Relative advantages, disadvantages of public and private capital investment in FTTP

As the long running battle between public and private capital continues in the advanced telecommunications space amid what have described as a private capital “gold rush” to capture and own customers, here are the relative advantages and disadvantages of each. 

PUBLIC CAPITAL ADVANTAGES	PUBLIC CAPITAL DISADVANTAGES
Access to lower cost, more patient capital in public bond markets.	Lack of coherent, committed public policy and strategy for getting FTTP to most all doorsteps.
No need to earn profit or pay shareholder dividends.	Goal dilution; focus on ancillary benefits vs. universal FTTP connectivity.
Longer term commitment.	Slower capital allocation due to political decision-making process and tax & fee resistance/exhaustion. Private capital deals can be made within months vs. years.
Accountable to public interest and not just investor shareholders.	Subject to disinformation campaigns by private capital owners exercising First Amendment rights.

 

PRIVATE CAPITAL ADVANTAGES	PRIVATE CAPITAL DISADVANTAGES
Current dominance as legacy (telephone and cable company) providers. First mover advantage in natural (utility) monopoly that can slow end user acceptance of public owned open access FTTP.	Business model constraints that limit capex for deployment, misalignment between capex and ROI needs.
Unregulated “wild west” spawns “gold rush” for cherry picked FTTP archipelagos offering relative rapid ROI; no universal service mandate, rate regulation.	Negative public perception due to deployment of FTTP only in select neighborhoods and not most; poor customer support.
Established control of public narrative based on “broadband” as market commodity vs. FTTP as utility infrastructure.	High debt and shareholder dividend obligations.
Public policy path dependency recognizing private sector dominance of policymaking process.
Relatively rapid access to private capital markets, private equity.

“Business model agnostic” rating urged by legacy incumbent telco for BEAD subgrants

Investor-owned providers, anxious public policymakers might adopt a fiber to the premises (FTTP) infrastructure standard for advanced telecommunications infrastructure that would complicate their business models, for years urged public policymakers to instead embrace a “technology neutral” standard.

Policymakers at the state level who will distribute $42.5 billion in federal grant subsidies appropriated under the Infrastructure Investment and Jobs Act (IIJA) are now hearing a similar sounding plea – this time aimed at dissuading them from favoring publicly owned FTTP once the federal dollars arrive. Lumen Technologies is urging Oregon to adopt a “Business Model Agnostic” standard when evaluating subcontract awards to connect premises where the vast majority – 80 percent – are not offered throughput meeting what the Federal Communications Commission in 2015 deemed “broadband” or those deemed “underserved” and not offered throughput of at least 100Mbps for downloads and 20Mbps uploads.

In a PowerPoint presentation at the March 30 meeting of Oregon’s Broadband Advisory Council, Lumen cited an open access fiber build by the Kitsap County (Washington) Public Utility District as an example of the risk of not being business model agnostic that shows higher monthly and service drop fees than Lumen charges for its vertically integrated (connection and services) “Quantum” branded FTTP. Jim Farr, manager of Lumen’s Mass Markets Grant Team, also urged Oregon officials to score subgrant applications to favor those having low per premise passed cost to maximize the number of premises connected, which would likely leave less densely developed neighborhoods unconnected.

Lumen’s motivation is clearly to own the customer. Whoever owns the delivery infrastructure owns the customer in a natural monopoly market that characterizes utilities. The problem with that is it turns access to advanced telecommunications into a market commodity, with FTTP regarded as a premium product offering in highly segmented markets where there are sufficient premises and households most likely to generate the fastest return on investment and highest revenues.

That’s contrary to current federal policy expressed by the Biden administration to connect all Americans, highlighted this week by Commerce Secretary Gina Raimondo at an interview with Yahoo Finance. "The reality is, if we're going to connect every American, including the tens of millions of Americans who now don't have the internet, we're going to have to lay fiber all across this country,” Raimondo said.

There is another way to get there besides regarding advanced telecommunications as a binary choice between public and private capital. But in order to do so, U.S. telecom policy will have to shift away from the dominant private sector “own the customer” business model in which it has been mired for decades and is the major impediment to near universal access to affordable FTTP connectivity.

That means public (or consumer cooperative) ownership of the infrastructure and various levels of involvement of private capital to design, build, operate and deliver services over it. This eliminates the winner take all dynamic in which investor-owned providers must ensure their shareholders come out as winners. Consequently, the public has been losing for decades as shown by continuing issues with access and affordability. That calls for a more comprehensive, holistic policy instead of doling out one off grants as consolation prizes to the public when the public interest inevitably comes in second place.

Oregon audit reinforces BEAD direction to states on universal service

As states move to the forefront to provide affordable access to advanced telecommunications with the direction of the federal government’s Broadband Equity, Access and Deployment (BEAD) program to develop Five Year Action Plans for universal service, a recent State of Oregon audit report offers them some critical guidance.

It meshes well with the National Telecommunications and Information Administration’s use of the word “action” in the requirement states develop strategies to ensure universal service to all their residents in their Five-Year Action Plans. Those strategies must be actionable roadmaps and not serve as aspirational wish lists that gather dust after they’re issued. From the Oregon Audits Division report:

The (Oregon) Broadband Office published a strategic plan in January of 2020, prior to the COVID-19 pandemic. The plan is high-level and notes: “This plan is aspirational and designed to carry out the mission and directives charged to the Broadband Office. The scope of activities the Broadband Office will ultimately undertake will be enabled, or limited, by the resources available.”

The plan does not contain specific and realistic approaches, strategies, or appropriate KPMs for how these aspirations will be measured, reported, and achieved; nor does it identify what resources would be needed to undertake the scope of activities.

The biggest reason “broadband plans” over the past 15 to 20 years have been aspirational is they were conditioned on funding. That’s to be expected for a bet on the come financing strategy that relies on one off government grants. An action plan by contrast has a clearly identified funding source to ensure universal service and not one based on the hope that financing will someday become available.

The resulting lack of progress naturally angers people who’ve had their hopes for modern fiber connections to replace legacy metallic ones dashed for years amid piecemeal, incremental progress that never quite seems to reach them where they live and work despite promises from their elected representatives at all levels of government. A solid plan can help restore their trust in public officials to get the job done where the private market cannot.

The Oregon audit notes “Oregon’s broadband public policy needs to be focused on the future, be more aggressive, be more financially supportive, be more specific, and have a renewed sense of urgency.” (Emphasis added)

Being more financially supportive means Oregon (as well as other states) cannot continue to rely on one off, highly restrictive government grants to attain universal service. They need to develop ongoing organic funding for the both the construction and reliable operation of fiber to the premise (FTTP) advanced telecommunications infrastructure to every doorstep. Grants such as those available through BEAD can only do part of the job – implicit in BEAD’s Five-Year Action Plan requirement.

Amid fading federalism in U.S. telecommunications policy, states on deck to regulate

For Plain Old Telephone Service (POTS), federalism underpins a scheme of shared regulatory oversight between the federal government (the Federal Communications Commission specifically) and state public utility commissions. It operates under the framework of Title II of the Communications Act of 1934 that regards telecommunications networks as a natural monopoly. Accordingly, voice telephone service is regulated as a common carrier utility to ensure it is accessible (universal service) and affordable (rate regulation by state PUCs) given the absence of market forces and buy side market power to assure that it is.

This federalist regulatory scheme does not exist for advanced, internet protocol (IP) telecommunications. Since 2018, federal policy promulgated by FCC administrative law regards it as a lightly regulated information service under Title I of the Communications Act similar to dialup services like CompuServe and America Online that were widely used in the early 1990s. Congress has not weighed in on the matter of how IP telecom is to be regulated since the 1996 Telecommunications Act, which similarly adopted a light touch, wait and see stance. Recent court rulings have cleared the path for states to move forward.

In the absence of regulatory federalism for IP-based telecommunications, one leader state is considering legislation that would regard IP telecommunications as a common carrier utility. AB 1714 would amend California’s Public Utility Act to include “broadband service” offered by a corporation (defined in the statute as including a corporation, company, an association, and a joint stock association) within the definition of a public utility. “Broadband Internet access service is defined at California Civil Code Section 3100(b) as “a mass-market retail service by wire or radio provided to customers in California that provides the capability to transmit data to, and receive data from, all or substantially all Internet endpoints, including, but not limited to, any capabilities that are incidental to and enable the operation of the communications service, but excluding dial-up Internet access service.”

“Just as the infrastructure of water and electricity grew at the end of the 19th century and led to the creation of regulation to make sure that these technologies were available to everyone, the internet has grown to a point that demands it be regulated as a public utility subject to the same regulatory process to make sure that everyone has access to this technology, moving us closer to digital equity,” said the bill’s author, Assemblymember Jim Wood in a news release. 

The proposed legislation comes as AT&T California petitioned the California Public Utilities Commission to relieve it of its POTS universal service obligations as carrier of last resort in parts of the state where there are alternatives such as VOIP (Voice Over Internet Protocol) or mobile wireless.

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.

ICT access as industrial policy

The United States currently lacks public policy assuring every American home is able to connect to landline Internet service as it did for voice telephone service in the 20th century under Title II of the Communications Act of 1934. It is instead an aspirational goal rather than affirmative public policy.

According to the U.S. Federal Communications Commission, the Telecommunications Act of 1996 “expanded the traditional goal of universal service to include increased access to both telecommunications and advanced services …for all consumers at just, reasonable and affordable rates.” In the nearly three decades since the law was enacted, the nation continues to struggle to meet that goal with numerous proscribed subsidy programs despite many billions of dollars spent.

In 2021, the Infrastructure Investment and Jobs Act (IIJA) adopted an expanded view of access to advanced telecommunications service, including it in a broader context as access to “affordable information and communication technologies (ICT) such as reliable fixed and wireless broadband internet service.” That definition – titled “digital inclusion” -- acknowledges a long term shift from an analog, industrial age 20th century economy to a 21st century digital economy. It encompasses internet-enabled devices, applications and online content designed to enable and encourage self-sufficiency, participation, and collaboration” as well as access to digital literacy training, quality technical support, awareness of measures to ensure online privacy and cybersecurity.

Digital inclusion in turn supports “digital equity,” defined in the IIJA as “the condition in which individuals and communities have the information technology capacity that is needed for full participation in the society and economy of the United States.” Accordingly, universal access to advanced telecommunications service is now framed in the larger context of access to ICT and the broad social and economic benefit of all Americans having access to and being able to use it.

In that regard, the IIJA states access to advanced telecommunications infrastructure as industrial policy – subsidizing and expanding access in order to promote social and economic benefit. This is an important development because it reframes public policy on advanced telecommunications infrastructure and access beyond the traditional market commodity based “broadband” offering.

However, the IIJA retains broadband service as a metric to determine eligibility for allocating $42.5 billion in grants to the states to subsidize advanced telecommunications infrastructure, with priority afforded to fiber to the premises (FTTP). Subsidies are largely targeted to areas where “broadband” – defined as 25Mbps down and 3Mbps – is not marketed to most serviceable addresses.

Industrial policy by definition calls for a broad and sustained effort. The National Telecommunications and Information Administration (NTIA) is charged with administrating the IIJA advanced telecommunications infrastructure subsidy dollars. It describes that appropriation as representing only the beginning. According to a fact sheet, the NTIA’s subsidy program represents an “historic investment will lay critical groundwork for the infrastructure needed to connect everyone, from big cities to small towns and everything in between.” 

Another provision of the IIJA at Title VI that expresses industrial policy calls for the creation of an interagency federal working group to develop recommendations to address the workforce needs of the telecommunications industry and provide guidance to the states. In a report to Congress in January, the working group recommended measures to support the recruitment and retention of telecommunications workers.