As funds begin to roll out from the Broadband Equity Access and Deployment (BEAD) program, here's a former broadband director's take on why states must follow rules to assess applicants' financial viability and business case in advance.
Over the last couple of weeks, I took time to "harass" some trout on a trip from the Pacific Northwest southward – a drive that took me through some of the broadband-starved rural areas I spent the last few years focused on as I ran Washington State's broadband office. A journey like this requires plenty of preparation, some long days and persistence in the face of unpredictable weather and washed-out roads – all that comes before a line is even cast in the water.
There's a lesson in here for the public servants now wrestling with the Bipartisan Infrastructure Bill's historic $42 billion Broadband Equity Access & Deployment (BEAD) program: The past three years of mapping, planning and prep work are all just a prelude to the real challenge of building broadband networks capable of serving communities for decades to come.
It's been a long road since the National Telecommunications and Information Administration (NTIA) published the BEAD program's Notice of Funding Opportunity (NOFO) in May 2022. Since then, state broadband offices have been working intensely to meet the program's complicated pre-work requirements and secure federal approval of their initial proposals. Several states are now in the early stages of accepting project applications, with initial approvals expected in the next eight to 12 months.
In the rush to connect all unserved and underserved locations in the US, the infrastructure bill invited both established ISPs and non-traditional providers (such as municipalities, counties, electric cooperatives and others) to apply for BEAD funding. But to increase the likelihood of success, NTIA requires state broadband offices to evaluate whether applicants actually have the operational, managerial and financial wherewithal to successfully build and operate retail broadband networks. Additionally, NTIA also requires that applicants provide a minimum financial match of 25% of a project's cost, backed up with a letter of credit.
While some applicants may believe these requirements to be unfair, these common sense guardrails help limit the risk of BEAD projects going belly-up.
Waiving these safeguards for non-traditional applicants would increase the risk of project failures, wasting substantial taxpayer resources. Performance bonds, letters of credit and funding matches are typically used when infrastructure projects are funded by local governments – it only makes sense that NTIA requires the same kinds of commitments for BEAD.
As part of the qualification process, BEAD applicants must also lay out their business case: prospective revenues, initial matching investments, and ongoing capital and operating expenses. If projected revenues over the project's life can't cover both the upfront and ongoing costs, state broadband offices should reject the application; otherwise, they'd waste tax dollars building broadband networks "designed to fail."
Alarmingly, though, several BEAD applicants and state broadband offices attending the recent Mountain Connect conference seemed hopeful they could skirt these financial realities by banking on ongoing funding from the federal Universal Service Fund (USF). In other words, some applicants whose anticipated revenues can't cover their anticipated costs expect the federal government to provide perpetual operating subsidies – on top of the initial BEAD construction funds.
To be clear, this is a terrible idea – and one that NTIA and state broadband offices should emphatically reject.
For one thing, the USF program is increasingly unsustainable because its obligations are paid for by an effective 35.8% tax rate on interstate and international telephone service revenues. As spending on traditional phone service continues to decline, that "contribution factor" rate has to increase just to keep overall program funding level. But loading USF with new, additional obligations to subsidize non-traditional BEAD applicants with unsustainable business models will increase USF's obligations – increasing the tax on consumers and further destabilizing USF overall. Looking to USF to backstop "financial sustainability" on otherwise unsustainable BEAD projects would amount to financial malpractice.
Moreover, USF itself is in legal limbo as the Supreme Court will review a recent decision by the Fifth Circuit Court of Appeals challenging its constitutionality.
Take a long view
State broadband officials are in the unenviable position of accommodating both crushingly short timelines and political pressure to spread funding around like peanut butter, so that "everyone gets a bit" – even if that means approving marginally qualified applicants or sub-par business plans.
However, to responsibly meet the goal of promoting sustainable broadband service, broadband directors and NTIA need to take a long view. NTIA must use its oversight authority and reject any awards to unqualified applicants or to projects counting upon uncertain future subsidies to pencil out.
Taxpayers and consumers are not served by green-lighting broadband projects that have little chance of sustaining service without further infusions of uncertain funding from the already-challenged USF program. After all, "success" isn't measured by press releases announcing BEAD awards – but rather, by whether the networks built with those awards are still serving their communities decades from now.
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