Thursday, February 24, 2011

Mediacom Asks USDA Inspector General for Federal Probe of Lake County, MN Broadband Award

Filing is the First Broadband Stimulus Complaint to IG of USDA to be Disclosed 02/24/2011 San Francisco   – Cable operator Mediacom has filed a complaint with the Inspector General of the U.S. Department of Agriculture, asking for a federal probe of the $66.5 million broadband stimulus grant/loan package awarded to Lake County, Minnesota. This, the first publicly disclosed filing about the broadband stimulus program issued to Agriculture’s Inspector General, comes as the new Republican leadership of Congress is pushing federal IGs to more rigorously examine stimulus program irregularities.

Federal inspectors general have wide ranging civil and criminal investigative powers, including the ability to audit grant applications and disbursements, execute search warrants, recommend suspension of grant or loan payments, and recommend indictments.  

Two days ago Lake County officials announced the retention of new consultants in hopes of jump starting the controversial project which has become a focal point in the national battle over public vs. private broadband investment.

Highlighting this particular controversy is the role of the County’s former lead consultant, Tim Nulty, the founder and past general manager of the troubled Burlington Telecom network, owned by the City of Burlington, VT. Central to the complaint filed by Mediacom Communications Corporation (NASDAQ: MCCC), which operates cable franchises in the largest population centers of the County, is the allegation that Nulty’s firm was retained to secure the $66.5 million under a federally prohibited “fee for success” contract.  

The federal project subsidy was issued by the Rural Utilities Service (RUS) of USDA, as part of the $7.2 billion broadband stimulus program of the Obama Administration. The lead County manager for the public broadband project, County Coordinator Matthew Huddleston, was not available to speak with this publication by telephone over the past week following his kind return of our first call. We hope to report on detailed responses to the Mediacom filing with full input from County officials.

Lake County's Fiber-to-the-Home Project
Lake County Courthouse, Two Harbors, MN
Lake County, which won the loan/grant combination award in Round 2 of the federal broadband stimulus program, seeks to build and operate a fiber-to-the-home (FTTH) network serving its very rural jurisdiction. 

Funding was announced by USDA on September 13, 2010, as one of 43 awards totaling $518 million issued that day in the penultimate group of competitive grants and loans issued in the RUS portion of the program. RUS gave out its last four broadband stimulus awards on September 30th at the legal deadline set by Congress.   

In addition to all residences in Lake County, the project is intended to serve eastern parts of adjacent St Louis County. Commissioners worked to craft a proposal to RUS that would result in the extension of the FTTH network to all residences in their jurisdiction now served by power or phone utilities, including the extremely low density areas outside the cities of Beaver Bay, Silver Bay, and Two Harbors.

The County, working through Nulty’s firm, National Public Broadband, applied to RUS in Round 1 of the federal funding effort as well, for an $11.050 million grant and a $22.435 million loan combination package. The project summary provided to RUS by the County and NPB in its first application stated, "The Project will be the first rural county fiber network in the U.S. to fully serve every home and institution that is currently served by wired telephone or electrical service. The advanced services offered will be priced lower than the very limited services currently available. The Project will be a public-private partnership between Lake County and National Public Broadband, a non-profit org." 

Core Points of Mediacom’s Complaint  
Mediacom bases its complaint to the Office of Inspector General (OIG) on 3 core points of financial viability, legal authority, and retention of outside consultants via an alleged "success fee" agreement. The firm, headquartered in Middletown, NY, was ranked the twelfth largest cable multiple system operator in the nation at 1.203 million subscribers, by the National Cable Telecommunications Association (NCTA) in its September 2010 listing.   

As part of its argument that the proposed project is not financially sound, the Company backs into the statement that the project is impermissible under the rules of RUS whjich forbid the "overbuilding" of existing broadband networks. The agency published its rules for Round 2 of the program, in its so-called RUS NOFA-2.  Currenlty broadband infrastructure does exist in the four communities of Beaver Bay, Silver Bay, Two Harbors, Aurora, and Hoyt Lakes. The probe request to OIG says that the County "ignored data as of the Application date that reveals that a very significant number of housing units have access to Internet speeds of 20 - 50 Mpbs."
Importantly however, the "overbuild" allegation -- one that is the primary concern with the stimulus initiative as voiced by many incumbent service providers large and small -- is not the central claim Mediacom most heavily documents in its request for a probe by OIG.

"From our perspective, this just doesn't work financially," said Tom Larsen, Mediacom's VP of Public and Legal Affairs, in a telephone interview with this publication. Larsen hones in on the lack of financial viability argument expressed in the firm's complaint. "Thirty percent of the homes in the service area are unoccupied according to the most recent census," he said. 

"Most of those homes appear to be cabins in the Superior National Forest," he argued. In Mediacom's view, those seasonal housing units work to greatly drive up the effective "homes passed per mile" of proposed new outside cable optical plant, in an area of already extremely low densities. 

"This ultra-low density results in a high cost per housing unit passed of $4,700 per unit and about $6,772 per occupied housing unit," says the Mediacom filing with OIG. "By comparison, these amounts are 3.9 to 5.6 times higher than the $1,200 per housing unit passed cost for a fiber-to-the-home system that was recently determined to be an appropriate cost for such a system in a more populated area." Mediacom clearly suggests that the capital cost of the system can never be recovered from such a low density subscriber base.

To drive home the point that the Lake County project is unsustainable, Mediacom alleges that County officials are operating under the false assumption that RUS will forgive what the company sees as inevitable, in its own calculation -- a nonperforming federal loan that results from the project. The company further alleges that at least one Commissioner has been quoted having had a conversation with a senior RUS official stating that RUS would forgive any such default. 

In our opinion, it would be highly doubtful that any manager within RUS, let alone a senior official, would make such a statement. RUS has a legacy begun under the New Deal's Rural Electrification Administration. The agency has been authorized by Congress to issue rural telephone loans since 1949. It has held a national loan portfolio across the intervening decades with an extremley low defualt rate.

In a series of legal arguments often heard when incumbents allege public network overbuilding, the cable operator states in its filing that Lake County has neither the authority under  Minnesota law to own or operate the network, nor to secure capital bonding for the local match contribution of $3.5 million required by RUS.  

The 26-page Mediacom complaint calls on OIG to "expeditiously investigate whether a BIP $66.5 million plus loan/grant combination awarded to Lake County, Minnesota to construct a last-mile broadband network in portions of Lake and St. Louis Counties, Minnesota was improperly obtained." The company further requests that no grant/loan funds be disbursed pending the investigation. RUS brands its part of the stimulus effort the Broadband Initiatives Program (BIP).  

Most recent media attention on the Lake County project, given the concerns expressed by Mediacom, have focused on Mr. Nulty’s roles in both the Burlington and Minnesota projects. Lake County is one of several points on the current national map at which public broadband advocates square off with industry. Burlington, the Green Mountain State's largest city, is another. Two local review committees and the state's Public Service Board have reported serious instances of fiscal and operational mismangment by Burlington Telecom that resulted in the default by the municipal network on a major capital equipment lease, and the high risk of further losses faced by city government.

Just what is the situation in Lake County? One finds it difficult not to admire the obvious public interest intent of the Lake County Commissioners, as they work to bring the benefits of ubiquitous broadband to their very rural local realm. Equally, any objective analysis of the public - private networking fights around the coutnry reveals instances of unprofessional attacks by incumbents on local officials attempting to support their constituents. Just as clearly, the largest cable and telephone company interests in the nation never wanted any part of President Obama's broadband stimulus program to begin with.

"I can say that there is a pattern of incumbent cable and telephone company behavior to prevent any kind of competition. They will use any means at their disposal to do so, regardless of how frivolous the charges”, said Minnesota-based Chris Mitchell, a leading community network advocate who heads the Community Broadband Networks project of the Institute for Local Self-Reliance.

It is thus a local dispute between what appear to be well intentioned County officials working to accomplish a public good, and a well managed cable operator making serious allegations about that effort. It is however a local dispute caught-up in a national debate over the proper role of government in broadband deployment -- a debate even further complicated by the partisan divide which marks federal policy. It is this roiling conflict that lands on the desk of USDA Inspector General Phyllis Fong.

First Broadband Stimulus Public Complaint to OIG, Others in Hopper?
Phyllis Fong, Inspector General, USDA
The Mediacom filing is only the second such probe request disclosed to the public across the entire $7.2 billion broadband stimulus program; the first disclosed as filed on the USDA side of the initiative. In November Santa Clara County, California requested an investigation of the controversial BayWEB $50 million public safety grant with the Inspector General of the Department of Commerce. was informed by a federal source that 2 requests for OIG investigations of broadband stimulus awards by RUS had been filed by the end of 2010. We have not been able to confirm the status of either filing, the specific project awards involved, or the identities of parties that requested the federal probes.

In early November RUS spokesperson Bart Kendrick informed us “It is USDA policy not to comment on matters under review by the Office of Inspector General.”  

Alan Mandl, a Boston attorney not involved in the Lake County matter who has represented New England clients both facing and carrying out overbuilds, observed, “Absent specific legal authority that permits taxpayers to bear the risks associated with a broadband venture, taxpayers should be protected against those risks."

"Lenders and public officials need to perform due diligence reviews of project legal authority and financial feasibility," cointinued Mandl, who previoulsy served as Assistant Massachusetts Attorney General for Regulated Industries. "Even where legislative protections of taxpayers have been enacted, as was true in the Burlington Telecom case, those protections alone did not prevent massive, unauthorized cross-subsidization of the municipal broadband project by taxpayers.”

Mandl tells us that in the Burlington project, where federal state, and city officials are all now investigating, “Cash was drained from general municipal funds and not repaid when the broadband project failed to generate sufficient revenues to cover its costs. Regulatory limitations on short term uses of municipal cash accounts were breached in order to keep the broadband venture going, according to findings by the Vermont Public Service Board.”

These situations are more likely to happen where, as Mediacom has alleged, the broadband project cannot withstand a reality check. “Federal taxpayers also are entitled to protections against unauthorized or imprudent projects,” concluded Mandl, who represented the incumbent cable operator and regional cable trade association in the Burlington proceeding, which is discussed in Mediacom’s complaint.   

GOP Congress Prods IGs on Broadband Stimulus
The powers and responsibilities of federal agency inspectors general cannot be taken lightly by any corporate or public official. OIGs have the powers to execute search warrants, recommend federal criminal indictments, and seek civil fines or monetary restitution. As seen last week in the first congressional oversight hearing of the broadband stimulus effort to be convened by the new Republican controlled House, the GOP leadership is urging greater action by OIGs to probe allegations of fraud and waste in the program. 

USDA Inspector General Phyllis K. Fong testified at the hearing chaired by Rep. Greg Walden (R-OR-07) of the House Subcommittee on Communications and Technology. Although Fong is well respected in the federal IG community, as witness by the fact she now heads the professional association of inspectors general, her testimony was lacking in any specific references to current OIG work on broadband stimulus.

To the dismay of several Republican Committee members looking for action on RUS grants and loans, she stated that her office will now more closely examine the broadband stimulus awards.  She stated she had waited for the General Accountability Office (GAO) to complete its most recent report submitted to Congress (of numerous previous full reports and letters) that looks at the program.

The Mediacom filing against Lake County is in this sense an opportunity for Inspector General Fong and her staff. It is an opportunity to conduct an objective and highly professional review of serious claims made against a dedicated local government body by a leading broadband service provider. It is also an opportunity fraught with the danger that her inquiry will be subject to the partisan crossfire which has taken over any effective oversight, by either party in Congress, of the broadband stimulus program to date.
Complaint 2 to OIG - Lake County Fiber Project 02 07 11 (2) 
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