Loan Program Gets Hit But Remains on Track

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Washington -- A $1.25 billion federal loan bill for rural
TV service came under attack last week in the House, but the uproar probably won't
stop Congress from approving some version of the plan in the weeks ahead.

"It's a go. We are going to produce a bill,"
Rep. Billy Tauzin (R-La.) said after a hearing on the bill last Thursday in his
Telecommunications Subcommittee.

The bill is intend to provide loan guarantees -- most
likely to satellite companies -- to providers of local TV signals in unserved and
underserved markets, which is another way of saying the millions of households incapable
of receiving local-signal service from DirecTV Inc. and EchoStar Communications Corp.

Tauzin said his panel will vote on the bill March 23,
followed by a full Commerce Committee vote March 28.

In a key point for small cable operators, Tauzin said he
did not want to make the bill an exclusive deal for the direct-broadcast satellite
industry. "That still has to be a goal," he added.

The bill (H.R. 3615) took two hits at the hearing last
week.

The Congressional Budget Office said the bill would cost
taxpayers $365 million in defaults and administrative costs -- a river of red ink that has
some Republicans running scared. "I think there are serious problems with this
legislation as currently written," Rep. Chris Cox (R-Calif.) said.

House Commerce Committee chairman Tom Bliley (R-Va.)
stopped the hearing for a few minutes to register his concerns. "I urge my colleagues
today to examine closely the potential cost to the American taxpayer. [The] CBO notes that
'providing local television service in rural areas is likely to prove financially and
technically risky,'" he said.

The other point of controversy involved the federal agency
that would administer the loan program -- the Rural Utilities Service, a division of the
Department of Agriculture.

An internal audit by the Agriculture Department's
inspector general revealed that past RUS loans in some cases were not being used to
finance rural projects, and in other cases, they were going to recipients that easily
qualified for loans from private lending institutions without federal aid.

The report said the RUS had made $11 billion in loan
guarantees to electric borrowers that had turned around and invested just $61 million --
less than 0.5 percent -- in rural America. The companies poured the loans into
money-market funds, stocks, bonds and mutual funds.

"I am from the rural part of the South Bronx, which is
very close to the rural part of Wall Street, where the bulk of these funds seem to be
going," inspector general Roger Viadero quipped in a heavy New York accent.

Viadero's report also disclosed that 434 RUS
telephone-company borrowers with loan balances totaling $1.3 billion had the financial
strength to seek loans without RUS assistance.

"I hope all of the taxpayers in America are listening
to this testimony," Rep. Steve Largent (R-Okla.) said.

RUS acting administrator Christopher McLean acknowledged
that tighter auditing was necessary. But he insisted that the RUS and its borrowers were
serving the needs of rural America.

"I accept [Viadero's] request that we redouble
our efforts to encourage more investment in rural economic development, although I think
he went too far in his statement that rural electrics are not investing in rural
infrastructure," McLean said, adding that in the past 50 years, not one telephone
borrower had defaulted.

Both Viadero and McLean stressed that none of the RUS
borrowers highlighted in the report had violated the law.

Democrats joined Republicans in questioning the scope and
details of the bill. Rep. Edward Markey (D-Mass.) said he would fight to ensure that cable
companies would be ineligible for loan guarantees.

"I know many of these cable companies would like us to
give them loan guarantees to help them upgrade. I think that would be a bad policy,"
he said.

He also voiced concern that the bill would allow
loan-guarantee recipients to use the money to participate in Federal Communications
Commission spectrum auctions.

The bill -- sponsored by Reps. Bob Goodlatte (R-Va.) and
Rich Boucher (D-Va.) -- would authorize the RUS to make $1.25 billion in loan guarantees,
with one company eligible to receive one loan not to exceed $625 million. The RUS is
permitted to back 100 percent of a loan.

CBO director Daniel Crippen told the panel the
Goodlatte-Boucher bill was risky for several reasons. He said the loans would flow to
companies to provide a competitive service, rather than to extend an essential service
like electric power and telephony to consumers who never had it before.

He said about 2 million U.S. household are unable to
receive either cable or free over-the-air broadcasting, providing too small of a base to
make the loan-guarantee program a financial success. All other households, he added, have
access to cable or free TV.

Crippen added that in order to reduce taxpayer exposure,
Congress could lower the $1.25 billion amount or agree to back less than 100 percent of a
loan. Pending Senate legislation would back 80 percent, prompting the CBO to estimate the
default risk at $265 million.

Boucher challenged Crippen's analysis. He said the DBS
industry was growing like gangbusters -- adding 200,000 subscribers per month -- fueled in
part by the newly won right to offer local TV signals. He added that the CBO failed to
take into account the millions of consumers in rural markets who would drop cable and
subscribe to a satellite service with a full complement of local signals.

"There are going to be millions of subscribers,"
Boucher said. "You just don't understand the market."

Crippen replied that he was not making a policy judgment,
and his report focused on the financial risks associated with the loan-guarantee program.

"What we are talking about here is the economic
viability of a very large loan program," Crippen said. "That is not to argue
that this is not the right thing to do or it is inappropriate. Rather, it is just to say
that there isn't going to be enough of a market to provide a commercially viable
vehicle."

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