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.

West Des Moines, Iowa offers model for states, regions to scale up open access fiber telecom infrastructure

To ensure the timely modernization of legacy metallic telecommunications delivery infrastructure to fiber to the premise (FTTP) infrastructure at significant scale, new models for its construction and operation are needed. Investor-owned providers using vertically integrated, closed access networks tend to restrict capital investment to densely populated areas compatible with their business models that demand a rapid return on investment.

Subsidies of up to 75 percent of construction costs may be available in the near term through the federal Infrastructure Investment and Jobs Act (IIJA) of 2021. But eligibility restrictions on the funding will likely result in it being allocated only in the most remote and insular parts of the country since those restrictions are designed to protect the markets of incumbent providers that have a presence outside of those areas. That will leave it to the states to come up with new approaches.

One promising appearing model is emerging in West Des Moines, Iowa. The municipality finances and builds the basic supporting infrastructure – in this case buried conduit. But it could also be aerial fiber on metal half height poles placed in existing rights of way, for example. A private sector network operator – here Google Fiber – installs the telecommunications infrastructure: the fiber, network electronics and premise connections. It shares part of its end user revenues with the local government to finance bond debt incurred by the government to construct the supporting infrastructure. Since it is operated as an open access network, other providers can pay a fee to access it and the end users it serves.

This model for the construction and operation is particularly well suited to exurban and small town America that like West Des Moines are only partially served by legacy providers using metallic infrastructure.

To make it rapidly scale to meet burgeoning demand for connectivity, this model provides a framework for a statewide or regional scope – for example local governments forming a regional telecommunications authority like California’s Golden State Connect Authority. Like roads and highways and airports -- the Golden State Connect Authority regards advanced telecommunications infrastructure similar to regional airports – very substantial financing capacity is needed beyond that which individual local governments can provide. In addition, the limited, one off grant subsidies that have been the predominant financing model don’t provide funding sufficient for the task at hand.

U.S. telecom infrastructure crisis natural outcome of nation’s failure to address foundational questions

America’s advanced telecom policy failure stems from the failure to address two fundamental questions:

1/ How much would it accurately cost to bring fiber to most every American doorstep?

2/ What are the optimal roles of the public and private sectors in financing, building and operating this critical infrastructure -- and constructing it in the most expeditious manner given only about one third of homes have fiber connections?

The failure to honestly ask and answer these questions and make clear policy choices based on the answers has led to the default market-based, incremental, ad hoc and highly granular efforts dating to the mid-1990s. That has led to using throughput as a metric of progress vs. replacing legacy metallic telephone and cable delivery infrastructure with fiber to the premise (FTTP) and what scholars like Christopher Ali describe as “The Politics of Good Enough” and barely adequate infrastructure prone to near term obsolescence. While Ali frames his argument in binary terms of urban vs. rural infrastructure similar to the deployment of electric power distribution infrastructure in the early 20th century, it extends to other geographic settlement areas due to highly granular, incremental market driven deployment based on household density and demographics and other factors.

The failure to address these overarching questions and make solid policy decisions has in its place produced sloganeering like “Internet for All” -- meaningless and merely aspirational without a realistic plan to get the nation there -- and getting lost in the weeds.

A glaring example is “broadband mapping” and the controversy surrounding the FCC’s related efforts that will determine the allocation of advanced telecommunications infrastructure subsidies appropriated in the Infrastructure Investment and Jobs Act of 2021. “Broadband mapping” encapsulates the previously mentioned flawed policy of defining progress based on throughput vs. infrastructure modernization. Even more fundamentally, the failure to determine the optimal roles of the public and private sectors, with mapping as protectionist response by investor-owned providers seeking to protect their interests in the meantime.

On telecom infrastructure modernization, politics of "good enough" likely to prevail at expense of FTTP

Despite the enactment of the Biden administration’s Infrastructure Investment and Jobs Act (IIJA) one year ago, the United States is unlikely to show significant progress over the foreseeable in modernizing its legacy metallic telephone and cable TV distribution infrastructure to fiber to the premises (FTTP) for advanced telecommunications. Here are some of the reasons:

• Policymakers will likely argue that getting American homes connected as quickly as possible – the urgent need shown during pandemic restrictions – is paramount and hence any technology that can do that is “good enough.” They’ll also argue that fixed terrestrial wireless (FWA) and satellite delivered connectivity have demonstrated their ability to do that, particularly in areas that meet the legislation’s Broadband Equity, Access, and Deployment (BEAD) Program (BEAD) primary eligibility standard for construction subsidies (>80% of prems are unable to order service with throughput of 25/3 Mbps or greater). That could also lead to efforts to regulate the rates for these technologies since they typically priced above landline delivered services.
  
  
• Fixed wireless – licensed or not – and satellite will be deemed “good enough” after intense lobbying of the federal and state governments over the BEAD subsidy eligibility standards. Notably, the director of the National Telecommunications and Information Administration (NTIA) – charged with overseeing the distribution of the subsidies – suggested satellite and fixed terrestrial wireless will have to suffice in some high cost areas of the nation.
  
  
• The FCC’s recently released “broadband map” that will determine eligibility for infrastructure construction subsidies designates areas currently served by satellite and mobile wireless providers offering licensed FWA as ineligible for funding.
  
  
• Coax cable and second generation DSL fiber to the curb (FTTC) infrastructure will also be deemed “good enough” over FTTP in more densely settled parts of the nation. The cable industry will continue to refine its DOCSIS signal compression technology and only invest in FTTP selectively in newly built residential subdivisions whereas just a couple of years ago, they were installing coax in newer developments.

States and regions need to step up to ensure timely transition to fiber from metallic telecom infrastructure

Given ongoing political gridlock in Washington and the lack of comprehensive federal policy to rapidly modernize America’s legacy metallic telecom infrastructure built in the previous century to deliver analog telephone service and cable TV to fiber for the current one, it now falls to states and regions to take the lead.

States and localities have looked to multiple time-limited and heavily restricted federal grant sources over the past 15 years or so as their primary source of funding -- most recently infrastructure subsidies contained in the American Rescue Plan Act state and local government coronavirus relief legislation.

But to move the nation rapidly forward with world class fiber reaching most every American doorstep, they will have to generate their own dedicated revenue and regard federal dollars as supplemental and not primary. States should consider telecom bill surcharges to service long term bonds to finance publicly owned advanced telecommunications infrastructure construction and operations.

This has to be a state and regional effort given the necessities of scale and time. Local governments tend to look at advanced telecommunications infrastructure deficits like sections of deteriorating road needing replacement. That approach is too piecemeal and incremental and won’t bring fiber to most every address in a reasonably rapid time frame -- the urgency of which became painfully apparent when pandemic restrictions turned homes into workplaces, places of learning and extensions of medical clinics.

Local governments are reluctant to impose parcel taxes that would provide sufficient funding such that grant funding would play a minor supplemental role. This is important because even with $45 billion appropriated for advanced telecommunications infrastructure in the federal Infrastructure Investment and Jobs Act enacted one year ago, provisions of the legislation restrict its use to the most remote and insular areas of the nation. That allocation may turn out to be spread too thinly given the nation’s large land mass and the funds being earmarked for extremely remote areas where construction and operational costs are the highest.

This shouldn’t be viewed in binary terms as an all or nothing choice between the public and private sectors. While state and regional infrastructure should be publicly built and financed as roads and highways are, private sector actors play a critical role in designing, building and operating this infrastructure in addition to offering advanced telecommunications and information services. NGOs such as consumer utility cooperatives also play an important role, particularly in rural areas where they have historically operated.