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Lender Discusses Differences Between Broadband and Electric Service

The following article is reprinted from CFC Solutions News Bulletin (17 January 2018, Volume 19, Number 2).

With more electric cooperatives looking into providing broadband service to unserved and underserved rural communities, CFC Senior Vice President for Member Services Joel Allen told listeners during December’s CFC Financial Webinar Series broadcast that, “Broadband is pretty big right now, and we are financing it. However, we’re also seeing more systems, after doing due diligence, deciding not pursue it.”

Allen was joined by CFC Senior Vice President for Loan Operations Robin Reed, who oversees the lending portfolio of the Rural Telephone Finance Cooperative, which is managed by CFC. She cautioned cooperative directors and staff: “Broadband is a totally different environment from the electric industry. Telecommunications services are not essential services, and the marketplace is very competitive.”

Reed further warned of a whole new set of challenges connected to broadband, including strong marketing tactics, subscriber churn rates, specialized customer service skills and industry regulations. “Hard questions also need to be addressed regarding service reliability, responsiveness as well as the overall customer experience—you’ll be going into a customer’s home to install and troubleshoot equipment.”

The CFC duo suggested that electric cooperatives evaluating the viability of a broadband project start by assessing the competitive landscape and who else may be offering services, such as local telephone companies, cable TV firms and wireless carriers.

“You need to be acutely aware of the competition and understand what competitors are selling at what price points,” Reed advised. “Then determine how you will compete—price, content or quality of service—and whether your brand recognition will be strong enough to help you achieve subscriber counts sufficient to cover infrastructure costs. Regulatory requirements differ for each type of service you might consider—voice, video or high-speed Internet—so it’s important to engage a telecommunications attorney for guidance.”

When it comes to how broadband infrastructure will be owned—by the cooperative, through a subsidiary, or with a partner such as a local telecom provider—Allen noted that CFC members are exploring all options. “In one case a cooperative with fiber assets formed a broadband cooperative that neighboring electric cooperatives are joining. The broadband cooperative leases out the fiber.”

On average, deploying broadband in rural areas runs about $10,000 per location. “Due to the capital-intensive nature of the business and cost to gain subscribers, most start-up operators don’t achieve cash flow break-even points for at least five years,” Allen said.

Reed stressed that assessing risk tolerance and setting expectations regarding losses are two difficult but necessary conversations for cooperative boards to have when discussing a broadband venture. “Properly scaling a project to a size that’s manageable from both an operating and financial standpoint will help minimize problems. Starting with a small-scale effort allows you to acquire an understanding of telecommunications and better apply lessons learned from the initial launch to future rollouts.”

To finance a broadband endeavor, CFC wants to see:

  • A phased-in approach to project growth;
  • Due diligence that includes a business plan, feasibility study, marketing study, engineering design, financial projections for both the broadband enterprise and the cooperative, competitive analysis and an exit strategy;
  • Strong support from the electric cooperative;
  • Guarantees if a subsidiary approach is taken;
  • Loan terms of up to 20 years; and
  • Projected positive cash flow in a reasonable period of time.

Contact your CFC regional or associate vice president for more information on broadband financing. To listen to the full broadcast of the webinar, visit nrucfc.coop, log in and look for “Past Events” under the “Events” tab. The Member Website also features a brochure “Broadband to Rural America: An Overview for Electric Cooperatives.” It’s available in the “Resource Library” under “CFC Information and Reports.”