediacom’s complaint to the inspector general’s office (http://xrl.us/bm59eg).

In July 2011, an RUS official overseeing Lake County’s loan told Lake County Coordinator Matthew Huddleston that RUS had concerns that Lake Communications (LCI) appeared to be an extension of the county itself and not an independent consultant. “It appears that LCI has no capital formation. If LCI did not receive an equity investment to operate on, we have serious concerns since all employees of the system will be LCI employees and there are a number of expenses that LCI must be able to handle,” RUS Broadband Division Director Kenneth Kuchno wrote (http://xrl.us/bm582x). “If the county is covering 100% of all the LCI expenses then this is another indication that LCI is an extension of the County,” he wrote. But the RUS appears to have ignored its own concerns because it never requested any compliance actions from the county, a memo from Mendoza to the MCA said.

Mediacom and MCA have also raised concerns about the amount of money Lake Communications is set to earn versus the amount that will be paid to the county. An “Operate and Management Agreement” (O&M) between the county and Lake Communications calls for Lake to receive more than $4.4 million from the county over five years for running the network (http://xrl.us/bm59ek). Additionally, Lake Communications will pay just $8 per line per month for access to the county’s local loops on the network -- a figure cable officials say is below market rates.

So far, the House Commerce oversight subcommittee is conducting a basic investigation to get the facts, Stearns said. Mediacom and MCA hope the attention leads RUS to pull the project’s funding, Mendoza said. “We're hoping that by providing the documents the county itself has not really provided, that somebody will say, ‘This does not make sense,’ and put a stop to it,” he said.