Public bonds to finance publicly owned open access regional fiber

Private capital is recognizing the long-term asset value of fiber to the premises (FTTP) advanced telecommunications distribution infrastructure and its ability to generate long term revenue over its estimated 30 to 50-year lifespan. It also offers first mover advantage given FTTP functions as a terminating natural monopoly. The provider that makes the initial fiber connection is unlikely to face competition later from another fiber builder and will own the customer premise for decades.

That’s evidenced in the many private equity deals over the past year with investor owned FTTP players including a joint venture between BlackRock Capital Investment and AT&T. Fundamentally, this is a regime change, shifting away from the more constrained investment model of the large incumbent telephone companies. With their highly leveraged balance sheets and the need to pay large shareholder dividends, the short term value analysis has prevailed. Hence, FTTP deployment is deployed conservatively to areas where ROI and ARPU are projected to be the most favorable, leaving most without.

Now the public bond markets have the opportunity to similarly recognize the long term value and relative safety offered by FTTP networks. To spread risk and cost of deployment to gain economies of scale – particularly important amid labor and supply chain constraints and rising interest rates -- that investment would optimally be leveraged by regional public owned networks.

A model potential path ahead lies in Vermont. In that state, one regional network comprised of 31 towns formed under state law as a Communications Union District (CUD) obtained a BB rating for its $7.53 million 2023 Series A bonds from S&P Global, the nation’s preeminent credit rating agency. “This is a historic moment,” said Stan Williams, ECFiber’s municipal finance advisor. “For the first time, a CUD will be issuing a rated bond, which means that many more investors will be competing to buy those bonds, lowering the interest rate.”

That financing could potentially be expanded significantly if the nine CUDs operating in the state jointly issued a bond to fund their expansion. That could also enhance end user affordability with the financing costs spread over a much larger base.

Doing so would help ensure Vermont can meet its goal of getting FTTP to every location connected to the electrical grid by the end of 2028, particularly given a state audit report earlier this year that identified uncertainly associated with federal grant funding as a risk to attaining it, pointing out the need to identify other funding sources. The audit also noted CUDs have not been partnering for procurement of goods and services, risking higher costs and inferior outcomes.