Wednesday, July 1, 2009

Time for the Grownups: 8 Points for Understanding Today's Broadband Stimulus Regulations 07/01/09 Boston -  Good Morning. Today the regulations for the broadband stimulus first grant round (Round I) will be released.

We have been working with federal and state officials and the industry for months to try and determine the outlines of the regulations, and the larger policies they reflect.  The noise and ill-informed "analysis" from many quarters has often made the task difficult.  
Sometimes the smartest guys in the room turn out to be the fools. Sometimes the inmates are indeed running the asylum. Sometimes the wiseacre from your high school class ends up as your hometown police chief.

Copyright 1966, United Artists Entertainment LLC
Welcome to what has been passed off as serious reporting on, and analysis of, broadband stimulus policy of the past several months. Welcome to breathless and over-the-top reports, the business media equivalent of a Hollywood farce.

Sometimes the grownups really do need to sit at the table and call a timeout.

Let's start:

As we have said before, we believe the regulations will take the form of one single set of guidelines, called a Notice of Funds Availability (NOFA) covering both agencies involved, the National Telecommunications and Information Administration (NTIA) at Commerce, and the Rural Utilities Service (RUS) at Agriculture. As mentioned in # 7, below, the issuance of one NOFA is significant, as it effectively means that the legacy regulations of RUS will remain in place.

The release of the NOFA today means that the broadband stimulus program remains on track in terms of grant rounds time frames. The program has not been "delayed" by any federal agency, or by any schedule reported to Congress. Anyone that took at face value verbal statements (none of which were Congressional testimony) made by acting agency chiefs on 2 occasions as the NTIA-RUS public comment period was launching needs to sit down and be still.

The first round of competitive grants and loans will issue by December 30 of this year. First round applicants will have just over 60 days to file applications from today’s July 1 launch of the process. The agencies will take 90 to 100 days to evaluate what is expected to be over a 1,000 applications. The agencies are retaining contracted support firms to assist in the application vetting process. Did anyone seriously think these time frames could be reduced, while still running a coherent program?

Less than $10 billion in broadband stimulus is not going to trigger another tech or telecom boom. That figure is a fraction of the annual capital expenditure (capex) of American cable, wireline and wireless carriers, even in the current recession. The $7.2 billion in broadband stimulus funds is not chump change, but it will not set-off much more than a boomlet in spending. Instead, we need to focus on how and when new federal policies, and program reforms, will create new models for sustainable operations in high cost and low demand geographic and demographic areas (# 8, below).

The estimated $100 billion plus in total information technology (IT) funding in the entire Recovery Act (ARRA) will be an appreciable stimulus to aggregate demand for the sector. Service providers and American (# 3., below) equipment manufacturers need to inventory and pursue that total opportunity (# 4., below).

Enforcement by federal officials of existing domestic content laws will not "derail" either the broadband stimulus program, nor the larger IT fiscal pump priming. Virtually all of the reporting on this issue to date has ignored the presence of federal regulations in this realm that exist today (#3, #5, below).

We see 8 key policy areas; the outlines of which we believe have been visible for months to the grownups:

1. The Rules Do Matter
It isn’t just today’s NOFA that matters. There are a host of legacy federal laws and regulations, and newly issued regulations of the Obama Administration which define legal compliance necessary for successful grant and loan applicants. Have you factored the requirements of the Davis Bacon Act into your capital expenditure (capex) planning as reflected in your grant applications? Do you know what metrics the agencies expect you to use in your application, and monitoring your spending?

Our Take: Make sure you are using support firms and personnel that understand what the ALL the rules are, and they do matter.

2. The States (and their internal governance structures) Do Matter
Governors that choose to designate state broadband programs, state agencies, or even individual state employees as having a role in selecting and recommending competitive grant applicants, originating from their applicable jurisdictions, will have such power recognized in the agency NOFAs. Thus, the federal regulations will essentially codify an "opt in" approach for state chief executives.

The language of ARRA tells us that the NTIA "may consult" with the states as grant and loan criteria are being set, and as the actual awards are being made. Many observers have looked at the Act’s permissive language and assumed the states will not be significant players. Moreover, critics on the left (Public Knowledge), the right (Americans for Prosperity), and in some outposts of the hardware manufacturing sector (Alcatel-Lucent) have been lobbing snowballs at the idea of a formal role for the states. The untrained observer may suspect that with powerful critics of a role for the states that the issue is a non-starter. Not true.

The state regulatory commissioners, via their national association (NARUC), of 38 states have petitioned the Administration to enshrine a role for state gatekeepers. Their policy inputs will be backed-up by political realities.

Several of the governors that are most closely aligned politically with the President and his Administration -- Paterson (New York), Patrick (Massachusetts), and Richardson (New Mexico) – have broadband programs in place. No one in the Administration is going to push back at those relationships.

For service providers attempting to compete for broadband stimulus capital funds, detailed knowledge of their state programs, where they exist, and of the decision makers administering the programs becomes key. The related matter that providers must make consider: Governance issues defining the state programs themselves. Where state broadband programs exist, what are the legislative mandates, if any, that define them? What impact do these legal strictures have on construction and operation of subsidized networks?

These issues become most pressing in states that have both legislatively chartered broadband programs and state-derived funding to support them. States like California, North Carolina, Maine, Massachusetts, and Vermont that have raised in-state broadband funds are seeking to leverage these state monies with both federal funds and private sector investments. In some jurisdictions, both “open access” legal requirements (stricter than ARRA requirements), and outright mandates for public network ownership ride on the state subsidies (#4, below).

Our Take: Understand the state broadband programs in the regions in which you want to expand using broadband stim grants and loans. In many states, these programs will play a lead role.

3. Yes to Made in America… Buy American, Not So Much
We know that the Commerce Department last week issued a waiver for the Buy American provisions of the ARRA. The policy food fight over Buy American gave has been one of the largest controversies to have erupted since the President’s signing of the Act on February 17.

Watching the food fight makes for riveting entertainment. In our opinion however, the Buy American food fight triggered by ARRA is not the point.

As rural service providers know, the Made in America provisions of RUS have been on the books for years. We believe today’s NOFA will leave the legacy Made in America and technical certification regulations of RUS in place.

Equipment manufacturers have expended significant effort, funds, and time working with RUS on certification programs. These programs themselves have been on the books for years. A coordinated policy approach, between NTIA and RUS, to the regulation drafting effort will not toss these years of regulatory certification onto the scrap heap.

Our Take: Service providers should contact their equipment vendors to determine if their product solutions are certified under the RUS Made in America program. Unless we miss our guess, it will be these requirements that continue to define domestic content qualifications for RUS grants, loans, and loan guarantees. We believe that, under the clear concept of regulatory coordination being engaged in by the Obama Administration, the Made in America criteria will also frame NTIA’s regulatory interpretations of the Buy America provisions of ARRA.

4. Public Money Means Public (and sometimes publicly owned) Networks
The ‘open access’ provision of ARRA (Sec. 6001(j), the “non-discrimination and network interconnection obligation,” has caused some of the largest cable and telco players to forgo applying for broadband stimulus funds. We believe that close attention needs to be paid to how NTIA will interpret this section in the NOFA.

Importantly however, there is another level of consideration and due diligence that service providers need to engage in. What does it do you your business model when federal funds will cause the deployment and operation of one or more public networks, as in fully publicly owned and operated, in your service territory?

As we discussed in #1, above, as we looked at the movable feast that will be the effect of state broadband programs across all 50 states, some states own and operate state networks today. The legislative charters of some state broadband programs require that state subsidized networks not only be ‘open’ to all providers, but also be owned by state authorities when state broadband funds (which will be commingled with federal money) are used.

It is not a coincidence that Obama Administration officials have talked about the possible benefits of government owned network deployments in certain circumstances. We believe this thinking will be reflected in the NOFA, even to the point that backhaul, backbone, and middle mile network facilities are favored.

Our Take: Some level of public sector owned and operated networks will result from the federal – state broadband funding cycles which will launch with the release of the NOFAs by July 1. As your firm begins to understand the thinking of your state broadband programs, where they exist, your challenge is to be part of the answer as to where fully public networks might be deployed. Simultaneously, you need to know what regional governments, public-private partnerships, and community organizations may be organizing to deploy fully public networks in and near your territories. To the extent that such networks drive down current high costs, like Tier I Internet access and backhaul, a public network on your doorstep could indeed be a positive good, rather than a competitive nightmare. .

5. Silo Busting
We haven’t heard governmental officials use the term “cross cutting” as much as we’ve heard it used by FCC Commissioners, Members of Congress, and the Obama Administration since the passage of the Act. One of the keys to success exploited by winning grant and loan applicants will be the degree to which their applications engage in what we are calling federally purposed silo busting.

How many federally sanctioned societal ‘goods’ will your proposed broadband networks enable at the application level? Not your problem? We remember winning cable franchises way back in the 1980s because we loaded up our applications with great community ascertainment, and tech solutions that took another 20 years for the IT sector to deliver. Remember I-Nets and energy management systems? The industry’s challenge at the time was to prove how it was far more than movies, boxing, and something called CNN. Federal and state law at the time required us to ascertain the needs of the communities we were proposing to serve.

Welcome to the same idea, now operating on what we see as 2 levels, each separately blessed by the Act:

Level 1 is comprised of the Broadband Direct (our term) federally sanctioned purposes and target populations. Well known are the Act’s identified populations that are “underserved” and/or “unserved” by existing patterns of broadband access and deployment. Dig deeper into the text to develop an inventory of federal sanctioned intuitions: “schools, libraries, medical and healthcare providers, community colleges and other institutions of higher education, and other community support organizations and entities to facilitate greater use of broadband service by or through these organizations..”. The list goes on. Each institution and target population that you propose to service, with a realistic plan developed with the relevant stakeholders, is another ‘check in the box’ of a competitive application.

Level 2 is made up of the ARRA’s major appropriations and programmatic outlines for Broadband Indirect (also our term) stimulus for healthcare record computerization, energy smart grids, public housing (inclusive of potential broadband wring upgrades), and transportation infrastructure including potential intelligent transportation system (ITS) deployments. These elements operate on the application layer of your network, clearly. Under the Act they have separate funding sources. Properly coordinated, they can compliment your funding, not take from it.

Our Take: Successful broadband stimulus applicants, from the ranks of investor-owned service providers, will be those firms that build real alliances across our described Level 1 Broadband Direct, and Level 2 Broadband Indirect institutions, communities, target populations, and separate grant recipients. Break the silos.

6. It’s Still the Economy, Stupid
The Recovery Act is meant to create new jobs, and to prevent the further loss of jobs in the worst recession since FDR. It is obvious that all of the focus on “shovel ready” projects is a result of this underlying priority. Some of the Buy American controversy obviously also touches on the issue of jobs. We see in some of the arguments around the Buy American provision a look at the metrics of job creation in the telecom sector. Typically these counting mechanisms are arrived at after an examination of jobs in the construction and operational functions of service providers vs. the jobs created via the purchase of equipment, cable, software, and the like.
A second order of job creation should also be examined. This arena is generally informed by academics who have studied both US broadband deployments, and their respective economic developmental attributes, and global metrics matching broadband take rates to economic activity. Your corporate ‘broadband stim’ team needs to become familiar with both tiers of job creation metrics, and with accepted methods of applying them to your firm’s operations and served communities.

The economic developers, elected officials from rural regions, and tech sector lobbyists in your operating territories haven’t been braying about the benefits of broadband all these years for nothing. All those hackneyed clichés about broadband infrastructure being the railroads and highways of the 21st century are for real. There is substantial evidence that broadband, particularly at high penetration levels, lifts the economic activity of a served community or region. Make the officials, academics, and employers in your service territories your biggest boosters, as you share your broadband roll-outs and upgrade plans with them.

This basic equation of broadband = jobs is the sine qua non of broadband provisions in the economic stimulus package.

Our Take: The federal agencies, and to some extent the state broadband programs, will be looking closely at the first and second order job creation estimated benefits of your application. Service providers need to understand what specific metrics they will apply to their proposed new network builds, and to the operations that capital spending will enable.

7. Coordinated Policy Means Coordination with Existing (RUS) Programs
Some critics have questioned the now fully reported role that the White House, with personnel from the Council of Economic Advisors and Office of Science & Technology Policy, plays in coordinating broadband policy among the FCC, NTIA, and RUS. Given the ground that the agencies need to cover in under a year, from issuing the NOFAs, to drafting the national Broadband Plan, to conducting the 3 funding rounds, it would be public malfeasance for the White House not to be involved.

Forget about following the who’s who of Administration policy types. Focus on figuring out what a fully coordinated policy between NTIA and RUS will look like as the NOFAs are issued within the month.

Making coordinated federal policy isn’t like making an Orange Mango Banana Vivanno at Starbucks. Not everything gets blended together into a single mass, especially not when existing programs spread across rural America are slated for the blender. On the RUS side of the equation, policy coordination means existing programs remain.

Unremarked by most observers, the biggest hurdle to coordination between the 2 agencies is the simple fact that RUS has ongoing funding programs in telecom, while NTIA does not. The RUS rural telecom programs are heavily decentralized, with experienced and knowledgeable regional directors having significant influence over grants and loans in their regions. NTIA’s Technologies Opportunities Program ceased funding in 2004.

The RUS regulations, virtually unknown outside of a small group of rural telecom practitioners, have been built in layers through the years. The last 2 Democratic Farm Bills have attempted to reform the identified excesses of the past. The real secret of the current RUS regulations: They should be named ‘The Rural Telecom Incumbents Protection Act.’ Arcane rules for grants and loans favor previous recipients, and disallow funds to a new entrant attempting to enter an existing loan recipient’s service footprint.

It is no wonder why some broadband advocates insisted that NTIA administer all of the broadband stimulus monies, something the rural lobby in Congress did not (and never will) allow. Wither agency / policy coordination when one agency has ongoing programs upon which an entire sub-sector of American telecom is built? The RUS programs will continue in large measure intact. The winners of RUS funds from ARRA will be the incumbents already in receipt of grants and loans, primarily the latter.

Our Take: Where NTIA-administered broadband stim funds flow into rural underserved regions, they will largely be targeted to low density communities that currently lack RUS-subsidized providers; and at common facilities that drive down the high costs of rural and ex-urban broadband operations. The latter application gives rise to the prevalent idea that NTIA’s greatest effort will be seen in middle mile deployments.

Overtime, probably as part of the reform of USP promised by Congress, the RUS rules will be amended. There is simply too much precedent, too many operations on the ground, and too many protected fiefdoms for reform to occur before the ARRA monies are expended by September 2010.

8. Sustainable Operations
In explicit language, ARRA disallows funds any federal funds from being spent on network operations. ARRA is capex only. Sustaining operations in low density / high cost rural areas becomes the central challenge for service providers paying attention to running a business, as opposed to running a grant application firm.

The most pressing concerns out beyond the spend-down of all ARRA broadband funds by October 1, 2010 are today the most unclear. When will Congress finally reform the universal service fund (USF) operating subsidies for rural telcos, to allow funds to directly flow to rural broadband operations?

When will Congress and the regulators reform a program which is seen as being both underutilized (in the case of the Rural Healthcare Program), and potentially subject to abuse (in the case of the E-rate Program)?

The recently released Report on a Rural Broadband Strategy by then FCC Chairman Michael J. Copps suggests that Congress can and should needs to enter the fray immediately to reform the USF-related Sections of the Telecom Act of 1996.

Providers building their business plan for continuing operations, within ARRA grant applications need to reach out to in-region schools, libraries, colleges, and healthcare facilities, in order to aggregate E-rate and Rural Healthcare income from a particular area. The greater number of new rural networks, even those based on the existing RUS rules, will expand the political constituency for USF reform. There is no question that the agency players and relevant committee chairs in Congress all want to move ahead with true USF reform.

Our Take: The challenge for service providers will be to develop business plans that are realistic for high cost operational areas while waiting for new monies to flow post-USF reform. We think Congress may complete their work in time for the third funding round of ARRA funds. Government subsidies will be required in high cost rural areas for the foreseeable future, in areas which by definition costs are too high for a sustainable business without such publish sector support.

President Obama: “I Won….”
President Obama famously, and flatly, said early on in his tenure “I won,” in response to a pointed question, from across the partisan aisle, about a change in specific policy. That straight faced enunciation of political reality by the President is something to keep in mind as we look toward the NOFAs, and beyond.

Sectors of the telecom industry will find much not to like in today’s NOFA. Ditto, and perhaps even more so, as the Obama Administration, via the FCC, issues its National broadband Plan for All Americans prior to February 2010. Some of us have been at this since before Divestiture. It is good to remember that kind of long view now. Each successive cycle of dynamic change in this industry has been heralded by both advocates and naysayers.

The Democratic political alliance that today controls both ends of Pennsylvania Avenue, and a majority of state houses across the nation, means what it says. As we move through the broadband stimulus phase, into the rule makings for the Broadband Plan, into more reforms to USDA Rural Development via successive farm bills, through a new look at spectrum policy, and into reforms to the universal service fund (USF), we are indeed moving into a new era in American telecommunications.

The policy people in the White House and the agencies, Senator Kerry and Congressman Boucher as the respective Senate and House subcommittee chairs for telecom legislation, and incoming FCC Chairman Genachowski are unapologetic advocates of the transformative societal role of ubiquitous broadband.

The arguments claiming that current broadband advocates in government are engaged in “industrial policy,” in “picking winners,” or are confused as to “the proper role of government” don’t work. Those clichés, so much in vogue over the past 8 years, are no longer part of the national conversation that matters. This is not political rhetoric. It is political – and policy – reality.

Good luck reading today’s NOFA. We'll be relaxing today, reading our NOFA on a nice quiet beach in coastal Massachusetts. No noise or chaos here. No Hollywood farce. Say hello to the police chief if you stop by.

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