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General Policies, Types of Loans, Loan Requirements-Telecommunications Program

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Rural Utilities Service, USDA.


Final rule.


The Rural Utilities Service (RUS) is amending its regulations to update the criteria for determining “reasonably adequate service” levels for local exchange carriers and providers of specialized telecommunications service. This rule is part of an ongoing RUS project to modernize agency policies in order to provide borrowers with the flexibility to continue providing reliable, modern telephone service at reasonable costs in rural areas, while maintaining the security and feasibility of the Government's loans.


This rule is effective September 8, 2000.

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Jonathan P. Claffey, Deputy Assistant Administrator, Telecommunications Program, Rural Utilities Service, 1400 Independence Avenue, SW., Room 4056, STOP 1590, Washington, DC 20250-1590. Telephone: (202) 720-9556.

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Executive Order 12866

This rule has been determined to be not significant for purposes of Executive Order 12866 and, therefore, has not been reviewed by the Office of Management and Budget (OMB).

Executive Order 12988

This rule has been reviewed in accordance with Executive Order 12988, Civil Justice Reform. RUS has determined that this rule meets the applicable standards provided in section 3 of that Executive Order. In addition, all State and local laws and regulations that are in conflict with this rule will be preempted; no retroactive effect will be given to this rule; and in accordance with section 212(e) of the Department of Agriculture Reorganization Act of 1994 (7 U.S.C. 6912(e)) administrative appeal procedures, if any are required, must be exhausted prior to initiating litigation against the Department or its agencies.

Regulatory Flexibility Act Certification

RUS has determined that this rule will not have a significant economic impact on a substantial number of small entities, as defined by the Regulatory Flexibility Act (5 U.S.C. 601 et seq.). The RUS telecommunications loan program provides borrowers with loans at interest rates and terms that are more favorable than those generally available from the private sector. RUS borrowers, as a result of obtaining Federal financing, receive economic benefits that exceed any direct cost associated with complying with RUS regulations and requirements.

Information Collection and Recordkeeping Requirements

This rule contains no new reporting or recordkeeping burdens, under OMB control number 0572-0079 that would require approval under the Paperwork Reduction Act of 1995 (44 U.S.C. chapter 35).

Send questions or comments regarding this burden or any other aspect of these collections of information, including suggestions for reducing the burden to F. Lamont Heppe, Director, Program Development and Regulatory Analysis, Rural Utilities Service, 1400 Independence Avenue, SW., Room 4034, STOP 1522, Washington, DC 20250-1522.

National Environmental Policy Act Certification

The Administrator of RUS has determined that this rule will not significantly affect the quality of the human environment as defined by the National Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.). Therefore, this action does not require an environmental impact statement or assessment.

Catalog of Federal Domestic Assistance

The program described by this rule is listed in the Catalog of Federal Domestic Assistance programs under numbers 10.851, Rural Telephone Loans and Loan Guarantees, and 10.852, Rural Telephone Bank Loans. This catalog is available on a subscription basis from the Superintendent of Documents, the United States Government Printing Office, Washington, DC 20402-9325. Telephone: (202) 512-1800.

Executive Order 12372

This program is excluded from the scope of Executive Order 12372, Intergovernmental Consultation, which may require consultation with State and local officials. See the final rule related notice entitled “Department Programs and Activities Excluded from Executive Order 12372,” (50 FR 47034).

Unfunded Mandates

This rule contains no Federal mandates (under the regulatory provisions of title II of the Unfunded Mandates Reform Act of 1995) for State, local, and tribal governments or the private sector. Thus, this rule is not subject to the requirements of sections 202 and 205 of the Unfunded Mandates Reform Act of 1995.


The telecommunications industry is becoming increasingly competitive. The Telecommunications Act of 1996 mandates that universally available and affordable telecommunications services, including advanced services, be made available to all US citizens whether in rural areas or city centers, affluent or poor communities. RUS supports this mandate and the goal that, with the assistance of advanced telecommunications technology, rural citizens be provided the same economic, educational, and health care benefits available in the larger metropolitan areas. RUS believes that the most expeditious way to bring the full range of telecommunications services to rural areas is to provide RUS funding for the full range of telecommunications services defined under the RE Act.

RUS regulations currently contain criteria for RUS to consider in determining whether telecommunications service is reasonably adequate (7 CFR 1735.12(c), Nonduplication). However, these Start Printed Page 54400criteria do not recognize certain technological and other factors that are currently employed to determine adequate service. RUS is adopting separate criteria for local exchange carriers and providers of specialized telecommunications service. These revised criteria for determining “reasonably adequate service” are derived primarily from RUS policies related to telecommunications carriers generally, the Telecommunications Act of 1996, and FCC rules and regulations.

Under the Telecommunications Act of 1996, all incumbent local exchange carriers (ILECs) are automatically considered eligible telecommunications carriers (ETCs). An ETC is certified by the regulatory commission having jurisdiction, which makes it eligible to receive universal service support. Each State regulatory commission will name at least one ETC for every area. In return for universal service support, the ETC must make available an FCC-specified level of service throughout a designated area. Furthermore, an ETC must agree to advertise basic services in a specific area and offer service to everyone in that area.

If the borrower is a LEC, RUS will consider whether a borrower has been designated as an ETC when assessing loan feasibility. ETCs are eligible for universal service support and have accepted the obligations of being an ETC. ETC status, therefore, both enhances loan feasibility and promotes area wide coverage.

The Governor of RTB utilizes RUS policies in carrying out RTB's loan program. Therefore, these policy revisions would apply to loans made by RTB, as well.


RUS received comments from nine organizations regarding the proposed rule, published at 65 FR 33787 on May 25, 2000, and took all into consideration in preparing the final rule. A list of the commenters and comment summaries and responses follows:

1. Joint comments submitted from the National Rural Telecom Association, the Organization for the Protection and Advancement of Small Telecommunications Companies, the United States Telecom Association and the Western Rural Telephone Association, (the Associations).

2. The National Telephone Cooperative Association (NTCA).

3. GTE Service Corporation (GTE).

4. iSKY, Inc.

5. Rural Community Assistance Corporation.

6. City of Granite.

7. Umatilla County, Board of Commissioners.

8. Greater Eastern Oregon Development Corporation.

9. City of Heppner.

Comment: The Associations, as a general comment, stated that there was no need for RUS to try to conform its policies in administering the Rural Electrification Act of 1936 (RE Act) to the Telecommunications Act of 1996.

Reply: As RUS stated in the background section of this rule, the Telecommunications Act of 1996 and regulatory actions by the Federal Communications Commission (FCC) are drastically altering the regulatory and business environment of all telecommunications systems, including RUS borrowers. At the same time, changes in overall business trends and technologies continue to place pressure on RUS-financed systems to offer a wider array of services and to operate more efficiently. The changes contained in this rule are designed to facilitate, within the limits imposed by the RE Act, the deployment of advanced services in all of rural America—both the areas served by existing RUS borrowers and where necessary, rural areas that are underserved by non-RUS borrowers or receiving no service at all. The technologies used to provide telecommunications services continue to evolve rapidly and RUS is updating its regulations under the RE Act to meet the growing demand of rural service.

Comment: The Associations objected to the requirement that a borrower, in order to be eligible for RUS financing, be an eligible telecommunications carrier (ETC), commit to become an ETC, or commit to act as an ETC with respect to RUS' area coverage requirements. They stated that sections 201, 203, and 305 of the RE Act cover RUS eligibility requirements and therefore, ETC status should have no impact on RUS' determination of eligibility to borrow. The Associations disagreed with RUS' assertion that ETC status enhances loan feasibility and promotes area wide coverage. The Associations also objected to entities that, in the absence of ETC designation, can “act” or “commit to act” as ETCs to be eligible for RUS financing.

Reply: RUS has removed the provision regarding ETC status as an eligibility requirement for LECs. However, as noted in the general comment, RUS believes that the Telecommunications Act of 1996 and the RE Act should compliment each other to produce the goals set forth by Congress and the Administration for the deployment of advanced telecommunications services in rural America. ETC status advances the objectives of the RE Act by adding certain new requirements that enhance area coverage. ETC status, as noted by the Associations, allows a local exchange carrier to be eligible to receive universal service support. Given the high cost to serve areas where RUS borrowers construct plant, universal service funding is a very import component of loan feasibility. Without it, many areas would not be served due to exorbitant costs of providing such service and rates required to support that service. In addition, ETC status provides some assurance beyond RUS' loan feasibility study period that borrowers will continue to be eligible to receive universal service support throughout the life of the loan. ETC status also brings with it the responsibility to provide service to an entire, designated service territory and to advertise this availability. These two aspects of ETC status clearly enhance the ability of a borrower to repay its loans. Therefore, in making loans, RUS will take into consideration ETC status when determining loan feasibility.

Comment: NTCA recommended that RUS abandon use of ETC status as an eligibility requirement for a LEC to obtain financing from RUS and revert to the requirement that any borrower must be providing “basic local exchange” service in their rural study areas. NTCA commented that “[a]dequate telephone service has always been basic local exchange service.”

Reply: As noted in response to the previous comment, RUS has removed the requirement that a LEC be designated an ETC. With regard to requiring all borrowers to provide “basic local exchange” service, RUS believes that modern telecommunications services are just as vital to rural areas as to the rest of the United States and there are entities providing these services in addition to LECs. RUS would eliminate these providers, and many of the services they could provide for rural America, if RUS made loans only to LECs. In today's high-tech market, a wide array of advanced services are being demanded by consumers, both urban and rural. Specialized service providers play an important role in the delivery of advanced services and RUS believes that financing should be available to such providers and not limited to just LECs. As RUS borrowers know, rural residents need more than just dial tone. RUS must ensure that its loan funds are used to provide a level of service—including all types of advanced services—beyond just basic local exchange service. The RE Act allows for Start Printed Page 54401the financing of “any communication service,” not just basic local exchange service.

Comment: GTE stated that linking eligibility to ETC status would limit the participation in the telephone lending program by new entrants.

Reply: RUS is in fact encouraging the participation of new entrants in the program for the purpose of providing services not offered in the area to be served or where existing service is inadequate. As noted in the previous two comments, RUS has removed the requirement that a LEC be designated an ETC and will consider whether a borrower is an ETC when determining loan feasibility.

Comment: The Associations objected to extending eligibility to a “separate class” of borrowers referred to in the regulation as entities providing specialized telecommunications services. They stated that “ ‘specialized telecommunications service’ is an impermissible non-statutory definition of telephone service.” They further expressed concern that this would permit loans to multiple borrowers providing telephone service in the same service area, which, they state, would effectively circumvent the statutory prohibition against those RUS loans which would duplicate lines, facilities or systems providing reasonably adequate service.

Reply: The RE Act definition of “telephone service” is sufficiently broad to allow RUS to finance special services (such as Internet service, pager service, etc.), mobile service, and wireline service. In addition, neither the definition nor any other provision of the RE Act prevents the RUS from financing more than a single provider of nonduplicating services in a specific area. Specialized telecommunications service, as defined in the regulation, means any telephone service other than telephone exchange service, exchange access, or mobile telecommunications service. This definition clearly recognizes the difference between wireline exchange access, mobile service, and specialized service. RUS believes that specialized services are clearly different from other forms of telecommunications services and they are not duplicative because the different services are used for different purposes; use of one does not displace use of the other.

Comment: NTCA stated that, because RUS has not acknowledged that wireline, wireless, and specialized telecommunications carriers can provide the “same telecommunications service” as an incumbent rural LEC, the proposed rule allows for multiple RUS-financed carriers offering the same or equivalent services in the same competing territories. They stated that the new rule leaves the door open for a RUS-financed rural LEC providing adequate telephone and broadband services to incur revenue losses as a result of a new competing RUS-financed carrier offering basic or advanced services that duplicate a LEC's service in a rural study area. NTCA added that RUS should avoid lending policies that create incentives for borrowers to compete against each other.

Reply: Again, RUS believes that wireline, wireless, and specialized are distinct services and do not duplicate each other. In fact, wireless and wireline services co-exist in many places in today's market, both providing different services and neither replacing the other. Therefore, entry of a mobile or specialized service provider into a wireline-only service area should pose no significant risk or duplication. If the existing mobile service being provided is adequate, RUS cannot finance the same service in the same territory offered by another carrier. In addition, as a lender, RUS is aware of its responsibilities regarding the security for its loans. In the final rule 7 CFR part 1735 published in the Federal Register on July 11, 2000, at 65133, RUS clarified that it would generally not make a loan to another entity to provide the same service (i.e., wireline where wireline exists) already being provided by an RUS borrower unless the borrower is unable to meet its obligations to RUS. As a Federal lender, it is RUS' responsibilities to ensure, to the best of its ability, security for all outstanding and future loans, and to encourage telecommunications services in rural areas.

Comment: The Associations recognized the need for RUS to update the criteria used to determine whether service is reasonably adequate. However, they stated that RUS should rely on a single standard for determining whether telephone service is reasonably adequate to all providers of telephone service. In addition, the Associations assert that RUS does not have authority to determine the affordability of any type of service.

Reply: The criteria used in determining whether service is reasonably adequate are designed to ensure that no rural area is trapped with inferior, substandard service. As stated previously, there is a distinction between wireline, mobile, and special telecommunications services. It is prudent, therefore, to have separate criteria for determining adequate service for each type of service being offered. The RE Act requires the Administrator of RUS to determine that a loan will not result in the “duplication of lines, facilities, or systems, providing reasonably adequate services” where a state does not have the authority to issue a certificate of convenience and necessity.

If the existing service is not reasonably adequate, an RUS loan to improve service does not result in duplication. Since the types of service mentioned above are distinct, they require an adequacy definition that is unique to that specific type of service. With regard to the affordability of rates, RUS believes that service available only at extremely high rates that render it inaccessible to subscribers in rural areas is not adequate. The evaluation of whether rates are affordable to rural subscribers is made only to determine whether RUS will make a loan in a particular situation and is clearly different from the regulatory judgement of whether rates are reasonable.

Comment: The Associations asserted that the proposed rule changes should not be made applicable to the Rural Telephone Bank (RTB), stating that injecting “new classes of stockholders” into existing stockholders would impede accelerated privatization and potentially harm the legitimate interests of the existing equity owners of the Bank.

Reply: Concurrent lending (whereby a borrower applying for a loan from RUS must receive part of its funding requirement from the RTB) was mandated by Congress through passage of the Rural Electrification Loan Restructuring Act of 1993. Today, the RTB operates as an agency of the Federal government, fulfilling its role as a supplemental lender to those entities eligible to borrow from RUS. All rules and regulations governing the processing and purposes of loans for RUS borrowers also apply to the RTB. No “new classes” of borrowers would result from this rule. New borrowers would purchase Class B stock in the same manner as existing borrowers and they would receive the same privileges associated with stock ownership. Privatization of the RTB, as proposed by the President's budget, will benefit all borrowers, whatever types of service they provide. It should be noted that the rate of privatization rests in the control of the RTB Board of directors. However, in recent years, that control over the decision to privatize or not, has been limited by Congressional appropriations language that effectively removes the Board's power to privatize the RTB.

Comment: GTE objected to the criterion that plant be capable of Start Printed Page 54402carrying Internet access at speeds of at least 28.8 Kbps in determining whether service is reasonably adequate. They stated that such a requirement would dictate significant upgrades and modifications to existing networks at substantial costs. For instance, they stated that loops that are loaded and exceed 18,000 feet would have to be redesigned for service through a remote switch unit or digital loop carrier (DLC). In addition, they stated that end-user and Internet service provider equipment beyond the control of the LEC could have a negative effect on the ability to achieve the prescribed speed.

Reply: All RUS financing provided since 1993 must provide for the construction of telecommunication plant that is consistent with provision of various broadband services. Specifically, the Rural Electrification Loan Restructuring Act of 1993 limited RUS to making loans only to borrowers that were participating in statewide telecommunications modernization plans. RUS provided the essential minimum requirements for the development of such plans (see 7 CFR 1751.100 et seq.). This included building plant that was capable of evolving toward broadband deployment and the elimination of loaded plant in new construction. RUS cannot set a lower standard for determining “adequate service” for new entrants.

Comment: NTCA, quoting the National Exchange Carriers Association's $10.9 billion estimate for completing upgrades for broadband capability throughout NECA's rural study areas, stated that RUS should reserve its funding to complete the unfinished business of bringing broadband to rural areas.

Reply: As noted in the previous reply, RUS has been providing funding to further the deployment of broadband services in rural areas. RUS does not believe, in view of the many ways now available to provide telecommunications services, that funding to provide these services should be limited to just LECs. The investment needed, as noted in the comment, will be formidable. However, by targeting areas where service is nonexistent or inadequate, RUS hopes to use its loan funds to, within the limits of the RE Act, finance broadband services where they are needed the most.

Comment: iSKY requested that RUS modify its rule to clarify that satellite-based specialized communications services capable of covering broad geographic areas are not automatically precluded from RUS funding on the basis of duplication of services.

Reply: RUS is “technology neutral”—it lends to finance the service to be provided, not the technology used to provide that service. Where no service currently exists, or where existing service is inadequate, RUS may fund a carrier to provide such service, delivered by any means. RUS will work with any provider to try to devise a feasible method for providing the service to rural areas. Where service is to be provided to both rural and nonrural areas, see 7 CFR 1735.13.

Comment: The Rural Community Assistance Corporation, City of Granite, Umatilla County Board of Commissioners, Greater Eastern Oregon Development Corporation, and City of Heppner all expressed strong support for the proposed changes to the regulations. Citing the need for advanced telecommunications in rural communities as the single most promising opportunity to prosper and grow, these organizations applauded RUS' efforts to help ensure that rural America receives the same services and benefits as its urban counterparts.

Reply: RUS appreciates the support and involvement of the commenters' organizations in bringing advanced telecommunications technologies to rural America.

Good cause is shown to make this rule effective on the date of publication in the Federal Register because any further delay would contribute to denying benefits to residents in rural areas. This rule is part of an Administration initiative to ensure that rural areas receive access to all types of telecommunications services—services already available to urban residents. Part of the intent of that initiative is to provide funding, this fiscal year (fiscal year 2000), to entities to provide advanced telecommunications service where that service does not exist or is inadequate. In order to do that, applicants must have time to prepare and submit applications in accordance with this and other applicable RUS regulations; RUS must also have adequate time to process and approve eligible applications. A delay in the effective date of this rule of 30 days, coupled with application preparation, review and processing times, would undermine the ability to provide funding this fiscal year, thereby denying benefit to rural residents.

7 CFR part 1735 was previously amended through publication in the Federal Register on July 11, 2000, at 65133. This final rule further amends 7 CFR part 1735, as amended by those amendments published July 11, 2000.

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List of Subjects in 7 CFR Part 1735

  • Accounting
  • Loan programs—communications
  • Reporting and recordkeeping requirements
  • Rural areas
  • Telephone
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For the reasons set forth in the preamble, 7 CFR chapter XVII is amended as follows:

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1. The authority citation for part 1735 continues to read as follows:

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Authority: 7 U.S.C. 901 et seq., 1921 et seq., and 6941 et seq.

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2. In § 1735.2, revise the definition of Mobile telecommunications service and add the following definitions in alphabetical order to read as follows:

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Exchange access means the offering of access to telephone exchange services or facilities for the purpose of the origination or termination of telephone toll services.

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Local exchange carrier (LEC) means an organization that is engaged in the provision of telephone exchange service or exchange access.

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Mobile telecommunications service means radio communication voice service between mobile and land or fixed stations, or between mobile stations.

Modernization Plan (State Telecommunications Modernization Plan) means a State plan, which has been approved by RUS, for improving the telecommunications network of those telecommunications providers covered by the plan. A Modernization Plan must conform to the provisions of 7 CFR 1751, subpart B.

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RE Act means the Rural Electrification Act of 1936, as amended (7 U.S.C. 901 et seq.).

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Specialized telecommunications service means any telephone service other than telephone exchange service, exchange access, or mobile telecommunications service.

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Telecommunications means the transmission or reception of voice, data, sounds, signals, pictures, writings, or signs of all kinds, by wire, fiber, radio, light, or other visual or electromagnetic means. Start Printed Page 54403

Telephone exchange service means: (1) Service provided primarily to fixed locations within a telephone exchange, or within a connected system of telephone exchanges within the same exchange area operated to furnish to subscribers intercommunicating service of the character ordinarily furnished by a single exchange, and which is covered by the exchange service charge; or

(2) Comparable service provided through a system of switches, transmission equipment, or other facilities (or combination thereof) by which a subscriber can originate and terminate a telecommunications service.

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3. Revise § 1735.10(c) to read as follows:

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(c) A borrower receiving a loan to provide mobile telecommunications services or special telecommunications services shall be considered to be participating in the state telecommunications plan (TMP) with respect to the particular loan so long as the loan funds are not used in a manner that, in RUS' opinion, is inconsistent with the borrower achieving the goals set forth in the plan, except that a borrower must comply with any portion of a TMP made applicable to the borrower by a state commission with jurisdiction.

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4. In § 1735.12, revise paragraph (c) and add paragraph (f) to read as follows:

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(c) RUS shall consider the following criteria for any wireline local exchange service or similar fixed-station voice service provided by a local exchange carrier (LEC) in determining whether such service is reasonably adequate:

(1) The LEC is providing area coverage as described in § 1735.11.

(2) The LEC is providing all one-party service or, if the State commission has mandated a lower grade of service, the LEC is eliminating that service in accordance with the requirements of the Telecommunications Act of 1996, 47 U.S.C. 151 et seq.

(3) The LEC's network is capable of providing transmission and reception of data at a rate of at least 1,000,000 bits per second (1 Mbps) with reasonable modification to any subscriber who requests it.

(4) The LEC makes available custom calling features (at a minimum, call waiting, call forwarding, abbreviated dialing, and three-way calling).

(5) The LEC is able to provide E911 service to all subscribers, when requested by the government entity responsible for this service.

(6) The LEC is able to offer local service with blocked toll access to those subscribers who request it.

(7) The LEC's network is capable of accommodating Internet access at speeds of at least 28,800 bits per second (28.8 Kbps) via modem dial-up from any subscriber location.

(8) There is an absence of frequent service interruptions.

(9) The LEC is interconnected with the public switched network.

(10) No Federal or State regulatory commission having jurisdiction has determined that the quality, availability, or reliability of the service provided is inadequate.

(11) Services are provided at reasonably affordable rates.

(12) Any other criteria the Administrator determines to be applicable to the particular case.

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(f) RUS shall consider the following criteria for any provider of a specialized telecommunications service in determining whether such service is reasonably adequate:

(1) The provider of a specialized telecommunications service is providing area coverage as described in § 1735.11.

(2) An adequate signal strength is provided throughout the largest practical portion of the service area.

(3) There is an absence of frequent service interruptions.

(4) The quality and variety of service provided is comparable to that provided in nonrural areas.

(5) The service provided complies with industry standards.

(6) No Federal, State, or local regulatory commission having jurisdiction has determined that the quality, availability, or reliability of the service provided is inadequate.

(7) Services are provided at reasonably affordable rates.

(8) Any other criteria the Administrator determines to be applicable to the particular case.

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Dated: September 5, 2000.

Inga Smulkstys,

Acting Under Secretary, Rural Development.

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[FR Doc. 00-23092 Filed 9-7-00; 8:45 am]