Regulation - What is it Good For?

Who Should be Eligible for Broadband Grants?

This is the next blog in a series looking at the upcoming $20.4 billion broadband grant recently announced by FCC Chairman Ajit Pai. Today I look at the question of grant eligibility. This will be, by far, the largest broadband grant program to date. What can the FCC do to make sure this money is available to the widest set of constituencies possible?

FCC programs in the past have usually stated that they are available to a wide range of potential grant recipients. However, after digging into the detailed rules of how grants are awarded, it’s generally turned-out that it’s harder for some classes of grant recipients to win a grant. I hope the FCC can take some of the following into consideration this time around.

Municipalities. Cities and counties have often had a hard time meeting the eligibility rules for broadband grants. That’s interesting because local governments receive a lot of federal funding for other purposes, but there are aspects of broadband grants that have been a challenge for local government.

Consider the current Re-Connect grant program that is awarding $600 million for rural broadband. The program is a combination of grants and RUS loans. I worked with several county governments that concluded that they could never accept the RUS loans. The rules governing RUS loans are set by legislation and cast in concrete and so their loan terms are largely not negotiable. There are aspects of RUS loans that don’t work for government entities, like the surety requirement for giving the RUS first lien on a property funded by the loans. Most municipalities are legally not allowed to pledge assets in this manner.

Another past telecom grant practice has stopped municipalities from applying for grants. Some FCC grant programs require that grant applicants show proof of already having the matching funds available to fulfill a project before they can apply for a grant. That requirement makes some sense for commercial applicants because the FCC wants to avoid giving grants to entities that won’t be able to accept the money once awarded. This is a chicken and egg dilemma for local governments. Normally, municipalities win a grant first and then raise the matching bond funds. Bonds that have not yet been sold can’t be used to guarantee a grant – until a bond is sold it doesn’t exist. There is no such thing as a line of credit based upon a future bond issue. Governments can’t raise the bond money first until they know the size of the grant funding – a real example of a Catch-22.

Open Access. Past FCC grants that utilize the Universal Service Fund have required that grant recipients become Eligible Telecommunications Carriers (ETC) – and this might apply to the new $20.4 billion grant program. This is a regulatory designation that basically shows a blessing by a state commission that the entity is a recognized carrier. Only entities that provide retail services are eligible to become an ETC. This requirement makes it impossible for government entities that own open access networks to get grant funding. In an open access structure the network owner – the entity that would use the grant funding to build rural broadband networks – is unable to become an ETC because they don’t provide any retail services to customers, that function is provided by the ISPs that provide service on the open access network.

This requirement discriminates against states that require or favor open access networks like Washington, Utah, Colorado, and Virginia. A good example are the PUDs, the municipal electric companies that operate rural open access fiber networks in rural Washington. The PUDs are building rural fiber, which is a goal the FCC clearly favors, yet they are ineligible for federal grants that require ETC status. This is a case of a regulatory requirement created for a different purpose that will deny federal grant money to large rural areas of the country. The PUDs would love funding to build more rural fiber and the commercial ISPs operating on their networks are ready to sell services.

Partnerships. One of the biggest industry trends is partnerships that are created to build rural broadband networks. Some of the most common partnerships are between county governments and commercial ISPs or between electric cooperatives and rural telcos. Poorly conceived grant rules can cause problems for partnerships even though the FCC and the federal government supposedly love such partnerships.

Any partnership where the network owner doesn’t provide retail broadband can have the same problem as just described for open access networks if the network owner is unable to become an ETC. If the network owner in the partnership is a government entity they will also have problems accepting government loans as part of an award.

Partnerships face other hurdles as well. The current Re-Connect grant program requires providing several years of strong financials to show that a company has a history and a strong balance sheet. New partnerships have no historical financials, yet both entities that own the partnership likely have a long financial history. Poorly written grant rules could block newly formed partnerships from receiving funding, even if the partnership will eventually have a huge cash infusion from the partners.

Other grant rules can also be a problem. For example, a typical partnership might be one where an electric cooperative builds a fiber network and a telco provides services. In this case the grant funding will go to the electric cooperative that is building the network, but the cooperative will be unable to make any pledges or guarantees about customer performance such as promising fast speeds, offering low prices, or serving anchor institutions.

When I read grant rules one of the first things that is always obvious to me is that the people writing the grant rules don’t understand the wide range of business structures that currently operate broadband networks. There are numerous partnership and other arrangements that differ significantly from the traditional model of a single ISP that owns the network and sells retail products to customers. If grant eligibility rules aren’t updated to recognize the way networks are being built and operated, then large numbers of potential grant recipients are going to be ineligible for the new grants. While that hurts the new entities, it really hurts the rural residents that are served by these new kinds of ISPs.

This blog is part of a series on Designing the Ideal Federal Broadband Grant Program.

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