First 20% of BEAD infrastructure funds come with restrictions

As the new year gets fully underway, states are developing their required Five Year Action Plans laying out how they plan to address advanced telecommunications access and affordability using funds from the National Telecommunications and Information Administration’s (NTIA) Broadband Equity, Access and Deployment (BEAD) program and other sources.

As these plans are being drafted, questions are likely to naturally arise over exactly where states can use these funds that can cover up to 75 percent of capital construction costs. According NTIA guidance spelled out in a Notice of Funding Opportunity (NOFO), the initial 20 percent of infrastructure funding is limited to projects that meet both of these criteria:

1. Service (with a strong preference for fiber to the premise) to addresses that cannot order service that provides throughput of at least 25/3 Mbps with latency low enough to support real-time, interactive application.
2. Locations where the number of households with incomes below 150 percent of the federal poverty level exceed the national average.

Some states may find it difficult to identify qualifying projects with a significant number of dwellings while adhering to these eligibility restrictions.

Low income households may have access to legacy DSL and wireless service from mobile wireless providers using licensed spectrum meeting the first condition that would disqualify a proposed project that would bring them fiber connections. That won’t further the digital equity goal of BEAD since many if not most of these are smartphone dependent households that could benefit from fiber connections that would promote broader access to digital services.

Homes at the exurban edges of metro areas and in small towns that have seen substantial in migration from knowledge workers in recent years but which have historically suffered weak advanced telecommunications infrastructure also aren’t likely to qualify for BEAD subsidies due to household incomes exceeding the NOFA guideline.

So where will the money end up going?

Given the eligibility guidelines, incumbent providers selected by states as subcontractors could use it to fund line extensions to a small number or even individual homes in low income areas since the NOFO states an eligible project could be a single home or group of homes provided at least 80 percent meet condition #1 above (“unserved) or are considered “underserved” and unable to order service offering throughput of 100/20 Mbps if a state has sufficient funding to subsidize fiber projects connecting them.

The incumbent providers have a good idea where these addresses are located having since they are unlikely to meet their internal return on investment (ROI) standards or offer sufficient average revenues per unit (ARPU) and have thus not been prioritized for fiber delivery infrastructure.

Some possible areas could be small groups of homes in low income areas of the rural south, Appalachia and isolated tribal lands. But even with construction costs largely subsidized by BEAD, households not in tribal areas wouldn’t likely to be seen as providing sufficient ARPU revenues to cover operational costs over the longer term given the requirement on providers to offer low cost service of $30 per month or less. The limit is higher in tribal areas: $75 per month or less. That could favor projects in these areas.

Projects in remote areas could also see BEAD funding under a provision of the NOFO that funds projects in high cost and extremely high cost areas. Projects in the latter could substitute delivery infrastructure technologies other than fiber prioritized for BEAD funded projects.

Fiber flippers: Private equity investment in FTTP

For market-based providers, a fundamental reason why the modernization of legacy copper telecommunications delivery infrastructure to fiber has been slow is lack of patient investment capital. Shareholders of the dominant telephone and cable companies that operate as rent seeking natural monopolies are reluctant to upgrade and build out fiber in the service territories of these companies. These are risk averse, impatient investors who expect a quick return on capital investment within five years or so. They fear significant capex will erode their historically fat shareholder dividends that are a feature of these rent seeking natural monopolies. That short investment timeline is poorly aligned with investing in infrastructure with its large upfront costs and long wait for ROI, notwithstanding the lower opex costs of fiber modernization from legacy metallic plant.

In a similar vein, one would not expect relatively impatient investment capital in the form private equity and asset management firms would find investing in fiber to the premise (FTTP) infrastructure appealing. But it’s ironically occurring.

A prominent example is AT&T’s recently announced joint venture with the asset management firm Blackrock, Gigapower. Blackrock will take some of the capex burden off AT&T shareholders to allow the company to increase fiber deployments including in areas not within AT&T’s traditional service territory. Here, Blackrock is effectively serving as a bridge capital provider, stumping up capex dollars that AT&T would be reluctant to make out of its own funds in order to boost revenues. While the terms and conditions of the deal are not public, Blackrock would likely sell its stake to AT&T after several years, with AT&T paying a premium on that investment in order to capture more FTTP customers during that period than it might otherwise on its own.

Although Gigapower is nominally structured with an open access wholesale business model, AT&T will likely end up the sole service provider consistent with its current business model that recognizes owning the fiber connection to the customer means owning the customer.

Another example is playing out in the WISP space. Private investment company GI Partners recently acquired Rise Broadband with an eye on fibering its fixed wireless customer base. “GI Partners is committing meaningful new capital to improve customer experience and accelerate Rise Broadband’s rollout of fiber-to-the-home services for rural American homes and businesses,” GI Partners said in a news release this week announcing the deal. “Rise’s existing network infrastructure is uniquely positioned to execute a fiber expansion effort that will provide rural communities with next generation broadband service.” Investing in WISPs appears logical in that by definition, residential WISP customers are not passed by fiber, thus offering fiber deployers first mover advantage. That new fiber could in turn be flipped to a larger provider looking to roll up a larger customer base.

In July 2022, private equity firm Oak Hill Capital announced that it formed Omni Fiber “to bring to market a new option for high-speed Internet service in small and mid-sized markets in the Midwest that have historically been underserved by the large phone and cable companies.” The firm said its $250 million investment will “bring state-of-the-art fiber Internet, TV, and phone services to homes and businesses in communities across the Midwest.”

While some of these private FTTP investment deals will likely look to states for a share of the $43.45 billion appropriated as grants to the states in the Infrastructure Investment and Jobs Act of 2021 (IIJA) for advanced telecommunications infrastructure, Oak Hill said Omni Fiber “will not need to rely on grants or subsidies from federal, state, or local governments to build its network.”

2023 could be watershed year in U.S. telecom policy

America’s long struggle to modernize its legacy metallic copper telephone and coax cable TV telecommunications delivery infrastructure to fiber – now in its fourth decade – continues as 2023 begins.

The legacy providers are selectively deploying fiber that doesn’t pass a large majority of American homes. A policy of universal service/non discrimination that existed with voice telephone service under Title II of the federal Communications Act that regulated it as a common carrier utility would speed up the transition.

However, U.S. policy regards Internet connectivity as a discretionary information service like America Online and CompuServe were in the 1990s and not as a telecommunications utility. This is notwithstanding public health measures taken during the COVID-19 pandemic that boosted the need for Internet access, clearly establishing it as a de facto utility.

Not being regulated as a common carrier telecommunications utility that would mandate Internet service be provided to any customer who reasonably requests it, legacy landline providers lack incentive to upgrade and build out fiber to all addresses in their service territories. Accordingly, they deploy fiber only in select market segments or “footprints” compatible with their business models that demand rapid ROI and high ARPU in line with investor expectations. Moreover, there is no policy explicitly linking subsidies to support fiber construction and operation in high cost areas of the nation to support universal service as with voice telephone service.

Subsidy programs instead of supporting comprehensive modernization to fiber instead are largely a mix of multiple one-off grants to increase throughput or “broadband speed” in a discrete geographic area. Eligibility requirements typically exclude funding for fiber in these areas where incumbent providers -- including mobile wireless carriers -- advertise throughput meeting a minimum standard regardless of whether it can be delivered.

That has sparked tensions between states and the federal government over the latest and largest grant program under the Infrastructure Investment and Jobs Act of 2021 (IIJA) appropriating $43.45 billion as grants to the states for the construction of advanced telecommunications infrastructure. States complain grant eligibility requirements are based on outdated and unrealistic data that will leave them shorted. Even so, the total grant dollars are insufficient to bring fiber to most every American doorstep excepting extremely remote and isolated locations, consistent with the history of vastly oversubscribed grant programs where applications far exceed available funds.

A watershed moment could come in 2023 as disgruntled states and their elected representatives – who have heard constituent complaints about poor access to service for many years -- revolt against the federal government, concluding federal policy is aimed more at erecting barriers to progress and protecting legacy telephone and cable companies than serving their residents.

Consequently, states could openly defy the federal government and broadly devise their own policies to create near universal fiber access and to support construction and operational costs, using their bonding capacity to underwrite them. These would be significant sums that for some states could equal the amount the IIJA allocated for the entire nation.

In order create the policy foundation, states would have to deem fiber as essential to their residents and economies as roads and highways, contracting with private sector providers as they do for transportation infrastructure to design, build and maintain this advanced telecommunications infrastructure.