Broadband company’s demise puts taxpayers on hook for $74 million loan

October 26, 2011

As the government prepares Thursday to commit billions of dollars to bring high-speed Internet to rural areas, the biggest-­ever such project has collapsed.

The company Open Range, backed by a commitment of $267 million in loans from the Agriculture Department, filed for bankruptcy this month. Taxpayers are on the hook for $74 million that the upstart hasn’t repaid. And now the company, some analysts and a senior government official are blaming poor judgment and Washington bureaucracy as the reasons Open Range failed.

The two agencies that oversaw the venture defended their roles in Open Range’s demise, saying the circumstances that led to the bankruptcy were out of their control and highly unusual.

The decline of the Greenville, Colo., company comes as Republicans are criticizing the Obama administration for throwing taxpayer money at unproven ventures. The furor was sparked by the high-profile failure of solar-panel manufacturer Solyndra, which filed for bankruptcy after getting more than $535 million in federal loan guarantees.

While Solyndra has grabbed headlines, the spotlight on Open Range’s failure is intensifying. On Wednesday, Democrats called for the company to be included in a House investigation into the Solyndra affair.

Like Solyndra, Open Range aimed to use cutting-edge technology with a fragile business model, some analysts said.

“When trying to subsidize broadband in rural areas, there will be failures,” said Richard Bennett, a senior research fellow at Information Technology and Innovation Foundation, a think tank supported by major telecommunications companies. “That’s why technologies need to be carefully vetted — especially when they are unconventional, like in the case of Open Range.”

Goal deemed worthy

The federal loan given to Open Range was part of a long-standing policy objective, pushed by both the George W. Bush and Obama administrations, to extend high-speed Internet service to the most isolated parts of the country.

Advocates say the goal is worthy. Building the networks brings jobs, while greater access to the Internet can turn around local economies. And private companies have been reluctant to invest the resources to bring service to rural areas.

“There is a real role for government to play here,” said Joel Kelsey, a policy analyst at the public interest group Free Press.

The Federal Communications Commission will vote Thursday on diverting $4.5 billion, generated by consumer fees, to private companies that need the money to bring high-speed Internet service to the 18 million Americans who lack such access.

High-speed Internet “has gone from being a luxury to a necessity for full participation in our economy and society,” FCC Chairman Julius Genachowski said in a speech this month.

Yet, even supporters of the initiative caution that the government has had mixed success on such projects. In many cases, Kelsey said, cell towers are erected and miles of fiber are placed beneath roadways but consumers do not end up using the service.

The government has a “spotty track record,” Kelsey said. “When handing out ratepayer or taxpayer dollars, this need to be right.”

Open Range’s loan was originally granted by the Bush administration. In 2008, the USDA’s administrator of Rural Utilities Services grants, Bush appointee James Andrews, touted Open Range’s unique plan to get broadband to neglected areas by using a network of satellites owned by a company called Globalstar.

Special waiver sought

Open Range and Globalstar needed a special waiver from the FCC to partner on the project. Three of the agency’s commissioners approved the request, saying it wanted to support the USDA’s loan. Those who disagreed said it was inappropriate to give one company special favors.

One FCC official added: “It was bad all around. Open Range had bad technology, and Globalstar’s request was extraordinary. . . . We had no idea why the USDA approved this thing, and even staff at [the USDA] were telling us they were concerned about it.” The official spoke on the condition of anonymity because of the controversy surrounding the firms.

Problems at the companies quickly emerged. An equipment partner provided shoddy technology, according to Open Range’s bankruptcy filing. The USDA’s money was dispersed slowly and inefficiently, the filing said.

Globalstar also ran into delays in launching its satellites and failed to meet deadlines set by the FCC. On several occasions, Globalstar asked for more time.

In September 2010, as it looked increasingly clear that the FCC was not going to give the venture an extension, the USDA administrator of the loan, Jonathan Adelstein, sent a letter to Genachowski warning that its entire loan was at risk if more time was not granted.

“Such a result could severely curtail the program and would be contrary to the . . . shared goal of expanding broadband throughout the U.S., especially during the time of constricted private capital,” Adelstein wrote.

The FCC turned the request down a few days later. That led the USDA to slash its original loan commitment of $267 million to Open Range in half. Over the following year, the company fired the majority of its staff, including its chief executive Bill Beans. Although Globalstar has remained in business, Open Range filed for bankruptcy Oct. 6.

FCC promotes new venture

The FCC said it didn’t have a choice.

“Globalstar conceded failure to comply with its obligation to provide nationwide satellite service, which led to the agency’s decision to deny its extension request,” said Tammy Sun, a spokeswoman for the FCC.

Adelstein’s spokesperson declined to make him available for this report. In a prepared statement, Adelstein said that he was “disappointed” Open Range went bankrupt and that 99 percent of all USDA broadband loans are paid back.

Open Range did not respond to several requests for comment. Globalstar declined to comment.

The FCC’s handling of the matter has come under scrutiny by lawmakers partly because the agency promoted a similar venture called LightSquared about the same time it was turning its back on Open Range. Critics of the FCC have accused the agency of favoring LightSquared because it is backed by Democratically connected hedge fund financier Philip Falcone.

“There is clearly the perception of favoritism,” said Tim Farrar, an independent analyst at TMF Associates. Farrar said his consultancy has no financial interests in LightSquared or Open Range’s venture. A similar charge was levied by Globalstar in a recent letter to the FCC.

But unlike Open Range and Globalstar, LightSquared so far has followed through with its obligations, the FCC said.

“Comparing the two is like comparing apples and oranges,” Sun said.

Cecilia Kang is a national technology reporter, writing about tech and Internet policies at the Federal Communications Commission and Federal Trade Commission and how regulations affect businesses and consumers.
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