Thursday, July 7, 2016

FirstNet - Transparency issues here, the Law says that an "Opt-In" State will pay "its portion" of the FirstNet "Opt-In" solution!

Calculating the State’s portion of the build out of FirstNet and the Nationwide Public Safety Broadband Network.

Had an interesting conversation with someone and I thought I would write about it. In the Middle Class Tax Relief and Jobs Creation Act of 2012 that allocated the D-Block spectrum to Public Safety and created FirstNet, it is written:

(1) NOTICE.—Upon the completion of the request for proposal process conducted by the First Responder Network Authority for the construction, operation, maintenance, and improvement of the nationwide public safety broadband network, the First Responder Network Authority shall provide to the Governor of each State, or his designee—
(A) notice of the completion of the request for proposal process;
(B) details of the proposed plan for buildout of the nationwide, interoperable broadband network in such State; and
(C) the funding level for the State as determined by the NTIA.

Essentially the obvious question poised was “how much will the State have to pay?” A lot of States have been told, and the market, that “the State will not have to pay for anything and that FirstNet will come in and build it all”. Now we all know such a bloviated statement like this doesn’t hold salt, plus, as written in the law above, you can clearly see that the State will be responsible for its "portion" – they just don’t know how much yet -- which I believe to be a nefarious statement.  We do it all the time in the telecom industry.

We know that commercial carriers cover 42% of the geographic landmass (all the major metropolitan areas). Why? Because those are the areas that generate enough revenue for them to try and sell more. The commercial carriers don’t build out to the rural areas because those areas don’t make money. That means that more than 60% of the rest of the geographic landmass is not covered by the carriers. You should note that these uncovered areas include all the rural areas.

I may be mistaken, but one of the main reasons the D-Block was allocated to Public Safety was so that they could build their own network to cover the areas that the carriers don’t provide service. We all know that they carriers already provide Public Safety service in the major metropolitan areas -- that’s not our goal -- our goal is to cover all the areas the carriers don’t. So let’s pocket that info for the time being.

We also know that FirstNet was allocated $7 Billion to help construct the PSBN. We also know that $6.5 Billion is what’s remaining out of that $7 Billion. We can also assume that by the time this gets going that the NTIA/FirstNet will have spent another $500 Million, so in essence we will have a remaining budget of less than $6 Billion allocated to help the build. If a State decides to Opt-Out, then it can apply for its own portion of that remaining $6 Billion (see below). 

(I) may apply to the NTIA for a grant to construct the radio access network within the State that includes the showing described in subparagraph (D)

Now lets get back to the meat of the question. 

If a State decides to “Opt-In” then item “C” above takes effect, that is “the funding level for the State as determined by the NTIA”. Essentially, what this says is that the “State taxpayers” will have to pay a portion of the networks build-out. The answer we get back from FirstNet is, “we don’t know what that amount is yet, because we don’t have our partner lined up. Once we get our partner lined up we can then do a design that will provide us a cost for each State”. (TJ Kennedy, President FirstNet) Well, this is not entirely true! I can guarantee you that FirstNet is not being fully transparent here. They know in great detail what the capital costs are looking like because they did a rough design a longtime ago. Doing a design is the easy part. Any reputable telecom firm can create a design with calculated costs within a few hours -- as a matter of fact any reputable telecom firm will not even go beyond the go-nogo stage without a rough order of magnitude created -- those same "reputable firms" have been working with FirstNet since day-1 I can assure you.  

In the telecom/broadband space we make calculated "guesstimates" all the time. You have too, this process helps with the decision framework of product introductions, network enhancements, upgrades and rollouts. In this instance, we know that the carrier cover 40% of the geography (major metro areas) and they are interested in their ROI for service. We also know that FirstNet will make a, supposed, contribution of less than $100 Million start-up costs ($6 Billion divided by 55 States and Territories); that means the State will be responsible for the remaining 60% of the geography of its State, which covers all the rural areas.

On average we are looking at a capital buildout of $1 Billion per State to build PSBN. That means that 40% would be covered by FirstNet’s partner; FirstNet would contribute less than $100 Million; and the State would be responsible for 60%. Easy math now:

Partner pays - $400 Million -- and per the law can collect the revenue
FirstNet contributes less than $100 Million -- and per the law can collect the revenue
State contributes $600 Million -- and CANNOT collect revenue

So there we have it, a ballpark figure of $600 Million in capital will have to come from the State to address the demands in the law -- and no way to pay it back -- we haven't even addressed long-term operational costs.

(C) the funding level for the State as determined by the NTIA.

Here is another issue, if this holds true, then the State will also be responsible for 60% of the long-term operational costs of the baseline network. Typically, in the telecom space we see operation costs (opex) falling in the range of 10% of the capital program (capex), thus for a Billion-dollar network we are looking at $100 Million in annual operational costs.  This means that the State will be responsible for its portion totaling (most likely less than) $60 Million a year. Remember, the State, per the law for Opt-In, is not allowed to use the revenue, only FirstNet can.

Now let’s look at “Opt-Out”!

In short, if a State exercises its right to “Opt-Out”, then the State will have to pay nothing, not even for the long-term operations, and it will be able to use its portion of the revenue generated off their statewide network. Plus, the State can apply for its portion of the $7 Billion (which by then will be less than $6 Billion) to help construct its network. In essence, you Opt-Out you get a fully funded and self-sustaining broadband network, of which you maintain ownership, and you can benefit from the revenue the network generates. Then apply for your portion of the $6 Billion allocated to the cause. What a deal!

(2) STATE DECISION.—Not later than 90 days after the date on which the Governor of a State receives notice under paragraph (1), the Governor shall choose whether to—
 [Opt-In] (A) participate in the deployment of the nationwide, interoperable broadband network as proposed by the First Responder Network Authority; or
[Opt-Out] (B) conduct its own deployment of a radio access network in such State.
(A) IN GENERAL.—Upon making a decision to opt-out under paragraph (2)(B), the Governor shall notify the First Responder Network Authority, the NTIA, and the Commission of such decision.
(B) STATE REQUEST FOR PROPOSALS.—Not later than 180 days after the date on which a Governor provides notice under subparagraph (A), the Governor shall develop and complete requests for proposals for the construction, maintenance, and operation of the radio access network within the State.
(C) SUBMISSION AND APPROVAL OF ALTERNATIVE PLAN.— (i) IN GENERAL.—The State shall submit an alternative plan for the construction, maintenance, operation, and improvements of the radio access network within the State to the Commission (The FCC), and such plan shall demonstrate—
(I) that the State will be in compliance with the minimum technical interoperability requirements developed under section 6203 (NPSTC and PSCR); and
(II) interoperability with the nationwide public safety broadband network.

(ii) COMMISSION (FCC) APPROVAL OR DISAPPROVAL.—Upon submission of a State plan under clause (i), the Commission (The FCC)  shall either approve or disapprove the plan.
(iii) APPROVAL.—If the Commission approves a plan under this subparagraph, the State—
(I) may apply to the NTIA for a grant to construct the radio access network within the State that includes the showing described in subparagraph (D); and
(II) shall apply to the NTIA to lease spectrum capacity from the First Responder Network Authority.

Note: I highlighted, in blue, something nobody probably picked-up, the law states a Governor has 180 days from the time the State gives notice of Opt-Out; this means its not 90 days of an opt-out decision period, plus 180 days to RFP the solution; it means you have to commence your 180 days right when you notify them, so if you opt-out on day one you only have 180 days to get everything together. It takes a good 6-12 months to put your Revenue and Market Plans together. Not much tie to spare.  

How does a State pay nothing? With a State commissioned Public Private Partnership (P3) the State will choose its own partners, primarily financial investors (P3 consortium), and offer them the full rights to designing, building, operating and maintaining the State’s Public Safety Broadband Network. In short, the State brings the rights-of-way, assets, and – most importantly – the spectrum. The State sets the requirements of interoperability and technical standard requirements (per the PSCR and the NPSTC). State maintains a shareholder position, and board spot, to insure program goes as planned.

Private investing partners will bring in the cash to fund a start-up broadband company for the State. The P3 consortium will partner with a builder and manufacturer of the technology to build out the network. The State sets the contract terms for a 20 to 30-year obligation with full takeover rights if anything goes wrong. The consortium creates the new broadband entities Board of Directors based on shareholder positions. 

Revenue can be utilized through the P3 arrangement. (See below)

(f) USER FEES.—If a State chooses to build its own radio access network, the State shall pay any user fees associated with State use of elements of the core network. 
(1) IN GENERAL.—A State that chooses to build its own radio access network shall not provide commercial service to consumers or offer wholesale leasing capacity of the network within the State except directly through public private partnerships for construction, maintenance, operation, and improvement of the network within the State. 

But whom am I other than….

Just some guy and a blog…..

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