Could the feds withhold broadband funding to some states?

A conflict between state and federal laws may delay the first distribution of funds to the states from the $42.5 billion program to expand internet access.

Sixteen states bar or restrict municipally owned broadband, and nearly all of those states, according to an analysis by Route Fifty, appear unwilling to amend their laws as they finalize plans for how they will use their share of Broadband Equity, Access, and Deployment, or BEAD, funds. That could put them at odds with the Biden administration, which supports having more cities and local governments offer broadband. 

The 2021 infrastructure law requires that states allow local governments and utilities to receive BEAD funds to provide internet service. At the time the law was being crafted, the administration argued that local governments would be under “less pressure to turn profits” than broadband companies and, therefore, would likely offer internet access at lower prices.

The conflict comes as states approach a Dec. 27 deadline to turn in plans for how they will use their BEAD funds. The National Telecommunications and Information Administration has to approve each state’s proposal before it distributes the first fifth of funding. Only six states, including Nevada, have formally submitted plans, but NTIA has draft proposals from every state.

Nevada’s proposal is demonstrative of others with similar laws in that it will not make BEAD funding available to cities. Its Office of Science, Innovation and Technology said it’s not able to change a state law that bars municipalities with more than 25,000 inhabitants or counties with more than 50,000 inhabitants from providing internet service. 

Despite the infrastructure law’s requirement, the plan says that “municipalities and counties that do not meet the population requirements will not be eligible to get the funding.” Nevada officials would not say if they are concerned NTIA will require changes to its proposal before releasing the first tranche of the $416 million the state is set to receive.

In its draft plan, Texas’ broadband office said only the state’s legislature can change a law that gives preference to private broadband providers. As a result, the office said it cannot allow local governments to be eligible for BEAD funding in areas where private companies are also seeking funding to improve broadband service.

But a spokesperson for the state’s Comptroller of Public Accounts said the state’s plan follows the law’s requirements. It expects to get the first fifth of the $3.3 billion it is set to receive because the state will allow local governments or utilities to be eligible for funding if they partner with a company to build broadband. 

A few of the 16 states also said that they were meeting the law because they will allow municipalities to apply for the funding, even though they will still restrict how they can use it. Gigi Sohn, who President Joe Biden nominated to serve on the Federal Communications Commission, called the position “laughable” in an interview with Route Fifty.

The question now is what NTIA will do.

In a notice of funding opportunity last year, the agency required states to say in their plans how they will “ensure the participation of nontraditional broadband providers (such as municipalities or political subdivisions, cooperatives, nonprofits, Tribal Governments, and utilities).” The agency also required states to say what it would do if the nontraditional providers and broadband companies both bid for funding to serve the same areas.

Under the process laid out by NTIA, it could require states to revise, update or correct their plans. If that happens, the agency could “put its foot down” and withhold the first tranche of money, or part of it, from these states, said Sohn, who withdrew her nomination after strong opposition from the broadband industry. 

But it’s unclear whether the agency will go that far. Biden wants to be able to tout the funding as he runs for reelection, said Sohn, executive director of the American Association for Public Broadband, in an interview.

“There's a tension going on,” she said. “The administration wants to get this money out as soon as possible. The president wants to run on this.”

NTIA did not respond when asked how it will handle the issue.

Many states, it appears, see a loophole in the requirement.

In their draft plans, states like Alabama and Florida argue that even though they are not going to lift their restrictions on using the funds, they are complying with the law because they will allow local governments to be eligible to get BEAD funding. 

“Alabama laws do not preclude public sector providers from participation in the BEAD subgrant competition,” wrote the state’s Department of Economic and Community Affairs.

The department also said in an email that it believes Alabama is in compliance with the law.

But to use the funds to build or expand broadband, local governments would have to meet a number of requirements.  

According to an analysis of state broadband laws by the Coalition for Local Internet Choice, whose members include state and local officials, the requirements collectively make it very difficult for municipalities to succeed.” For example, Alabama bars municipalities from using local taxes to build the system or to cover ongoing expenses.

Florida’s Commerce Department said in its draft proposal that the state has a law that “imposes specific requirements on public sector broadband providers.” According to the Coalition for Internet Choice analysis, the state requires that any plan for a local government to provide broadband has to have enough revenue to operate the service and pay off all debt in four years.

However, the analysis noted that projects that involve building fiber to homes, whether it be public or private, take longer than four years to become “cash-flow positive.”

As a result, “this requirement either precludes municipalities from proposing [fiber] projects or invites endless disputes over whether or not a municipality’s plan is viable.”

In its proposal, Florida said it “will not waive this law as part of the BEAD program selection process.”

Groups like the National Association of Telecommunications Officers and Advisors, which represents staff from local governments, have argued that letting local governments be eligible to get funding but then restricting whether they can use it, goes against what Congress intended.

“Congress’s clear intent to ensure local governments are eligible subgrantees is meaningless if a state limits or prohibits local governments from using the funds for deployment,” the group argued in a letter to NTIA last year.

Tyler Cooper, editor-in-chief of BroadbandNow, agreed with Sohn that NTIA might “push the issue under the rug and not withhold funding from states because it is under pressure to move [the disbursement of funds] along.”

Opponents of public broadband like the National Taxpayers Union warn that such projects could land municipalities deep in debt and say that the business of building and operating broadband is best left to the private sector.

NTIA withholding funding from states would also likely bring backlash from Republicans. At a hearing on Thursday, Rep. Cathy McMorris Rodgers, R-Wash., the chair of the House Energy & Commerce Committee, criticized the FCC, saying a recent move to reduce digital discrimination would lead to “government bureaucrats micromanaging Americans' Internet access.” 

Some state broadband offices, though, are taking a different approach than Nevada or Texas.

Montana’s Senate came up with a “compromise” on the issue, according to the ConnectMT Broadband Program. Under a 2001 law, local governments cannot provide internet service unless there are no private companies providing broadband in the area. But after the passage of the infrastructure act, the state passed a new law in May allowing local governments to apply for BEAD funding if they are working with a private company to provide service. 

Local governments still no cannot provide broadband on their own but the state “views this as a compromise that reduces previous barriers to entry for municipal internet service providers while preserving the competitiveness of the broadband market,” the department wrote.

Meanwhile, Pennsylvania is the lone state planning to change its rules, according to its draft plan.

The state prohibited local governments from providing broadband in areas where a telephone company like AT&T was offering internet service. But the commonwealth’s Community and Economic Development Department said that in an “abundance of caution” it is waiving any laws that “impose specific requirements on public sector entities” when it comes to providing broadband. 

The department did not respond when asked how it is able to waive state laws.