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A northern Minnesota telephone cooperative has put a $19 million broadband expansion on hold because of federal changes that in fact are aimed at extending high-speed Internet access in rural areas.

Bemidji-based Paul Bunyan Communications, which provides service to some 28,000 phone customers, is slowing down an aggressive expansion of fiber optic cable because the Federal Communications Commission is shifting how it allocates money in what is known as the Universal Service Fund. 

The company could receive from $3 million to $5 million less from that fund each year as more money flows instead to such large carriers as AT&T and Verizon, a company spokesman said. 

The goal of the FCC reforms -- which have been brewing for more than a decade -- is to modernize a system designed years ago to promote universal phone service across the country. The new focus is to provide the same expansion of broadband access. The FCC plans to do that by eventually shifting customer fees away from phone service and instead to users of broadband.

Because many rural areas that are underserved in terms of broadband service fall into the service areas of large companies like AT&T and Verizon, those big regional carriers will get more of the Universal Service Fund than they used to, said Jon Banks, senior vice president of law and policy for an industry association called USTelecom. The group's membership ranges from very small companies to large carriers like AT&T and Verizon.

Even though those large carriers didn't provide service to many rural areas in the past, Banks says the intent is that larger carriers will now have more money for rural expansion. He thinks the reforms will speed up the spread of broadband.

But Aaron Kjenaas is one Paul Bunyan customer who will apparently feel a pinch instead. Kjenaas, who works for a major pharmaceutical company, has waited for years for broadband internet to come to his lake home just east of Park Rapids. He frequently sends and receives large amounts of data. Right now, his only Internet option is a mobile cellular connection. 

"I'm using a little Verizon mifi (mobile wireless device), which is a little rectangle about two inches by four inches," Kjenaas said.

The device next to his computer provides a faster connection than dial-up, but it's far slower and less reliable than wired broadband. The service is expensive, about $60 a month. Kjenaas and his family have to ration their data use to avoid additional charges.

Kjenaas was excited when he heard Paul Bunyan Communications secured a federal loan to bring broadband to his home. He was crushed when he learned the project is now uncertain.

"I work for a multi-national corporation and I feel like I'm at a competitive disadvantage," he said. "I have to go out of my way to work around it, and there's a lot of people like that. So it's frustrating.

Paul Bunyan Communications had planned to expand its broadband, phone and television services to Kjenaas and about 4,000 other residents in rural Park Rapids and a township near Grand Rapids. 

It follows an impressive pattern of expansion that began in the Bemidji area in 1999. Using several big loans from the U.S. Department of Agriculture, Paul Bunyan converted all of its old copper lines to high-capacity fiber optic cable. The network expanded into neighboring regions and now covers 4,500 square miles. It delivers high tech services to even the most remote homes.

But the cooperative's latest expansion plans for this year are on hold because of the FCC reforms announced last fall. 

"How much we're going to do for this construction season has not been determined, but it's almost a certainty it won't be on the scale that we've done every year since 1999," said Brian Bissonette, a spokesman for Paul Bunyan Communications. 

The business model for the cooperative's past broadband expansions depended on a couple of revenue sources. One of the primary sources is the Universal Service Fund, a pot of money that telephone customers nationwide contribute to. It was originally aimed at helping expand and maintain phone service in sparsely populated areas, but some rural phone companies like Paul Bunyan have aggressively used their share of the fund to extend fiber capable of carrying much more than phone signals.

Policy reforms at the FCC are changing how that money is distributed to telecommunications companies. And they are making major changes to another of Paul Bunyan's funding sources, a program called Intercarrier Compensation that is designed to compensate smaller carriers when long distance companies use their local phone lines.

Bissonette said the changes favor larger service carriers and hinder efforts by smaller companies like Paul Bunyan.

For Paul Bunyan, the changes will make it difficult to pay for future expansion, Bissonette said.

"It's kind of ironic. The mantra of these changes is to create jobs. It's killing jobs."

"That doesn't mean it answers everybody's needs in every place in the country, but the baseline that we're working against was a fund that really was not properly focused," Banks said.

Officials at Paul Bunyan Communications say the FCC's shift in focus creates a cloud of uncertainty for them. The cooperative's board of directors will decide the fate of this year's expansion plans next month.

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Tom Robertson

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Changes in telecommunications funding aimed at spreading access to high-speed Internet access are in fact causing a northern Minnesota phone company to put a fiber optic cable expansion on hold.

Funding change puts broadband expansion on hold

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