7 Mar 2024

BEAD — Let’s Not Throw Away Our Shot Part 2 –Affordability

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By Marc McCarty

& Meredith Morrison

The last Blog described the Missouri Office of Broadband Development’s (OBD) proposal to spend up to $1.7 billion for broadband projects that will be funded by the federal government’s Broadband Equity Access Deployment (BEAD) program. We highlighted ways local government and nonprofit organizations (Public Organizations) can play an important role at the outset, by helping to make the list of locations eligible for BEAD funding as accurate as possible, and by initiating contact with internet service providers (ISPs) to express the community’s interest in partnering to “digitally connect” their community.

Three ingredients are essential for communities to digitally connect while holistically benefitting the health, education, and economic advancement of its residents: (1) access to internet service, (2) the skills necessary for service adoption, and (3) a pricing model that makes service affordable. BEAD only directly addresses internet access. Internet adoption and affordability will require Public Organizations to organize and enter into partnerships with existing and new ISPs.

This blog focuses on the challenge to make broadband service affordable; a challenge that has been made much more difficult because of the end of funding for the Affordable Connectivity Program (ACP).

Why Affordability Matters

Obviously, community residents and businesses cannot reap the benefits of broadband service if they can’t afford it! Like other utilities, broadband service comes with a monthly fee, and all ISPs generally must earn enough in monthly subscription revenue to cover the costs of capital investment, network maintenance, and service operations. In Missouri, most ISPs are “for-profit” companies, in which shareholders/investors must earn a reasonable return on their investments. For this reason, particularly, in hard to reach communities where there are fewer locations per square mile, obtaining a high percentage of paying subscribers can be critical to an ISP’s survival.

Most Missourians are understandably unwilling or unable to pay for high-cost broadband service. Multiple surveys show that a high monthly internet subscription cost is one of the biggest roadblocks to the adoption of broadband. Of course, in part the affordability of broadband service depends on whether potential subscribers feel confident they need and can use fixed broadband, or instead, can continue to rely on their internet-connected mobile phone or public hotspots. The next blog will cover how Public Organizations can address this issue by boosting internet adoption.

Many Missourians face a “would if I could” problem when monthly internet subscription costs compete with basic necessities, such as food, housing, water, and other utilities. Ironically, these households most desperately need broadband service to effectively access government and nonprofit assistance and improve their economic prospects for a better life. Clearly, some targeted program to make broadband affordable to low-income households is needed.

The Affordable Connectivity Program

The Affordable Connectivity Program was enacted along with BEAD as part of the 2021 infrastructure law to address this specific concern. In the two years it has been in place, 23 million households nationwide (nearly 400,000 in Missouri alone) received a $30 per month subsidy for internet service and a one-time discount they could apply to the purchase of a basic computer or tablet. Roughly 1 in 6  households across our state benefited from ACP, and in many rural counties 1 out of every 4 or 5 internet subscribers, received service subsidized by ACP.

The ACP became a victim of its own success. As structured, 42 million households were estimated to be eligible for the ACP benefit. Even though just a little more than half those families eventually applied and began participating in the ACP, the original $14 billion appropriation for the program is almost entirely depleted. The FCC has barred any new subscribers, and the program will end next month. While bipartisan legislation has been introduced to fund the ACP until year end, it is not expected to be enacted, and of course it is only a stopgap measure. In order to truly meet the needs of families, and provide a stable subscriber income base for ISPs, the program needs a permanent funding source, and this need is particularly evident as ISPs attempt to build out broadband in hard to reach unserved and underserved areas using the BEAD program.

Certainly absent a viable alternative, many participating households served by the ACP may be forced to drop service. While the federal government’s Lifeline program can offer some current ACP subscribers discounted broadband at connection speeds up to 25/3 Mbps, that is below the 100/20 Mbps mandated by the BEAD and ARPA programs. Additionally, the qualifying income levels for Lifeline are lower, and other eligibility requirements are more difficult to meet than those imposed by the ACP. Finally, many ISPs are not qualified to offer customers the Lifeline program benefit.

The Subscriber Revenue Gap Created by the End of ACP

Of course, the end of the ACP also creates some significant financial challenges for ISPs. ACP gave ISPs an incentive to build infrastructure in low-income communities, because the program increased their estimated take rate and subscriber revenues.  One study estimated that the loss of the ACP will translate into a decline in subscribers that will raise the cost of bringing broadband to unserved rural communities by 25%!

It is also unclear how ACP’s termination affects the sixty ISPs that were awarded grants as part of Missouri’s  $261 million Broadband Infrastructure Grant Program. These grant came from Missouri’s share of the American Recovery and Reinvestment Act — Coronavirus State and Local Fiscal Recovery Fund (SLFRF). Federal Regulations for the SLFRF program require that grant recipients offer low-income households affordable subscription options, commensurate with ACP’s benefits in areas served by grant-funded broadband infrastructure. While this requirement may soften the blow from the loss of the ACP in these isolated communities, the question remains, how will ISPs afford to implement a “commensurate” ACP benefit on their own?

Taken together, the loss of the ACP seems destined not only to make it harder for lower income households to subscribe for internet service, it also may make it significantly harder for Missouri to achieve the overall goals of the BEAD program – to extend broadband service to all unserved and to as many underserved areas of the state as possible.

How can Public Organizations Help?

In 2022, Governor Parson proposed using state funds to supplement broadband subscription costs for low income households.  However, that legislation ultimately was not enacted, and other than the Lifeline program previously discussed, there is no comprehensive federal or state program that directly subsidizes the monthly cost of broadband for lower income families. However, that does not mean that Public Organizations – particularly local government – are unable to indirectly help ISPs provide affordable broadband service to households that need financial assistance.

The key here is to recognize that ISPs can provide an ACP-type benefit to their customers so long as that cost is subsidized and that subsidy can take the form of either a direct payment to help the customer pay for service or, indirectly, by further reducing the ISP’s cost of building the broadband infrastructure. A BEAD grant can do that in part, but likely not if the ISP’s subsidy needs to be increased by 25%, because the ACP is not available! Yet it makes no sense to increase the government subsidy to the ISP for construction unless the ISP is willing to use the amount saved to provide an affordable broadband connection to its customers, through a program similar to the ACP.

For example, assume that an ISP was able to build and successfully operate a broadband network with a BEAD grant of $2 million, so long as it could rely on ACP-funded subscriber revenues to help pay for the infrastructure and cost of network operations. Based on the Commonsense study, one would conclude that the ISP would need 25% more ($2.5 million) because of the loss of the ACP. In that case Public Organizations might agree to provide the ISP the additional money needed to close the funding gap ($500,000), but only on the condition that the ISP agrees to self-fund an ACP-type benefit for the community in the future.

Unspent Local ARPA Funds

One possible source of the additional money needed, that some local governments may have available is the local government component of ARPA SLFRF money. In addition to money paid directly to the state, Missouri’s 114 Missouri counties and 15 cities received a separate SLFRF award. These local governments have the flexibility to use these funds for many purposes, one of which is “high-speed broadband infrastructure.” All local SLFRF money must be obligated by December 31, 2024 and spent by December 31, 2026. As of September 2023, Missouri’s local governments reported that they had obligated only $1,450,997,654 of the $2,419,661,436 in SLFRF Funds. This means that as of last Fall, just over 40 percent of the money awarded remained available.

Other possible local programs to access local money.

Many communities may already have appropriated their entire ARRA SLFRF award for other permitted purposes. In these cases, there are other options that can be used to provide financial support to ISPs that agree to provide affordable broadband service to lower income households. Again, the overall strategy is the same: use locally generated funds to reduce the ISP’s cost installing broadband infrastructure in unserved and underserved locations, in exchange for the ISP’s commitment to provide a targeted low-cost subsidy to qualified low income subscribers.

These options include special financing districts and government sponsored tax-exempt financing.

Special District Financing

Three  types of special financing districts are available to Public Organizations seeking to raise money to support an ISPs broadband infrastructure project. In each case, these special financing districts must support and fund a “public private partnership” (P3) that will provide broadband service within a specific geographic area or “District.” Each type of District may impose various new local taxes or special assessments for that purpose. The three types of districts are (1) a Community Improvement District (CID), (2) a Neighborhood Improvement District (NID) and a Broadband Infrastructure Improvement District (BIID).

The statutes set out the procedure and powers for each of these districts and while they are not identical, they do share some common elements:

  • The area served by the District can be specifically tailored to include all or a portion of a city or county, or in the case of CIDs and BIIDs multiple jurisdictions.
  • The District may fund a public private partnership that will bring broadband service to one or more unserved or underserved areas (as certified OBD). The statute defines unserved and underserved using similar criteria to that used for BEAD grant funding.
  • The District can impose a variety taxes (sales tax, property taxes, or a special property assessment to fund its contribution the P3). However in most cases, voter approval of the affected district residents is required to impose the tax.
  • In each case, the P3 agreement must provide that the ISP will own and operate the broadband network infrastructure (not the District).

A significant advantage of Missouri’s special financing district laws is that they are flexible and can be adapted to a variety of situations. Since Districts can impose local taxes and/or assessments that only apply in the District, it is possible to tailored them to include only those areas that need broadband. In this way they could be an ideal source of locally sourced funds to help ISPs close a funding gap and make it economically feasible to provide broadband service to residents of all income levels. This is important both because of the gap created by the loss of the ACP funding and, more generally because all BEAD – funded projects must have at least 25% of the project costs funded from some source other than the BEAD grant.

 

Example of a Special District Financing to Support Broadband Affordability

A community might decide to create a CID to assist in funding broadband infrastructure for 20 unserved farms and homes along a county road. Property owners along that road could petition the County to form and authorize funding for the CID. The District’s objective would be to lower the cost of installing broadband so that the ISP was financially able to provide free or low-cost service to low income families with school age children.

To fund the CID, property owners in the area would agree to impose an annual special assessment (collected along with real property taxes each year) from each property owner in the District. As part of the P3 agreement, the CID would agree that amounts collected each year would reimburse it for part of its cost of funding the broadband project that was not paid for out of the BEAD grant, and that the collected amounts would be applied to fund a monthly broadband service subscription subsidy for lower income families.

Tax-exempt Private Activity Bond Financing

Tax-exempt private activity bond financing may provide another option for Public Organizations that want to reduce an ISPs infrastructure cost, so that a low cost broadband subscription option can be offered to lower income residents. Tax-exempt private activity bonds are a special type of local government debt. Unlike traditional bonds where the local government is the named borrower and responsible for repaying the debt, private activity bonds are usually repaid only from money provided by a private entity (in this case an ISP).

These tax-exempt bonds can only be used in a specific geographic area where 50% or more of the structures are “unserved” (broadband service less than 25 Mbps download and 3 Mbps upload). When completed, the constructed project must provide at least 90% of the previously unserved locations with connection speeds of at least 100 Mbps download and 20 Mbps upload. If these and other requirements are met, interest paid to investors (bond purchasers) is exempt from most federal and all Missouri income tax. Because investors do not pay income tax on the bonds they own, they are willing to accept a lower interest rate than a similar taxable bond or loan. In this way, the ISP benefits because it pays substantially less interest each year on the debt used to finance the project.

 

Example of Tax Exempt Private Activity Bond to Support Broadband Affordability

 

Assume an ISP wished to bring broadband service to all structures in a county, and that the cost of constructing the network was $50 million. The ISP receives a BEAD grant for $35 million, but is responsible for raising the additional $15 million. The County’s residents want the service, but know that a significant number of residents simply cannot afford to pay the monthly subscription cost for broadband service. For a variety of reasons, the county cannot provide financial assistance to the ISP through a new tax or assessment.

Instead, the County might issue $15 million of private activity bonds that the ISP would use to fund the project. The ISP (not the County or any Public Organization) will be solely responsible for repaying the bonds.  The bonds have an interest rate that is 1.5% lower than a taxable borrowing. This means the ISP “saves” $225,000 of interest cost each year the bonds remain outstanding.

As a condition for issuing the bonds, the County requires the ISP to offer lower income subscribers a special low cost broadband plan, which it is able to fund because of the interest expense saved each year. 

Where There’s a Will….

In a perfect world, funding for broadband affordability would not have run out just as funding for broadband access and adoption was becoming available. Of course no one would say that the ACP was a perfect solution. Many would argue that the ACP and Lifeline programs need to be combined and a permanent funding model needs to be put in its place, and there is considerable merit to that position. But allowing ACP to expire without reworking the Lifeline program or providing some other workable alternative is difficult to justify. The unfortunate result for many communities is that they must work creatively with their ISPs to make sure that the broadband infrastructure built is affordable to all members of the community. The alternatives listed here all seem to be feasible, and there are many others (described in a recent “White Paper”) that communities can consider. However, all require a community effort, and some creative thinking. The question for many communities – is whether they are willing to make this effort, or will they instead risk “throwing away their shot” at digital connectivity.

6 Dec 2022

Office of Broadband Encourages Participation in FCC Challenge Process

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Missourians have until January 13 to file challenges to newly released maps of broadband coverage to be considered when determining Missouri’s share of federal broadband funding. The Office of Broadband Development encourages Missourians to make sure their homes, businesses, and communities are correctly represented on the maps to ensure locations are eligible for funding and receive their fair share.

The FCC map will determine how much of more than $42 billion in funding will come to the state through the Broadband Equity, Access, and Deployment (BEAD) Program, a component of the Infrastructure, Investment, and Jobs Act (IIJA). In 2023, Missouri will use BEAD funding for its Connecting All Missourians initiative, which aims to provide high-quality internet to every home and business statewide. Read more…

3 Jan 2022

The Broadband DATA Act, RDOF, BEAD, The Long Slog Toward Broadband Access

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By Marc McCarty

Happy New Year!

As 2022 begins, it seemed an appropriate time to take stock of progress we’ve made in funding broadband access. This blog checks in on some federal government programs that have gotten quite a few headlines over the past year or two, to see how implementation is going.

The Broadband DATA Act

The Broadband Deployment Accuracy and Technological Availability Act (thankfully shortened to the “Broadband DATA Act”), doesn’t directly provide any money to build broadband infrastructure, but implementing it may be the key to actually spending the billions of dollars already appropriated by Congress for broadband buildout, and that’s part of the reason why the results to date have been a little disheartening.

The Broadband DATA Act became law March 23, 2020. One of its primary objectives is to once and for all identify – with a high degree of confidence – all areas in the United States where a broadband connection can be installed (a “Serviceable Location”).  Serviceable locations include those in urban as well as rural areas, and arguably should include businesses and institutions, as well as residences. A key provision of the Broadband DATA Act requires the FCC to define what a “Serviceable Location” is and to produce a “data set” that would enable folks to accurately locate all of them on a map. This is called the “FABRIC.” Internet providers and the public would then report whether fixed wired or wireless broadband service is (or could be) offered to each of these Serviceable Locations with existing infrastructure.  

Knowing all this is critical of course, because federal funding to assist in building internet infrastructure needs to be targeted to locations that currently do not have service available. Folks just “tuning into” this issue usually are shocked to learn that many billions of federal government dollars have already been directed to build out broadband infrastructure based on maps that everyone acknowledges are not very good. In fact, Missouri was one of two states where this was illustrated in a pilot project commissioned in 2019 by the broadband industry. This project was undertaken to determine the feasibility of creating the FABRIC, and to see how much it differed from the broadband access data that the FCC and others were using to award federal grants and loans.  The results were sobering: In Missouri, 36% of the rural Serviceable Locations identified using the FABRIC were not being reported at all (either as served or unserved) in the existing FCC data.

However, even though the need is obvious, progress in creating the FABRIC has been slow, even as the need for it has become even more critical. After the Act became law, the FCC reported that it could not begin work because it did not have the funds necessary to achieve the objectives of  the Broadband DATA Act. This was finally rectified in December 2020, when an additional $65 million was appropriated to the FCC by Congress.

So, where is the FABRIC? Well, that’s what Indiana Congresswoman Victoria Spartz wondered. So, in late September she sent a letter to FCC Chair Jessica Rosenworcel, asking for a target date for completion of the FABRIC and related objectives of the Broadband DATA Act. It seemed a logical question, as the Commissioner was reported to have testified before Congress in March 2020 that the improved map could be produced in 3-6 months.

Commissioner Rosenworcel responded in early December. She did not provide a date for delivery of the FABRIC but did provide some reasons for delays in 2021. The FCC elected to contract out work to produce the FABRIC to a private company. After a series of false starts, the bid request was finalized in mid-August and the contract to build the FABRIC was awarded in early November. However, before work could start an unsuccessful bidder filed a protest with the General Accounting Office (GAO) and this has delayed any further work until February 2022 while the bidder’s protest is evaluated. Assuming the GAO does confirm the original award, once work commences it will be another four months before a preliminary version of the FABRIC is delivered.

Of course, that’s just the preliminary version of the FABRIC. There are also important policy questions that remain unresolved. For example, should Serviceable Locations identified as part of the FABRIC be limited to residences only, or should some or all all businesses and institutions be included as well. And of course, the preliminary version of the FABRIC will need to be vetted and updated, internet providers will need to report whether they can (or do) offer service at those locations, and this information will need to be verified by the FCC and the public, as required by the Act.

The Rural Digital Opportunity Fund (RDOF) Auction

There are “real world” consequences to delays in implementing the Broadband DATA Act. On December 7, 2020, the FCC announced that $9.2 billion had been awarded on a “preliminary” basis to hundreds of private and public internet service providers to help fund the build out high-speed internet in unserved areas (census blocks) throughout the United States. While the announcement of this award was welcome, in an earlier blog I cautioned not to expect too much too soon because the awards were preliminary, recipients would have to go through a vetting process, and when the grant was finalized they would have six years to satisfy their commitment to build out service in the unserved areas.

However, these observations proved to be far too optimistic. Earlier this month, in response to a written inquiry signed by 19 members of Congress, Commissioner Rosenworcel detailed the challenges that have delayed the FCC in finalizing the awards. At that time, more than a year after the initial announcement, less than 20% of the preliminary award had been finalized and committed.

Because eligibility for grants was based on the FCC’s maps, the Commission determined that over 5000 census blocks that were announced as receiving awards last December needed to be removed because they clearly either had broadband service – or they never should have been included in the first place. Parking lots and international airports were among those receiving preliminary awards of funds in 2020.

While 5,000 census blocks is a big number, there were well over 60,000 census blocks that received an initial award, so there were still plenty of locations remaining. According to the Commissioner, the FCC continues to press on, reviewing details provided by winning bidders, and it will periodically continue to announce more locations and winning bidders that have successfully navigated the review process. Most recently, on December 16th, the FCC announced it would begin to fund an additional $1 billion (over 10 years) of the original $9.2 billion announced last December. That said, it is sobering that distribution of approximately 2/3 of the promised money has yet to begin, particularly in light of the 6-year period the awardees have to complete the required internet service connections.

The IIJA

Of course, by far the most newsworthy new federal funding program this year was the mammoth Infrastructure, Investment and Jobs Act (the IIJA). This law appropriates $42.4 billion to the new Broadband Equity, Access, and Deployment (or “BEAD”) Program. As noted in an earlier Blog, rather than the FCC, the agency primarily responsible for administering the BEAD Program is the National Telecommunication and Information Agency (NTIA). In addition, instead of direct federal grants to internet service providers, the BEAD Program contemplates that each state will establish its own program for broadband deployment, (subject to NTIA’s approval) and that NTIA will allocate each state a share of BEAD Program funds based primarily on how many underserved locations are present within the state as compared to the rest of the country. All this is supposed to commence with the publication of a “Notice of Funding Opportunity (or “NOFO”) to all states by May 14, 2022.

“How will NTIA figure what locations are served and unserved” you ask? Well, that will be based on the FABRIC and full implementation of the Broadband DATA Act. And of course, as noted earlier, delivery of the FABRIC and full implementation of the Broadband DATA Act is in the hands of the FCC.

What Comes Next?

A “slog” is a particularly tiring task that requires a lot of effort. A “long slog” describes situations where that effort is required for an extended time. The events of the last year certainly make it clear that this description is going to be appropriate for the process of getting the promised federal dollars necessary to build and deploy broadband into the hands of states, and ultimately to public and private internet service providers.

To some extent, local government, business, and institutions are at the mercy of the federal agencies charged with implementing the RDOF, the BEAD Program, and many other similar grant and loan fund programs; and those agencies must follow procedures mandated by law to account for the proper expenditure of those funds. However, that doesn’t mean it is appropriate to ignore situations where the bureaucracy appears to have run amok. If nothing else, keeping the lack of progress or inordinately slow progress front and center in the public’s mind may ultimately lead to procedural reforms within these agencies and perhaps within Congress as well.

It also seems apparent that it would be a mistake for state and local governments to wait for the FCC to compete the FABRIC. For one thing, it seems apparent that delivery of the final product will extend well into 2022 (and perhaps beyond). But at a more fundamental level, each state needs independent engineering and technical evidence to verify that the data the FCC and NTIA propose to use to distribute federal grants is accurate and complete. Thankfully, Missouri is moving in that direction, and in November awarded a contract for a detailed assessment of fixed and wireless broadband deployment needs, and estimates of the cost to make fixed wired and wireless broadband service available throughout each county in the state. That work should be completed this spring, well in advance of the completion of even the preliminary FABRIC.

Likewise, state and local governments already have funds available through the American Rescue Plan Act to assess community needs and resources available to improve broadband service, with a view and to beginning the process of deploying broadband in their communities. While there are many priorities that arguably need to be addressed with this money, broadband certainly is one of them, and the Governor’s proposal to commit $400 million of the state’s share of those funds to broadband deployment, should serve as an example for counties and cities as they decide how to spend their American Rescue Plan Act funds.