When Vermont Telephone Co. recently won $116 million in federal stimulus funds to expand high-speed Internet service throughout the state, the news was met with praise that bordered on the breathless.
http://www.vnews.com/08222010/6924328.htm
Published 8/22/2010
Jeremiah Millay, left, a network engineer, and Justin Robinson, vice president of engineering, work at their desks at VTel’s office in Springfield, Vt., on Tuesday.
(Valley News — Jennifer Hauck)
How VTel Got Stimulus Millions
By Chris Fleisher and Gregory Trotter
Valley News Staff Writers
Springfield, Vt. -- When Vermont Telephone Co. recently won $116 million in federal stimulus funds to expand high-speed Internet service throughout the state, the news was met with praise that bordered on the breathless.
Rep. Peter Welch predicted a “broadband revolution.” Sen. Patrick Leahy called the project a “game-changing network” and said the grant “ranks among the most promising breakthroughs in rural economic development since rural electrification” in the 1930s. It would create “hundreds of new jobs,” added Sen. Bernie Sanders.
The federal funds would help the telecom make Vermont the first state in the nation in which every resident would have high-speed Internet access, boosters said. It would be the great equalizer for rural communities.
But some communities -- not to mention the rural telephone companies that serve them -- would be more equal than others.
The total cost of the project is estimated at $146 million (VTel is contributing $30 million). Nearly half of that total -- $70 million -- will go not to provide broadband to Internet-starved customers in rural corners of Vermont, but instead to benefit VTel's 18,000 existing customers, who already enjoy high-speed service. State-of-the-art fiber optic connections will give them the fastest Internet access in the world -- allowing them, for instance, to download the movie The Godfather in a few seconds — VTel President Michel Guite said in an interview with the Valley News.
The other half of the money will go to the part of the project that has received the most attention thus far: Internet access beamed from wireless towers across the state that could help the 114,000 Vermonters who currently have slow or no Internet connections, Guite said.
“The first state in America where absolutely everybody gets coverage,” declared Guite.
While the wireless system would represent a significant improvement for those businesses and homeowners, Guite acknowledges that it won't be as consistently fast and reliable as hard-wired lines. Critics wonder whether the wireless portion of his plan represents a short-term fix to a long-term problem. Others wonder why for-profit enterprises should get taxpayer-funded assistance.
“I have a philosophical problem with giving free taxpayer money to private companies and letting them keep the profits,” said Tim Nulty, chief executive officer of ECFiber, a municipal effort to build a fiber network in eastern and central Vermont.
“And this isn't peculiar to Guite and VTel, this is all over the country. A large part of the stimulus has been hijacked,” Nulty said.
Leahy's spokesman, David Carle, defended the senator's support of these programs. He said Leahy's primary goal was to ensure that “Vermont got its fair share” of stimulus funds and that Vermonters would benefit from improved access to broadband.
Leahy believes “nonprofit, public and private broadband providers all have roles in broadband expansion,” Carle said in an e-mail to the Valley News, “and that while some broadband technologies are superior to others, there is a place for varied technologies from wireless, to fiber (and) everything in between if it means the difference between leaving Vermonters disconnected or giving them social and economic opportunity through broadband access.”
There also is the question of whether a small company like VTel, with just 70 employees, will be able to pull off such a massive expansion of Vermont's broadband capabilities.
Even Guite knows his project is a gamble.
“Increasingly it's a game for giants, and increasingly, it's difficult for a new player to succeed against T-Mobile, AT&T and Verizon,” Guite acknowledged in an interview. “Even though there's hundreds of little operators, there’s fewer every day, and so can you really compete? That remains to be seen, but that's the bet we’re taking and it’s not without risk.”
Try, Try Again
As risks go, though, there's a very big safety net.
When VTel made its first bid for some of the federal stimulus money intended to jump-start a sputtering economy, the company asked for about $56.6 million, mostly to finance the $70 million project of extending fiber optic lines to the telecom's existing customers, located in and around Springfield, Vt. The plan also called for developing a wireless network to reach customers in southern Vermont.
That effort failed to capture the imagination of the government officials in charge of the cash. Application denied.
Guite was not deterred. He submitted a new application that contained the original project and added a bold twist.
Instead of providing a new wireless network only for southern Vermont, the company sought to broadcast wireless Internet throughout the entire state, into all the hills and hollows of rural Vermont, and even extending into eastern New York and western New Hampshire. Guite and his colleagues requested $116.8 million in grants and loans to accomplish this goal.
(As part of the deal, VTel has agreed to chip in $30 million of its own money in the form of matching equity, including wireless licenses it already owns, bringing the total project cost to about $146 million.)
VTel also had received $12.3 million of stimulus money earlier in the summer to build a so-called “middle-mile” fiber optic network -- infrastructure that doesn't necessarily serve customers directly but serves as a kind of backbone -- to connect schools and hospitals in communities including Essex, Stowe, New Haven and Berlin. VTel is contributing $6 million of equity to that project.
“How do you get ubiquity of broadband? Because Vermont has a small footprint, here was a way for $100 million-plus dollars to get absolutely everybody,” Guite said.
While $70 million of the total project costs will be spent deploying a fiber-to-the-home network in VTel's backyard, Guite said, the balance will enable the company to broadcast cutting-edge “fourth generation” wireless throughout the state.
The plan is to build as few towers as possible and to run fiber optic wire, or in some cases, microwave mesh wire, to many of the existing 300 or so cell phone towers in Vermont. In some remote communities, there will be wireless bay stations installed in creative places -- such as atop town halls, church steeples and granaries -- to strengthen the signal, Guite said.
It helps that Vermont Telephone Co. has been acquiring broadband spectrum -- like radio frequencies for broadband signals -- since the late 1990s through FCC auctions. It now has sufficient spectrum to cover the entire state, Guite said.
Getting the Money
VTel wasn't the only Vermont winner in the broadband stimulus sweepstakes, but it certainly gained the most.
Waitsfield Champlain Valley Telecom, a company of comparable size (20,000 customers), was awarded $5.6 million for a smaller fiber-to-the-home project that would serve 1,385 rural customers in Washington, Addison and Chittenden counties.
ECFiber, a collaboration of 23 towns that seeks to build municipally owned fiber-to-the-home network, requested $44 million in grants and loans but was shut out for the second consecutive round of stimulus money.
Funding came through the second round of awards for U.S. Department of Agriculture's Rural Utilities Service Broadband Initiatives Program. Just over $1 billion was distributed in the first round, leaving it about $1.5 billion left to commit by Sept. 30, the mandated deadline under the American Recovery and Reinvestment Act. There's $500 million in broadband money left to be obligated by the end of September, according to the USDA.
The USDA, citing proprietary financial information, has so far declined to provide details about VTel's application or the team of officials that reviewed it. In an e-mail to the Valley News, USDA spokesman Bartel Kendrick said only that it was “in-house professional staff.”
When asked why VTel was approved for that quantity of money, Kendrick said applications are reviewed based on their merits, as well as their compliance with application requirements and the ability to provide broadband to unserved and underserved communities. In VTel's case, the “subject application responded to the set specifications for meeting requirements in the area,” Kendrick said.
According to Guite, his application sailed through the process.
The fact that VTel already had the spectrum to accomplish the statewide wireless network likely was critical to the success of its application, said Tom Evslin, chief technology officer for Gov. Jim Douglas.
“It's the equivalent to being shovel-ready,” Evslin said. “It's evidence of VTel's commitment and investment.”
Applications for Rural Utilities Service broadband money in round two were evaluated according to a system with 12 “scoring criteria,” outlined in a 109-page application guide available on USDA's Web site, www.usda.gov.
For example, VTel's application was judged on the proportion of rural residents its project would serve in unserved areas of the state, how well the project would work in cooperation with other stimulus projects, the level of service VTel would provide, service to “small disadvantaged businesses,” organizational capability, etc.
Chris Campbell, executive director of the Vermont Telecommunications Authority, a 3-year-old agency charged with expanding Internet and mobile phone service in the state, didn't work with VTel on the application, and he had no role in the process of awarding its funds. But looking at what VTel says it wants to do, he said, the company could have come out ahead in several areas.
“VTel has a very big proposal. It's a proposal that addresses most of the unserved areas in Vermont,” Campbell said.
Both Evslin and Campbell said the sheer magnitude of VTel's project could have played a major role in its success. VTel's $116 million could help connect 114,000 unserved households throughout the state, Guite said.
The other two projects were less ambitious. ECFiber aimed to connect 6,491 unserved premises with its application; Waitsfield Champlain Valley will not be connecting any unserved people, but instead rolling out fiber to 1,385 existing customers with DSL, according to officials with both companies.
Still, unlike ECFiber, Waitsfield Champlain Valley got the full amount it requested.
Some of those 1,385 customers are considered “underserved,” meaning they have DSL but experience slower Internet service because they live in more remote areas, said Kurt Gruendling, vice president of marketing for the company. None of the customers who could benefit are considered “unserved” by the RUS definition.
The RUS application defined minimum broadband speed as 768 kilobits per second downloading and 200 kilobits per second uploading. Unserved customers, by definition, are people who don't have access to at least that. As a point of reference, 968 kilobits per second (the combined upload and download speed) is generally recognized as being faster than dial-up and satellite but not DSL, cable and fiber.
Plus, the RUS program had handed out less than half of the $2.5 billion it was allocated and was facing a Sept. 30 deadline to do so, Campbell noted. None of the first round's money went to Vermont, which, he suggested, might have made RUS officials eager to find a worthy recipient.
“They hadn't awarded any proposals in Vermont, and VTel came in with a big one that met, generally, the needs in Vermont.”
Powerful Supporters
VTel also had its congressional delegation and state governor working hard on its behalf. VTel was the only “last mile” project -- those that bring broadband service directly to homes, businesses, etc. -- that Douglas endorsed. It's also the only last-mile project that sought the governor's endorsement in the second round of stimulus money, according to David Coriell, spokesman for Douglas.
In a May 12 letter to the USDA, Douglas championed the company as having “an excellent track record of service to Vermonters and investment in Vermont infrastructure,” pointing to the company's total infrastructure investment of more than $100 million.
Around the same time, Leahy joined Sanders and Welch in a joint letter of support to the USDA and U.S. Department of Commerce for giving stimulus money to expand broadband in Vermont.
The letter was sent to Jonathan Adelstein, administrator of USDA's Rural Utilities Service, and Lawrence Strickling, assistant secretary of the Commerce Department's National Telecommunications and Information Administration.
Welch, Sanders and Leahy listed six projects seeking funds, including the Waitsfield Champlain Valley project, the EC Fiber proposal and one from the Vermont Telecommunications Authority. Two VTel projects were on the list. One, the middle-mile project called “Vt. Bell,” was seeking $13.7 million from the Department of Commerce's NTIA. The other was the $116.8 million it wanted through the USDA.
In the end, four projects got money. The VTA won the $33.4 million grant it wanted for mid-mile fiber. Waitsfield got its $5.6 million. And both VTel projects were approved for amounts just shy of what the company wanted.
Leslie Cadwell, the telecommunications director at the Vermont Department of Public Service, has not been a VTel cheerleader. She was the DPS attorney in a rate case against VTel in 1997. It was determined that the telephone company paid for company expenses, including artwork and leisure travel, with the revenue generated by service rates. The case resulted in the reduction of about $750,000 from the company's rate revenue, meaning a refund of about $3 per phone line to customers.
That being said, Cadwell commended Guite on his ability to anticipate competitive pressures, pointing to the company's rollout of DSL service years ago and to the subsequent accumulation of broadband spectrum for the wireless network.
On VTel's stimulus success, she said: “I think it's a terrific thing for Vermont.”
Cue the Critics
Not everyone is so enthused about the federal government doling out its millions for a fiber-to-the-home build-out in one small piece of the state and a wireless network to cover everyone else.
Nulty, of ECFiber, called it “a foolish waste of money,” pointing to the large amount of stimulus money -- about $70 million -- that would mean fiber only for VTel customers who already have DSL and an increased profit for an already profitable company.
Nonprofit startup efforts, like ECFiber, have been left out in the cold in the stimulus process, he said.
In contrast to VTel, which is a privately owned Delaware company, ECFiber is a collaboration of 23 towns that seek to build a municipally owned fiber-to-the-home network. On Town Meeting Day 2008, the project received enthusiastic approval in the form of landslide votes in favor of participation, but it has since struggled to find funding after the market crash.
In ECFiber's 23 towns, there are 22,259 households, according to 2000 Census data on the ECFiber Web site. Of them, 4,918 households have pre-registered for the service.
ECFiber's application for a $44 million loan and grant package would have built out the network in 18 towns. Though there are technically 23 towns involved in the ECFiber project, only 18 could be included in the USDA application because of its restrictions.
To be eligible for the funding, at least 75 percent of the proposed projects' area had to be considered rural by the RUS definition, with at least 50 percent of those rural premises not having access to “high-speed broadband service.” High-speed broadband is defined as a minimum of 5 megabits per second (combined downloading and uploading speed).
ECFiber no longer harbors hope for stimulus money, Nulty said. It has moved on by preparing to build a pilot project in the coming months to prove the model to potential private investors.
Wireless Vs. Fiber
Many questions are yet to be answered on what exactly VTel's wireless network will mean for rural Vermonters.
Will it be fast enough to attract businesses? Will it be reliable? Will it really reach everyone?
In many ways, Vermont is merely a small player in a national debate on how to best provide broadband in rural areas -- wireless or fiber? Critics of wireless say it's too slow and unreliable to attract businesses. Even its defenders, such as Guite, generally concede that fiber is faster. But they acknowledge that fiber is too expensive to build out into rural areas.
The type of fourth-generation wireless that VTel is planning to build -- called LTE, or long-term evolution -- has a theoretical maximum download speed of 100 megabits per second, which is much faster than most current wireless. Fiber is generally acknowledged as having a higher ceiling for speed, ranging far beyond 100 megabits per second.
In terms of actual speed, Guite said: “I don't see why anyone would be less than 10 megabits per second.”
As a point of reference, the download speed of DSL typically maxes out at 7 or 8 megabits per second, and premium cable ranges up to about 15 to 20 megabits per second, according to various download speed projections.
Dial-up Internet service has a download speed of 56 kilobits per second. A megabit equates to 1,024 kilobits; extremely slow Internet speeds are typically referred to in kilobits instead of megabits.
But the actual speed of VTel's wireless is difficult to predict for many reasons, said Campbell, of the VTA. Factors including the distance between home and cell tower, the number of users sharing the signal and obstructions in between, all could influence the speed of a wireless network.
Verizon, which is bracing to deploy the same type of wireless network nationwide by 2013, is predicting speeds of 5 to 12 megabits per second.
“We don't know exactly how this is going to sugar off in terms of speed,” Campbell said.
Building a wireless network as the primary source of broadband in a rural area can be a vast improvement over dial-up service, but it's “an intermediate solution to a long-term problem,” said Andrew Cohill, president and CEO of Design Nine, a Virginia-based telecommunications consultant.
Cohill's company is helping design the network for New Hampshire Fastroads, a group of some 43 New Hampshire towns working to build out a fiber network. Though Fastroads focuses on fiber, Cohill described his company as “technology agnostic,” and said it is also working on wireless projects in other states.
“Wireless is very important in rural areas because lots of people are still on dial-up,” Cohill said. “It provides improved services very quickly.”
And wireless meets the increasing consumer need for mobile technology such as iPhones, Kindles and Androids, he said. But it lacks the bandwidth for service fast enough to encourage economic growth.
“How are you going to attract the next generation of businesses when you have pretty good wireless but no fiber” in some parts of the state? Cohill asked.
The discussion is further complicated by the fact that there are no working models of exactly what VTel is proposing to do. The technology is new and relatively untested, said Stephen Schultze, associate director of Princeton University's Center for Information Technology Policy. But, he adds, it has great potential.
“It's significant because it starts at a higher speed than any wireless we've ever seen before,” Schultze said. “And the platform can be easily upgraded in the future -- that's why it’s called ‘long term evolution.’ ”
Still, wireless technology is not likely to keep pace with fiber speed, he said. But the need for both types of service is becoming increasingly evident, as well.
“More and more, people are expecting to get home-like Internet while they're on the road,” he said. “That's a critical part of economic growth, too, and fiber is inherently limited in that way, while being generally superior in other ways. I can't drive around with my fiber.”
“In a perfect world, we would all have fiber to our homes. But in the real world, we need a combination of wired and wireless.”
Guite himself admitted a bias toward fiber over wireless.
“But you can't help but look at the huge growing number of people who say they don't need wired, they just need wireless,” he said.
Remaining Questions
There are still many open questions, including whether VTel is prepared, financially, to operate the system of this size once it is built.
VTel is a private company, a subsidiary of Delaware-based Vermont National Telephone Co., and so details about its financial condition are not available to the public. However, VTel does have to file an annual report with the Department of Public Service, which offers a basic profile of its in-state operations.
VTel currently spends $18.5 million to run its network, and brings in more than $20 million in operating revenue, according to the 2009 annual report. It claims no long-term debt, but the report doesn't say how much debt is held by Vermont National.
Guite said Vermont National borrowed $25 million 10 years ago, but would not say how much of that has been paid down, or whether it has borrowed beyond that.
Part of VTel's stimulus award includes a $35 million loan, and the company has to put up $30 million of its own capital. Guite said he'd also have to hire about 12 more full-time employees.
“Anybody with ($35 million) in new debt is at some risk,” Guite said. “There's nothing risk-free about this at all. We're really betting a lot.”
But the company will not become another FairPoint, he said.
“We wouldn't do this if we weren't expecting to get another 30,000 or 40,000 customers,” he said. “But simultaneously, if the economy collapses and we're struggling to stay afloat, and we had no more customers, could we afford to do this? Yes we could.”
The federal debt will be assumed by a new company, called VTel Wireless, that will govern the expanded fiber and wireless networks, Guite said. The stimulus money cannot be used for operating costs -- only the project's construction. After that, the network is VTel's financial responsibility, and its potential financial gain.
The project must be fully completed within three years of the award date, according to the RUS application. But there are some questions over regulation.
Wireless companies are still required to get a certificate of public good from the Public Service Board, said Cadwell of the Department of Public Service. But there is no regulation of wireless rates.
“I think it remains to be seen what type of regulation would apply. We'll know better once more details of the project and the proposed services VTel offers are fleshed out (before the Public Service Board) and known,” Cadwell said in an e-mail.
Then there is the gamble on the technology. Guite is certain about the fiber portion. He said he has a bias toward “a wired solution” and figures, no matter how much wireless frequency the FCC allocates, fiber is always going to be faster.
So why not just expand fiber everywhere?
“The economics just don't work,” he said. “The operating costs just don't cover the revenues that you could possibly get. It just doesn't work in the model.”
Both Cohill, of Design Nine, and Nulty, of ECFiber, painted another picture entirely. If one were to conduct a 30-year cost analysis of fiber as opposed to wireless, fiber is the better long-term investment, Cohill said.
And Nulty said the revenue potential in the incredibly fast fiber optic cables far outgains that of wireless service.
Both sides are right, according to Princeton's Schultze. Though no definitive cost-benefit analysis has yet been done, he said, it is generally accepted that fiber is superior in some ways but more expensive to immediately deploy in rural areas.
“Some sort of hybrid approach is necessary,” Schultze said. “We're not going to get 100 percent wired. I don't think an absolutist position on either side is the most efficient approach.”
In an e-mail to the Valley News, Sanders acknowledged the challenges of figuring out which technology was best for providing broadband access throughout the state, as well as who is best to provide it. He was convinced, however, that the government needed to be involved.
“We can argue about the best way for local, state and federal governments to participate, but there is no question in my mind that government needs to be involved,” the senator said.
There are some remaining concerns, he added, which Sanders said he has discussed with Adelstein of the USDA. Those concerns include ensuring that the service is affordable, that the project is done in a timely manner, and that the process is transparent.
“With substantial taxpayer funds involved, the people of Vermont have a right to know how the VTel project will evolve and have input into the process,” Sanders said.
Sanders said he was planning a town meeting to discuss the issue in depth and allow people to make comments and ask questions.
There is still much to be considered and worked out before Vermont has the statewide coverage that VTel has promised. Cadwell said she was confident VTel would accomplish what it has set out to do.
“In my experience, Michel (Guite) has delivered on his promises to bring VTel customers good quality, advanced services that are poised to compete with the big communications players,” she said. “For those wanting to see the ‘eState' a reality, we should not lose sight of this point and VTel's potential to help make it happen.”
Jeremiah Millay, left, a network engineer, and Justin Robinson, vice president of engineering, work at their desks at VTel’s office in Springfield, Vt., on Tuesday.
(Valley News — Jennifer Hauck)
How VTel Got Stimulus Millions
By Chris Fleisher and Gregory Trotter
Valley News Staff Writers
Springfield, Vt. -- When Vermont Telephone Co. recently won $116 million in federal stimulus funds to expand high-speed Internet service throughout the state, the news was met with praise that bordered on the breathless.
Rep. Peter Welch predicted a “broadband revolution.” Sen. Patrick Leahy called the project a “game-changing network” and said the grant “ranks among the most promising breakthroughs in rural economic development since rural electrification” in the 1930s. It would create “hundreds of new jobs,” added Sen. Bernie Sanders.
The federal funds would help the telecom make Vermont the first state in the nation in which every resident would have high-speed Internet access, boosters said. It would be the great equalizer for rural communities.
But some communities -- not to mention the rural telephone companies that serve them -- would be more equal than others.
The total cost of the project is estimated at $146 million (VTel is contributing $30 million). Nearly half of that total -- $70 million -- will go not to provide broadband to Internet-starved customers in rural corners of Vermont, but instead to benefit VTel's 18,000 existing customers, who already enjoy high-speed service. State-of-the-art fiber optic connections will give them the fastest Internet access in the world -- allowing them, for instance, to download the movie The Godfather in a few seconds — VTel President Michel Guite said in an interview with the Valley News.
The other half of the money will go to the part of the project that has received the most attention thus far: Internet access beamed from wireless towers across the state that could help the 114,000 Vermonters who currently have slow or no Internet connections, Guite said.
“The first state in America where absolutely everybody gets coverage,” declared Guite.
While the wireless system would represent a significant improvement for those businesses and homeowners, Guite acknowledges that it won't be as consistently fast and reliable as hard-wired lines. Critics wonder whether the wireless portion of his plan represents a short-term fix to a long-term problem. Others wonder why for-profit enterprises should get taxpayer-funded assistance.
“I have a philosophical problem with giving free taxpayer money to private companies and letting them keep the profits,” said Tim Nulty, chief executive officer of ECFiber, a municipal effort to build a fiber network in eastern and central Vermont.
“And this isn't peculiar to Guite and VTel, this is all over the country. A large part of the stimulus has been hijacked,” Nulty said.
Leahy's spokesman, David Carle, defended the senator's support of these programs. He said Leahy's primary goal was to ensure that “Vermont got its fair share” of stimulus funds and that Vermonters would benefit from improved access to broadband.
Leahy believes “nonprofit, public and private broadband providers all have roles in broadband expansion,” Carle said in an e-mail to the Valley News, “and that while some broadband technologies are superior to others, there is a place for varied technologies from wireless, to fiber (and) everything in between if it means the difference between leaving Vermonters disconnected or giving them social and economic opportunity through broadband access.”
There also is the question of whether a small company like VTel, with just 70 employees, will be able to pull off such a massive expansion of Vermont's broadband capabilities.
Even Guite knows his project is a gamble.
“Increasingly it's a game for giants, and increasingly, it's difficult for a new player to succeed against T-Mobile, AT&T and Verizon,” Guite acknowledged in an interview. “Even though there's hundreds of little operators, there’s fewer every day, and so can you really compete? That remains to be seen, but that's the bet we’re taking and it’s not without risk.”
Try, Try Again
As risks go, though, there's a very big safety net.
When VTel made its first bid for some of the federal stimulus money intended to jump-start a sputtering economy, the company asked for about $56.6 million, mostly to finance the $70 million project of extending fiber optic lines to the telecom's existing customers, located in and around Springfield, Vt. The plan also called for developing a wireless network to reach customers in southern Vermont.
That effort failed to capture the imagination of the government officials in charge of the cash. Application denied.
Guite was not deterred. He submitted a new application that contained the original project and added a bold twist.
Instead of providing a new wireless network only for southern Vermont, the company sought to broadcast wireless Internet throughout the entire state, into all the hills and hollows of rural Vermont, and even extending into eastern New York and western New Hampshire. Guite and his colleagues requested $116.8 million in grants and loans to accomplish this goal.
(As part of the deal, VTel has agreed to chip in $30 million of its own money in the form of matching equity, including wireless licenses it already owns, bringing the total project cost to about $146 million.)
VTel also had received $12.3 million of stimulus money earlier in the summer to build a so-called “middle-mile” fiber optic network -- infrastructure that doesn't necessarily serve customers directly but serves as a kind of backbone -- to connect schools and hospitals in communities including Essex, Stowe, New Haven and Berlin. VTel is contributing $6 million of equity to that project.
“How do you get ubiquity of broadband? Because Vermont has a small footprint, here was a way for $100 million-plus dollars to get absolutely everybody,” Guite said.
While $70 million of the total project costs will be spent deploying a fiber-to-the-home network in VTel's backyard, Guite said, the balance will enable the company to broadcast cutting-edge “fourth generation” wireless throughout the state.
The plan is to build as few towers as possible and to run fiber optic wire, or in some cases, microwave mesh wire, to many of the existing 300 or so cell phone towers in Vermont. In some remote communities, there will be wireless bay stations installed in creative places -- such as atop town halls, church steeples and granaries -- to strengthen the signal, Guite said.
It helps that Vermont Telephone Co. has been acquiring broadband spectrum -- like radio frequencies for broadband signals -- since the late 1990s through FCC auctions. It now has sufficient spectrum to cover the entire state, Guite said.
Getting the Money
VTel wasn't the only Vermont winner in the broadband stimulus sweepstakes, but it certainly gained the most.
Waitsfield Champlain Valley Telecom, a company of comparable size (20,000 customers), was awarded $5.6 million for a smaller fiber-to-the-home project that would serve 1,385 rural customers in Washington, Addison and Chittenden counties.
ECFiber, a collaboration of 23 towns that seeks to build municipally owned fiber-to-the-home network, requested $44 million in grants and loans but was shut out for the second consecutive round of stimulus money.
Funding came through the second round of awards for U.S. Department of Agriculture's Rural Utilities Service Broadband Initiatives Program. Just over $1 billion was distributed in the first round, leaving it about $1.5 billion left to commit by Sept. 30, the mandated deadline under the American Recovery and Reinvestment Act. There's $500 million in broadband money left to be obligated by the end of September, according to the USDA.
The USDA, citing proprietary financial information, has so far declined to provide details about VTel's application or the team of officials that reviewed it. In an e-mail to the Valley News, USDA spokesman Bartel Kendrick said only that it was “in-house professional staff.”
When asked why VTel was approved for that quantity of money, Kendrick said applications are reviewed based on their merits, as well as their compliance with application requirements and the ability to provide broadband to unserved and underserved communities. In VTel's case, the “subject application responded to the set specifications for meeting requirements in the area,” Kendrick said.
According to Guite, his application sailed through the process.
The fact that VTel already had the spectrum to accomplish the statewide wireless network likely was critical to the success of its application, said Tom Evslin, chief technology officer for Gov. Jim Douglas.
“It's the equivalent to being shovel-ready,” Evslin said. “It's evidence of VTel's commitment and investment.”
Applications for Rural Utilities Service broadband money in round two were evaluated according to a system with 12 “scoring criteria,” outlined in a 109-page application guide available on USDA's Web site, www.usda.gov.
For example, VTel's application was judged on the proportion of rural residents its project would serve in unserved areas of the state, how well the project would work in cooperation with other stimulus projects, the level of service VTel would provide, service to “small disadvantaged businesses,” organizational capability, etc.
Chris Campbell, executive director of the Vermont Telecommunications Authority, a 3-year-old agency charged with expanding Internet and mobile phone service in the state, didn't work with VTel on the application, and he had no role in the process of awarding its funds. But looking at what VTel says it wants to do, he said, the company could have come out ahead in several areas.
“VTel has a very big proposal. It's a proposal that addresses most of the unserved areas in Vermont,” Campbell said.
Both Evslin and Campbell said the sheer magnitude of VTel's project could have played a major role in its success. VTel's $116 million could help connect 114,000 unserved households throughout the state, Guite said.
The other two projects were less ambitious. ECFiber aimed to connect 6,491 unserved premises with its application; Waitsfield Champlain Valley will not be connecting any unserved people, but instead rolling out fiber to 1,385 existing customers with DSL, according to officials with both companies.
Still, unlike ECFiber, Waitsfield Champlain Valley got the full amount it requested.
Some of those 1,385 customers are considered “underserved,” meaning they have DSL but experience slower Internet service because they live in more remote areas, said Kurt Gruendling, vice president of marketing for the company. None of the customers who could benefit are considered “unserved” by the RUS definition.
The RUS application defined minimum broadband speed as 768 kilobits per second downloading and 200 kilobits per second uploading. Unserved customers, by definition, are people who don't have access to at least that. As a point of reference, 968 kilobits per second (the combined upload and download speed) is generally recognized as being faster than dial-up and satellite but not DSL, cable and fiber.
Plus, the RUS program had handed out less than half of the $2.5 billion it was allocated and was facing a Sept. 30 deadline to do so, Campbell noted. None of the first round's money went to Vermont, which, he suggested, might have made RUS officials eager to find a worthy recipient.
“They hadn't awarded any proposals in Vermont, and VTel came in with a big one that met, generally, the needs in Vermont.”
Powerful Supporters
VTel also had its congressional delegation and state governor working hard on its behalf. VTel was the only “last mile” project -- those that bring broadband service directly to homes, businesses, etc. -- that Douglas endorsed. It's also the only last-mile project that sought the governor's endorsement in the second round of stimulus money, according to David Coriell, spokesman for Douglas.
In a May 12 letter to the USDA, Douglas championed the company as having “an excellent track record of service to Vermonters and investment in Vermont infrastructure,” pointing to the company's total infrastructure investment of more than $100 million.
Around the same time, Leahy joined Sanders and Welch in a joint letter of support to the USDA and U.S. Department of Commerce for giving stimulus money to expand broadband in Vermont.
The letter was sent to Jonathan Adelstein, administrator of USDA's Rural Utilities Service, and Lawrence Strickling, assistant secretary of the Commerce Department's National Telecommunications and Information Administration.
Welch, Sanders and Leahy listed six projects seeking funds, including the Waitsfield Champlain Valley project, the EC Fiber proposal and one from the Vermont Telecommunications Authority. Two VTel projects were on the list. One, the middle-mile project called “Vt. Bell,” was seeking $13.7 million from the Department of Commerce's NTIA. The other was the $116.8 million it wanted through the USDA.
In the end, four projects got money. The VTA won the $33.4 million grant it wanted for mid-mile fiber. Waitsfield got its $5.6 million. And both VTel projects were approved for amounts just shy of what the company wanted.
Leslie Cadwell, the telecommunications director at the Vermont Department of Public Service, has not been a VTel cheerleader. She was the DPS attorney in a rate case against VTel in 1997. It was determined that the telephone company paid for company expenses, including artwork and leisure travel, with the revenue generated by service rates. The case resulted in the reduction of about $750,000 from the company's rate revenue, meaning a refund of about $3 per phone line to customers.
That being said, Cadwell commended Guite on his ability to anticipate competitive pressures, pointing to the company's rollout of DSL service years ago and to the subsequent accumulation of broadband spectrum for the wireless network.
On VTel's stimulus success, she said: “I think it's a terrific thing for Vermont.”
Cue the Critics
Not everyone is so enthused about the federal government doling out its millions for a fiber-to-the-home build-out in one small piece of the state and a wireless network to cover everyone else.
Nulty, of ECFiber, called it “a foolish waste of money,” pointing to the large amount of stimulus money -- about $70 million -- that would mean fiber only for VTel customers who already have DSL and an increased profit for an already profitable company.
Nonprofit startup efforts, like ECFiber, have been left out in the cold in the stimulus process, he said.
In contrast to VTel, which is a privately owned Delaware company, ECFiber is a collaboration of 23 towns that seek to build a municipally owned fiber-to-the-home network. On Town Meeting Day 2008, the project received enthusiastic approval in the form of landslide votes in favor of participation, but it has since struggled to find funding after the market crash.
In ECFiber's 23 towns, there are 22,259 households, according to 2000 Census data on the ECFiber Web site. Of them, 4,918 households have pre-registered for the service.
ECFiber's application for a $44 million loan and grant package would have built out the network in 18 towns. Though there are technically 23 towns involved in the ECFiber project, only 18 could be included in the USDA application because of its restrictions.
To be eligible for the funding, at least 75 percent of the proposed projects' area had to be considered rural by the RUS definition, with at least 50 percent of those rural premises not having access to “high-speed broadband service.” High-speed broadband is defined as a minimum of 5 megabits per second (combined downloading and uploading speed).
ECFiber no longer harbors hope for stimulus money, Nulty said. It has moved on by preparing to build a pilot project in the coming months to prove the model to potential private investors.
Wireless Vs. Fiber
Many questions are yet to be answered on what exactly VTel's wireless network will mean for rural Vermonters.
Will it be fast enough to attract businesses? Will it be reliable? Will it really reach everyone?
In many ways, Vermont is merely a small player in a national debate on how to best provide broadband in rural areas -- wireless or fiber? Critics of wireless say it's too slow and unreliable to attract businesses. Even its defenders, such as Guite, generally concede that fiber is faster. But they acknowledge that fiber is too expensive to build out into rural areas.
The type of fourth-generation wireless that VTel is planning to build -- called LTE, or long-term evolution -- has a theoretical maximum download speed of 100 megabits per second, which is much faster than most current wireless. Fiber is generally acknowledged as having a higher ceiling for speed, ranging far beyond 100 megabits per second.
In terms of actual speed, Guite said: “I don't see why anyone would be less than 10 megabits per second.”
As a point of reference, the download speed of DSL typically maxes out at 7 or 8 megabits per second, and premium cable ranges up to about 15 to 20 megabits per second, according to various download speed projections.
Dial-up Internet service has a download speed of 56 kilobits per second. A megabit equates to 1,024 kilobits; extremely slow Internet speeds are typically referred to in kilobits instead of megabits.
But the actual speed of VTel's wireless is difficult to predict for many reasons, said Campbell, of the VTA. Factors including the distance between home and cell tower, the number of users sharing the signal and obstructions in between, all could influence the speed of a wireless network.
Verizon, which is bracing to deploy the same type of wireless network nationwide by 2013, is predicting speeds of 5 to 12 megabits per second.
“We don't know exactly how this is going to sugar off in terms of speed,” Campbell said.
Building a wireless network as the primary source of broadband in a rural area can be a vast improvement over dial-up service, but it's “an intermediate solution to a long-term problem,” said Andrew Cohill, president and CEO of Design Nine, a Virginia-based telecommunications consultant.
Cohill's company is helping design the network for New Hampshire Fastroads, a group of some 43 New Hampshire towns working to build out a fiber network. Though Fastroads focuses on fiber, Cohill described his company as “technology agnostic,” and said it is also working on wireless projects in other states.
“Wireless is very important in rural areas because lots of people are still on dial-up,” Cohill said. “It provides improved services very quickly.”
And wireless meets the increasing consumer need for mobile technology such as iPhones, Kindles and Androids, he said. But it lacks the bandwidth for service fast enough to encourage economic growth.
“How are you going to attract the next generation of businesses when you have pretty good wireless but no fiber” in some parts of the state? Cohill asked.
The discussion is further complicated by the fact that there are no working models of exactly what VTel is proposing to do. The technology is new and relatively untested, said Stephen Schultze, associate director of Princeton University's Center for Information Technology Policy. But, he adds, it has great potential.
“It's significant because it starts at a higher speed than any wireless we've ever seen before,” Schultze said. “And the platform can be easily upgraded in the future -- that's why it’s called ‘long term evolution.’ ”
Still, wireless technology is not likely to keep pace with fiber speed, he said. But the need for both types of service is becoming increasingly evident, as well.
“More and more, people are expecting to get home-like Internet while they're on the road,” he said. “That's a critical part of economic growth, too, and fiber is inherently limited in that way, while being generally superior in other ways. I can't drive around with my fiber.”
“In a perfect world, we would all have fiber to our homes. But in the real world, we need a combination of wired and wireless.”
Guite himself admitted a bias toward fiber over wireless.
“But you can't help but look at the huge growing number of people who say they don't need wired, they just need wireless,” he said.
Remaining Questions
There are still many open questions, including whether VTel is prepared, financially, to operate the system of this size once it is built.
VTel is a private company, a subsidiary of Delaware-based Vermont National Telephone Co., and so details about its financial condition are not available to the public. However, VTel does have to file an annual report with the Department of Public Service, which offers a basic profile of its in-state operations.
VTel currently spends $18.5 million to run its network, and brings in more than $20 million in operating revenue, according to the 2009 annual report. It claims no long-term debt, but the report doesn't say how much debt is held by Vermont National.
Guite said Vermont National borrowed $25 million 10 years ago, but would not say how much of that has been paid down, or whether it has borrowed beyond that.
Part of VTel's stimulus award includes a $35 million loan, and the company has to put up $30 million of its own capital. Guite said he'd also have to hire about 12 more full-time employees.
“Anybody with ($35 million) in new debt is at some risk,” Guite said. “There's nothing risk-free about this at all. We're really betting a lot.”
But the company will not become another FairPoint, he said.
“We wouldn't do this if we weren't expecting to get another 30,000 or 40,000 customers,” he said. “But simultaneously, if the economy collapses and we're struggling to stay afloat, and we had no more customers, could we afford to do this? Yes we could.”
The federal debt will be assumed by a new company, called VTel Wireless, that will govern the expanded fiber and wireless networks, Guite said. The stimulus money cannot be used for operating costs -- only the project's construction. After that, the network is VTel's financial responsibility, and its potential financial gain.
The project must be fully completed within three years of the award date, according to the RUS application. But there are some questions over regulation.
Wireless companies are still required to get a certificate of public good from the Public Service Board, said Cadwell of the Department of Public Service. But there is no regulation of wireless rates.
“I think it remains to be seen what type of regulation would apply. We'll know better once more details of the project and the proposed services VTel offers are fleshed out (before the Public Service Board) and known,” Cadwell said in an e-mail.
Then there is the gamble on the technology. Guite is certain about the fiber portion. He said he has a bias toward “a wired solution” and figures, no matter how much wireless frequency the FCC allocates, fiber is always going to be faster.
So why not just expand fiber everywhere?
“The economics just don't work,” he said. “The operating costs just don't cover the revenues that you could possibly get. It just doesn't work in the model.”
Both Cohill, of Design Nine, and Nulty, of ECFiber, painted another picture entirely. If one were to conduct a 30-year cost analysis of fiber as opposed to wireless, fiber is the better long-term investment, Cohill said.
And Nulty said the revenue potential in the incredibly fast fiber optic cables far outgains that of wireless service.
Both sides are right, according to Princeton's Schultze. Though no definitive cost-benefit analysis has yet been done, he said, it is generally accepted that fiber is superior in some ways but more expensive to immediately deploy in rural areas.
“Some sort of hybrid approach is necessary,” Schultze said. “We're not going to get 100 percent wired. I don't think an absolutist position on either side is the most efficient approach.”
In an e-mail to the Valley News, Sanders acknowledged the challenges of figuring out which technology was best for providing broadband access throughout the state, as well as who is best to provide it. He was convinced, however, that the government needed to be involved.
“We can argue about the best way for local, state and federal governments to participate, but there is no question in my mind that government needs to be involved,” the senator said.
There are some remaining concerns, he added, which Sanders said he has discussed with Adelstein of the USDA. Those concerns include ensuring that the service is affordable, that the project is done in a timely manner, and that the process is transparent.
“With substantial taxpayer funds involved, the people of Vermont have a right to know how the VTel project will evolve and have input into the process,” Sanders said.
Sanders said he was planning a town meeting to discuss the issue in depth and allow people to make comments and ask questions.
There is still much to be considered and worked out before Vermont has the statewide coverage that VTel has promised. Cadwell said she was confident VTel would accomplish what it has set out to do.
“In my experience, Michel (Guite) has delivered on his promises to bring VTel customers good quality, advanced services that are poised to compete with the big communications players,” she said. “For those wanting to see the ‘eState' a reality, we should not lose sight of this point and VTel's potential to help make it happen.”
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