A rural broadband group planning to offer superfast net services in Oxfordshire has been told that the project cannot go ahead, the BBC has learned.
A similar project in Dorset was turned down last month.
It comes just weeks after a report criticised the government for wasting taxpayers' money by giving all of its broadband funds to BT.
Those involved are angry that BT will monopolise rural broadband rollouts.
Both Oxfordshire and Dorset county councils have signed contracts with BT to provide broadband services to rural areas.
These contracts mean that alternative schemes are no longer required.
Having competition in the broadband market is important, think experts.
"Some of the niche operators want to deliver better and faster services now, and don't understand how BT can win contracts on what they believe is a weaker product," said Sebastien Lahtinen, founder of broadband news site ThinkBroadband.
BDUK, the group set up by government to oversee rural broadband rollouts, has been widely criticised for how it has handled the process.
All contracts in England and Wales have been awarded to BT, which is providing so-called fibre-to-the-cabinet (FTTC) services to the majority of UK homes.
Fibre to the cabinet provides fibre to the green street cabinets that are located in towns and villages around the UK but relies on old-fashioned copper connections to reach individual homes, meaning that the further a home is from the cabinet, the slower the service will be.
Most of the rival rural broadband providers want to roll out fibre-to-the-home (FTTH) services, which run fibre all the way to premises and are faster than FTTC.
As well as doubts about whether that is the best technology to use, there has been outrage that taxpayers' money has gone to a former telecom monopoly.
A recent report from the Commons Public Accounts Committee (PAC) said that the government needed to spend funds set aside to get superfast broadband to the last 10% of the UK more wisely.
As part of the process to get broadband to the really hard-to-reach parts of the UK, broadband groups were encouraged to bid for a separate pot of money, known as the Rural Broadband Community fund.
In July, Culture Secretary Maria Miller lent her support, saying that innovative broadband schemes like those in Dorset and Oxfordshire should "co-exist happily alongside the wider rural broadband scheme, led by BT."
The Cotswolds Broadband scheme aimed to provide fibre-to-the-home services to 5,000 premises in West Oxfordshire.
It was disappointed to find out that the scheme cannot go ahead.
"Oxfordshire County Council has supported this all along but has now decided it is not going to separate it from their contracted plans with BT," said Hugo Pickering, head of Cotswolds Broadband.
"We have already put in a whole lot of money and so the council may receive a compensation claim," said Mr Pickering.
Mr Pickering later
He believes his scheme would have offered better value for money for taxpayers because the majority of it is privately funded by residents and other interested parties.
"We only wanted 34% of state aid, which is much lower than BT, which in some cases is asking for 90% state aid," he said.
It is a point echoed by Steve Adamson, who runs a similar scheme in Dorset, aiming to run fibre networks along disused rail tracks.
"Our scheme offered fibre to the home, which is not what BT is offering. It was going to be better and it was going to be cheaper," he said.
"The decision was delayed until such time as the county council had signed its contract with BT. It became clear that BT intended to include the area we were going to cover leaving our scheme dead in the water."
A third rural broadband scheme, B4RN, that is already up and running in Lancashire, is waiting to hear whether it will qualify for Rural Broadband Community funding.
Chris Conder, one of the founders of B4RN, told the BBC: "There should be a level playing field and no cheating when it comes to taxpayers' money. BT is effectively stopping any innovation or competition and reducing the effectiveness of government support."
B4RN is due to meet with BDUK shortly.
Mr Lahtinen is not surprised that BT is dominating rural broadband.
"BT has an existing nationwide wholesale broadband platform and channel which ensures consumers have a wide range of choice as to who they buy their broadband service from," he said.
"Many councils are also likely to see BT as a 'safe option' as so many other councils have made the same decision."
In response BT told the BBC: "It is up to the local council to decide who they work with on rural broadband. Having said that, a key consideration is that any network which benefits should be open to all ISPs to use. That way, local monopolies are avoided and customers have choice.
"BT has spent huge sums developing systems that support such competition and it may be the case that small local operators can't meet those conditions and are therefore ineligible to receive public funds."