[12/6/19 Update – Columbia Law Professor Tim Wu and Google’s Derek Slater suggested a similar concept to what is suggested below in a 2008 white paper, Homes with Tails. The ironic thing is that I had referenced this paper in a comment I made to an April 2013 article I had written about Google Fiber. Clearly, I forgot about Wu and Slater’s innovative approach or else I would have referenced it the article that follows. This condo-like approach is something that really should be considered as a way to extend limited federal and state dollars for rural areas. With the proliferation of independent rural service providers and the ability to manage endpoints from anywhere, the ideas contained herein and within Wu and Slater’s papers are as relevant as ever.]

Something someone said at the 2015 Calix User Group was the inspiration for a new approach to funding rural broadband, described in this article. Perhaps it was Kelley, Drey and Warren partner Tom Cohen’s comment suggesting that the FCC’s priority is fiber deployment, as opposed to downstream speed. Or, perhaps the trigger for what follows was a comment from another panelist about the importance of funneling money to “communities”.

In his presentation, Calix’s Juan Vela tied together home and community with his statement that, “The building block of every community is the home.” If Vela’s premise is correct, that the home is where community begins, perhaps that’s where policymakers should start as they look at new ways of funding rural broadband. That is, what if there was a way for property owners to “tax” themselves to bring broadband to their respective homes?

Enter Communications Owners Associations #

Although at first glance, the notion of people taxing themselves may sound like a municipal overbuild, it isn’t. This is about individuals deciding that they are willing to pay for their respective portion of a given fiber to the premise network. It is also about creating a process and framework such that individuals have a way to form “Communications Owners Associations”, which would be similar to Homeowners Associations.

At a fundamental level, each property owner would pay for their portion of fixed and variable costs to build a given network. The costs would be amortized on their property taxes over a certain time frame, much as the PACE program helps property owners finance energy efficiency upgrades.

Of course, one homeowner doesn’t make a network. This is where homeowner equity as a funding source combined with the fiberhood concept, pioneered by many of the independent telcos and made famous by Google, comes into play. That is, if enough “neighbors” band together, they will have a critical mass to create a viable Fiber to the Premise (FTTP) network. To create a financially viable network, the penetration often must be between 20 to 30%, but this threshold will vary depending upon parameters such as construction costs, housing density, and mid-mile costs.

Here is a rough outline of how a Property Assessment for Broadband program might work:

1. A property owner would rally other nearby owners (whether at a municipal, homeowner’s association, or even at the block level) to create a provisional Communications Owners Association (COA).
2. Interested property owners in a given geographic location would sign electronic letters of intent and provide good-faith deposits, whereby they would commit to helping finance a broadband network through their property taxes, as long as certain criteria were met, such as:
   1. A minimum threshold of sign-ups based on benchmarks for a given density.
   2. A successful review by the lending body to determine whether the threshold for a particular entity made sense given the specifics for its proposed serving area.
   3. The creation of a board of directors. If any of these steps could not be accomplished, then the good-faith deposits would be returned.
3. The board of directors would hire or appoint a manager (analogous to a property manager in the HOA world) to manage the system. The lending body would most likely have a pre-approval list of COA managers (much as the PACE program has pre-approved contractors).
   1. The COA manager would put together the plan for building and operating the network, which the lending body would approve (or not). The effort to put together this plan would be paid for, as needed, by the good-faith deposit money.
   2. The COA manager would oversee the engineering, installation, and operations (again, this might be something that the COA management firm might do or outsource to multiple subcontractors).
   3. Assuming approval, then, similar to PACE funding, money would flow from private entities and would be released as milestones were achieved.
   4. Like the PACE program, property owners would begin making payments when their next property tax bill is due. At the end of the financing, the payments would go away. .

Broadband 4 the Rural North

BR4N is a classic example of a community-created, broadband network. The single mother, who rallied the community to literally build (think farmers doing the trenching) a last-mile, gigabit network, provides an overview of how they started and built their network in this interview.

What Is Needed to Make This Work: #

Again, the program described above is a rough outline. In that context, the following list provides a high-level view of elements that would be needed to make the above program work:

1. A mapping and associated back-office solution that provides a way for users to sign-up as outlined in step number 1, above. Private companies, such as Adams Fiber, are already using this sort of software to aggregate demand for their FTTP service prior to building the network (as seen in this video). Lenders or their agents (e.g. potential COA managers) would need similar types of software and associated portals to understand potential demand and then be able to glean enough information to determine the viability of a proposed project. In a sense, this step would be similar to what Google has done with Project Sunroof for reducing friction in understanding the initial viability of specific rooftop solar projects.
2. There are a number of national lenders, such as RUS, Co-Bank, or RTFC, as well as local lenders that already provide funds for rural projects. They would have a number of incentives to loan money for this type of program, including:
   1. These would essentially be government-guaranteed loans, as they become part of an owner’s property tax bill
   2. If structured like the PACE program, with interest rates between 6.5 to 8.29%, there would be a huge incentive for private money to provide funding in today’s low-interest environment.
3. Organizing the group would be the next challenge. It would probably be rare to have local champions that could start a board from scratch as well as have the expertise to understand the challenges of broadband. The lending entities wouldn’t necessarily want to organize community groups, but they could provide templates and have approved consultants who could organize initial meetings and create the initial plan
4. Just like the PACE program has approved contractors, the lending entities would have a list of pre-approved COA managers. These entities would be experienced at managing telecom networks; likely candidates would be existing Communications Service Providers (stay tuned for a video referencing an example of this sort of arrangement that exists today).

Property Assessed Broadband Example #

What isn’t needed or what might be greatly diminished with the above approach is explicit government funding to expand broadband to rural areas. Let’s take a real-world example from the FCC’s recently awarded Rural Broadband Experiments program. In one case, the FCC awarded almost $2.2M in one-time funding for a provider to serve a little more than 1,500 homes. At 100% penetration, this works out to approximately $1,430/home.

At 25% penetration, this would equal $5,720 per home served. Coincidentally, a June 2015 paper by Molnar (U of CO at Boulder) Savage (U of CO at Boulder), and Sicker (Carnegie Mellon University) suggested that fiber adds $5,437 to the typical home’s value. Assuming the aforementioned capital requirement ($5.7k/home), the following graph depicts the monthly payments required to pay off the upfront capital costs (network build and associated equipment) as a function of time and interest rate:

Of course, as the penetration increases beyond 25%, the fixed capital cost per customer would be reduced, shifting the above curves down.

Assuming the aforementioned 25% penetration and $5,720 capital costs, the following table provides an estimate of the per-subscriber monthly costs of providing broadband connectivity in a scenario where a property owner finances her portion of the network build via a 15-year loan with an interest rate of 8.29%.

Note:

1. On a per property basis, the fixed capital costs per owner would be reduced as penetration increases beyond 25%. Those reductions could be used to incent the initial members to encourage their laggard neighbors to sign up for service (e.g. those who signed up prior to the COA formation might get a reduction in their bill as new owners sign up for service).
2. The “Network Replacement Reserve Fund” is somewhat a double count, as this is a reserve for replacing optoelectronics as it fails or becomes obsolete. The network equipment is also included in the “Amortized Cost of Network & Equipment.”
3. It is expected that the line items “Maintenance & Operations” and “Regulatory/Billing/G&A” might be fees to the COA and/or a third-party to handle these tasks. With TR-069 capabilities and an all-fiber network, the cost of maintenance should be quite low compared to previous copper and hybrid fiber-coaxial technologies that featured active components in the outside plant.
4. The network is assumed to support last-mile peak speeds of 1 gigabit, although the backhaul is oversubscribed with each property being able to receive 10 Mbps on a dedicated basis. One of the important considerations is the cost of mid-mile access, which, varies by location. For the purposes of this exercise, it was assumed to be $1/megabit/month.

It is important to note that the estimated costs in the above example are for a 100% property owner financed network at rates that are similar to PACE financing for energy efficiency improvements. If the Federal Government provided truly low-interest loans (say at 2%, which is above the Fed’s cost of money, but still lower than what could be found on the commercial market) with a 20-year term, then the monthly amount required to pay back the upfront capital would be approximately $14.52, almost 50% less than the payment required of an 8.29% loan.

Advantages to this Approach #

By financing the broadband build as a property enhancement  (which it is), a fiber network could be constructed in an area where it would otherwise not be possible. Other advantages to this bottom-up approach include:

1. Funding is directed to locations with known demand.
2. Leveraging limited federal dollars to expand broadband further than would otherwise be possible.
3. The process of forming a broadband cooperative would help strengthen a given community.
4. Unlike a municipal effort, which can sometimes be politically divisive, owners would be voting to only tax themselves and not their neighbors.

Next Steps: #

With the PACE program as a benchmark, local and state governing entities will need to expand or create PACE programs to include a broadband component. As alluded to above, there are several roles the federal government could play to help, including the extension of relatively low-rate RUS financing to help prove-in those cases that otherwise wouldn’t make sense.

Additionally, there could be opportunities to try this approach in a future FCC Rural Broadband Experiment. There is no shortage of locations to try such an experiment; even Silicon Valley’s home of Santa Clara County, has rural areas that are broadband deficient and could use a program such as what is described in this article.

Finance, although important, is secondary to the value of the process. That is, the process of neighbors talking to other neighbors to build initial support and create an ongoing organization will help foster community. And the effort to expand broadband will start at home.

Please leave feedback below to help refine the nascent plan outlined above.

[To read an equally radical idea about a different way of funding USF, click on this article and this article.