Regulation - What is it Good For?

State’s Role in Broadband Grants

This is another blog in the series looking at the upcoming FCC $20.4 billion broadband grant program. Today I discuss how states might best take advantage of that large federal grant program.

A lot of states either have or are considering the establishment of state broadband grant programs. The grant programs vary widely in terms of the amount of annual grant, eligibility to receive the grants, etc. Most state programs award at least some grant dollars to help to pay to bring broadband to unserved and underserved places in a state.

Unless the FCC chooses a different mechanism, it looks like the federal grants might be awarded using a reverse auction. That means that ISPs that can accept the least amount of federal grant funding will receive the grants. That implies that ISPs that enter the federal auction that already have state grant money will have an advantage over other ISPs with a similar business plan. This means that states can attract a greater amount of federal grant dollars by coordinating state grants with the federal grant cycle.

The obvious way to do this is to award state grants to go along with projects that get the FCC grants. That sounds easy, but my guess is that figuring out the mechanics and the timing to do this right is going to be complicated. Getting that timing right is vital because awarding the state grants before the federal grants will improve ISP’s chances of winning a federal award. Timing is also vital because, in many cases, an ISP that wants to build fiber is going to need both both state and federal grants to make an economic business case. An ISP that gets only one of the two grants is likely to return the grant money rather than proceed. We’ve seen funding returned to both state and federal grant programs and that process is messy and benefits nobody.

The circumstances of these grants are different than the normal government grants. There is a routine coordination between state and federal grants for a wide array of purposes such as building bridges or roads. The normal process is that the entity receiving the grants apply to both the state and federal grant programs and they only proceed when they’ve received both grants – timing is not normally an issue and it doesn’t matter if the state or federal grant is approved first. If the FCC uses a reverse auction then there is no guarantee that an applicant will receive the federal funding – it’s vital that the state grant is in place first in order to increase the chance of winning the federal grant.

An ISP needs to know before the federal reverse auction that they can rely on state grants. Most state grant programs are awarded on some sort of merit scale, with a scoring system. That process might make it difficult to award state grants to those most likely to win federal grant funding. This likely means somehow changing the mechanism of the state grant program to favor projects that can win federal funding.Following are a few ideas of how states might do this – I’m sure there are other ways.
• States could have a formula that guarantees a fixed amount of state grant for anybody that wins a federal broadband grant. The formula might be something like, ‘the state will match the lesser of 50% of the amount of the federal grant award or $1 million’. With that kind of formula, an ISP could count on state money during the federal reverse auction. The downside to this idea is that if a state attracts a lot of federal grants they might owe more in matching than their grant budget.
• It might be as simple as awarding state grants before the federal reverse auction and requiring that anybody receiving a state grant must also apply for a federal grant. The downside to this is that there will likely be returned state grants for those that don’t win the federal grants.

The states also have an opportunity to influence the technology solutions they want to see. For example, a state might only offer matching grants for fiber and refuse to match grants for technologies like DSL, satellite or fixed cellular. Or states could promote fast speeds by awarding grants only to projects that provide 100 Mbps or faster.

Finally, the best way for a state to take advantage of the $20.4 billion in federal grants is to step up their game. Many state grant programs today have annual budgets of $5 million to $20 million per year. That is a paltry amount when the FCC is awarding $2 billion annually in grants. States that want to attract a bigger share of the federal grant money can do so by increasing the annual size of the state grant awards. If a state is serious about finding broadband solutions they want to attract as much of the federal grant money as possible. The federal grant program will likely reward states that are bold enough to get serious about also funding broadband. I know state legislators like to pat themselves on the back because they have created a state broadband grant program. However, state grant programs that only award $20 million annually in grants might need to make such awards for fifty years or longer to actually solve their rural broadband gap. States can do better and the federal grant program makes it easier to justify larger state grants.

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

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