Letter-of-Credit Rule Draws Criticism in Broadband Effort

Letter-of-Credit Rule Draws Criticism in Broadband Effort
Elizabeth Bowles, CEO of Aristotle Unified Communications, is one small-business leader who has expressed concern about new grant funding requirements that could hamper broadband internet expansion across the state. (Karen E. Segrave)

The Arkansas Department of Commerce is reviewing internet service providers’ concerns about a new grant funding requirement they said would hamper their business and hurt efforts to expand broadband access.

In July, the Arkansas Legislative Committee of the state Legislature approved emergency rules proposed by the state Commerce Department that require internet service providers to have an irrevocable letter of credit for 100% of the grant amount.

“That is a major issue for a lot of providers, particularly smaller providers,” said Elizabeth Bowles, CEO of Aristotle Unified Communications LLC of Little Rock. She said that letters of credit are costly and add debt to a company’s books, making it harder to borrow money or finance projects.

“Cost shifting money out of the broadband program into bank fees and collateral for maintaining letters of credit will hurt those Arkansans that have the greatest need,” Bowles wrote last month in a letter to the Commerce Department.

Instead, Bowles suggested that the state require a performance bond issued by a bank or financial institution to guarantee the completion of the project.

Bowles said requiring a performance bond would be cheaper for ISPs because the premium would vary between 0.5% and 2% of the contract amount, whereas banks charge up to 5% annually of the face value of letters of credit. Also, the amount of the performance bond would drop as the project is completed, reducing the cost of the premium.

And with a performance bond, the state would have to go through a claims process to claw back the money if the provider failed to honor its commitment. Letters of credit, however, are demand instruments that can be taken at any time if the provider fails to do its job — something state officials say is necessary to protect taxpayers.

Bowles and others spoke at a public hearing Aug. 19 on the permanent changes to the broadband grants. The Arkansas Department of Commerce will take the comments into consideration before submitting the final rule for legislative review, Alisha Curtis, chief communications and legislative director at the state Department of Commerce, said in an email to Arkansas Business. Curtis said a hearing on the changes could take place in October.

State Rep. Reginald Murdock, D-Marianna, told Arkansas Business last week that he has heard smaller providers’ concerns and plans to talk to agency officials about what could be done.

State Sen. Kim Hammer, R-Benton, chair of the Administrative Rules Subcommittee of the ALC, said the letter of credit requirement was added because of fears that a provider would get the grant money and not finish the project. “There could be a lot of money out the door, and then we would have to step in and have somebody else finish it out,” he said. “There was actually no clawback or recourse that we would have as a state.”

Curtis said that a letter of credit is part of the federal requirements issued by the National Telecommunications & Information Administration in connection with the 2021 federal infrastructure bill that could provide at least $100 million to Arkansas for broadband. “These federal requirements make no provision for substituting a performance bond,” she said, adding that a letter of credit is already a requirement for grants issued by the Federal Communications Commission under the Rural Digital Opportunity Fund

Last week, the U.S. Treasury approved Arkansas’ plan to spend $47.5 million in federal money on broadband infrastructure projects under the Arkansas Rural Connect program. Since 2019, the state Broadband Office has awarded $392 million for 163 projects to connect homes and businesses with high-speed access. Connecting the remaining 140,000 homes could cost $500 million or more.

The line of credit requirement would not be a concern for Dobson Fiber of Oklahoma City, which owns and operates about 5,000 miles of a fiber-optic network in Oklahoma, western Arkansas and northern Texas, said Jim Horsburgh, Dobson’s chief strategy officer.

In February 2021, Dobson bought Pinnacle Communications of Fort Smith. Pinnacle had received $6.4 million in two grants for projects in Booneville and Ozark awarded in the first round of ARC grants. He said that he couldn’t comment on grants the company was considering applying for in Arkansas. “But if it came with a line of credit obligation, that’s not … an issue for us,” he said.

Aristotle and Little Rock telecommunications company Windstream sent letters to the state Broadband Office expressing their concerns about the letter of credit requirement.

Every letter of credit has a carrying cost imposed by banks, Bowles noted in her Aug. 22 letter, which was released under the Arkansas Freedom of Information Act.

Had letters of credit been required in the latest round of ARC awards, between $1.25 million and $6.2 million annually for three-year projects would have gone to banks for fees and not to broadband deployment, she wrote.

“Given the average ARC grant award in the last round was $3.9 million, cost shifting broadband funds toward letter of credit carrying costs means entire projects will not be funded,” Bowles wrote. “This, in turn, will prevent some Arkansans from receiving broadband at all. We do not believe this outcome can be what the state intends.”

She also wrote that providers might not be able to obtain the letter of credit if they don’t have cash on hand, disproportionately affecting smaller providers “and cash-poor but asset-rich providers.”

“These facts ultimately will inhibit deployment of broadband in Arkansas by excluding smaller providers who are otherwise qualified to participate in the program and by chilling participation by even larger providers who do not wish to tie up their assets just to support a letter of credit,” Bowles wrote.

Curtis said the department couldn’t respond to comments made outside of the administrative rules process.

Windstream’s Aug. 21 letter said “a 100% LOC could be a deterrent to robust participation in the ARC Program,” resulting in “less broadband deployment, not more.” David Avery, Windstream’s vice president of government affairs, suggested the department revise its letter of credit requirement to 25% of each grant amount, which would make it consistent with the federal Broadband Equity, Access & Deployment requirement.

Windstream has a fiber-optic network spanning about 125,000 miles. Still, Aristotle said it plans to apply for grants.

“It would take a lot for us not to apply, because we are committed as a company and as an organization to serving unserved,” Bowles told Arkansas Business. “We serve the poorest counties in the state and that work is in the Arkansas Delta.

“We believe that everyone should have broadband,” she said. “So if it is within our power to apply, we will do it. But the state is not making it easy with these rules.”