Broadband

Background

For more than 80 years, Pedernales Electric Cooperative (“PEC”) has provided low-cost, reliable electric service to the Texas Hill Country when for-profit electric utilities would not. The reason PEC was able to transform lives throughout the Hill Country by bringing its Members badly needed electric service was that PEC was (1) a not-for-profit electric utility (as a cooperative), and (2) the Federal Government awarded PEC approximately $1.3 million in loans to build its electric lines (about $25 million today).

Today, PEC proudly provides reliable, safe electricity to almost one million people at rates more than 10% below the average competitive areas. PEC has achieved this while also increasing system reliability to its highest historic level in 2020.

Recently, some of the Cooperative’s Members have requested that the Cooperative become involved in the provision of broadband accessibility or connectivity, harkening back to the Cooperative’s roots. Accordingly, the Cooperative has extensively reviewed strategies and data regarding this business of providing broadband, as well as reviewing Members’ access to broadband connectivity. In October 2015, the Board began hearing presentations and reports on what financial, operational, and regulatory impact broadband services would have on the Cooperative and its Members. Then, in May and June of 2016, the Board discussed the need for broadband in Texas’ rural areas and referenced this issue during the Annual Meeting presentation and the Board President’s remarks. Later that year, the Board was notified of the broadband topics discussed at the National Rural Electric Cooperative Association (NRECA) regional meeting. In January 2017, the review of a broadband business opportunity was included within the Cooperative’s Strategic Plan under possible service innovations. That Plan called for a “feasibility study to assess the opportunity that could exist in a fiber and/or wireless network (broadband) throughout the service territory that enables a smart grid and could provide affordable data access services to the members.” In September 2018, the Cooperative again discussed broadband implementation in its service territory. At that time, various models for broadband services offered by other cooperatives were reviewed. In February 2019, the Board discussed legislative initiatives in Texas and their possible impact to broadband for rural Texas. In June 2019, at the Annual Meeting the Board President’s remarks noted that a broadband feasibility study had commenced.

Later in October 2019 at a Board workshop, the Board reviewed the results of the broadband feasibility study. Since the details of the study and its findings are sensitive, proprietary, and competitive information, the Cooperative cannot release these materials. In January 2020, however, the Board approved directing its Board delegates at NRECA meetings to vote in favor of resolutions that would affirmatively request NRECA to assist with efforts that remove state statutory or regulatory barriers for cooperatives that wish to provide broadband services.

In May 2020, the Board investigated an option with the Federal Communications Commission’s (FCC) Rural Digital Opportunity Fund (RDOF) broadband initiative, but the timing of regulatory and financial requirements, risks, and considerations made PEC’s participation inappropriate.

In September 2020, the Board authorized various activities to examine whether and how PEC could be involved in broadband service in its service territory. The Board authorized reviewing business plans for the provision of broadband services; the preparation and analysis of opportunities for funding of such plans; and the preparation and review of corporate, legal, and regulatory constraints in regard to provision of broadband services.

Analysis and Considerations

Over the past three years, the Cooperative has conducted a thorough review of the many options available for offering broadband to Members. The Cooperative engaged various business, technical, and legal advisors who reviewed and analyzed a range of issues associated with the potential provision of broadband services. The Board has additionally reviewed the complex financial, legal, and regulatory issues associated with all of these options.

In October 2020, the Board received an expert report covering the legal, corporate, financial, and regulatory impacts to potential business plans for the provision of broadband services. Throughout the process the Board has given careful consideration to PEC’s Members’ need for access to broadband in light of PEC’s primary mission to provide low cost, reliable, and safe energy solutions to its Members.

The Cooperative examined current and expected future broadband service coverage in PEC’s territory to determine areas of need. PEC’s vast service territory—spread over 8,100 square miles across 24 counties in Central Texas with over 340,000 meters—has varying levels of need for connectivity among the Cooperative’s Members. The majority of PEC Members have access to internet connectivity. Based on information provided to PEC through FCC data and associated definitions, approximately 3% of PEC’s Members are unserved and approximately 10% of PEC’s Members are underserved.

See, e.g., FCC FACT SHEET, Rural Digital Opportunity Fund, Report & Order – WC Docket Nos. 19-126, 10-9, available at https://docs.fcc.gov/public/attachments/DOC-361785A1.pdf. FCC Auction definitions, census blocks, and maps available at https://www.fcc.gov/auction/904.

PEC’s service territory is currently served through a mix of DSL, fiber, and fixed wireless from a variety of providers. This means that there is no single broadband solution for PEC to engage in providing broadband services to its members system-wide.

Review of Business Plans and Funding Options for Broadband

The Board reviewed several scenarios and various business plans when examining options for broadband service. Especially relevant to this inquiry are available technology, competition or market opportunities, and financing options.

Many potential corporate structures and financial models for a PEC broadband business line were examined. Electric cooperatives and other companies offering broadband service have done so through a wide variety of corporate structures. PEC’s advisors considered potential corporate structures for PEC to provide broadband services, including: (1) as a separate division of the Cooperative; (2) creating a broadband subsidiary; (3) acquisition of an existing provider; and (4) engaging with an outside provider of broadband services through a joint venture or other commercial arrangement. In reviewing the analyses, the Board carefully considered the complex, overlapping risks and management implications for PEC’s existing size and structure, and expected future Cooperative growth.

In a Fiber-to-Home (“FTH”) solution, PEC studied solutions where the Cooperative would own fiber on existing distribution lines while potentially utilizing an operating company to lease unused dark fiber. Another FTH solution could involve a separate operating entity, either as a PEC subsidiary or independent company. A significant limitation for an FTH solution, however, is the fact that PEC has not deployed, nor does it plan to deploy, fiber throughout its distribution system because fiber is not necessary for PEC to operate its distribution system. The lack of an initial deployment of fiber in the distribution system exacerbates the time to deploy the system and greatly increases the cost. Fixed Wireless and different types of partnerships or commercial arrangements were also options examined by the Board in looking at potential solutions.

In reviewing any of the potential business plan solutions, capitalization was a key consideration. Whether and how to address potential cross-subsidization among PEC Members and services was specifically scrutinized. PEC’s membership is large and varied.  Different geographical areas have different needs and expectations for services.  The Board is focused on providing consistent, stable service for the entire membership.  The Board does not intend to favor one particular area or one set of members over another.  Uniform treatment of members is especially important when committing to significant financial investments. PEC’s membership must be successful as a whole.

Likewise, the Board examined the prospect of directly or indirectly utilizing electric business resources to help establish a new broadband venture.  The Texas Legislature, in fact, specified in Section 181.048(d) of the Utilities Code that “[a]n electric cooperative or electric cooperative affiliate that provides broadband service shall maintain separate books and records of broadband service operations and the broadband service operations of any subsidiary and shall ensure that the rates charged for provision of electric service do not include any broadband service costs or any other costs not related to the provision of electric service.”  As such, PEC must maintain capitalization and resource separation in regard to broadband activities and electric rates.

Both private and government (grants or loans) financing alternatives were also carefully studied. How and when PEC could utilize proceeds from any venture is a particularly complex matter given the cooperative business structure, ranging from state and federal tax consequences, capital credit distributions, regulatory burdens, and long-term member ownership and governance.

When considering the alternatives, the Board took into account infrastructure, timing, investment, demographic data and assumptions, density of provision, operating needs, and projected financial returns. Each presents its own financial tax considerations, especially concerning the preservation of PEC’s federal tax exemption. The structures also present different opportunities and risks for financing any new venture. Accordingly, the Board carefully considered government and private funding, the need to avoid cross-subsidization between the electric and broadband businesses, and planning for the various uses of proceeds of financing sources.

Corporate, Legal and Regulatory Constraints

To better understand potential governance, legal, and regulatory matters associated with a broadband business, PEC also considered the corporate, legal, and regulatory obligations associated with the provision of broadband service.

The federal regulatory regime applicable to broadband service varies with the services provided, the funds used, and the technology deployed. Different technology may require different regulatory considerations as well. The state regulatory issues associated with broadband service likewise depend on the types of service PEC might provide. For example, in order to participate in some federal financial funding distributions, the recipient may be required to become an interconnected voice telecommunications provider (also known as a certificated telecommunications provider). Even if and when PEC proposes to fund and provide broadband services itself, new regulatory commitments must be made by PEC as a federal “information services” provider. Significant information disclosure requirements regarding network management practices, performance, commercial terms, and licensing requirements must be regularly reported and made accessible. There is also no guarantee that today’s requirements will remain unchanged in future iterations of the regulatory regime.

Real estate and land access questions were also examined. The State of Texas recently enacted a new statute to facilitate the use of existing electric cooperative easements for the provision of broadband service. Although helpful, the statute does not eliminate many of the challenges associated with the acquisition of new easements appropriate for broadband service, especially given PEC’s varied demographics, population, geography, and terrain.

Findings

1. As a result of the foregoing detailed research, risk assessment, and analysis, and the Board’s examination of technical, financial, and demographic concerns, the Board has determined that PEC’s direct provision of broadband service is not appropriate at this time.  Based on PEC’s feasibility information and the experiences of other providers, PEC estimates that providing broadband to the service territory would require an investment of more than $600 million.   Given the financial commitment necessary for deployment, the Board must carefully take into account how such a venture will impact the entire membership and cooperative-wide activities.
2. PEC remains willing to consider the possibility of working with an existing provider of broadband services or engaging in other commercial arrangements within an established framework. The Cooperative may explore such options, but when doing so will keep the Cooperative within the following guiding principles:
   • Manage any financial exposure or risk while minimizing all other risks;
   • Maintain PEC’s existing non-profit, tax-exempt entity and governance structure;
   • Ensure that any venture does not invite additional regulatory exposure, regulatory risk, or compliance obligations;
   • Avoid the need for a separate stand-alone entity; and
   • Protect the value of the PEC brand.
3. PEC is most interested in possible arrangements with existing or new broadband providers within PEC’s territory. The Board would particularly like to encourage solutions utilizing the Cooperative’s existing infrastructure, market knowledge, and expertise to assist or incentivize deployment of broadband service in PEC’s territory.
4. Whatever future steps the Cooperative may take related to broadband services, the Board is committed that such efforts not negatively affect the Cooperative’s primary, founding purpose—the provision of low-cost and reliable electric service to our Members. The Board is committed to maintaining electric rates separate from capitalization of any new broadband venture.  The Board is mindful about the long-term ramification of investments in a new broadband business, as well as the reputation of the Cooperative with its membership. The Board’s primary mission to protect each Member’s investment in the existing electric cooperative business model will prohibit any broadband service venture that creates unnecessary risk to Members’ assets, service, or rates.

Body

WHEREAS, the Board of Directors of PEC, has reviewed and analyzed strategies and data regarding Members’ access to broadband connectivity; 

WHEREAS, the Board of Directors focuses on planning that is both fiscally and operationally responsible for the Cooperative and membership;

NOW, THEREFORE, BE IT RESOLVED BY THE BOARD OF DIRECTORS OF THE COOPERATIVE, that the Cooperative adopts the discussion and findings attached hereto as the Cooperative’s statement on provision of broadband services by PEC;

BE IT FURTHER RESOLVED BY THE BOARD OF DIRECTORS OF THE COOPERATIVE, that the Chief Executive Officer of the Cooperative, or designee, is authorized, to provide information and communication to the Membership consistent with the Board’s discussion and finding this day; and

BE IT FURTHER RESOLVED BY THE BOARD OF DIRECTORS OF THE COOPERATIVE, that the Chief Executive Officer, or designee, is authorized to take all such actions as needed to implement this resolution.

October 2015

The Board began hearing from members and listening to needs and potential impacts of broadband services.

May and June 2016

The Board discussed the need for broadband in Texas’ rural areas and referenced this issue during the Annual Meeting. The Board was notified of the broadband topics discussed at the National Rural Electric Cooperative Association (NRECA) regional meeting.

January 2017

Cooperative’s Strategic Plan called for a feasibility study of broadband deployment throughout the service territory.

September 2018

The Board addressed and reviewed various models for broadband services offered by other cooperatives.

February 2019

The Board considered Texas legislative initiatives, including Senate Bill 14.

June 2019

At the Annual Meeting, the Board noted a broadband feasibility study had commenced.

October 2019

The Board conducted a workshop to review the results of the broadband feasibility study. Since the details of the study and its findings are sensitive, proprietary, and contain competitive information, the Cooperative cannot release these materials.

January 2020

The Board approved directing co-op delegates at NRECA meetings to vote in favor of NRECA assisting with efforts removing state statutory or regulatory barriers for broadband deployment.

May 2020

The Board investigated Federal Communications Commission’s (FCC) Rural Digital Opportunity Fund (RDOF) broadband funding.

September 2020

The Board authorized various activities to examine PEC broadband service options.

October 2020

The Board received expert advice covering the legal, corporate, financial, and regulatory impacts to potential business plans for the provision of broadband services.

The Board completed a broadband workshop.