May 31, 2006 4:43 PM PDT

USDA sued over broadband loan program

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A rural cable provider filed a federal lawsuit against the U.S. Department of Agriculture, insisting it reform a low-interest loan program created by Congress to bring high-speed Internet access to rural areas.

Mediacom Communications, a cable operator serving mostly rural communities, and the Iowa Cable and Telecommunications Association (ICTA) filed the suit on Tuesday in U.S. District Court for the Southern District of Iowa.

The suit accuses the USDA of offering a loan to a small service provider called Lisco, which plans to build a fiber-to-the-home network in Fairfield, Iowa, a town of about 10,000 people that is already served by two other broadband providers. Mediacom argues that the government's low-interest loan program was intended to help service providers offer broadband in rural areas where no other such service is available. The company charges that by approving the loan, the USDA is providing Mediacom's competitor, Lisco, with an unfair market advantage.

The lawsuit seeks to force the USDA to rewrite the regulations that determine how the program is administered. It's also looking to block Lisco's $9.5 million loan.

"We have the same goal as the USDA, which is to provide broadband service to rural America," said Jon Koebrick, vice president of government relations for Mediacom. "We don't want to see the program end, but we do think changes should be made to adjust who gets money and how the process works."

While broadband penetration in the U.S. has increased over the past few years, some pockets of rural America are still without high-speed access, mainly because of high costs associated with building new infrastructure.

The rural broadband program was passed as part of a farm support bill in 2002 to provide low-interest loans to private companies building networks in communities with less than 20,000 people. Since its inception, the Rural Utilities Service (RUS), the arm of the USDA administering the program, has approved $872 million in loans.

But a September 2005 audit by the USDA Office of Inspector General (click for PDF) found that the RUS has granted hundreds of millions of dollars in low-interest loans to companies that are using the funds to build broadband networks in affluent suburbs and in communities where residents already receive high-speed Internet service from a choice of two or more providers. Specifically, the report states that more than $103.4 million in loans has been allocated to 64 communities near large cities, including $45.6 million in loans that went to 19 planned subdivisions outside of Houston.

"The intent of the program is to provide incentives to entrepreneurs to take a risk and build infrastructure in rural, hard-to-reach areas of the country," said Brian Dietz, vice president of communications for the National Cable and Telecommunications Association. "But what's happened is the funds are going to companies building infrastructure in suburban communities with ample broadband coverage."

Officials from the USDA declined to comment on the lawsuit, but Michael Porter, vice president of marketing and customer relations for Lisco, said that the company was well within its rights to apply, and get approval, for the loan.

"We are just a little company in a little town that followed the rules of the program," he said. "The larger social issue is whether or not the government should be helping stimulate true economic development in rural America. That's what the loan is helping us do in Fairfield."

But Porter didn't deny that the government loan offers his company an advantage over Mediacom, which raised money from the private capital market to fund the construction of its network. He said that the government has long provided advantages to large telecommunications companies.

"The idea that the telecommunications industry operates in a free market is simply not true," he said. "In the past, Congress has passed laws benefiting big phone companies and cable operators. They are the ones that have lobbyists and write legislation. And now someone is bent out of shape that a little mom-and-pop service provider in Iowa gets a government loan? What a joke."

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