BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA Funding Approval from the California Advanced Services Fund (CASF) for the California Broadband Cooperative s Digital 395 Middle Mile Project Amounting to $10,149,422 Draft Res. T-17232 COMMENTS OF CALIFORNIA BROADBAND COOPERATIVE AND INYO NETWORKS ON DRAFT RESOLUTIONT-17232 FOR FUNDING APPROVAL FROM THE CALIFORNIA ADVANCED SERVICES FUND (CASF) FOR THE CALIFORNIA BROADBAND COOPERATIVE S DIGITAL 395 MIDDLE MILE PROJECT RECOMMENDATION: the Commission should increase the Project s matching CASF funds from $10,149,422 to $19,294,717, which increases the CASF matching funds requirement from 10% to 19%. DISCUSSION Pursuant to Rule 14.5 of the Commission s Rules of Practice and Procedure, California Broadband Cooperative, Inc. and Inyo Networks, Inc. submit these comments relating to the Commission s October 29, 2009, Draft Resolution T-17232 Funding Approval under the California Advanced Services Fund (CASF). 1 The Communications Division s Draft Resolution T-17232 approves $10,149,422 in matching funds for California Broadband Cooperative s Digital 395 Middle Mile Project (hereafter Digital 395 Project or Project ), an amount which represents 10% of the total Project budget. The Digital 395 Project anticipates the construction of a fiber backbone network along US 395 between the cities of Barstow and Carson City to serve the State of California s rural Eastern Sierra region. This 448-mile transport and backhaul network, upon completion, would provide essential middlemile connectivity at affordable rates to an underserved population of over 64,000 residents, more than 2,500 businesses, and 168 critical institutions with some unserved pockets thrown into the mix. In addition to providing both interoffice transport and a combination of advanced Ethernet 1 Per Draft Resolution T-17232, Inyo Networks, Inc. will serve as fiscal agent for the California Broadband Cooperative, Inc., a non-profit cooperative. 1

technology and high-speed access for the area s last-mile households and businesses, the network s Ethernet-based transport layer will be offered to all requesting providers on a wholesale, open-access basis, including, among others, Internet service providers, wireless carriers, and Verizon. To be sure, California Broadband Cooperative, Inc. (hereafter, CBC ) and Inyo Networks, Inc. (hereafter, Inyo Networks ) appreciate the Commission staff s 10% matching funds recommendation. However, to ensure total Project funding, CBC and Inyo Networks request that the Commission adopt the Draft Resolution with one essential modification. That is, owing to CBC s status as a newly formed nonprofit cooperative seeking to develop a competitively neutral open-access, middle-mile network, CBC and Inyo Networks respectfully request that the Commission increase the Project s matching CASF funds from $10,149,422 to $19,294,717. 2 CBC and Inyo Network, in essence, here request a good-cause waiver of the CASF program s 10% cap relating to matching funds grants. 3 CBC makes this request to increase the Project s matching funds because: (a) its unique organizational structure as a startup cooperative formed to develop an open-access network on a non-profit basis does not generally appeal to private equity funding sources; (b) lacking a financial history, CBC, generally speaking, will likely face more challenging hurdles in qualifying for debt financing relating to its capital expenditures, and make its service offerings prohibitively expensive; (c) the economy of the Eastern Sierra region is such that there are greater-than-average limits to the availability of in-kind funding, vendor contributions, or other sources of funding; 4 2 The Draft Resolution at page 2 states that The applicant requests that CASF funds be used to fund 10% of the total project or $10,149,422, while concurrently seeking 80% funding the ARRA program. CBC and Inyo Networks, however, respectfully advise that their CASF application requested 19% of the total project funding at Section 11 of the CASF application filing, which was also resent on Sept 17, 2009, in response to a data request from Michael Pierce, CPUC analyst. 3 As additional background, though Inyo Networks, serving as fiscal agent for CBC, had applied for 20% in CASF matching funds, staff applied the 10% cap and recommended $10,149,422 the standard maximum amount staff regarded as awardable. In total, therefore, the applicants combined BTOP and CASF funding requests amount to $92,348,923. 4 It is no coincidence that the Eastern Sierra region lacks the resources to self-fund a substantial portion of the proposed network. Only a relatively small portion of land is privately held, and beyond US Route 395 the state has made no significant investment in the region in higher education, administrative centers, or transportation. Instead, what infrastructure that had been introduced to the region the Carson & Colorado - Southern Pacific Railroad and the Los Angeles Aqueduct were not investments to help it develop, but rather to extract resources for use by others, leaving today an abandoned railroad right-of-way and emptied lakes. The result is an economy dominated by government service jobs (e.g., Caltrans maintenance, USFS, public safety, local government, etc.) and seasonal tourism. The Statewide fiscal crisis has forced cutbacks in the former, and the sluggish economy has assaulted the latter. That said, CBC, working closely with the region s local city and county governments, has identified some in-kind funding that can be contributed to the project. As a result, a total of $337,400 in appropriate in-kind contributions that would off-set certain capital expenditures have been identified, but they will have to be verified and approved by the governmental entities involved for a commitment. Finally, CBC has been successful in obtaining a contribution from its prime contractor, Praxis Associates, Inc., in the amount of $666,726, which is substantial for a small business given the current economic climate. Thus, local government in-kind funding (if approved) and vendor contributions currently amount to $1,004,126. 2

(d) the unique Eastern Sierra region, which consists primarily of government lands, has suffered for generations from underinvestment in infrastructure by government landlords and largescale natural resource developers; and (e) the CASF and ARRA funding programs present a unique once-in-a-lifetime opportunity to ensure the deployment of essential infrastructure that will benefit the rural Easter Sierra region and its local communities, as well as the state as a whole. CBC believes its non-profit status qualifies it as a unique public interest entity, and that its proposal to develop and operate an open-access middle-mile network will indeed serve the public interest of the underserved and unserved communities of the Eastern Sierra region. Moreover, CBC and Inyo Networks believe that their request qualifies as necessary and convenient within the meaning of Pub. Util. Code 701, and that, to achieve the maximum leverage from the ARRA program, the Commission possesses both the individual-case basis discretion and decision-making authority to increase the CASF matching requirements up to 19% of the total project cost on CBC s behalf. 5 A. CBC s organizational structure and non-profit cooperative attributes The CBC was created from a community consensus, led by the elected leadership of California's Eastern Sierra counties, to establish a telecommunications alternative for the area. Once constructed, the Digital 395 Network will be owned and operated by CBC a member-owned cooperative. Membership is open to all wholesale level customers, and prospective members are required to purchase facilities or services in order to join the cooperative. Potential cooperative members are Government, Education and Medical agencies, Telephone, Wireless, Cable TV, and Internet Service Providers. Operated as a competitively neutral open-access network, CBC and its management of network facilities will not favor or discriminate based on service provider or applications. CBC proposes to offer a full range of carrier grade, wholesale services intended to promote broadband development for the region by (1) enabling affordable broadband to existing service providers; (2) creating a strategic platform for new last-mile broadband entrants; (3) enhancing the dependability of the areas telecommunications infrastructure with route redundancy; and (4) introducing a diverse route out of Southern California and Nevada to strengthen the national telecom grid. These Project business assumptions reflect the broad 5 A September 8, 2009, letter of support addressed to the Commission from State Legislators both within and outside the proposed funded service area emphasizes that the current 10% CASF funding match falls short of what is needed, as well as cites to CBC s Digital 395 Project as a project that will result in substantial benefit to the Eastern Sierra region. A copy of the letter is available on request. We also note the Commission s pronouncement in Decision 07-12-054 in R. 06-06-028, dated December 20, 2007, that [w]e choose to use our authority under the California Constitution and Pub. Util. Code including 701 to establish the CASF. 3

social policy goals reflected in both the CASF and ARRA grant programs, and will benefit the region and California as a whole. B. Lacking a financial history, CBC, generally speaking, will likely face more challenging hurdles in qualifying for debt financing relating to its capital expenditures, and potentially make its service offerings prohibitively expensive In today s economic environment, any new cooperative's not-for-profit business model and lack of an established financial history makes applying for traditional loan programs to finance capital expenditures exceptionally difficult, thereby necessitating CBC s request for a 19% CASF matching grant. By way of comparison, the rurally-oriented loan program offered under the BIP program is a 50-50 grant/loan combination. Unfortunately, due to the scale of the Project, its $101.5 million price tag, and the region s unique market characteristics, we do not believe the CBC s cooperative's business model would be able to support this level of loan leverage without making the service offerings prohibitively expensive. CONCLUSION CBC has proposed a unique non-profit, public-interest oriented cooperative enterprise for deploying essential open-access middle-mile infrastructure in a unique region comprised of enduring local communities and businesses, who, unlike their non-rural brethren in more populated and economicallydiverse communities, would love to avail themselves of the benefits inherent in advanced communications services at affordable rates. Unfortunately, but for programs like CASF and ARRA, the good people of the Eastern Sierra region face far greater challenges in attracting such infrastructure investment to their underserved and unserved communities. Accordingly, as a matter of necessity and convenience so as to ensure total project funding, CBC and Inyo Networks respectfully request that the Commission, in the exercise of its discretion and authority under Pub. Util. Code 701, increase the recommended funding in Draft Resolution T-17232 by $9,145,295 to a total amount of $19,294,717. Respectfully Submitted this 14 th day of October, 2009. /s/ ROBERT W. VOLKER ROBERT W. VOLKER President and CEO California Broadband Cooperative, Inc. 1101 Nimitz Avenue Vallejo, CA 94592 4

Telephone: 707-551-8210 Facsimile: 707-552-8120 e-mail: rvolker@praxisfiber.com /s/ MICHAEL T. ORT MICHAEL T. ORT President and CEO Inyo Networks, Inc. 1101 Nimitz Avenue Vallejo, CA 94592 Telephone: 707-551-8200 Facsimile: 707-552-8120 e-mail: mort@praxisfiber.com TABLE OF AUTHORITIES Pub. Util. Code 701 Decision 07-12-054 in R. 06-06-028 APPENDIX Revised Finding Paragraphs 7 and 8: 7. The applicant is anticipating that ARRA will fund 80% of the total project cost, CASF will award 19% and the applicant will fund the remaining 1%. 8. The total project cost is $101,494,218, with $25,461,688 being materials and equipment and $76,032,530 comprising the fully loaded installation and labor costs. CASF funds will be used to fund 19% of the total project or $19,249.717. Revised Ordering Paragraphs 1, 2, and 6: 1. The Commission shall award contingent funding of $19,249,717 from the California Advanced Services Fund to Inyo Networks, fiscal agent for the California Broadband Cooperative for its Digital 395 Middle Mile project to provide service in an underserved area, as described in the discussion portion and Appendix A of this Resolution. The award is contingent on 1) Inyo Networks receiving Commission approval on it CPCN application (A.09-07- 023), 2) The California Broadband Cooperative receiving an ARRA grant for 80% of the total estimated project cost, and 3) California Broadband Cooperative obtaining CEQA review approval. 2. The California Broadband Cooperative shall be required to post a performance bond equal to the total amount payable under this CASF award, or 19% of the project costs and provide a copy of the bond to the Communications Division in compliance with the Commission rules. 6. The program fund payment of $19,294,717 for the Commission-approved underserved project shall be paid out of the CASF fund in accordance with the guidelines adopted in Resolution T-17143 and D.09-07-020. 5