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.

California proposes to regard areas served by DSL and FWA as potentially eligible for BEAD subgrants

The California Public Utilities Commission (CPUC) has developed a framework to guide eligibility for the state’s $1.86 billion allocation under the federal government’s Broadband Equity, Access and Deployment (BEAD) program. The framework would regard areas served by DSL and fixed wireless service as potentially eligible for BEAD subgrants. The framework is part of a proposed rulemaking issued November 7.

Under BEAD and its authorizing legislation, the Infrastructure Investment and Jobs Act (IIJA), the primary scope of proposed projects eligible for state subgrants is where at least 80 percent of serviceable addresses are not offered service with throughput greater than 25Mbs for downloads and 3Mbps for uploads at latency of less than 100ms, designated “unserved.” Those where at least 80 percent are not offered 100Mbps/20Mbps are deemed “underserved.” 

“The CPUC will treat locations that the National Broadband Map shows to have available qualifying broadband service (i.e., a location that is “served”) delivered via DSL as ‘underserved.’" The CPUC's proposed framework is consistent with BEAD program guidance that acknowledges that in some cases, DSL does not provide consistent access to advertised speeds. "To the extent a particular location is identified on the Broadband DATA Maps as served by DSL at speeds that warrant treatment of that location as 'served' or 'underserved' but is not in fact reliably served at such speeds, this would be a proper basis for challenging the relevant location’s service status during the challenge process created by the Eligible Entity," the guidance states.

The CPUC notes this "will better reflect the locations eligible for BEAD funding because it will facilitate the phase-out of legacy copper facilities and ensure the delivery of ‘future-proof’ broadband service, the proposed framework states. “This designation cannot be challenged or rebutted by the provider.”

Additionally, the CPUC will presume 5,829 locations the National Broadband Map shows “underserved” by DSL as “unserved” for reported speeds that are lower than 30/5, for which there is supporting evidence that speeds consistently deliver below 25/3 service. “Considering the low prospects of providers investing in maintenance of legacy copper plant, low speed DSL should be replaced as soon as feasible with more future-proof infrastructure. This modification will better reflect the locations eligible for BEAD funding because it will facilitate the phase-out of legacy copper facilities and ensure the delivery of ‘future-proof’ broadband service,” the CPUC concluded.

“Due to the possibility of California’s BEAD allocation being fully committed to deploying service to unserved locations, this modification will also ensure that locations served by low-speed DSL are not excluded from eligibility for this critical investment,” citing AT&T’s application for relief from its landline voice telephone service carrier of last resort obligation in rural areas of the Golden State under Title II of the federal Communications Act.

The proposed rulemaking would also regard 36,887 locations that the National Broadband Map shows as “underserved” delivered over Licensed Fixed Wireless (LFW) as “unserved” for reported speeds that are lower than or equal to 30/5 Mbps:

"As a technical matter, fixed wireless speeds fluctuate heavily,” the framework notes. “Given this, speeds that barely qualify as underserved will likely be below 25/3 service during peak usage times. This is especially true of older fixed wireless deployments that struggle to reach higher speeds and mitigate interference and line of sight issues. In fixed wireless networks, service performance can be affected by a customer’s proximity to a base station, the capacity of the cell site, the number of other users connected to the same cell site, the surrounding terrain, and radio frequency interference. Additionally, fixed wireless networks require a clear line-of-sight. Therefore, obstructions, such as trees, can block radio signals and impact the reliability of fixed wireless networks. Poor weather conditions, including rain, can affect the availability and quality of a customer’s fixed wireless service.”

Cellular fixed wireless will similarly undergo critical scrutiny when determining whether an area is deemed eligible as underserved:

“The CPUC has observed that some fixed wireless operators report 25/3 or 100/20 speeds on the National Broadband Map even where their networks frequently reach those speeds only under optimal circumstances and have not been replicated in other testing environments, such as the CPUC’s own CalSPEED process. User agreements for leading providers of cellular fixed wireless indicate that users will be deprioritized during periods of network congestion, decreasing the likelihood that service delivered to consumers will meet the claimed thresholds, especially in future years as network utilization increases.”

The CPUC explained its rationale as due to the possibility of California’s BEAD allocation being fully committed to deploying service to unserved locations. “This modification will also ensure that locations served by low-speed and unreliable cellular fixed wireless are not excluded from eligibility for this critical investment.”

The CPUC said it will treat locations that the National Broadband Map shows to be “underserved” or “served” as “unserved” if rigorous speed test methodologies show otherwise. “This modification will better reflect the locations eligible for BEAD funding because it will consider the actual speeds of locations, leveraging the extensive data collection already conducted by the CPUC and reducing the administrative burden on challengers, providers, and CPUC staff to process challenges for locations already successfully challenged using equivalent evidence to that required for BEAD challenges.”

Concurrent FCC rulemakings would bar redlining for Internet service

One month after proposing a rulemaking to classify Internet protocol-based advanced telecommunications as a common carrier utility subject to universal service and non-discrimination mandates, the U.S. Federal Communications Commission will take up a similar rulemaking. The FCC’s proposed rulemaking Preventing Digital Discrimination is set for a vote at its November 15 meeting. It is primarily intended to remedy disparate impact (versus intentional) discrimination by providers that affects neighborhoods based on their demographics: income level, race, ethnicity, color, religion and national origin.

According to the FCC, the rulemaking implements section 60506 of the Infrastructure Investment and Jobs Act of 2021. It states federal policy that “insofar as technically and economically feasible— subscribers should benefit from equal access to broadband internet access service within the service area of a provider of such service.” Section 60506 defines equal access as “the equal opportunity to subscribe to an offered service that provides comparable speeds, capacities, latency, and other quality of service metrics in a given area, for comparable terms and conditions.”

Since IP telecom is currently classified as lightly regulated optional information service under Title I of the Communications Act, providers are free to deploy delivery infrastructure wherever they wish and at rates of their choosing. They naturally prefer denser, higher income neighborhoods that will produce faster return on capital investment (ROI) and where households are less price sensitive and more inclined to subscribe to higher priced services, thereby maximizing average revenue per unit (ARPU).

The proposed rulemaking gives providers an out by allowing them to defend deployment and pricing decisions based on technical and economic feasibility. They could conceivably argue that they must be more conservative in building infrastructure in lower income neighborhoods and charge more for comparable services than those offered in higher income communities in order to feasibly meet their ROI and ARPU targets. The higher rates in turn would be out of reach of some lower income households, making them less likely to sign up for services and perpetuating an unvirtuous cycle. Similarly, they could argue middle mile infrastructure isn’t adequate to serve a given community, thus making delivery infrastructure deployment technically unfeasible. It's entirely logical to segment markets and pricing in a market-based scheme under Title I regulation. Disparate market impact will be a natural outcome. Additionally, providers choosing to build fiber in higher income areas but not in lower income areas could be seen as intentional discrimination based on income, i.e. disparate treatment.

The proposed rulemaking apparently contemplates a comparison of deployment activity to help regulators establish a pattern of market conduct demonstrating discrimination. That assessment would be based on a mandate on providers annually report on their deployment activities:

We propose that each annual report must address the following components to provide a
comprehensive picture of each major deployment, maintenance, and upgrade project completed or substantially completed for each state and territory within its service area or footprint: (1) the nature of each project completed or substantially completed in the calendar year immediately preceding the submission of the report (i.e., deployment, upgrade, maintenance, or a combination thereof); (2) the number of housing units affected by the project (i.e., the number of housing units whose broadband availability or quality is positively impacted by the project) by census tract (utilizing the system presently used in the BDC); and (3) a narrative description of the project and of the areas served by the project, to allow for greater precision and clarity regarding what the project is designed to accomplish and what communities are served by the project. 

While the language of the proposed rulemaking includes providers’ more proscriptive term to describe where they have built infrastructure and offer advanced telecommunications services , i.e. “footprint,” should the FCC reclassify Internet protocol telecommunications as a utility under Title II of the Communications Act as proposed in a separate notice of proposed rulemaking issued September 28, 2023, Safeguarding and Securing the Open Internet, 47 U.S.C. 214(e)(5) affords state public utility commissions and the FCC authority to develop their own geographic parameters for the purpose of Title II’s universal service mandate requiring providers to offer service to all serviceable addresses within the service area:

(5) “Service area” defined

The term “service area” means a geographic area established by a State commission (or the Commission under paragraph (6)) for the purpose of determining universal service obligations and support mechanisms. In the case of an area served by a rural telephone company, “service area” means such company’s “study area” unless and until the Commission and the States, after taking into account recommendations of a Federal-State Joint Board instituted under section 410(c) of this title, establish a different definition of service area for such company.

Similar to the FCC’s Preventing Digital Discrimination rulemaking, reclassification of IP services under Title II would give regulators additional statutory authority to sanction discriminatory conduct under 47 U.S.C. 202, titled Discrimination and Preferences. While FCC is forbearing rate regulation in the proposed Title II reclassification rulemaking, this provision makes it unlawful for common carriers engage in “unjust or unreasonable discrimination in charges, practices, classifications, regulations, facilities, or services for or in connection with like communication service, directly or indirectly, by any means or device, or to make or give any undue or unreasonable preference or advantage to any particular person, class of persons, or locality, or to subject any particular person, class of persons, or locality to any undue or unreasonable prejudice or disadvantage.” The statute allows for fines of $6,000 for each violation and $300 daily penalties for ongoing violations.

"Community broadband" sounds great in concept. Paying for it is another matter.

Schaffer is a firm advocate for communities taking ownership – literal ownership – of their broadband network: bringing “a high-quality, universal service” to everyone – “not for profit, but for service.”

There’s a cost to that, of course, but the community then can make decisions about how to lower that cost, she said. “When you take the profit margin out of it, it allows you to serve more people” at a reasonable price.

https://dailyyonder.com/a-rural-calling-peggy-schaffer/2023/10/25/

Or whether communities are willing bear any cost whatsoever that would incur bond debt and new taxes to service it. It's a hard sell for many with ongoing concerns over public and personal finances, an aging population and resistance to new taxes for infrastructure. That's why private ownership along with its attendant problems of limited access and affordability will remain predominant in the United States.

Sohn avoids mention of FCC Title II rules in recent speech

In a speech last week, Gigi Sohn, executive director of the American Association for Public Broadband, conceded that advanced telecommunications infrastructure will largely remain in the hands of private sector investors. Sohn has also questioned the notion of private sector market competition as the means to ensure advanced telecommunications infrastructure reaches all American doorstep.

It’s a logical conclusion since telecommunications like other utilities tends toward monopoly. Companies aren’t going to compete to bring multiple proprietary fiber connections to a given address because it’s economically inefficient and favors those that make the first connection. One might gain customers by bringing in a second fiber line, taking them from the provider of the first. But the return on investment rapidly diminishes with additional lines. This is not a competitive market defined by many sellers and many buyers. Many buyers, yes, but there won’t be many sellers. 

Sohn’s declaration that advanced telecommunications will remain in private hands as a service that naturally tends toward monopoly has powerful implications since market forces aren’t going to balance for buyers’ interests in access and value. Strong, meaningfully enforced regulation is needed to ensure universal and affordable access. Without it, providers are free to offer fiber connections available wherever they want at whatever price they choose.

It is thus striking that Sohn in her remarks voiced no support whatsoever for the Federal Communications Commission's (FCC) proposed readoption of regulations that would classify advanced telecommunications under Title II of the Telecommunications Act of 1934. That would make advanced telecom service a common carrier utility where reasonable requests for service – i.e., serviceable addresses – must be honored. No cherry picking and no neighborhood redlining.

It’s even more striking that Sohn didn’t refer to Title II given she promulgated the same regulations while on the staff of the FCC in 2015. The FCC in a split vote opened comment reviving the Title II regulations just two days after Sohn’s speech. As it did in 2015, however, the FCC is setting aside granting state public utility commissions authority over rates charged end users to help ensure affordable access.

AT&T urges states to favor contiguous BEAD funded projects serving both unserved and underserved locations

AT&T is urging states to award subsidies of up to 75 percent of construction costs allocated by the federal government’s Broadband Equity, Access and Deployment (BEAD) program for combined projects containing both unserved (where at least 80 percent of serviceable addresses in the project are not offered throughput of 25/3 Mbps or better) and underserved (where at least 80 percent of serviceable addresses are not offered throughput of 100/20 Mbps or better).

In so doing, AT&T is clearly indicating it plans to use any BEAD funding it is awarded to edge out its footprint. Some addresses could be served by VDSL over AT&T’s existing copper cable plant and qualify as underserved under BEAD program rules. As DSL signals degrade with distance, addresses farther out from its central offices and DSLAMs would likely not and be served by first generation ADSL – or no landline connections whatsoever – falling below the 25/3 Mbps cutoff and thus qualify as unserved. Some addresses in the latter category might ostensibly be designated as extremely high cost locations that AT&T would serve with fixed wireless.

A potential problem AT&T faces at least some states in urging BEAD funding for contiguous unserved/underserved projects is BEAD program rules require states to first award funds for projects reaching unserved locations. Underserved projects can only be funded if there are enough funds remaining from a state’s BEAD allocation after all unserved locations have been served.

AT&T is apparently aware. “We know that this won’t be possible in every state," writes Erin Scarborough, president of AT&T’s Broadband and Connectivity Initiatives, in a blog post. As the “next best alternative,” Scarborough urges states to group eligible locations into the smallest geographic unit possible, such as a census block, and allow providers to combine them into project areas. “This would still enable providers to design efficient deployments that maximize the use of existing infrastructure,” Scarborough wrote.

Near term outlook, trends for advanced telecom infrastructure

U.S. telecom policy will continue to favor investor owned, market-based advanced telecommunications infrastructure despite its higher cost compared to public and consumer-owned (utility cooperative) infrastructure. The predominant role of privately owned legacy telephone and cable infrastructure reinforces path dependency.

Government and consumer utility coop owned open access fiber to the premise infrastructure missed significant expansion opportunity from 1998 to 2019 as telephone companies made minimal investments in fiber to the premise (FTTP) delivery infrastructure, keeping legacy copper outside plant in place. Lack of political will, unrealistic expectations of incumbent providers, unfavorable demographic and economic trends, tax resistance and reliance on limited grant programs for majority of funding versus organic debt funding severely limited their expansion.

Boosted by infusions of private equity investment, investor owned FTTP builds will be expanded beyond what providers could otherwise achieve on their own due to limited capex constrained by overleveraged balance sheets and dependence on expected network revenues to meet rate of return goals. Private equity investment is motivated by a potential premium upon exit in five to seven years through sale of their stakes to their provider partners and/or network consolidators. Investment will be primary focused on newer existing and planned suburban developments in selected metros. Private equity investment is predicated on regarding FTTP as long term asset that affords first mover advantage. Connecting the customer premise means owning the customer since only one fiber connection will meet current and future service needs.

Advanced telecommunications infrastructure subsidies allocated by the 2021 Infrastructure Investment and Jobs Act will mostly go to large telephone and cable companies to incrementally edge out their networks in rural and exurban areas, primarily to dense clusters of homes and those in areas of cut off density not reached by existing landline advanced telecommunications infrastructure. Some BEAD funding will subsidize wireless in remote rural areas to provide both fixed and mobile services.

FTTP networks in less densely developed areas will receive some subsidization from existing programs as well as a new potential high cost area subsidy program to replace the FCC Universal Service Fund, particularly if the FCC reclassifies Internet protocol telecommunications service as a common carrier utility.

FWA seems like a lower cost alternative to FTTP -- until radio propagation constraints taken into account.

Outside of our urban cores and highway corridors, many modern life-enhancing technologies remain unavailable. For underserved constituencies, health outcomes are less positive; educational and business opportunities are more limited; and a myriad of other harms are borne by our more rural constituencies. But 5G FWA stands to finally connect those communities that remain unserved or underserved. Because this technology can span distances and cross terrains that coaxial and fiber cannot, at a fraction of the cost, more communities will be connected using 5G FWA than ever before. 

https://broadbandbreakfast.com/2023/08/sascha-meinrath-12-gigahertz-band-is-key-to-bridging-the-digital-divide/

The challenge is very limited propagation. The high frequencies used by FYA like the 12 Gigahertz cited in this article have very limited reach. Propagation distance is inversely correlated to the frequency. High frequencies can carry more data than lower ones. But the tradeoff is they don’t travel very far. Consequently, homes and businesses close to FWA radio towers get good throughput as Doug Dawson explains in this blog post. But just a bit farther out, it drops off dramatically as this example of a Sacramento, California suburb illustrates using two relatively lower frequencies. For 12 Gigahertz, the propagation circle of coverage would be even smaller. 

To overcome these limits, in rural areas it would seem to make sense to deploy radios close to customer premises mounted on existing utility poles or new dedicated poles. But the tradeoff there would be those radios would need fiber to feed them. At which the economics would point to connecting the premises to fiber directly as the most cost-effective approach.