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I’ve been wondering lately if some of the RDOF reverse auction winners are having second thoughts about accepting the RDOF awards. It’s amazing how much the broadband world has changed since the end of that auction in December 2020.
It’s gotten more expensive to build fiber projects over the last year. The supply chain has played havoc with the costs of the raw components needed to build fiber networks. Many clients tell me that the cost of fiber components like conduit are collectively up by 40 percent or more over the last year. As somebody who has worked through several periods of inflation in the past, there is not a big likelihood that prices will return to the old levels even after the supply chain gets back to normal.
A bigger concern is the cost of labor. The explosion in the volume of fiber construction projects is almost too hard to grasp. The demand for construction crews is going to soon outstrip the number of experienced technicians. That means big challenges for finding and keeping construction crews. Shortages always lead to higher labor costs.
The federal government also layered on a new requirement that didn’t exist at the time of the auction. The Buy American Act now applies to infrastructure projects awarded with federal funds after November 18, 2021. These rules will apply to any RDOF winner that is approved by the FCC after that date. These rules don’t automatically add to the cost of building a fiber network, but they kill any thoughts of using lower-cost foreign fiber or components. The Act makes it clear that components like fiber and conduit must be 100 percent sourced to U.S. manufacturers. The new rules also make it seem unlikely that there will be many waivers allowed – these new rules have teeth.
The biggest kick in the teeth to an RDOF winner is the huge new grants that are offering far more funding than anybody won in the RDOF auction. The giant BEADS grants can fund up to 75 percent of the cost of building a network for a rural project. Grants like ReConnect also have a 75 percent grant option. An RDOF winner that was unopposed in the auction got 60 percent of the FCC’s bid price – and that price was not set at the full cost of building a network but based upon some screwball federal cost models. An electric cooperative that won the RDOF auction could get a lot more funding from ReConnect grants or the upcoming BEAD grants – but nobody in the industry knew this at the time of the RDOF auction.
Another issue to consider is that RDOF winners might have missed out on the opportunity for matching state grants. While some states might make matching grants to go along with RDOF awards, many will not. That means the RDOF funding is all such winners will see.
What I’ve never figured out is why some RDOF winners bid the awards down to ridiculously low levels. There are places where bidders accepted RDOF awards under 10 percent of the expected cost of building a network – in some cases as low as 1 percent. In one county I’m familiar with, an RDOF bidder accepted less than 5 percent of the cost of building the network. This is a county with some of the easiest costs in the country to bury fiber. But this county is typical of rural areas and is sparsely populated, so the cost per passing is still high. Even considering the relatively low construction costs in the area, I couldn’t make a business case in this county for accepting less than 50 percent outside funding to make the project viable. I’m still scratching my head, wondering how this RDOF winner expects to make a business plan out of such a low award.
It’s not hard to imagine that some RDOF winners are having second thoughts. There are penalties for walking away from RDOF, but those penalties might be a lot smaller than the downside of being forced to build a rural network that will never generate enough revenue to cover the cost of construction. I was mystified by some of the winning RDOF bids in 2020 – and those bids make a lot less sense when viewed from 2022.
Reprinted with permission from CCG Consulting’s “Pots and Pans” blog.
Contributed by Doug Dawson, President, CCG Consulting
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