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Obama's USDA: Rural Utilities Service administrator: Broadband spending key to rural jobs

SPECIAL REPORT


OBAMA’S USDA AT TWO YEARS:
Fourth of an occasional series of U.S. Department of Agriculture interviews


By JERRY HAGSTROM

Rural Utilities Service Administrator Jonathan Adelstein runs an agency that is renowned for bringing electricity, telephone, water and sewer service to rural America, but that now has a new and challenging mission: to bring high-speed Internet service or broadband to those areas of rural America that have been left out of what has become a necessity for business and personal life.

RUS got $2.5 billion in the economic stimulus package, formally titled the American Recovery and Investment Act, to speed the arrival of broadband in rural America and more for water and sewer investments, and it has allocated all of that money. Critics have questioned whether the money for broadband was a wise investment because it will take years for some of the money to be spent, but in an interview Adelstein defended the spending decisions on broadband and said the demand for sewer and water money is growing.

Adelstein, who was born and raised in Rapid City, S.D., worked in the Senate for 15 years, including seven years for former Senate Majority Leader Tom Daschle, D-S.D., before serving as a Federal Communications Commission commissioner from 2001 to 2009.

Following are excerpts from the interview.

HAGSTROM: What’s been happening in your mission areas in the two years that you have been here?

ADELSTEIN: We’ve had a record year in all three of our areas of responsibility, electricity, telecommunications, and water. We‘ve been running full-tilt getting out record levels of support for rural America in all three. We did over $3.5 billion in telecom investments, $3.27 billion for water and sanitation, and $7.1 billion for electric, all of which are the largest in each category that we’ve ever done.

Anybody who complains about the federal worker doesn’t really see how hard people worked here to get this job done, that they met this enormous challenge. We were able to move the ball forward in transforming rural America for the future.

And at the same time, we made recently 108 awards for our distance learning and telemedicine projects, nearly $35 million. We did $690 million on top of that in traditional telecom loan funds that were authorized by Congress.

I think our water program Recovery Act investments are a good example of an established program addressing our existing backlog and putting people back to work. We have already got 45 projects completed and more than 300 additional projects across the country have shovels in the ground.

Broadband, on the other hand, required really a fresh approach. We wanted to fuel innovation and transform rural America’s telecommunications landscape as quickly as we could but also to ensure long-term economic growth. I think we’ve done both. We’ve created jobs in the short term by getting these projects funded quickly and making sure they get under way, but we’re also transforming the economy for the jobs in the 21st century. These are innovation projects, but they also can lead to more innovation as rural residents have the opportunity to take advantage of broadband that works to contribute to the national economy.

You can’t have young people in rural areas not have access to broadband. They won’t stay there, and if they do stay there, they won’t have the opportunity to grow and develop and make their contribution to society as much as they would if they are completely plugged into broadband networks.

The next Bill Gates or Steve Jobs — maybe they'll be out in a rural area somewhere, and there will be broadband that will enable them to realize their dreams, to realize their talent, and to bring them to fruition for our whole national economy.

We don’t have a person to waste in this country. We’re up against China with a billion people. They train their people in math and science, but we have always been a more innovative country. That’s true in rural areas as well as it is in urban areas. Given the international global competition that we’re up against, I think we need to make sure that our rural areas have the infrastructure they need, so that our young people can learn, can develop, can have access to all the information at their fingertips through these broadband networks that we’re creating.

HAGSTROM: Rural America has been electrified for a long time. So what is the electricity money spent on these days?

ADELSTEIN: We are investing in upgrades to existing plants, meeting new demands, but we are also really focused on renewable energy, on energy efficiency.

Last year, we did over $300 million in renewable energy project financing, and we hoped to increase that this year. We’re also developing a pilot project with [the Energy Department] on energy efficiency to finance new businesses that can retrofit homes and small businesses. What we want is to avoid creating costs in new generation plants.

The cheapest new generation plant is the one you never built. The best way to prevent the need for costs in new generation is by energy efficiency. It can immediately reduce demand, but you can create green jobs at the same time. We’re looking at a pilot that will see how that can be done and then invest in businesses that could go out and retrofit rural homes and small businesses.

If you do a proper energy audit and find a place that with the proper investments can be retrofitted in a way that saves enough energy, the costs that are reduced can actually pay for the debt service. In the end, you have no extra cost because it pays for itself. A retrofitted home that uses less energy is more valuable because its ongoing expenses are less.

A lot of the $7.1 billion goes toward doing upgrades that ensure that our energy plants are in compliance with environmental regulations, so that they are cleaner, and sometimes investing in new and cleaner energy, natural gas, not for base load but for peaking. Rural areas are more expensive to serve. They have fewer customers per line of utility. They require low-cost financing in order to keep energy both clean and affordable for rural residents.

You see time and again that businesses will locate in an area that has affordable energy, and they won’t go to areas where energy is expensive. An example is The Dalles in Oregon where people put one of the server farms up there because it had cheap hydroelectric energy. Businesses do look at all of the different costs and inputs, and if there is not broadband, if there is not good telecommunications infrastructure, if there is not good electric infrastructure or water infrastructure, businesses won’t locate there, and those communities are going to stagnate and fall by the wayside.

So RUS finances the underpinnings that allow these communities to grow and maintain their vitality into the future.

HAGSTROM: Does your spending on telecom including providing traditional telephone service?

ADELSTEIN: It was $690 million in our traditional telecom loan program. All of that plan, we require to be broadband-capable. The majority of the loans that we make in the traditional program, the vast majority are fiber to the premise. Some of them are wireless projects.

HAGSTROM: There has been a lot of talk about whether broadband was good for the Recovery Act, because if the point was to create jobs quickly, broadband takes some time.

ADELSTEIN: This is creating jobs now. We’re seeing that our awardees have indicated they are projecting 25,000 direct jobs being created, and I think that’s on a conservative side. But the important thing is that direct jobs are just the beginning. We’re helping to build a network that will serve as a platform for job creation for years to come.

It does take a little while to get broadband projects up and running, but because of their long-term job creation potential, that is important.

We are seeing the need for jobs today, even as we were last year. We are glad to see that contractors for outside services are adding workers. Construction material purchases are going forward. We can see those companies add employees, and the companies transporting purchases to job sites are busy.

There are a lot of jobs being created that don’t get counted directly. There are equipment manufacturers. Calix [a communications equipment supplier] out in California is working at a much higher level of production because we are getting so many orders for their fiber networks.

So we are seeing job creation across the board now, and I think we are going to continue to see that. As the construction season begins, there will be more jobs created in the coming months, but job creation longer term is more difficult to forecast. We only know that after they have been completed, 360,000 businesses [are getting connected]. That is going to have an impact on employment, and who knows how many new businesses will be created that otherwise wouldn’t have been there? They will be jobs that are high-wage jobs, ones that allow for the full use of people’s innovative skills because they need broadband in order to do that.

We’ve already got some systems that are connecting new customers. In Lenora, Kansas, a farmer and a seed dealer are getting better customer service than they ever had before because they are able to provide broadband.

We see this as a great investment, even though the direct jobs are just a small portion of the overall job creation that we anticipate will result from the broadband stimulus program. A lot of these broadband jobs go well beyond the engineering phase and are in construction and building out their networks. Among the construction projects under way are excavating, laying fiber, erecting towers, and making end user connections. We also have a satellite program, [and] we already have satellite receiver installations and connections that are being made there.

HAGSTROM: Can you give a general description of where the lowest level of broadband service is and how well the projects that you have made grants and loans for will address the need?

ADELSTEIN: The areas that have the lowest population density are the hardest to serve because you have to put the most miles in for less revenue. Mountainous or desert type terrain can be very, very difficult. It is hardest to deliver terrestrial broadband where geography is the most rugged. It presents the most obstacles that equipment can’t overcome, and that is both for wire line and wireless. Wire lines are tough to put in through hilly areas, and wireless doesn’t propagate as well in those areas.

We were looking for areas that were unserved or underserved and really tried to focus on those. We find that tribal areas are a major problem. Particularly remote tribal areas tend to have some of the lowest levels of service anywhere in the country. Low-income rural areas where, again, it is harder to make a business case for private companies [that] need assistance as well.

HAGSTROM: Once you get the systems built in these areas, these remote areas, the tribal areas, the low-income areas, are people going to be able to afford the Internet?

ADELSTEIN: We think they will, but one of the things we took into account in funding a project and whether it was feasible, were the prices that were being charged. We don’t set rates. We ensure that whatever they are proposing is both realistic for the socioeconomic environment they are operating in and it is efficient revenue to make the business case work, so that the project can repay the loan. One of the conundrums we face as a financing agency [is] that the areas that we most want to get at sometimes have the most difficult business case. That’s why we’re there.

But sometimes the business case is just impossible, and we can’t go forward with a loan to an area. It was wonderful to have the opportunity under the Recovery Act to provide grants to those areas, and we had the ability to provide a 100 percent grant, which we did in a very few cases that otherwise we thought wouldn’t be feasible. Some places aren’t even feasible with a pure grant. Their ongoing costs can’t be covered by ongoing revenues.

[The] Universal Service [Fund] plays a role in filling that gap, but if it’s all grant, then it’s not eligible for Universal Service.

Anyway, that’s a long way of saying that we really do try to focus on those areas, and we try to work with companies in our regular program to make it work if we can for areas that are hardest to serve.

We had around 2,000 applications, and only 400 or so that got awards in both rounds. So there were 1,600 there that weren’t feasible. Some weren’t technically feasible. Some didn’t score high enough and were beaten out by a better project, but a lot of the problems we saw were financial feasibility.

It’s a great test of sustainability. If a project can’t pay us back, chances are it won’t be sustainable under any circumstance for that community, and there is no point in putting any loan or grant funds in a community project that is going to be gone in a few years because it can’t pencil out.

We have an overall default rate of less than 1 percent here at RUS, the envy of private banks. We want to keep it that way, but when you get into broadband, these are some of the riskiest areas that we have ever dealt with, and so we do a very rigorous financial and technical analysis on each application.

HAGSTROM: Geographically, can you say that there are areas in the country that are unfeasible for broadband?

ADELSTEIN: There is no area that we can’t touch. We financed a satellite broadband program that would ensure that those who didn’t otherwise get any broadband through this program or didn’t have broadband, so those that are totally unserved, even after this program was complete, would have access to an affordable connection.

HAGSTROM: What will you do now that you have allocated all your Recovery Act money?

ADELSTEIN: We are soon going to publish our farm bill broadband regulation. We are going to publish a notice of funds availability for the Community Connect program and the distance learning telemedicine program, and we are engaging our state field operations, so that each state director is being empowered to work in their state when the map comes out to figure out ways that they can fill whatever gaps in coverage are identified.

We also want to use our expertise in economic development to build businesses on top of these networks. These networks are not in an end in themselves. We don’t want broadband just for broadband’s sake. The point is to have people use it for economic development. So our Rural Business Service is looking at ways that they can finance Internet-based businesses, to help educate people about how they can use broadband to be more efficient, more innovative, more productive, and to finance projects that need financing in order to grow and create new jobs.

HAGSTROM: Do you have a picture of who is going to be delivering broadband? Is it mostly rural electric co ops and telephone co-ops?

ADELSTEIN: We are seeing a mix. A lot of our traditional borrowers did get awards, but we are also seeing new innovative companies coming in, new upstart wireless companies. Sometimes county governments or municipalities take it upon themselves to provide broadband where the private sector hasn’t done it.

Traditional telecommunications companies are well positioned to provide the service because they already have the infrastructure. There are some fixed costs associated with the back-office operations that they already have in place, and so there are certain efficiencies there, but we haven’t shied away from financing to start up companies, new entrants into the field, if they are willing to provide broadband in a cost effective, financially and technically feasible fashion.

And some of them have, so the kind of mix of technologies is in our report between wireless and wire line, but a lot of them are fiber. But there are significant numbers that employ wireless as well. Over 20 percent of our projects are wireless, and over 30 percent have a wireless component. So we are very interested in innovative approaches, but we were open to any of them that worked. We are technology neutral.

HAGSTROM: What have you been trying to accomplish with the water and sewer programs?

ADELSTEIN: We have massive demand. When you go out to rural areas, you see that the water infrastructure is aging, in some cases falling part, in some cases unreliable. Other cases, it’s not safe. It’s not meeting EPA guidelines, or it’s damaging the environment.

One of the reasons that people love to live in rural areas is the environment. They enjoy the environment — whether it’s to hunt or to fish or just to enjoy the beauty of being in an area that’s not so densely populated. But sometimes the rural residents don’t have a water system that that protects their precious natural environment. We see many communities coming to us for assistance in order to do environmental upgrades, so that their systems work, or to put a new system in to reach rural residents who may be off the water system and polluting their neighboring environment.

[There’s] a lake in the Ozarks that I was visiting recently, where a lot of the residents have summer homes, but they are all on septic systems. There’s actually waste pouring sometimes directly into the lake, and the lake is the source of a lot of the economic development for the area. It’s a huge recreational facility, and if the lake is polluted and people aren’t safe to swim there, it’s not safe to fish in there, people won’t come visit, that community’s economic underpinnings are going to be kicked out from under them. But more than that, it is damaging a precious natural resource.

So we need to make sure that these communities have the help they need and we give them a precisely calibrated amount through loans and grants. We look at the community and see what it can afford to pay, because when you hook up these systems, people are going to pay for that. We know they are going to get revenue, but it is usually not enough to cover the cost. If we can get them grant amounts and lower the costs, so they can get an affordable rate but not a subsidized one, just one that you would expect to get in the rest of the country per month and then give them a loan to pay back the rest through the ongoing revenue from the system, that way we get the most bang for the buck.

HAGSTROM: Can communities that are middle-income benefit from your program?

ADELSTEIN: We do target low-income communities. In the Recovery Act, as a matter of fact, we targeted 10 percent towards persistent poverty counties and more than met that. We had 11 percent of our grants go out to persistent poverty counties.

We have an initiative in the colonias, along the [Texas-Mexico] border region, that is an attempt to deal with their needs. There was a special program we did for Alaska, which has huge water needs for the very impoverished communities up there.

But we do assistance to any communities that meet our guidelines. If a community has a higher level of income, generally speaking, they will get a lower grant amount because they will able to afford it more themselves. The cost to serve that community might be very high compared to what the cost would be for a denser urban area. They need assistance to affordable financing.

HAGSTROM: In the Recovery Act you’ve used grant authority to help a lot of low-income or remote areas, but you don’t have grant authority in your regular programs.

ADELSTEIN: We have two small programs. The Community Connect program is a small grant program that we use for totally unserved communities, and we are going to be announcing funding for that in the next month or two. We have the distance learning and telemedicine program.

HAGSTROM: How does RUS rank as a financial institution?

ADELSTEIN: Around 30th. We have nearly $60 billion in outstanding loans. Our interest rates are extremely low right now, very, very attractive rates. It is a good time to be building infrastructure because costs of construction have dropped due to labor costs and materials because of the economic downturn. It is an affordable time to do it, both from an interest rate perspective and from a cost of labor and equipment and materials.

We get appropriations, and then we give them what’s called a "subsidy rate" from [the Office of Management and Budget.] Our subsidy rates are attractive because we have been very diligent about keeping our default rates low. The overall default rate for RUS is less than a percent if you take all the programs combined. The cost to the taxpayer is very low, and we would like to keep it that way, so that we can take the funds that Congress provided and leverage them for investments in rural economic development.

HAGSTROM: If you look at your job over the next two years, besides broadband, are there any other particular goals that you want to achieve?

ADELSTEIN: We need to build our investments under the Recovery Act in water projects to meet the massive demand that remains. When we began the Recovery Act, there was $3 billion backlog of water projects, and we have done over $3 billion in projects. As people learned about our program and people saw what we could do, we now have a backlog that is just as large as when we started. We have got to learn how to use the resources we have to meet those vast needs out there for water.

In energy, we really want to expand our renewable energy financing. We did over $300 million this last fiscal year, and we want to increase that substantially this year. We want to do this energy efficiency pilot and begin to be major financiers of energy efficiency projects to reduce demand and to help avoid the need for costly new generation.

We want to help our rural electric co-ops to finance cleaner energy. There are still huge projections for demand in rural energy that current generation capacity won’t meet in the long term. It takes a long time to get generation capacity up and running. So we are looking at ways that we can help power projects that are cleaner energy projects, that will ensure that there is a reliable portable source of energy in rural areas for years to come and cleaner at the same time.

We want to create those green jobs. We want to pioneer energy efficiency programs that can help rural consumers save on their electric bills, at the same time reducing the demand for energy, at the same time protecting the environment.

The farm bill is an opportunity to explore how we can reach unserved areas better, and I think the lessons of the Recovery Act will be brought to bear as Congress deliberates.

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