States face major challenge to develop plans for universal FTTP access

Given America’s highly fragmented, piecemeal deployment of fiber to the premises (FTTP) over the past few decades that continues in the current one, states are confronting a significant challenge to develop plans to ensure it reaches most every doorstep.

Last year, all states and territories received planning grants under the National Telecommunications and Information Administration’s (NTIA) Broadband Equity, Access and Deployment (BEAD) program – part of the Infrastructure Investment and Jobs Act (IIJA).

That funding requires states to develop Five-Year Action Plans in 2023 that will inform their requests for $42.5 billion in grants to subsidize advanced telecommunications infrastructure, with priority afforded to FTTP. 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.” 

This comes amid a rapid increase in FTTP deployment that some have likened to a land grab in order to obtain first mover market advantage. Conditions are ripe. FTTP is a virtually unregulated natural monopoly with strong demand, present and future. That makes it attractive to investor-owned companies where those factors combined with sufficiently high development density and household incomes support the business case. Private equity has even gotten in on gold rush, hoping to flip fiber assets in the future to large providers looking to expand their footprints without investing their own capital by rolling up smaller players.

Local governments that have for years heard complaints from residents and businesses about poor Internet access that grew louder during the public health restrictions of the pandemic that turned homes into places to work and study are handing over their federal pandemic relief dollars to incumbent providers to build FTTP.

Some local governments are building their own. Others have banded together to form regional telecommunications authorities to deploy FTTP where the business case is weak for investor owned providers. In rural areas, electric utility cooperatives are getting into the telecommunications business with FTTP.

Since the U.S. regards Internet protocol (IP) telecommunications as an information service and not a utility (that could change in California under proposed legislation), none of these providers are required to extend FTTP to any home or business that requests service. The result is disparate deployment in discrete areas, leaving a lot of holes in the FTTP Swiss cheese.

Consequently, states face significant challenges to attain a goal of universal FTTP access and developing a meaningful plan that closes the gaps with insufficient market or regulatory incentive for the various aforementioned providers to fill them amid a tight labor market for FTTP technicians and installers.

The $42.5 billion in grants to subsidize advanced telecommunications infrastructure appropriated in the IIJA is intended to help achieve that under the NTIA’s Internet for All initiative, allowing states to contract with providers to build infrastructure and cover up to 75 percent of the capital cost of deployment.

However, as currently structured under the IIJA, those subsidies aren’t targeted to underwriting FTTP. Much of it could end up being requested by cable companies to incrementally edge out their existing coax footprints since the NTIA rules on BEAD funding allow awards for projects of a small number of serviceable addresses and even a single address. Moreover, the NTIA’s BEAD eligibility requirements bar subsidization where a mobile wireless provider using licensed spectrum also advertises fixed premise service meeting minimum throughput standards.

The luxury connotation of advanced telecom -- why it’s still called “broadband.”

Three decades ago, the United States failed to put in place a transitional process to modernize twisted pair copper telephone infrastructure designed in the 20th century for analog voice telephone service to fiber for digital Internet protocol (IP) services that emerged in the late 1980s and early 1990s. It should have been seen as a natural evolution of telecommunications technology.

Instead, the legacy copper infrastructure was kept in place and advanced telecommunications was framed as an enhanced service under the name “broadband.” Basic service was dialup -- relatively inexpensive and affordable to most households and small businesses. By contrast, broadband was always on and allowed end users to access digital voice, web pages, images and video that dialup could not. That distinguished it a premium luxury service providing a far richer amount of information and content.

Broadband was a natural for Cable TV – an enhanced, premium service over television signals broadcast on the public airwaves. Cable companies got into the broadband business in a big way and are now the dominant providers of advanced telecommunications connectivity.

Hence, “broadband” connoted a luxury upgrade over narrowband dialup. As with any luxury, it comes at a price premium and is marketed to select households likely to upgrade. The more broadband, the higher the price.

The term “broadband” is so widely used today it’s become shorthand for advanced telecommunications capability. The luxury connotation has stuck. It’s fundamental to the challenges the nation faces with access and affordability now that advanced telecommunications like the voice telephone service before it has become a basic utility and not a luxury.

Francella Ochillo, Executive Director, Next Century Cities, reinforced the point at the annual Silicon Flatirons conference earlier this month:

“We could hide behind the internet's new and it's really a luxury. And it was really very strategic to even use that language to call it a luxury, because then it made it OK if everybody didn't have it. And I'm not saying that that's intentional. I'm saying that that's just real. And whether or not it's intentional, that was the impact. And so when we're in a moment where we have to start questioning structures, and thinking about why have we been doing it that way for that long.”

It was intentional however to the extent the framers of the 1996 Telecom Act also saw IP powered advanced telecommunications as new. Because it was novel, the thinking went, let’s keep policy technology neutral and see how market competition will evolve to deliver it to homes, schools and businesses. And not establish fiber to as the advanced telecommunications delivery infrastructure standard even though it predates the emergence of IP telecommunications by two decades.

Then as now, fiber was a proven technology for delivering advanced telecommunications services that wasn’t going to be obsoleted by another technology anytime soon. That’s seen in 2023 as public policymakers at all levels of government look to speed fiber connections to nearly every American doorstep, making them as ubiquitous as copper telephone line connections.

States could designate ISPs as public utilities as strategy to attain universal service

The National Telecommunications and Information Administration’s (NTIA) Broadband Equity, Access and Deployment (BEAD) program guidance spelled out in its Notice of Funding Opportunity (NOFO) requires states as part of their Five Year Action Plans to develop “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.”

A potential component of these plans could be legislation deeming companies providing advanced telecommunications as common carrier public utilities and thus mandated to offer universal service to all of a state’s serviceable addresses. These are defined in the BEAD NOFO as “a business or residential location in the United States at which fixed broadband Internet access service is, or can be, installed.”

California legislation introduced this month (AB 1714) would designate these providers as common carrier public utilities. Other states could take a similar route in developing the universal service component of their Five Year Plans due to the NTIA this year.

Voice telephone service is regulated as a common carrier public utility under Title II of the Communications Act of 1934. Per the law, "It shall be the duty of every common carrier engaged in interstate or foreign communication by wire or radio to furnish such communication service upon reasonable request therefor..." It also bars them from “unjust or unreasonable discrimination” in “charges, practices, classifications, regulations, facilities, or services.”

The federal government has declined to regulate providers of advanced telecommunications as such, instead opting to regulate them as “information services” under Title I of the statute. Since information services are not classified as common carrier utilities, they are not subject to the universal service and non-discrimination mandates. That has led to substantial problems with access and affordability with advanced telecommunications that BEAD aims to remedy.

Feds punt universal advanced telecommunications service to the states

The U.S. federal government has whiffed multiple times over the past three decades when it comes to mandating universal service for advanced telecommunications as it did for analog voice telephone service before it. A universal service mandate recognizes that telecommunications infrastructure like other utility infrastructure functions as a natural monopoly because of high cost barriers to competitor entry and first mover advantage accorded incumbents limit choice among multiple sellers.

It first did so in the Telecommunications Act of 1996. The statute includes language stating legislative intent that access to advanced telecommunications and information services should be provided in all regions of the Nation including rural and high cost areas -- but no means to ensure that it would.

The closest federal policy came to mandating universal access to advanced telecommunications was in 2015 when the Federal Communications Commission (FCC) placed Internet protocol telecommunications under Title II of the Communications Act of 1934, classifying it as a common carrier utility requiring reasonable requests for service be honored and barring neighborhood redlining. The FCC declined to enforce a regulation adopting the reclassification and reversed course in 2018, repealing it.

Instead, the FCC and state public utility commissions must merely “encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans … in a manner consistent with the public interest, convenience, and necessity” per 47 U.S. Code § 1302(a). The statute also turns economic logic on its head by mandating these regulatory bodies promulgate “measures that promote competition in the (aforementioned natural monopoly) local telecommunications market.”

In 2021, the feds punted the universal service issue to the states with the Infrastructure Investment and Jobs Act that appropriates $42.5 billion in grants to the states to subsidize advanced telecommunications infrastructure and prioritizing funding of fiber to the premise (FTTP) delivery infrastructure. The funding is administered under the National Telecommunications and Information Administration’s (NTIA) Broadband Equity, Access and Deployment (BEAD) program.

The BEAD program requires states to develop “Five-Year Action Plans” including “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.” It also frames universal access as a matter of digital inclusion and equity, noting that it's necessary for civic and cultural participation, employment, lifelong learning, and access to essential services. 

For the states, that will mean developing their own concrete universal service policies and funding strategies given that federal policy remains aspirational. A U.S. General Accountability Office report issued in May 2022 concluded there is no national strategy to guide the deployment of advanced telecommunications infrastructure. Instead, the report found, there are numerous, uncoordinated subsidy programs administered by multiple federal agencies.

How BEAD could fund incremental "edge outs"

Funding allocated in the National Telecommunications and Information Administration’s (NTIA) Broadband Equity, Access and Deployment (BEAD) program could support incremental "edge outs" of  delivery infrastructure to relatively small numbers of homes and small businesses at the edges of incumbent providers' service footprints.

Incumbents know exactly where these addresses are located – no “broadband map” needed. They are bereft of landline connections because while they in most cases are serviceable addresses – i.e., able to be connected -- they’re spaced too far apart to meet providers’ internal return on investment (ROI) standards to build out delivery infrastructure to connect them. Infrastructure thus extends part of the way down a road, street or cul de sac where the ROI standard can be met and ends where it cannot.

Clusters of serviceable addresses may meet the density cutoff when viewed in isolation. But they are cut off from the network because lines to service them would have to be extended along roads and streets where there too few homes, businesses or institutions to meet the density standard.

Consequently, residents and small business operators have felt dissed and bitterly complained for many years they unable to order service while addresses a mile or two – or even hundreds of feet away -- can. And because these are a relatively small number of addresses among a much larger number of those served by an incumbent provider, there aren’t enough of them to justify a contiguous project for an alternative provider. This circumstance is typically found in small towns and exurban locations where dwelling density is below that of suburbs but well above that of rural areas – but not at a level sufficient to attract investor-owned incumbents.

According to BEAD program guidance spelled out in the NTIA's Notice of Funding Opportunity (NOFO), incumbent providers selected by states as subawardees could fund line extension projects to these premises. Under the NOFO, a project eligible for up to a 75 percent capital subsidy can be a small number of serviceable addresses and even a single address. It's possible incumbent providers could propose these line extensions to state offices charged with subawarding BEAD funding as a single project or grouped in large geographical regions, arguing batch processing their funding requests this way would expedite the BEAD goal of ensuring all state residents have access to service. 

For incumbent providers, incremental edging out minimizes the challenge of having to bear the operating expense of maintaining entirely new networks serving many addresses that in order to qualify for BEAD subsidies would have to be built in isolated, insular areas lacking reliable service. Adding a few addresses at the periphery of existing infrastructure allows the associated opex to be more easily absorbed without the need for ongoing subsidization.

Cable companies are most likely to do BEAD backed edge outs, extend their existing coax plant to reach addresses on the edges of their current footprints that fall below their current density standards. Incumbent telephone companies aren’t likely to have existing fiber plant to support edge outs to BEAD eligible unserved addresses (those where at least 80 percent are unable to order service with throughput of 25/3 Mbps or higher and latency not exceeding 100ms) since they tend to concentrate fiber builds in densely settled areas far from unserved areas. Copper cable plant in these areas is also less likely to be able to reliably support VDSL.

Cable companies can also meet the BEAD throughput requirement: at least 100/20 Mbps with less than 100ms of latency 95 percent of the time. Although BEAD funding is prioritized for fiber to the premise delivery infrastructure, states are likely to sign off on incremental cable build outs to increase access.

A possible obstacle for this potential strategy is challenges from fixed and mobile wireless providers claiming these addresses are served by them and are thus ineligible for BEAD funding. States could then be in the position of having to sort through these addresses to determine whether they are eligible as unserved or “underserved” – without service of at least 100/20 Mbps. Due to various factors affecting radio frequency propagation, that could vary considerably among these locations, making sorting out the challenges a tedious task.

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.