Posted by: Ann Treacy | June 1, 2012

Lake County Fiber Project: How much is smoke and where are the fires?

The Lake County Fiber Project has garnered attention from the media, public and competition since receiving $66 million from the USDA Rural Utilities Service as part of the BIP/ARRA funding in 2010. They received considerably more funding than any other Minnesota-focused project with a $56 million loan and $10 million grant. (BIP funding for all 18 Minnesota projects totaled  $228 million. I’m including only projects that really focused on MN; not where MN was a partner state.)

I provided a rough history of the Lake County Project in a post in February. They have had issues with open meeting laws, concerns with original consultants managing the program and negative marketing from an existing local broadband provider (Mediacom). They have received attention locally and nationally. There are a few questions that concern me:

  • How much is smoke and how much is fire?
  • Will decisions made based on this situation create policies and precedent that have an impact on future community networks?
  • Will the unwanted attention hinder and/or stop the project?

It seems as if the main barriers to the project now are allegations raised by Mediacom, an incumbant provider in the area. The May 8 Communications Daily, a trade publication for the telecommunications industry (sorry archive not available online) outlines many of the allegations. In pretty plain language Communications Daily spells out the situation …

Mediacom Communications, which serves some of the less sparsely populated parts of Lake County, Minn., complained last year to the US Department of Agriculture’s office of the inspector general that Lake County’s Broadband Initiatives Project (BIP) loan application appeared to be fraudulent, designed to set the county up for financial failure and allow outside consultants handpicked by local officials to buy the fiber-to-the-home systems at a discount (CD March 17/11 p6). More recently it has been taking its case to nearly anyone else who might listen, including federal prosecutors in DC and investigators with the House Commerce Oversight and Investigations Subcommittee, and apparently gaining some traction.

Here’s a short list of allegations gleaned from the same article:

  1. Lake County didn’t have the funding required at the time it.
  2. Lake County didn’t use the most recent census data in its original application.
  3. To be successful, the Lake County plan would require 100 percent take rate, which would be very difficult to obtain.
  4. Lake County has been assured that even if they default on the loan, the RUS would not seek repayment beyond the proceeds of a foreclosure auction on the network.
  5. The replacement consultants hired to manage the project are more like an extension of the County than a separate entity.
  6. There are questions on how much the consultants are getting paid to run the network versus the amount they set to pay the County for access to the network ($8 per line per month).
  7. Minnesota law prevents municipalities from owning a telephone exchange without a super majority approval through a referendum.

Last week, the House Subcommittee on Communications and Technology announced that they would be taking a closer look at all ARRA projects – the concern was progress (or lack of progress) of ARRA projects. The implication being that projects weren’t as shovel-ready as indicated in their original applications. I think there are some legitimate reasons for projects running behind (slow response from sponsoring agencies and fiber shortage being two) and I suspect that, as Lac qui Parle project report reflected last month, most projects still have time to make up for lost ground. Testifying at the meeting Jonathan Adelstein said something similar…

Big infrastructure projects, whether done by telecommunications, water or electric utilities, are transformative and take time to build out.  Projects have to be carefully planned, constructed and operated.  All awardees must comply with federal and state environmental, historic preservation and in some cases tribal or intergovernmental reviews that often require significant consultation with the public.  Large telecommunications projects, like those financed under the Recovery Act, often take between three and five years to complete, although many are able to move more quickly.

I’m including video of the session. It’s long – but interesting because the questions asked by the subcommittee members reflect the concerns of their constituencies. The Lake County project was mentioned by name twice during the meeting; some of the allegations mentioned above were addressed.

Funding, & Demographics

Adelstein outlined the scrutiny that each project undergoes as part of the funding process. (I especially appreciated Congressman Terry’s (R-NE) question on USF changes and RUS grants! Borrowers are indicating that the changes are hurting their business plans – an issue that Hubbard County is working on.) Around about minute 59, Congresswoman Christensen (D-VI) asked specifically about the Lake County project, asking why the project was not investigated further once a formal complaint was made, alluding, I believe, to at least the first two (maybe three) allegations listed above. Deputy Inspector General Gray responded that after preliminary investigation they didn’t see a need to delve deeper.

Business Plan / Take Rate

The third allegation is less clear-cut than the first two. Adelstein talked about evaluating financial feasibility of projects. They look into business plans but there are more moving pieces and the local market can change. I wouldn’t presume to evaluate the Lake County plan, but I would say that the RUS’s approval of the project seems indicates that they found it to be a viable plan.

Repayment of Loan

Adelstein was also asked about the allegation that Lake County might not be required to repay the loan (at about 1 hour and 52 minutes). He emphatically denied reports that anyone at RUS had told a borrower for a fiber project in Lake County that RUS would not seek repayment of its loan from the borrower.

Consultants or Staff? Compensation

The questions of contracts and consultants were not raised in the subcommittee session. The Communications Daily article raises some concerns (the article alludes to email correspondence) …

In July 2011, an RUS official overseeing Lake County’s loan told Lake County Coordinator Matthew Huddleston that RUS has 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. “If the County is covering 100% of all LCI expenses, then this is another indication that LCI is an extension of the County and possibly should be treated as a political subdivision of the County.”

LCI may have been formed to provide telephone service. Documents (dated Sep 8, 2011) provided to me by Lake County (as result from a request under the Data Practices Act) would indicate that access to a CLEC license would have been a factor…

LCI is not funded or formed by Lake County. Lake County is currently paying two Limited Liability Corporations to provide consulting services on the RUS broadband project. Principals of the consulting companies are also principals of LCI. LCI is raising capital to cover its startup costs, which include engaging  an accounting firm and legal representation, who are assisting in its application for a Certificate of Authority  as a Competitive Local Exchange Carrier (CLEC) from the Minnesota Public Utilities Commission, to provide  telecommunications services in the Lake County area.

LCI intends to use its CLEC to resell telephone service over Lake County’s broadband network. This service will be separate from its contract to operate and manage the network. LCI will purchase access for telephone, on the network from Lake County at the wholesale price. LCI will purchase the dial-tone from an existing provider. The interconnection for this “resell service” must be between entities  who possess Certificates of Authority. As described in the application, Lake County will not possess the CLEC or provide the telephone on the network. LCI’s telephone service will be bundled with Internet (ISP) and Video services provided by Lake County. LCI will receive the revenue from the telephone  customers.

I think part of the concern is the manner in which the consultants were selected. There was no formal RFP as far as I know. I don’t know that an RFP process would or should have been required. But having watched the oversight subcommittee meeting in its entirety, I could see that having received multiple bids for work is helpful if you find yourself asked to explain a purchase or contract. I guess the question is, would issuing an RFP have made a difference in the selection, and/or would an RFP process have slowed the progress?

A related issue is one of compensation – and this is where a competitive bidding process might have been helpful. It would allow outsiders to compare other bids and glean from other business plans. The Communications Daily article links to the Lake County Operate and Management Agreement. I don’t know the going rate for running a network or leasing phone lines in NE Minnesota. Others may have insights to share on the topic…

An “Operate and Management Agreement” (O&M) between the county and Lake Communications calls for Lake to received more than $4.4 million from the county over five years for running the network. 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.

RUS has seen these documents; they continue to support the project, which would indicate to me that they are within their margin of reasonable.

Municipalities and Telephone Exchange

The issue of municipally owned telephone exchanges has come up many times in Minnesota. In short to provide telephone service, a municipality must hold a referendum seeking permission from the public to take on that role and the referendum must pass by 65 percent (a super majority). It’s been an issue in Monticello, Cook County, North St Paul and Sibley County to name a few communities. The issue came up again in the Minnesota Legislature this year (very short-lived!).

The policy was put in place to protect taxpayer investment. Some folks question the wisdom of requiring a super majority.  I think that unfortunately this requirement has become a tool that slows down progress – because a super majority can be difficult to pass, and because ambiguity in the regulation means that even winning the referendum does not guarantee a path forward. This came up in a community meeting in Sibley County earlier this year. They are opting to not pursue a referendum because of the time and cost. Also it is unclear whether their project would be considered a municipal network under the law because the term “municipality” is not really defined. It may mean a city; it may refer to something broader. So there’s little incentive for local governments to take on the time and cost of a referendum if it can be avoided. If they lose, they lose. If they win the opposition can claim that as a county the municipal law doesn’t apply.

Lake County Fiber Forges On

Some of the allegations have been addressed; I’m sure more questions will be asked. The Lake County Fiber Optic Committee had made plans to meet every Monday. I know that the meetings were cancelled in early May. I don’t know if they met this week – and unfortunately there are no minutes posted for the meetings after March 5, 2012. It would be interesting to attend or get notes from previous meetings. (I have requested them but have not heard back on the request.)

From the perspective of focusing on expanding broadband coverage in Minnesota, it’s good to see that the Lake County project forges ahead. You can track some of the progress of the project through County Commissioner meeting minutes. They are signing cable franchise agreements, approving utility permits and sending payments to various consultants. So they are addressing two objectives that concerned the Subcommittee on Communications and Technology – networks are moving forward and money is stimulating local economies.

[Added 6/6/2012 - more on Lake County: Who is Accountable if the Lake County Network Fails?]


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