Preliminary Comments on the Governor’s May Revision Proposal for Broadband Infrastructure

The administration’s 2021‑22 May Revision proposes up to $7 billion (federal and state funds) over two fiscal years to fund state broadband infrastructure projects and programs. In the following sections, we provide our preliminary comments on this proposal, reflecting our understanding of the proposal as of Sunday, May 23. We understand that a budget change proposal in the California Public Utilities Commission (CPUC) that will provide details of the proposal is forthcoming. Proposed trailer bill language that will implement components of the proposal also is forthcoming. The lack of availability of the budget change proposal and proposed trailer bill language limits our ability to fully evaluate this major proposal. We may provide additional analyses to the Legislature as feasible when additional information becomes available.

Background

Broadband Infrastructure Has Various Components. High-speed internet service often is provided to communities and households using broadband infrastructure. Broadband infrastructure can be categorized into three groups based on distance covered, from longest to shortest distance: (1) backbone or long-haul, (2) middle-mile, and (3) last-mile. The administration’s proposal and thus our preliminary comments focus on middle-mile and last-mile broadband infrastructure. A middle-mile broadband network often consists of high-capacity fiber-optic cables laid over tens or hundreds of miles that, if connected to by an internet service provider, helps deliver high-speed internet service. Last-mile broadband infrastructure includes the antennae, cables, poles, and wires that connect middle-mile networks to individual communities and their households.

CPUC Administers Broadband Access and Affordability Programs. Relevant to the administration’s budget proposal, CPUC administers a number of programs to help expand broadband internet access to unserved and underserved areas in the state. CPUC’s California Advanced Services Fund (CASF) program uses revenues from a surcharge rate collected by telecommunications companies to provide broadband infrastructure grants that, for example, fund broadband access and last-mile infrastructure projects. Companies that participate in CPUC’s High Cost Fund A Program also receive revenues from a surcharge to support their broadband and voice service offerings in remote and rural areas of the state. While CPUC’s California Lifeline Program provides free or discounted telephone service to low-income households, the corresponding Federal Communications Commission’s (FCC’s) Lifeline program also provides discounted broadband service.

The American Rescue Plan (ARP)Act. Signed into law on March 11, 2021, ARP allocated $195.3 billion to a Coronavirus State Fiscal Recovery Fund. States can use their allocation from this fund for a very broad set of uses at their discretion, which is stated to include, for example, investment in broadband infrastructure. Total funding for California from the Coronavirus State Fiscal Recovery Fund is $27 billion. Funding can be encumbered through December 31, 2024 and, according to recent guidance from the U.S. Department of the Treasury, can fund infrastructure projects to be completed by December 31, 2026. Other eligible uses of the funding related to internet access could include, among others, direct assistance to households with expenses related to internet access.

Proposal

Budget Proposal Would Appropriate $2 Billion Federal ARP Funds in 2021‑22, With Intent to Commit $5 Billion in Federal ARP and State Funds in 2022‑23, for Broadband Infrastructure Projects and Programs. The administration proposes $2 billion federal ARP funds in 2021‑22 to fund at least four broadband infrastructure projects and programs. A new proposed budget control section would authorize the administration to flexibly allocate this amount among the projects and programs, with quarterly legislative reporting on expenditures. The control section also includes intent language that the administration and Legislature commit an additional $5 billion total funds in 2022‑23 ($3.5 billion federal ARP funds and $1.5 billion General Fund) to these projects and programs, for a total of $7 billion across the two fiscal years. Below are summaries of each proposed broadband project and program and their estimated total cost across the two fiscal years. We have not received information from the administration that breaks down the total cost of each of these projects and programs by fiscal year or fund source.

An Open Access Middle-Mile Broadband Network—$4 Billion. The administration proposes to install an open access (which means open to all potential internet service providers) middle-mile network near the state’s highways at an estimated total cost of $4 billion. This cost estimate uses a statewide average cost per mile that is based on past California Department of Transportation (Caltrans) projects that installed fiber-optic cables (either as standalone projects or in combination with other construction activities). The number of miles to install is based on the total length in miles of the state’s highways, with some of the length removed to account for existing or planned broadband infrastructure projects. The product of the statewide average cost per mile and the total length in miles of the state’s highways equals the estimated total cost of the middle-mile network.
Last-Mile Broadband Projects—$2 Billion. To connect communities and households to the new open access middle-mile network, the administration proposes to create a new account within CPUC’s CASF program to award grants for last-mile broadband infrastructure projects. (We understand proposed trailer bill language is likely to provide additional information about this new CASF program account.)
A “Loan Loss Reserve Account”—$500 Million. The administration proposes to create another new CASF program account—a loan loss reserve account—to help secure financing for locally owned broadband infrastructure projects sponsored by counties, municipalities, and tribes. (We understand proposed trailer bill language is likely to provide more information about this new CASF program account.)
Broadband Improvements for Telecommunications Companies in CPUC’s California High Cost Fund A Program—$500 Million. Lastly, the administration proposes to support broadband infrastructure improvements for telecommunications companies that participate in CPUC’s California High Cost Fund A Program. (Proposed trailer bill language is likely to provide additional information about changes to the California High Cost Fund A Program.)

Assessment

Unclear Whether Projects and Programs Identified by Administration Represent Best Solution to Current and Future State Broadband Access, Affordability, and Availability Challenges. The administration’s proposal to create a state-owned middle-mile network with grant funding and financing for last-mile infrastructure projects is one solution to some of the state’s broadband access, affordability, and availability challenges. It is possible, however, that the administration’s proposal might not address these challenges going forward due to technological changes that provide high-speed internet service to unserved and underserved areas in more cost-effective and efficient ways, or because the problem of internet access is less to do with availability and more to do with affordability (which the proposal does not appear to address, at least in the short term). It is important for the Legislature to consider the risk associated with a large capital investment such as the proposed middle-mile network and, in doing so, consider whether other solutions that are not being proposed by the administration could better solve some of the state’s current and future broadband-related challenges.

Lack of Information From the Administration Limits the Legislature’s Ability to Assess the Proposal. Without CPUC’s budget change proposal to provide key information, such as a breakdown of funding across the four programs and projects across two fiscal years, and proposed trailer bill language to explain key proposed programmatic changes, such as how new CASF program accounts will work, the Legislature cannot fully assess the administration’s proposal. The Legislature’s ability to assess the proposal is further constrained by the abbreviated time line of the May Revision process, which makes the lack of information about the proposal even more challenging.

Several Federal Proposals Under Consideration Would Provide Significant Amounts of Additional Broadband Infrastructure Funding and Are Not Accounted for by This Proposal. Proposals currently under consideration by the federal administration and Congress would, if passed and signed, appropriate between $65 billion and $100 billion to fund broadband infrastructure projects and programs. The Governor’s May Revision proposal does not account for this potential future funding source for broadband infrastructure. While the ultimate fate of these federal proposals is uncertain, approving intent language for an additional $5 billion total funds in 2022‑23 (including $1.5 billion General Fund) when it is possible more federal funding might be available over a longer time frame by 2022‑23 may be premature.

Middle-Mile Network Cost Estimate Is Very Preliminary. We understand from the administration that their middle-mile network cost estimate is based on a statewide average cost per mile ($350,000) that was calculated using a small set of Caltrans projects. The cost per mile for each of these sampled projects varied significantly, due to factors including the cost of materials, the location of the project, the placement of the fiber-optic cables, and other considerations. (We have not yet received requested additional information from the administration about these sampled projects.) The administration also calculated and added an additional 30 percent ($105,000) to the cost per mile to account for pre-construction, construction inspection, and contracting activities. (We understand from the administration that the cost of these activities usually are not calculated per mile, but instead are calculated based on the total cost of the project.) Calculating the product of the total statewide average cost per mile ($455,000) and the estimated length of the state’s highways along which cables will be deployed (around 8,000 miles) provides the Legislature a very preliminary cost estimate for the middle-mile network of around $4 billion. For new projects, the administration estimates it will take 3 to 4 years to complete construction (which includes 12 to 18 months of pre-construction work). For existing projects that could be modified to include installation of fiber-optic cables, the time line could be much shorter. In summary, while there is some information available to the Legislature about the middle-mile network cost estimate, it is very preliminary and subject to considerable uncertainty.

Proposal Does Not Appear to Address Short-Term Broadband Affordability Issues. While the forthcoming proposed trailer bill language is likely to include additional information about the new CASF program accounts and California High Cost Fund A Program investments, the proposal does not appear to include funding for broadband affordability programs. (CPUC is working on a preliminary analysis of strategies to address broadband service affordability, including possible changes to the California LifeLine Program, but it is unclear when these changes would occur and at what cost. It is also possible forthcoming proposed trailer bill language could provide more information about these changes.) We note that the FCC recently launched its Emergency Broadband Benefit program, which assists low-income households with expenses related to internet access by discounting plans provided by internet service providers. This temporary new program is tied to the federal declaration of a national public health emergency due to coronavirus disease 2019. We also note that one of the eligible uses of discretionary ARP funding could be direct assistance to households with expenses related to internet access.

Proposal Does Not Appear to Address Potential Implementation Challenges. There are a number of implementation challenges acknowledged by the administration that could slow the time line for installation of the middle-mile broadband network. Challenges include requirements of the contracting process, the permitting process (that is, environmental impact reviews required by the California Environmental Quality Act), and the installation process (such as installation of fiber-optic cables underground). While forthcoming proposed trailer bill legislation might address some of these challenges, such proposed legislation has not been made available for legislative review.

Options for Legislative Consideration

We provide the Legislature with a number of options, which could be taken individually or collectively, to consider for taking action on this proposal due to the lack of information from the administration, the significant amount of federal ARP funds and General Fund at stake, and the short time frame in which to consider significant new infrastructure projects and programs.

Make Allocation of Funds Contingent on Subsequent Legislation. If the Legislature agrees in concept with the administration’s proposal, the Legislature could consider appropriating some amount of federal ARP funds in 2021‑22 and making funding contingent on trailer bill legislation that could be passed later in the budget process or policy legislation passed later this session. Such legislation would allow the Legislature to consider and resolve the implementation and/or policy issues related to the administration’s proposal.
Do Not Yet Make Out-Year Funding Commitments. The Legislature could consider striking the intent language that the administration and Legislature commit an additional $5 billion total funds in 2022‑23 ($3.5 billion federal ARP funds and $1.5 billion General Fund) from the proposed control section. For the reasons discussed above, including the potential for major new federal funding for broadband infrastructure to be made available in future years, we think making out-year funding commitments is premature.
Consider Addressing Broadband Affordability in the Short Term. While the administration provides that improving broadband affordability is an eligible use of funds subject to the proposed control section, it does not explicitly list any broadband affordability programs as examples like it does with proposed infrastructure projects. The Legislature could modify the proposed control section to add specific affordability-related activities and expenses it wants to prioritize alongside the administration’s proposed broadband infrastructure investments. In the absence of any short-term broadband affordability proposal from the administration, the Legislature could consider targeting a specific amount of the proposed ARP funding in this proposal to, for example, fund an extension and/or expansion of the FCC’s Emergency Broadband Benefit program at the state level. The Legislature could also consider changes to existing state programs such as CPUC’s California LifeLine Program (to the extent they are not proposed by forthcoming proposed trailer bill language) to increase broadband internet service availability and affordability.