Mark Vasconi: BEAD Shouldn’t Bet on Forever Subsidies

The $42 billion Broadband Equity, Access, and Deployment program has come under significant scrutiny in recent months, and this pressure will only ratchet up as Republicans take full control in D.C. next year.  A new administration loudly focused on “government efficiency” won’t hesitate to jump on examples of waste or mismanagement emerging from a program that is already unpopular in some GOP circles.  

The National Telecommunications and Information Administration and state broadband offices can get ahead of these concerns by ensuring applicants’ ability to build a successful, financially self-sustaining network. Afterall, BEAD money is start-up capital: it is not designed to provide on-going support for long-term operating expenses.

Yet alarmingly, many states are now receiving applications with business plans that presume they will receive perpetual government subsidies. If BEAD has any hope of avoiding further Congressional criticism, these applications should be rejected out of hand. 

To hasten broadband expansion, the infrastructure bill invited traditional internet service providers as well as non-traditional entrants (such as electric coops, public utility districts, municipalities and counties) to apply for BEAD funding. To ensure that BEAD is awarded to capable ISPs, NTIA requires applicants to have experience (or partner with contractors who do) and have technical, managerial and financial capacity to not only build a network but also operate it as a successful enterprise.

NTIA rightfully requires applicants to lay out their business cases – expected revenues, initial matching investments, and ongoing capital and operating expenses. State broadband offices are then required to review the business cases to safeguard against funding applicants whose projects have little chance of being financially sustainable. If projected revenues can’t cover upfront and ongoing costs, state broadband offices should reject the application; otherwise, they’d waste tax dollars building broadband networks effectively set up to to fail.

Some BEAD applicants and even some state broadband offices seem to believe that financial reality can be suspended by looking to subsidies from either the federal Universal Service Fund or from state governments to underwrite losses from continuing operations.  Betting that either of these sources will come to financial rescue of new networks that have already received millions in subsidies is a bet that neither NTIA nor state broadband offices should promote or allow. 

The USF program is increasingly unsustainable because its obligations are paid for by an effective 35.8% tax rate (increasing to 36.3% next quarter, and likely higher thereafter) on interstate and international telephone service revenue. As spending on traditional phone service continues to decline, this USF tax will continue to increase to maintain overall program funding and meet its existing obligations.

Loading USF with additional obligations to subsidize new BEAD applicants with unsustainable business models will increase USF’s obligations, increasing the tax on consumers and further destabilizing USF. Moreover, USF’s constitutionality is in question due to a recent decision by the 5th Circuit Court of Appeals that is being taken up by the Supreme Court.

While reliance on federal USF programs is problematic, expecting state legislatures to fund operating shortfalls is even more fraught with uncertainty. As an example, last year in Washington State (where I previously served as head of the state’s broadband office), the legislature rejected an effort to extend Washington’s State Universal Communications Services Program.

Washington’s program had been in place for over a decade and required only $5 million annually to continue supporting rural telecom networks – yet even in a state that is home to Microsoft, Amazon, Starbucks and Boeing, $5 million was apparently too much for the state legislature to stomach.  It is nothing short of folly to expect state legislatures to appropriate substantially more than $5 million per year to subsidize BEAD-funded networks whose business plans were underwater from the get-go. 

While NTIA and state broadband offices have the tall task of connecting all remaining unserved locations to broadband networks, this effort must be done while also exercising fiduciary responsibility to taxpayers. The last thing that policy makers and consumers need is a group of networks that fall into disrepair, cease operations, or are sold at fire sale prices to a limited pool of interested entities.

The only way to avoid these outcomes is for state broadband directors and NTIA to reject any applicants whose business models are designed to fail from the get-go. Success isn’t measured by press releases announcing BEAD awards or attending ground-breaking ceremonies, but instead by whether the networks built with BEAD funding are still serving their communities decades from now.

Mark Vasconi served as the director of Washington’s state broadband office from 2022-2023 and as director of regulatory services at the Washington Utilities & Transportation Commission from 2010-2022. This Expert Opinion is exclusive to Broadband Breakfast.

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