This is episode 225 of the Community Broadband Bits. Representatives of Midwest Energy Cooperative discuss their project to bring high-speed connectivity to rural southwest Michigan. Listen to this episode here.
Dave Allen: I really see this as a re-lighting of rural America.
Lisa Gonzalez: This is episode 225 of the Community Broadband Bits podcast, from the Institute for Local Self-Reliance. I'm Lisa Gonzalez. There's a project taking shape in rural southwest Michigan and the nearby regions of Indiana and Ohio. It's headed up by the Midwest Energy Cooperative. At the recent Broadband Communities Economic Development Conference in Minneapolis, Chris ran into Bob Hance, President and CEO of the cooperative, and Dave Allen, the cooperative's Vice President of Regulatory Compliance. Naturally, we wanted to hear more about their project and share the details with you. They provide some history and how access to high quality connectivity has positively impacted a number of their rural members. Chris, Bob, and Dave also have some interesting thoughts on federal funding programs, project standards, and the different rules for cooperatives and big corporate providers. Learn more about the project at teamfiber.com, where you can also discover more about the cooperative. Now you may notice some background noise. We apologize in advance. While we advocate for local choice and access to technology, sometimes technology is just not on our side. We had a little trouble with the mic that day. Also, Chris is suffering from allergies, and until winter sets in, he may sound a little like the late Howard Cosell, but never fear, it is our Christopher. Now, here with Chris are Bob Hance, President and CEO, and Dave Allen, Vice President of Regulatory Compliance for Midwest Energy Cooperative.
Christopher Mitchell: Welcome to another edition of the Community Broadband Bits podcast. I'm Chris Mitchell. Today, I'm speaking with two folks from Michigan. Bob Hance, the President and CEO of Midwest Energy Cooperative. Welcome to the show.
Bob Hance: Thank you.
Christopher Mitchell: And Dave Allen, the Vice President of Regulatory Compliance for the Cooperative. Welcome to the show.
Dave Allen: Thanks, Chris. Good to see you out in Minneapolis.
Christopher Mitchell: Yes, Dave, it was terrific to run into you and to learn more about your approach.
Bob Hance: Not many people say that, Chris.
Christopher Mitchell: Well, I'm happy to be the one. Now your cooperative is really leading Michigan, in terms of delivering high quality Internet access. Can you tell us about your regions that you serve?
Dave Allen: I can touch on the areas that we serve and set that up. Bob does a great job of talking about our history in the communication space. Midwest Energy serves twelve counties. Eight of those in Michigan, three in Indiana, and another two in Ohio. We have two distinct service areas. One in southeast Michigan, and one in southwest Michigan. The area we’re really focusing on, in terms of our initial phase of this project, is the southwest Michigan district. That scenario's characterized by Notre Dame, down in Indiana and South Bend, and you can go in a northeasterly direction toward Kalamazoo and southwest Michigan. We're those counties that fall in between that space. The area is really kind of identified by Whirlpool's world headquarters. Kellogg world headquarters is nearby in Battle Creek. We've got Pfizer up in Kalamazoo. A lot of industry that is in the area but not in our direct service footprint. The areas we serve are more rural areas, more characterized by seed corn industry, and perhaps to the south, the RV industry. My point being is that we are extremely rural. We probably serve about eight members per mile, but we do have large industry that's in the area that lives in our service footprint and really have a need for access to high speed broadband.
Christopher Mitchell: I have to point out that after talking with some of the telephone cooperatives here in Minnesota, eight people a mile is a positive luxury in some cases.
Dave Allen: In terms of municipals are 60-some-odd customers per mile. Investor on utilities run on the 30 members or customers per mile range. So at eight customers per mile, that's still pretty rural.
Christopher Mitchell: I think that a rule of thumb has been that you make money when you have eleven people per linear mile or more with a private sector business plan, but not if you have less than eleven people per mile. But let's talk about your history of offering communications services.
Bob Hance: Technically, we've been an active ISP since the mid-90's. That was all brought upon by a relationship we had with Trans World Network. We provided third party long distance, as well as ISP services through dial-up. As the Internet progressed, and people became more and more in tune with all things related to the electronic world and personal computers and the mobile devices that we have today, obviously dial-up service was just not going to be the thing of the future. So over time, we've had many, many folks who have left that to go to other options, including satellite, which we've entered in to providing terrestrial broadband, thinking that that was going to be a possible solution to the rural space that we were in, and a good replacement for dial-up. Unfortunately, we ran into problems such as limited band availability in the service territories that we were trying to serve. We had numbers of people who had signed up for that service but were let down because the capacity of the satellite just was not going to reach the demand. And even though they launched the second satellite, we ran into the same problem with that and eventually moved on to phase number three, if you will, with trying to provide rural America with some semblance of broadband. And that was broadband over power line. We were one of nine co-ops that were involved with a company called IBEC that was a single source provider of equipment and a process that would provide a signal across the power line. So an injection on our current equipment that sounded very promising as well. Unfortunately, we were two years into it and finally started to get past some of the technical issues that came with broadband over power lines when IBEC announced that they were bankrupt. That was back in December 2011. So here we have a few hundred people who had been hooked up with satellite and broadband over power line, and instead of abandoning them entirely, we just went back to the drawing board and said, "What's next?" Interestingly enough, at the same time, separate from communications, our utility folks, which includes me, were kicking around what we were going to do with respect to our needs in communications for the electric space. We have an active SCADA system. We know what's going to happen with the further smartening of the grid. So clearly utilities have been using various forms of communications between substations and their corporate offices at headquarters to get data back from the field. Eventually the light comes on and we say, "If we put in this fiber system, we take care of our utility needs, and at the same time, we can leverage that with the opportunity to replace what we've been trying to do by providing a true broadband to our membership, which married quite well together I can say."
Christopher Mitchell: Well, it's interesting because I think almost all electric utilities are involved in communications for internal needs, but there is a split between those who see themselves purely as an electricity co-op and not interested in doing anything externally, and then those that see themselves as more technology driven and bringing the technology of the day to their members. Is that your experience?
Bob Hance: I think you're spot on. I think those are the conversations that have been had across the country. I like to see it as we're doing what is required to continue to serve our membership in a relevant way. I'll just exercise that a little bit by saying that if not for the insistence of them for the last several years that we look at ways to provide them this service, I don't know that we would have. I think our principle responsibility and our duty is to our membership, and if the membership is asking us to consider other products and services that make being part of the rural landscape more enjoyable, more affordable, more reasonable for them, that's what we ought to do.
Christopher Mitchell: Dave, do you have anything to add on that?
Dave Allen: Yeah, just to add to that, we don't have an annual meeting per say, but we have district meetings where Bob goes out and engages our membership. And over the course of probably the last three or four years, the questions trended away from anything having to deal with electricity and more toward can you provide a broadband solution. We have a lot of folks out here that are on air cards. I think there are still some people on dial-up and folks utilizing satellite ... frustrations with usage allowances, with costs, with reliability, all these things that enter into the equation. They are just tired and fed up with that, so increasingly they have asked us to enter that communication space, where in all honesty, we were comfortable remaining an electric co-op. So we're a little bit of a reluctant participant. But there are a lot of things going on with respect to energy too, and Bob touched on some of the smart grid things we're doing. We have to do a better of helping people manage their energy use better, so this is one component of that.
Christopher Mitchell: I understand that you are not alone. There are other cooperatives in Michigan that are interested in working together to improve Internet access?
Bob Hance: We are working in conjunction with the other electric co-ops in Michigan. There are nine of us, specifically. A number of them are going through this process of evaluating from a conceptual standpoint. Maybe moving forward they are doing their due diligence. There are some surveys that have been presented to the memberships. At least three of them are fairly active in this process, but of course it takes a little bit of time for them to walk through that. I think it's promising. I think they understand that we're here to help in any way. We're the example that is on their way with already building a project, so we're a ready resource, and a valuable resource in their process. We'll see where it goes.
Christopher Mitchell: Thanks, Bob. I'm also curious if there is a difference in your members across different states in terms of appetites for delivering broadband or if the interest is pretty similar.
Bob Hance: Chris, I think there is interest from all kinds of areas. Even those co-ops that are serving closer to the suburban areas. What everyone understands, and you get this firsthand, is when Google showed up with this whole idea of Google-fying a city, or Google-fibering a city, and that whole contest that went on for the better part of two years, raised the specter of what does this mean, fiber, and what can this provide versus what we already have. This notion of this being like the technology that passes every other technology easily and to the extent that you can say it is future-proof, it just seems like there isn't any end to the desire of folks, even beyond our memberships, that would really like to get connected to fiber. If you look at who is signing up on our website, it is probably three to one right now. So for every three members that we have signing up to take service from us, we have a person signing up that is not an electric member of ours but is close enough to see what we're doing and hoping that they can get connected as well.
Christopher Mitchell: Interesting. You're getting pressure to expand even to people who are not members of the co-op at this point then.
Bob Hance: Yes, very much so. It's probably one of the hardest things for us to manage toward is this demand that is outside or external to our current footprint. And the strong desire for all these other people to get connected too.
Christopher Mitchell: I think that there are two key questions that come up. And Dave, I'd like to direct this to you first. In terms of a project like this, how do you finance it? There is a context here that rural areas have too little demand, and if you wanted to deliver high quality Internet access to them, it would be too costly. So how do you make it work?
Dave Allen: Well, in terms of your first question, our financing the project through member equity. We reached out to USDA, RUS, the Rural Utility Service, because as Bob mentioned earlier, we were looking at our need for better communications utilizing fiber. So we talked with the RUS about improving communications, utilizing fiber through our substations, through our facilities, and ultimately to the member home, and they agreed that that was a good purpose for us to pursue. You're looking at the clean power plan in the very near future in terms of what the ramifications might be to the users of electricity. Also in the state of Michigan, looking at a new energy bill, and our need really to help people manage their energy use better going forward. So that did resonate with the RUS, and ultimately, we're financing this project through an RUS work plan loan through the electric side. That provides us with the equity to pursue this project, which is going to be deployed over five years, running about 400 miles of fiber a year. As we're connecting homes, looking at those folks that would enjoy a voice or a data drop. So it's kind of an integrated project. Again, smart grid communications first and foremost for utility purposes, and then voice and data drops beyond that.
Bob Hance: You know our financial modeling bears the fact that we'll be cash positive after three years of building on our project, so we're very confident that despite the fact that we're in rural areas, there is an ability to realize a profit for the entity, so that beyond the five years, we can begin looking at those areas that are not an immediate part of our service footprint. It's been a very good and very positive project for us, and certainly resonates with members and non-members alike.
Christopher Mitchell: Let's clarify though Rural Utility Service financing. This is loan financing, right?
Dave Allen: Yeah, correct. We did receive a small, rural broadband experiment through the FCC. Bob has been very engaged in the past, advancing the notion that non-traditional providers of broadband services should be considered in the Connect America Fund, and as part of that, we applied for that rural broadband experiment, received a little more than $200,000. Probably the better part of that was just becoming eligible for the CAF phase 2 options, which will hopefully happen some time in 2017. But for the most part, yes, we are doing this through member equity, but there is an opportunity to engage CAF phase 2 and receive some funding that will really help us build out a little bit faster and perhaps consider some of the folks in those census blocks that we build out to that are not part of Midwest Energy.
Christopher Mitchell: Bob, I really want to make this very clear for everyone, that even though it took a tremendous amount of investment to take electricity to everyone, I don't think it really cost the American tax payers very much.
Bob Hance: I'm not trying to mix things together too much here. We have roughly $120,000,000 of plant that took us 80 years to build. What's interesting about this project is that although we are telling people that we're going to build 2,000 miles of fiber from scratch, and we're going to do it in five years, it doesn't seem to be fast enough. And the fact that it's nearly a $60,000,000 investment. So it can be done with the help of RUS, with respect to seeing the need and the opportunity, as Dave was projecting, the notion of smart grid and getting connections all the way to the home so that we can deal with in-home devices at some time in the future is invaluable.
Christopher Mitchell: That's right. The point that I really want to hit on is that when the federal government is giving out loans, the budgetary impact is quite small compared to other programs. The electric co-ops receive billions of dollars of loans, followed by billions of dollars in repayments over many years and over decades, so the interest rate may have been subsidized, but overall, this type of program seems like a very reasonable investment.
Bob Hance: When you think about bang for the buck, I can't imagine that there is another federal program that you could point to that has been as successful, or as deeply successful as the REA RUS program, bar none.
Christopher Mitchell: That's what I want to hear.
Bob Hance: You think about this over time and what was accomplished with loan dollars as you pointed out may be subsidized a little bit with respect to the interest rates, but when you see what we've accomplished and what we continue to accomplish with those loan dollars, and now carrying on the position as we did with the electric systems now with another product that is becoming more and increasingly important in the mix with respect to services to folks, we're just repeating what we did back in the 30's.
Christopher Mitchell: You mentioned the CAF 2 dollars. That's one of the ways that the federal communications division is giving out these grants, but as we move into the final question of this show, I want to talk about the response from your members to this service. But first, let's just finish the CAF 2 discussion by noting that the FCC has just given, without any hope of repayment, these are just grants, billions of dollars to the biggest private telephone companies so that they can build out to the obsolete 10 Megabit down, 1 Megabit up standard. You all got $200,000 to deliver much faster connections. Do your members appreciate the difference between what you're doing, versus what that 10 Megabit by 1 Megabit minimum is?
Bob Hance: Chris, I think unfortunately most folks don't get it. Most folks don't really understand what's really happening with Universal Service Fund and now CAF. I think there would be a country-wide outcry! I think you would have pitch forks and other things arriving in our nation's capital if they knew what we know. Dave and I, having gone to the FCC for the last almost four years now and seeing firsthand how quickly it is to throw $30 billion through the fan without ever giving a second thought to what we are getting for the $30 billion other than second class citizenry for our folks getting 10/1 when the rest of the country is moving toward these other standards. It's close to being criminal. I fashion it to be like you just shoved one of those metal objects into the sore part of my mouth. It's just crazy. Even with CAF 2 and the struggles we've had to help them get rules in place so that you have this stupid auction in the first place. And all the restrictions on $2 billion that they never put on the $30 billion. It's just crazy. It's ludicrous.
Christopher Mitchell: Dave, let me jump in quickly before you respond. I just want to make sure the people understand that making loan guarantees to co-ops requires a 10% budget hit. That is to say that doing $30 billion in loan guarantees requires budgeting only $3 billion. The $30 billion that is being misused from the CAF, from the Connect America Fund, that could have wired the entire country if it was spent in co-op loan guarantees. So now, Dave, can you please pile on?
Dave Allen: My only point in talking about the $30 billion, which has gone out the last 15 months to the price cap carries and rate of return carriers, is to point back to a conversation I had with Danna MacKenzie, who is the chief of Minnesota's broadband office, and they've set an appropriate benchmark of 25 download and 3 up, state-wide in terms of what they are promoting in the state of Minnesota, which is a national broadband standard. But of course that $30 billion went out with the only expectation that they build out to a 10/1 standard. So I had that chat with her, "Are you frustrated, are you disappointed?" And she said, "Immensely so." If the FCC from a policy standpoint had the intestinal fortitude to set that standard at 25/3, they essentially would have realized their goal well ahead of the date they had set, which I think was 2020 to hit that standard. Our frustration in going in and chatting with the FCC is, let's not set it at 10/1, let's at least set it at the broadband standard of 25/3 so that we can incent people to build out better networks like fiber going forward.
Christopher Mitchell: It's worth noting that the Minnesota requirement is not only 25 Megabits by 3, but that you also have to be using a technology that can scale all the way up to a 100 Megabits. I think that's a really good approach.
Bob Hance: Chris, I think that's consistent with the New York standard now too.
Christopher Mitchell: I think it's important to make sure that we're wisely investing so that we don't have to spend more in three more years for a new round of upgrades on networks that we've just subsidized. But I want to end on a more positive note. Dave, can you give us a testimonial from your members explaining why this is so important?
Dave Allen: I mentioned that when we were out in Minneapolis. We've actually taken over 100 pages of testimonials in to the FCC and left them with commissioner offices because they do resonate. They hear from us, but to hear from our members, our customers, folks in the rural space, really resonates with those folks. And even now, when we go back out there, they ask if we've updated that because we get these testimonials daily. My favorite, and I'll let Bob chime in with a couple of his, but this person from Metridgeberg said, "We're so pleased with Midwest, as we thought this service would never come down our dirt lane off of a dirt road." I think that really explains what we're doing. We're not going out to the urban areas, areas of high density. We came down a dirt lane off of a dirt road to provide this person with gigabit-capable fiber.
Christopher Mitchell: And Bob, do you also have one that you would like to share?
Bob Hance: The one that's striking to me is this one. Another customer that's hooked up now says, "When you live out in the country, you learn that not all things are easy. Not all things are accessible at a moment's notice. The country teaches you patience and understanding. Today, with the blink of an eye, something that I was told would never happen to the rural people, we have Internet. Not by tether of a phone or an air card with an astronomical price tag on it. Thank you Midwest Connections for being the stand up people that you said you were. I cannot tell you thank you enough."
Dave Allen: I'd just add too, it's interesting how life-changing this is for people in our area. They have been used to poor service, dial-up service, and to have fiber optic available to them has been just amazing for them. It's taken me by surprise in all honesty.
Bob Hance: There is a certain class of people though who live in cities and might be thinking, "What do I get out of it if they have better Internet access out there in the country?" My answer is a thought experiment. What if we did not electrify the country with the REA, the Rural Electrification Administration, and we thereby save a few billions of dollars in federal budgeting over many decades, maybe, we don't even know that we would save that much. But if we did, we would also end up with smaller markets. We wouldn't have people being as productive in the rural areas, and they would not be buying things that other people are producing. And my point is that this is not charity. It's in my self interest, as someone living in St. Paul, to make bigger markets everywhere because we're going to have a better economy.
Dave Allen: We're seeing for the first time in our nation's history the fact that rural areas are losing population. As they continue, births aren't keeping up with the rural out-flight. As people move back to cities and urban centers to avail themselves of services like broadband, that's going to tax those urban centers from an infrastructure standpoint. That should be a concern to urban areas in terms of how to maintain roads, sewer systems, and things like that as people move back to cities.
Bob Hance: I'd like to remind folks, but for rural electrification and now this new valuable service with respect to particularly how farms operate today, we have the food out here. We're the producers!
Christopher Mitchell: Yeah, the food doesn't just magically appear in Kansas then, I guess! That's a good reminder. I'm excited about your project, and I really want to thank you for joining us on the call. Thank you very much.
Dave Allen: Chris, we have reminders of our past scattered throughout our office of when this co-op was constructing the lines back in the 30's. And one that's really striking to me is a lady who is reaching up to turn on that light bulb for the first time. And that's exactly what this feels like to all of us, and it's really helpful to get the kind of affirmations that we're getting from members. I really see this as a re-lighting of rural America.
Christopher Mitchell: Yes, I'm with you. I think sometimes people say that this isn't as big as electricity, but when electricity was first rolling out, people didn't know where that was going to go either. So I think you're doing the right thing. What we have to do is make wise investments, and then let time do its thing.
Dave Allen: I like to think that we spend once. Build once, spend once.
Christopher Mitchell: Thank you so much.
Dave Allen: Thank you, Chris!
Bob Hance: Thanks, Chris!
Lisa Gonzalez: That was Chris talking with Bob Hance, President and CEO from Midwest Energy Cooperative, and Dave Allen, Vice President of Regulatory Compliance from the cooperative. Remember, we have transcripts for this and other Community Broadband Bits podcasts available at MuniNetworks.org/broadbandbits Email us at email@example.com with your ideas for the show. Follow Chris on Twitter. His handle is @CommunityNets. Follow MuniNetworks.org stories on Twitter. The handle is @MuniNetworks. Subscribe to this podcast and all of the podcasts in the ILSR podcast family. You can do it on iTunes, Stitcher, or wherever else you get your podcasts. Never miss out on our original research. You can also subscribe to our monthly newsletter at ILSR.org. Thank you to the group Mojo Monkeys for their song "Bodacious," licensed through Creative Commons. Thanks for listening to episode 225 of the Community Broadband Bits podcast.