Is the FCC Killing State Matching Grants?

In a bizarre last-minute change of the language approved for the upcoming $16.4 billion RDOF grant funds, the FCC inserted new language into the rules that would seem to eliminate grant applicants from accepting matching state grants for projects funded by the RDOF grants.

The new language specifically says that the RDOF grant program now excludes any geographic area that the Commission “know[s] to be awarded funding through the U.S. Department of Agriculture’s ReConnect Program or other similar federal or state broadband subsidy programs or those subject to enforceable broadband deployment obligations.”

It’s fully understandable that the FCC doesn’t want to award grant money from multiple federal grant programs for the same project, and that was a loophole that is sensible to close. I think most industry folks understood this to be true even if it wasn’t in writing.

But the idea of blocking states from making grants to supplement RDOF is counterintuitive. More than half of the states now have state broadband grant programs. It makes no sense for the FCC to tell states how they can spend (or in this case how they cannot spend) their state grant monies.

The whole concept of blocking state matching grants goes against the tradition of federal funding. The vast majority of federal funding programs for infrastructure encourage state matching funds and many programs require it. Matching state grants are used along with federal grants for building infrastructure such as roads, bridges, water and sewer systems, airports, etc. Why would the FCC want to block this for broadband?

The state grant programs that I’m most familiar with were planning to provide matching grants for some RDOF grants. Broadband offices at the state level understand that building broadband networks can be expensive and they know that in some cases the extra funding is needed to make broadband projects viable.

It’s important to remember that the RDOF grants are aimed at the most remote customers in the country – customers that, by definition, will require the largest investment per customer to bring broadband. This is due almost entirely due to the lower household densities in the RDOF grant areas. Costs can be driven up also by local conditions like rocky soil or rough terrain. Federal funding that provides enough money to build broadband in the plains states is likely not going to be enough to induce somebody to build in the remote parts of Appalachia where the RDOF grants are most needed.

State grant programs often also have other agendas. For example, the Border-to-Border grants in Minnesota won’t fund broadband projects that can’t achieve at least 100 Mbps download speeds. This was a deliberate decision so that government funding wouldn’t be wasted to build broadband infrastructure that will be too slow and obsolete soon after it’s constructed. By contrast, the FCC RDOF program is allowing applicants proposing speeds as slow as 25 Mbps. It’s not hard to argue that speed is already obsolete.

I know ISPs that were already hoping for a combination of federal and state grants to build rural infrastructure. If the FCC kills matching grants, then they will be killing the plans for such ISPs that wanted to use the grants to build fiber networks – a permanent broadband solution. Even with both state and federal grants, these ISPs were planning to take on a huge debt burden to make it work.

If the matching grants are killed, I have no doubt that the RDOF money will still be awarded to somebody. However, instead of going to a rural telco or electric coop that wants to build fiber, the grants will go to the big incumbent telephone companies to waste money by pretending to goose rural DSL up to 25 Mbps. Even worse, much of the funding might go to the satellite companies that offer nothing new and a product that people hate. I hate to engage in conspiracy theories, but one of the few justifications I can see for killing matching grants is to make it easier for the big incumbent telcos to win, and waste, another round of federal grant funding.

A Tale of Two Grant Programs

It is the best of times, it is the worst of times (for broadband grants). The state of California just initiated a state broadband grant program that is likely to spend money without doing much actual good for rural broadband. This can be contrasted to the grant program in Minnesota that has already funded a lot of rural broadband networks in communities that would have otherwise not probably ever gotten it. Comparing the two programs shows that it’s not good enough to lobby for and get a state broadband grant program. It’s important to get the details right to make sure that any such program is effective and creates maximum public benefit.

The California grant program is called the California Advanced Broadband Services Fund (CASF) and was recently granted funding by Assembly act 1665 and signed into law by Governor Jerry Brown. The CASF program is not new, but this recent act changes some of the grant rules and infuses $100 million of new funding into the program.

Interestingly the new law takes effect immediately (which is not normal for this kind of legislation) and this leaves four existing open broadband grants under the older CASF open for question because while they were filed under the old rules it seems like they will be judged under the new rules.

The big problem with the grant program is that it allows first right of refusal to the incumbent telcos in any propose service area. Like with most of America, the rural areas with poor broadband service in California are mostly in areas where AT&T or Frontier Communications are the incumbent telephone company.

It is this right of refusal that is going kill any real value of the grant program. For example, somebody might file to build fiber to customers in a small town or farming area. The incumbent telephone company can block the grant application by filing one of their own. But they don’t have to match the speed or technology of the first grant and could instead ask to build something else, such as upgrading existing DSL or cellular broadband. This effectively gives the incumbent telcos veto power over any grant request.

I’ve been reading local California consultants like Steve Blum who expects the incumbents to kill most projects. It’s possible they might let a few through in areas that they don’t want to make investments, but their lobbyists were successful in changing this law to make it easy for them to grab all of the funding if they choose to do so.

This contrasts greatly with a grant program that is doing things the right way – the Border-to-Border grants in Minnesota. In that programs the legislature has set aside funding now for four straight years that provides grants up to a 50% matching for qualifying broadband projects. So far the state has provided over $85 million to the program.

The incumbent providers have the ability to challenge a grant request, but only on a very limited basis. One of the parameters used to judge a grant request is whether a particular area is unserved or underserved with broadband, with this determination made from broadband maps that were created using ISP-reported data. The incumbents can challenge a grant request if they believe that the proposed service area has better broadband than is claimed by the mapping process. They also can challenge a grant if they have near-term plans to build broadband that is fast or faster than that requested by a grant request.

Since most of the Minnesota grant requests are requesting money to build fiber directly to customers there have been no serious challenges by the incumbents. There have been a few challenges that disputed the available speeds in an area.

The net result of the Border-to-Border grants is that small towns and rural farm areas all over the state are getting a real permanent broadband solution due to the assistance provided by the grants. There are a number of independent telephone companies and small cable companies in the state that are competing with each other to grab new territories that are made feasible due to the grant program.

There is no telling if the Minnesota grant program will continue because it’s been funded during a period of state budget surpluses. It’s expected that the budget will be tighter in 2018 and we’ll have to see if they keep the grants going. But this has been, by far, the most effective state broadband grant program in the country. Other states like Ohio are looking to use the Minnesota model in developing a new grant program.

It’s my understanding that the California grant legislation started out with good intentions but got hijacked by the ever-present telecom lobbyists in the legislature. The original sponsors of the grant asked the governor to veto the bill, but for some reason it’s gone ahead. Instead of an effective grant program that will help rural areas get real broadband, the California CASF is instead going to be a state version of the FCC’s CAF II program that also funnel money to the large incumbent telcos to make marginal improvements to broadband. The new CASF is one of the worst uses of tax dollars that I can imagine – it will enrich the bottom line of the telcos without making any significant improvements in rural broadband.