Private activity bonds could fund regional open access fiber networks

Nearly all U.S. airports are owned by state or local governments, mandated by the federal government to be as self-sustaining as possible, and thus receive little or no direct taxpayer support, according to the Airports Council International-North America (ACI-NA), an industry association representing local, regional and state governing bodies that own and operate commercial airports in the United States and Canada.

Over the past decade, according to the ACA-NA website, about 60 percent of bonds issued to finance airport capital projects were issued as private activity bonds, a type of municipal bond that is issued to finance a facility that serves a public purpose for the benefit of a private user – in this case airline companies. “Private activity bonds used for airport construction and renovation—are the most cost-efficient form of infrastructure financing available today,” the ACA-NA states.

Section 80401 of the Infrastructure Investment and Jobs Act (IIJA) amended Section 142(a) of the Internal Revenue Code of 1986 to specifically include advanced telecommunications infrastructure as an eligible use of private activity bond proceeds. Specifically, for “qualified broadband projects.”

On its face, the eligibility definition is more generous than the IIJA’s Broadband Equity, Access and Deployment (BEAD) program providing grant funding of up to 75 percent of infrastructure deployment costs. Basic BEAD eligibility is limited to builds where at least 80 percent of serviceable addresses lack access to infrastructure providing throughput of at least 20Mbps for downloads and 3Mbps for uploads with latency below 100ms. There is no definition of the minimum number of addresses that must be included. Projects could be as small as a handful of addresses or even a single address.

Eligibility for private activity bond funding is available for projects in one or more census block groups in which more than 50 percent of residential households do not have access to fixed, terrestrial broadband service which delivers at least 25Mbps downstream and at least 3Mbps upstream. Funded projects must provide access with at least 100Mbps for downloads and 20Mbps megabits for second for uploads.

That appears looser than the basic BEAD “unserved” eligibility standard of at least 80 percent of serviceable addresses unserved. But then it gets tighter with an additional qualification, unfortunately creating ambiguity. Private activity bond funding is available “only if at least 90 percent of the locations provided such access under the project are locations where, before the project, a broadband service provider— (i) did not provide service, or (ii) did not provide service meeting the minimum speed requirements.”

In another unfavorable provision, the IIJA amendment to the Internal Revenue Code opens this financing mechanism to potential incumbent gaming and stalling, further requiring existing providers be notified of a planned project and its intended scope and given at least 90 days to provide information on their ability to deploy, manage, and maintain a network capable of providing access at gigabit speeds – essentially fiber to the premises (FTTP).

The aeronautical analogy easily translates to publicly owned regional open access fiber network such as the Utah Telecommunication Open Infrastructure Agency (UTOPIA). Kimberly McKinley, UTOPIA’s chief marketing officer, described its partnership with an open access FTTP network rolling out in Bozeman, Montana as similar to city or state construction financing for airports, according to a recent article in the Bozeman Daily Chronicle.

UTOPIA is also partnering with the Golden State Connect Authority, a joint powers authority of 40 less densely developed California counties to build publicly owned open access FTTP. Its chair, Calaveras County Supervisor Jack Garamendi, compared it to a regional airport authority in a 2022 interview with the Electronic Frontier Foundation.

States will likely need additional federal funding to attain universal service under BEAD Five-Year Action Plans

The National Telecommunications and Information Administration’s (NTIA) Broadband Equity, Access and Deployment (BEAD) program – part of the Infrastructure Investment and Jobs Act (IIJA) – requires states that received planning grants in 2022 to develop “Five-Year Action Plans” in 2023 that will inform their requests for $42.5 billion in grants to subsidize advanced telecommunications infrastructure.

The plans must include “a comprehensive, high-level plan for providing reliable, affordable, high-speed internet service throughout the (state) including the estimated timeline and cost for universal service.” Additionally, the plans must include planned utilization of federal, state, and local funding sources to pay for it.

As with any infrastructure, it won’t come cheap. Hence the $42.5 billion BEAD allocates to states to subsidize construction costs. But BEAD also requires states to "rigorously explore ways to cover a project’s cost with contributions outside of the BEAD program funding." In developing their Five-Year Action Plans, states will have to determine to what extent they will have to cover shortfalls by, for example, issuing long term bonds to finance construction. 

And whether they will legislatively mandate universal service, requiring existing investor owned providers honor connectivity requests at serviceable addresses as proposed California legislation would do by deeming Internet service a public utility and establishing state policy of digital equity as a right of access. Or to fund public or consumer utility cooperative owned fiber to the premise (FTTP) infrastructure as a means of ensuring digital inclusion and equity as required by BEAD given challenges faced by investor owned providers that frequently scale back deployment plans to accommodate their business model constraints.

It's likely states could conclude that in order to attain universal service, they will need additional federal funding. That is evidently contemplated in BEAD. As part of their Five-Year Action Plans, states must detail technical assistance and “additional capacity needed for successful implementation of the BEAD Program.”

1996 Telecom Act, IIJA reflect America’s slow transformation and progress toward digital socio-economy

The United States innovated most of the information and communication technologies (ICT) that over the past 40 years that are transforming an analog socio-economy into a digital one. But the nation has lagged in the transition. Much of its existing telecommunications infrastructure is designed for an analog 20th century world of voice telephone service over twisted pair copper and premium television channels over coaxial cable.

America’s slow modernization of its legacy copper telephone system to fiber reflects the prolonged transition from an analog-based socio economy to a digital one in the 21st century. Related to this is that many Americans do not utilize ICT to allow their “full participation in the society and economy of the United States” according the Infrastructure Investment and Jobs Act (IIJA) of 2021.

At the close of the 20th century, the Telecommunications Act of 1996 foresaw the digitization of the telecommunications as the mass market Internet was taking off and some regional telephone companies filed plans with state regulators to offer two way video over fiber. But because the Internet as a means of communication was new, its drafters believed market competition would bring about reliable and affordable Internet connectivity as well as Internet-enabled devices and applications and online content.

The market competition will float all boats theory failed to reflect reality relative to Internet connectivity. A quarter century after the law was enacted, millions of Americans lack reliable and affordable connectivity, creating a “digital inclusion” challenge as it is described in the IIJA. Instead, market forces led to market segmentation, leaving lots of locations unconnected. The reason is making those connections isn’t that different from other utilities. Like voice telephone service, those copper cables that delivered it every home and business voice telephone service function as a natural terminating monopoly that doesn’t operate as a competitive market due to high cost barriers to competitor entry and first mover advantage.

That fundamental flaw in the 1996 Telecom Act left the nation further behind than where it should be for deployment of robust digital infrastructure with the old analog copper twisted pair telephone connections replaced with fiber reaching most every doorstep by 2010 at the latest. Over the interim, substandard and less reliable substitutes were employed such as Digital Subscriber Line (DSL) over copper and fixed and mobile wireless and satellite technology.

The IIJA while nominally an infrastructure measure that allocates federal dollars to states to build out advanced telecommunications infrastructure, like the 1996 Telecom Act, it doesn’t affirmatively  specify fiber to the premises (FTTP) infrastructure. However, the National Telecommunications and Information Administration (NTIA), charged with administrating the federal funds to the states, states a clear preference for FTTP. In that regard, public policy is slowly advancing into the digital age.