Tag Archives: BEAD Grants

Cost Models and BEAD Grants

I have only thoroughly digested the proposed BEAD grant rules for about a third of the states, but just in the sample I’ve analyzed, two states are going to use a cost model as part of the grant review process – Arizona and Missouri. I have to imagine there are others.

A cost model is just what it sounds like. There are consultants in the country who have built complex models that are supposed to predict the cost of building broadband anywhere in the country. The models have to be loaded with specific inputs for any given location, and the models are then supposed to calculate what it will cost to build a broadband network.

As somebody who has helped to do the hard work of estimating the cost of constructing broadband networks for several decades, I can tell you unequivocally that there are no cost models that work – absolutely none. The cost of building a broadband network invariably relies on local factors and nuances that a cost model can never capture. A model might do a decent job guessing the cost of building broadband in the open prairies of the Midwest where farms are far apart, but even there the models are going to whiff sometimes.

Consider some of the reasons why cost models will never be accurate:

  • For aerial fiber construction, a model can never predict the percentage of poles that must be replaced or that need major make-ready work. I’ve worked on projects just in the last few years where the percentage of bad poles varied between 10% and 90%. The models can also never model the ease or difficulty of working with a given pole owner. An uncooperative pole owner can add a mountain of time to a construction project – and time is money.
  • A cost model is going to miss the unpredictable issues that can add big delays and significant cost. This might be rights-of-ways that are hard to obtain, especially for bridges, railroads, interstate underpasses, wetlands, and federal or state land. The cost model is not going to predict that the local folks in some counties are land-right advocates, and getting easements will be an uphill battle.
  • A cost model is not going to predict the need for an environmental study – or even if it does, it won’t know if the study will be easy and cheap or complicated and extravagantly expensive.
  • Cost models are not going to properly predict the prevailing wages that are needed for the BEAD grants. Most state prevailing wage tables do not specifically list all of the various job functions needed to build a fiber network. I’ve spent several days on a single project figuring this out.
  • Cost models are not going to know that existing poles are now fifteen feet inside the woods that have grown since the poles were built. A cost model is not going to know that a County Highway Department has an edict against putting fiber in drainage ditches. A cost model is not going to understand that some mountain and rural roads have zero shoulders on both sides of the road.
  • A cost model probably does not include the most current costs of both materials and labor for building fiber. Engineers who estimate the cost of fiber projects for a living have been updating their costs almost weekly for the last several years due to supply chain issues and inflation.
  • No cost model is going to understand the extra cost of buying materials that comply with the Build American rule – because nobody knows that yet.
  • I could easily list a dozen more such issues, but I don’t want the blog to get too long.

These two states are using the cost models in the worst possible way because they are using the costs suggested by the cost models to help pick grant winners. That means they are accepting the results from the cost models as a real metric and will reject grant proposals that are above or not within a certain range of the cost model estimate.

Cost models have a useful function in a grant office, which is to double-check construction estimates made by ISPs. I’ve known grant offices that have done this for years as a way to perform a sanity check on proposed grant costs. But I don’t see that process working for BEAD. Most of the States have said that the grant review process is going to go very quickly, meaning there won’t be time for a real analysis of an ISP’s proposal. That alone is very disturbing. State Broadband Offices are clearly trying to push the grant awards out the door with as little analysis as possible – and using a cost model can save a lot of time and effort. Real analysis requires industry experts with long-time experience who really knows if an ISP is exaggerating costs – something that many SBOs are unfortunately lacking.

I have no idea how these two states or others came to the decision to use a cost model. I have to assume some consultant sold them on the idea that they have a highly accurate cost model. But there is no such thing as an accurate cost model, and there never will be.

I fear that states that use cost models are not going to get the results they are hoping for. In places where the cost model predicts a higher cost than actual for a project, ISPs will gladly go along with the higher cost model number and ask for more money. ISPs simply won’t seek grants in areas where cost models predict a lower cost than what can be constructed. If the cost model suggested costs are too low – nobody might ask for a grant.

I give ISPs in states with cost models the same advice I am giving everywhere. Ask the the money you need to make a grant work, and nothing lower. At the end of the day, the States must award the grant to somebody, and your grant offer might be high and still be the best offer on the table. I have a hard time advising anybody to accept less than you need, because that is a path to financial disaster.

Removing Broadband Construction Barriers

One of the provisions of the IIJA legislation that created the BEAD grants is a directive that States should take steps to reduce costs and barriers to fiber deployment. The legislation lists specific ways that States can reduce the cost of BEAD grant project: promoting the use of existing infrastructure, adopting dig-once policies, streamlining the permitting processes, providing cost-effective access to poles, conduits, easements, and rights-of-way, and requiring reasonable access requirements.

The IIJA hoped that States would reduce barriers, reduce costs, and shorten timelines for BEAD project. The legislation not only wants States to make these changes for building along State highways but implies that States should ask counties and municipalities to make the same changes. The language also suggests making special exceptions for building BEAD infrastructure and not necessarily for other construction.

Anybody who has ever built fiber would agree on the benefits that come from most of the items on the list. The IIJA was enacted in November 2021, and states have had two years to react to these federal suggestions. I am sure that some States considered these recommendations in the last two years and perhaps even made a few improvements in processes. But I’ve seen very little evidence that most States have taken any action, and for the most part, States seem to have ignored the IIJA directive.

I’ve written many times about these same issues over the years, and I wonder if States have the ability or even interest to tackle these changes.

Use of Existing Infrastructure. I’ve been advocating this for years. There is a huge amount of unused fiber sitting in networks built by state highway departments, school systems, county and city networks, and statewide networks that could be a big benefit for commercial fiber deployment. But there are always reasons cited why governments won’t share fiber. There might be legislative prohibitions or restrictions from the original funding source that built the fiber. Governments might not want to expend the effort and cost to provide access to the fiber. Some governments worry about security.

Dig-once Policies. This is an idea that policymakers seem to love, but the market doesn’t value. There have been some successes with dig-once, particularly when an ISP already wanted access to fiber along a road that is under construction. But mostly, this policy goes nowhere. Road builders don’t want to incur any extra cost or schedule delays to accommodate fiber. Unless an ISP is part of the process, nobody wants to pay for conduit or access points. Even when conduit is built, it often doesn’t have the access points that ISPs want. Dig once builds disjointed stretches of infrastructure that don’t connect to other networks at the endpoints. To get infrastructure everywhere with dig once would probably take a hundred years.

Streamlining the Permitting Processes. This idea is at the top of most ISP’s wish list. While some states have worked to make it easier to build along state highways, in many cases, the state permits are the hardest to obtain. Most States have zero sway over influencing the processes for city and county roads, and trying to intervene or impose rules would set off an intense battle over state versus local rights.

Cost-effective Access to Poles, Conduits, Easements, and Rights-of-way. This is an interesting request in the IIJA because it conflicts with FCC jurisdiction over these issues. About half of the States still follow the FCC rules for these issues. The other half of States have their own rules but are only allowed to differ from the federal rules in relatively minor ways. States certainly can set fees for using State infrastructure but have limited power elsewhere.

One of the most interesting aspects of this legislative directive is that it is aimed mostly at State Broadband Offices. Most of the changes listed above either require legislative change or would mean making changes at embedded bureaucracies like State Highway Departments – two things that are far outside the reach and power of a State Broadband Office.

BEAD’s Middle Class Affordability Requirement

One of the most perplexing requirements for the BEAD grant program is that State broadband plans must include a middle-class affordability plan to make sure that all consumers have access to affordable broadband. I don’t know anybody who fully understands what this means.

A good place to start is with suggestions made by the NTIA in the Notice of Funding Opportunity (NOFO) for the BEAD grant program. The following has been edited to replace the term Eligible Entity with State Broadband Office (SBO). The NTIA suggests that

Some SBOs might require providers receiving BEAD funds to offer low-cost, high-speed plans to all middle-class households using the BEAD-funded network. Others might provide consumer subsidies to defray subscription costs for households not eligible for the ACP or other federal subsidies. Others may use their regulatory authority to promote structural competition. Some might assign especially high weights to selection criteria relating to affordability and/or open access in selecting BEAD subgrantees. Ultimately, each SBO must submit a plan to ensure that high-quality broadband services are available to all middle-class families in the BEAD-funded network’s service area at reasonable prices.

It’s a challenge for any State to set BEAD rules related to prices. The original legislation that created BEAD grants prohibited States from requiring specific broadband prices.

BEAD grants have another requirement that States must have a plan to provide affordable rates for low-income homes. Most ISPs plan to meet this requirement by relying on the continuation of the Affordable Connectivity Program (ACP). These ISPs will have to cut rates somehow if the ACP program is not funded by Congress.

In 2016, the FCC suggested that the benchmark for a reasonable middle-class rate should be set at 2% of monthly household income. Pew Charitable Trust did some analysis that showed that the 2% benchmark would equal between $82.79 in the South and $107.64 in the Northeast. Pew estimated that as many as 30% of middle-class households would not be able to afford broadband set at those prices.

The idea of having to push down the rates to win the grants is scary for most ISPs – because most of the customers who aren’t low-income are probably considered to be middle-class. That is the category of broadband that drives the majority of the revenue in a broadband business plan. If ISPs are pressured to have low rates for everybody, it’s that much harder to build a business plan that doesn’t lose money.

The folks who write some of these grant rules don’t seem to appreciate how hard it is to succeed as an ISP in a rural area. For example, it can be a several-hour round trip to just visit some customers  – costs are a lot higher per customer than in more densely populated areas.

ISPs also have very limited ways to control profitability in rural markets. It’s difficult to cut enough expenses to make a difference to the bottom line, so raising basic broadband rates is about the only tool that can be used to keep a rural market in the black.

Luckily, many State Broadband Offices are making the middle-class rate issue into a check box – can a grant applicant demonstrate that rates are affordable? But other SBOS are clearly taking the low middle-class objective to heart by mandating specific rates to win grant points – all prompted by the language in the NOFO.

I’m sure it’s really tempting for a State Broadband Office to mandate affordable rates – it’s a chance through the grant process to try to establish public policy. But I find it really troubling that policy-driven folks who have never operated an ISP try to micromanage how an ISP should operate. The BEAD rules already layer on all sorts of extra costs that are not part of a regular business plan. Additionally requiring specific low rates can be a disaster for ISPs who will, by definition, not have many paths to financial success in rural markets. I can’t think of anybody who benefits if the ISPs that take BEAD money find themselves losing money a few years after the grant networks are built.

My Predictions for 2024

BEAD Predictions. It’s clear that most state broadband offices are going to try to award all of the BEAD grants in 2024. There will be barely any BEAD construction completed in 2024, but there will be big hoopla over the handful of customers that get connected before the end of the year.

A lot of pundits have been predicting that a large majority of the funding will go to the largest ISPs to build fiber. But after reading the grant rules in numerous states, I’m not so sure. In some states, the big companies will win it all. States that emphasize the cost of the grant per passing might end up giving all of the money to WISPs. A few state rules are so obtuse that even the big ISPs might decide to take their money to a neighboring state.

RDOF Troubles. I’ve talked with a lot of local governments that haven’t heard a peep from RDOF winners. Most winners will be required to have completed 40% of the RDOF construction by the end of 2024, so this is the year that will flush out ISPs that are going to default. Defaults will probably be too late to attract any BEAD funding.

Wireless Technology Improvements Shake up the Market. 6 GHz radios will change the WISP landscape. New radios that include the giant 6 GHz channels will deliver much faster speeds. More WISPs will begin advertising gigabit speeds in 2024, but most will not deliver what they advertise – but speeds will still be fast.

Big cellular companies will use C-Band spectrum to boost speeds on FWA broadband. But a lot of rural counties that are hoping to get faster speeds will not see the new technology deployed in 2024.

The Beginning of Consolidation. We’re going to see some interesting acquisitions in 2024. I don’t know who, but some of them will be big names. There is a huge amount of venture capital suddenly interested in broadband, and as it becomes clear that these companies will not win as much BEAD grants as they hoped, they’ll turn their attention to acquisitions.

Cable Companies Will Lose Broadband Customers. The large cable companies collectively gained only 4,700 customers in the third quarter of this year, and the only one that grew was Charter. In 2024, customer losses will increase each quarter, and the cable industry is going to panic. Cable company board rooms are at a loss on how to stem the losses. They are now banking that the public will be happy with faster upload speeds with mid-split upgrades, but that isn’t going to impress customers who are offered a fiber alternative or a much cheaper FWA alternative.

Little Impact from FCC Broadband Regulation. If you listen to the rhetoric from the big ISPs, the double whammy of Title II regulation and the new digital discrimination rules will devastate ISPs and kill innovation and new investments. The reality is that there will barely be a peep from regulators concerning the new regulations in 2024. Some minor investigations will be undertaken, but the new regulation will have almost no impact on the market or investments.

Congress Will Let ACP Lapse. There seems to be a big consensus in Congress that the ACP program should continue., But I can’t picture the currently dysfunctional Congress approving new funding for the subsidy program before ACP runs dry. I think ACP will get renewed later in 2024, but only after first lapsing, which will create chaos for ISPs and customers. When ACP is renewed, the number of eligible households will be greatly pared down.

The FCC Will Launch the 5G Fund. This is intended to bring more rural cell towers. The industry says that $9 billion is not nearly enough to reach all of the places that need better cellular coverage, so counties and states will lobby fiercely to get included in the funding.

Big ISPs Will Continue to Buy Back Stocks Rather than Invest in Networks or Maintenance. This may be the least bold prediction I have ever made.

Fifty States – Fifty Different BEAD Grants

When the NTIA suggested BEAD grant rules, a lot of industry folks assumed that states would largely follow the NTIA suggestions and that there would be a lot of similarity in the BEAD grant rules between states. It turns out that the opposite is happening, and many State Broadband Offices are taking unique approaches. In this blog, I compare the BEAD grant rules for Georgia and Illinois. I picked these states only because these are the two most recent rules I’ve read – but every other state plan I’ve read is also different than these two. It looks like fifty states means fifty different BEAD grant programs. Following is a high-level comparison of the two states:

Overall Approach. Georgia will only accept grants in the first round that offer to build fiber – other technologies will only be considered in a subsequent grant round if there isn’t enough money or grant requests for bringing fiber. The Georgia rules also strongly reward ISPs who propose to build an entire county.

Illinois has at least a two-step grant program. The first grant round will only accept proposals to build high-cost areas (that are designated as such by the state). The second round is for everything else. This is an odd approach since ISPs will fear winning high-cost areas but then not winning the nearby areas that together would constitute a coherent study area.

Most Important Scoring Metrics. Georgia gives 50 out of 100 points based on the amount of grant requested per location. Since everybody will be proposing fiber, the costs should be similar, so an applicant can grab the most grant points by offering the greatest percentage of matching funds. An ISP willing to contribute 40% of the cost of building will likely beat somebody who wants to contribute the minimum 25% matching. But this like RDOF, and an ISP is only competing against those that bid for the same County.

Illinois will award 25 of 100 points based strictly on the amount of matching offered. An ISP offering less than a 30% match will win 0 points. An ISP must cover 60% of the cost of the project to get the full 25 points. Illinois awards another 25 points for the cost of the grant award per passing compared to a not-yet-published suggested reference cost per location calculated by the state. By definition, this approach strongly favors lower-cost technologies like wireless.

Broadband Rates. Georgia will award 15 points to an ISP that promises that symmetrical gigabit prices will always be lower than the rates for the service in Metropolitan areas of Georgia.

Illinois will award 20 points for ISPs to meet specific price targets (5 points for each): $30 for 100/20 Mbps. $50 for 100/100 Mbps. $80 for 500/1000 Mbps. $100 for symmetrical gigabit.

Local Support. Georgia will award up to 9 points based on the volume and strength of the support from local communities.

Illinois will award 4 points for breadth and depth of local support and another 4 points if local community members or organizations make a verified financial commitment to the grant.

Other Grant Points

 Georgia:

  • 10 points for compliance with fair labor laws
  • 8 points for broadband speeds
  • 5 points for speed of network construction and deployment
  • 2 points for having been an ISP in Georgia for at least three years
  • 1 point for having a headquarters in Georgia

Illinois

  • 5 points for compliance with fair labor laws
  • 6 points for broadband speeds
  • 6 points for offering open-access
  • 3 points for speed of network construction and deployment
  • 2 points for working in a community that has participated in the Accelerate Illinois program.

My Summary. If I didn’t know these are both BEAD grants, I would never guess these are from the same funding source. The scoring emphasizes drastically different priorities.

Georgia. It will be interesting to see if the NTIA will allow the state to shut out other technologies. The scoring benefit from bidding for entire counties might violate the Congressional edict that grants can be as small as a single location. The emphasis on whole-county bids will make it hard for ISPs that want to edge out from existing networks or electric coops that only want to build in their own territory.

Illinois. The scoring benefit for meeting specific prices for specific products seems to violate Congressional intent that specified that BEAD should not set or influence rates. The huge amount of matching required to get grant points seems to not recognize that BEAD areas are extremely rural, by definition. I’ve never seen a rural fiber business plan that can tolerate 40% to 60% equity contributions – that’s why nobody has built these areas. The grant points from comparing actual costs to some target cost set by the state means these grants are going to heavily favor lower-cost wireless technology. The points for open-access are a head-scratcher since it’s almost impossible to successfully operate a rural open-access network unless it can serve 20,000 or more customers.

Bottom line: Georgia obviously favors fiber to the exclusion of other technologies. My best guess is that the big scoring related grant dollars per passing will favor big ISPs over small ones. For Illinois, I’m not sure if it’s intentional, but WISPs are going to score far better than anybody proposing to build fiber. Georgia could get border-to-border fiber while Illinois could get border-to-border wireless.

Again, these two plans were not chosen because they are extreme examples. These two plan just demonstrate the wide variance of state philosophies behind BEAD. I must note that these are proposed plans that might get changed before being sent to the NTIA. It will be interesting to see how pressure from ISPs and the public influence the final rules. The NTIA also will have to approve these plans.

I also have to wonder if State political leaders understand the direction that their State Broadband Offices are taking – because the grant scoring rules are going to largely define who has a chance of winning in each state – both the technology that is favored and the size of ISPs that are likely to win.

Is Carrier of Last Resort Dead?

The concept of common carrier stretches back to the 14th century in English law, where businesses were granted the exclusive right to be in business as long as they were willing to serve everybody. The term common carrier came into use to describe the obligation of businesses like coaches, ferries, etc. that were required to serve anybody who asked to be transported. The concept was carried over to businesses that were given a franchise to serve a local area, and businesses like blacksmiths and innkeepers were required to serve anybody who wanted service. This concept still applies to businesses today, like railroads, which are not allowed to selectively refuse to carry freight.

Carrier of last resort (COLR) is a version of common carriage that has been applied to businesses that operate large networks like telephone companies, electric companies, water companies, and gas companies. Federal or State rules have always required such businesses to serve anybody inside of the franchise area who requests service.

In exchange for being granted a franchise area, COLR for telephone companies has always come with specific obligations. A COLR is expected to serve everybody in the franchise area, even if that means extending facilities. A COLR needs regulatory approval to withdraw from serving customers. A COLR is expected to operate the business with care, skill, and honesty and to charge fair and reasonable prices.

The concept of carrier of last resort for telephone companies started to weaken with the passage of the Telecommunications Act of 1996. This Act allowed for local telephone competition, and some legislators or regulators granted relief for telephone companies from some of the carrier of last resort obligations. For example, some states have eliminated COLR obligations as part of deregulation. Some regulators have eliminated most COLR obligations for specific telephone companies for the same reason. But even in most cases where the COLR obligations have been weakened, regulators still usually require a telco to ask for permission to withdraw from a market.

While some COLR obligations were weakened, others were expanded. For example, some states have required CLECs (competitive telephone companies) to accept COLR obligations in exchange for participating in subsidy programs. Cities have often only agreed to give a franchise agreement to CLEC or ISP that agrees to serve everybody. In many cases, this obligation is no longer explicitly called COLR, but uses terms like “duty to serve” or “obligation to serve” but refers to obligations similar to COLR.

The COLR issue has come to the forefront for broadband because of broadband grants and subsidies. Some state and local broadband grants have included an obligation to serve everybody in a grant area. The largest subsidy program to require 100% coverage is the Rural Digital Opportunity Fund (RDOF). ISPs that accept this funding are expected to offer service to 100% of homes and businesses in the covered Census blocks by the end of the six-year deployment period. It’s not entirely clear if the upcoming BEAD grants will require 100% coverage, and that final determination will likely be included in each State’s final grant rules.

Is the agreement to serve customers that is obligated through a grant or subsidy program the same as a carrier of last resort obligation? I expect not. For example, will an RDOF winner be expected in the future to extend the network to newly constructed homes?

There are clearly going to be households in RDOF areas that are not offered service. For example, many of the RDOF winners use fixed wireless technology, and there are always homes in any area that can’t be reached with the technology for some reason. In hilly and heavily wooded areas, this might be a large percentage of households.

Does a home that is not covered by RDOF have a reasonable remedy to get service? In the past, a customer could complain to State regulators if a telco was refusing to serve them. It’s hard to imagine an individual homeowner opening an expensive and complicated FCC proceeding to complain about being missed by RFOF.

Technology is also creating havoc in rural areas for traditional telephone company obligations. When I was recently upgrading my cellphone in an AT&T store, I overheard the AT&T representative tell a customer that they would soon be losing their telephone copper and would be moved to FWA cellular wireless.  My county is extremely hilly and wooded, and there is a major lack of rural cell towers. There is a good chance that this customer is not within reach of the offered cellular broadband. It sounds like the end of carrier of last resort obligations if a telco can cut the copper wires and move customers to a cellular service that doesn’t work at their home.

In circling back to the question asked at the beginning of this blog, are there many places left where a regulator will step in and demand that an ISP built infrastructure to reach an unserved household? I think the chances of that happening are getting increasingly remote.

Keeping Track of BEAD

The NTIA has a great dashboard for tracking the status of the last several steps needed before States can receive BEAD grant funds. The dashboard seems to be regularly updated to allow you to track the state or states you are interested in.

This dashboard tracks the progress of each state’s specific BEAD grant plans. The NTIA has split the BEAD action plan from states into two volumes that address specific issues.

BEAD Volume I covers the following issues:

  • Status of current grant funding that has already been used in a state to bring broadband to unserved and underserved locations.
  • A list identifying the remaining unserved and underserved locations.
  • A list of the community anchor institutions that don’t yet have good broadband
  • A description of the state’s final upcoming challenge process where local governments and ISPs will be able to challenge the accuracy of the broadband maps to define areas eligible for BEAD grants.

BEAD Volume II is the core of how the BEAD grants will work and covers the following topics:

  • The specific objectives of a state’s BEAD grant plan.
  • A description of how a state assisted local, tribal, and regional broadband planning efforts
  • A description of the local coordination process where a state was supposed to reach out to all corners of the state to get feedback on the BEAD grants.
  • The specific plan of how the BEAD grant process will be structured. This includes defining the grading scale that will be used to choose grant winners.
  • A description of how some BEAD funds will be used for non-deployment purposes, and how grant winners will be selected. Non-deployment uses of BEAD includes grants for activities like cybersecurity training, promoting telehealth, improving digital literacy skills, etc.
  • Description of how a state will monitor the implementation of grants.
  • Description of how a state will track the jobs created by the grants
  • Description of how the BEAD grants will be use a diverse and highly skilled workforce
  • Description of how the funding process will give priority to minority and women-owned businesses.
  • Description of the steps a state has taken to reduce the cost and the barriers to infrastructure construction and deployment.
  • Description of how a state will assess the impact on climate by the projects
  • Description of the requirements for ISPs to offer low-income rate plans
  • Description of how a state will make sure that ISP rates are affordable for the middle class.
  • Descriptions of how a state will use the first 20% of BEAD funding
  • Description of any waivers that a state plans to use for situations where state laws conflict with BEAD requirements, such as not allowing grants to be awarded to local governments.

If anything, this list of requirements shows that states have more to do than just award grants. States must track a wide range of related issues and must satisfy the NTIA that the state will meet all of the obligations required in the NTIA BEAD rules.

There is a link at the end of the first paragraph of the dashboard that takes you to the Public Notice Posting of State and Territory BEAD and Digital Equity Plans/Proposals. This page includes the key documents that have been created by each State. This includes links to:

  • 5-Year Action Plans. Each state must file a plan to describe the goals and priorities for making sure that everybody gets access to broadband. It appears to me that in the haste to get BEAD grants awarded that the 5-year plans are not being given a lot of attention. It’s something that states need to complete, but the plans I’ve read so far are pretty generic.
  • Digital Equity Plans. These are plans to provide digital equity grants that are separate from the $42.5 billion allocated to last-mile broadband.
  • Volumes I and II of each state’s BEAD proposals.
  • The two NTIA NOFOs that describe the specific requirements for the digital equity and BEAD grants.

NTIA Modifies the Letter of Credit Requirements

For the first time in the BEAD process, the NTIA has bent to outside pressure and modified one of the grant rules. I almost labeled this blog as “NTIA Relaxes Letter of Credit Requirement,” but I still need to do more digging before I’m convinced that this makes a difference for smaller ISPs compared to the previous rules.

The specific modified  rules can be found here. Following is a summary of each change, shown in italics, followed by some of my continuing concerns.

A BEAD grant bidder can now obtain its Letter of Credit from a credit union that is insured by the National Credit Union Administration and has a credit union safety rating issued by Weiss of B- or better.

I am not sure of the genesis of this idea, but this opens the door to more financial institutions that can provide the Letter of Credit. There must be some subset of potential grant applicants that asked for this. A lot of the BEAD projects are going to be large, and I have to wonder how many credit unions will be willing to tie up cash reserves of many millions of dollars for a Letter of Credit. Financial institutions must keep any cash pledged to a Letter of Credit in reserve, meaning that money can’t be used to make other loans. That’s why the interest rate and the cost of a Letter of Credit are substantial – because money pledged to a Letter of Credit can’t be used to make other loans.

A grant bidder will not have to provide a bankruptcy opinion letter if they obtain a performance bond for 100% of the awarded grant amount.

One of the big gotchas for using a Letter of Credit is that a grant applicant must also obtain a legal opinion that the Letter of Credit will not be considered to be property if the grant applicant undergoes bankruptcy. That’s a hard legal opinion to obtain since bankruptcy courts tend to snag every asset with any perceived value. This is not a meaningless provision since large ISPs like Charter, Frontier, and Windstream have gone through bankruptcy.

The more important change is that a grant applicant can substitute a performance bond for a letter of credit. However, the performance bond is for the amount of the award. In the typical BEAD grant, the performance bond would have to cover the 75% grant, while the Letter of Credit covers only the 25% grant matching. I’m going to have to do some checking, but a performance bond that covers a larger dollar amount might not be much cheaper than a Letter of Credit that covers only the matching.

Additionally, a grant applicant must have proof of the performance bond before applying for the grant. This ignores the way that companies that give a performance bond operate. I have never worked with one who would give a bond for a theoretical project – only for an actual shovel-ready project that already has the funding and subcontractors under contract. It might be extremely difficult or impossible to get a performance bond for a theoretical grant project that might never come to fruition, or that might be materially different than what was contemplated when the performance bond was created.

A grant winner will be able to ratchet down the letter of credit as they meet specified buildout milestones. A grant winner using a performance bond will have the same option to reduce the size of the bond for meeting specific buildout requirements.

This sounds great in that the Letter of Credit or the performance bond can be reduced in size as the project gets constructed. However, this ignores the way that financial institutions work. Changing a Letter of Credit will likely be treated by a bank as a whole new transaction. They are going to do a complete new review of the borrower and the project and will charge a significant fee to make this change – much like having to undergo a credit check, pay for a new inspection, and pay points when you refinance a home loan. I’ve never been part of a project that reduced the amount of a performance bond, but I have to imagine the process is similar.

It is good to see the NTIA willing to make changes. They have been hounded by a wide range of industry folks and politicians to make changes to the Letter of Credit. Unfortunately, the change that was really needed was to get rid of the Letter of Credit requirement since it strongly favors big ISPs over small ones. I don’t want to sound skeptical, but I still see red flags in the practical application of the new rules that will be expensive and perhaps impossible for anybody but giant ISPs to meet. This feels more like a band-aid than a fix.

One More BEAD Map Challenge

There is still one more chance for local communities or ISPs to fix the maps that will be used to allocate BEAD grant funding. Under the NTIA rules for the BEAD grant process, every State Broadband Office (SBO) must conduct one more challenge process to the maps. This must be done sometime after an SBO has submitted its planned grant rules to the NTIA and before any BEAD grant can be awarded.

The Notice of Funding Opportunity (NOFO) for the BEAD grant says that a unit of local government, nonprofit organization, or broadband service provider can challenge the maps used by each state that define locations that are eligible for BEAD – meaning that the fastest broadband speed offered currently would be slower than 100/20 Mbps.

Every state will have its own timeline, but it’s likely that mapping challenges will done in the first quarter of next year. SBOs are supposed to file their BEAD plans with the NTIA by the end of this year, and so far, only two states have made that filing.

It’s expected that most states will use the FCC maps to define the grant-eligible areas, although states are free to ask the NTIA to use their own version of the maps. The FCC maps were used to allocate the BEAD dollars to states, but states are free to define grant-eligible areas for purposes of awarding grants.

I know from working around the country that there are still plenty of places that should be grant-eligible, but that are still misclassified on the FCC maps. Most States challenged the FCC maps earlier this year, but many states did not have the staff or the facts needed to challenge the maps at the detailed level needed to correct the maps. The FCC map challenge process is complicated, and a lot of valid map challenges were not accepted due to not meeting the FCC’s challenge format.

Any map challenge is going to be most effective if a challenger has some sort of data to support the challenge. Many ISPs are leery of using speed tests as a basis for a map challenge. There is some basis for this since many speed tests are slow due to reasons outside of the control of the ISP, such as a poor WiFi router inside a home.

But I believe that speed tests are a great tool in some circumstances. To be effective, there needs to be a large enough sample of speed tests taken in any geographic area. With enough speed tests, false claims on the FCC map become fairly obvious. For example, if an ISP is claiming in the FCC maps that its technology is delivering speeds greater than 100/20 Mbps, but there are no speed tests even close to that speed, it’s almost certain that the ISP is exaggerating its speed in the FCC reporting.

Challenging a map can get tricky. There are technologies like DSL or FWA wireless where speeds are slower as the distance between a customer and a hub increases. A telco that claims 100 Mbps DSL might be telling the truth for customers close to the DSLAM core – but customers even a relatively short distance further away won’t be able to achieve that speed. I often see telcos and cellular ISPs claiming a uniform speed across a large footprint when that is not possible with the technologies.

As anybody who digs deeply into the FCC maps knows, there are ISPs that just overstate the speed capabilities. They may not be breaking any FCC rules by doing so since ISPs are free to report marketing speeds to the FCC instead of actual speeds. But market speed overstatements can make a neighborhood ineligible for BEAD funding – which would be a shame since there might not be another chance for such places to get broadband funding in the foreseeable future.

It’s likely that there will be a short time window for filing challenges, so anybody interested in doing so should be prepared early and should keep a close eye on the State Broadband Office website to note important events.

Interest Rates and BEAD

I’ve recently been working with ISPs who are getting worried about what high interest rates might mean for the upcoming BEAD grants. Interest rates keep creeping upward to levels we haven’t seen in decades. Just last week, I saw that home mortgages are now at 8% – and infrastructure loans are only a little less expensive.

For any ISP that was going to borrow most of the BEAD matching funds, the increase in interest rates can be devastating. When BEAD was first announced in 2021, I had clients getting infrastructure loans at 4% or less. There are banks now talking 6% to 7%, with a good possibility that the rates will be even higher next year when it’s finally time to make the final go/no go decision to participate in BEAD.

Except for some exceptions for high-cost areas, most BEAD grants will be capped at 75% of the cost of the infrastructure. However, the NTIA has given instructions to states to stretch BEAD dollars by rewarding applicants who will accept less than a 75% grant. This means that many BEAD applicants will be borrowing to cover more than 25% of the cost of the infrastructure.

BEAD applicants also have to finance other costs that are not covered by the BEAD grants. BEAD grants only pay for broadband-related infrastructure. The grants don’t pay for vehicles, computers, furniture, and any other similar assets. BEAD also doesn’t cover expenses, and a BEAD applicant must cover the labor and other start-up costs for launching a new market. These expenses must be supported by the ISP until revenues grow to cover operational expenses.

It’s hard to stress the importance of interest rates on the viability of a rural business plan. The areas where BEAD will be built are rural, by definition, and will not generate a lot of monthly cash, even when completed and mature. Many of the business plans I’ve reviewed barely cash flow with a 75% grant and the interest rates we saw in 2021. In many business plans, interest expense is one of the major expenses in the early years of the roll-out.

There is another BEAD issue that is also dependent on the interest rate. The guaranteed letter of credit will be more expensive as interest rates increase. For ISPs that will borrow the matching funds, the base loan and letter of credit are a double whammy.

ISPs have a tough choice to make. It seems likely that interest rates will not stay at the high levels we see today. Interest rates may still rise as the Federal Reserve continues the fight against inflation. But historically, high interest rates have always returned to lower levels eventually. It doesn’t seem likely that interest rates are going to drop as low as what we’ve seen in the last decade, since for much of that period the interbank lending rate was near zero.

The hard question for an ISP who is borrowing at high rates is if and when interest rates will drop and if they will be able to refinance BEAD loans. I’ve lived through periods in the past where borrowers faced this same dilemma. Borrowers need to be prognosticators and make some guesses about the future of interest rates. If an ISP believes that rates won’t drop enough to ever be affordable, it’s time to pass on taking grant funding. But if future refinancing seems likely, a borrower has to guess when rates may drop and become affordable.

Interest rates are another of the many BEAD issues that are going to force some ISPs to think twice about taking the grants. Higher interest rates don’t directly affect ISPs that are planning on using equity, but even that’s not entirely true since equity investors consider market financial conditions as part of deciding where to invest.

There couldn’t have been a worse time for the still-increasing interest rates for anybody considering BEAD. The hardest question to answer is what the interest rates might look like in 2025 and 2026 when most of the money will be drawn to pay for construction. If rates start to return to sane levels by then, then the situation will not be as dire as discussed above. But who has the crystal ball that will predict interest rates over the next three years?