Justin Huebner: We’ve all participated in RSAs with our wireless providers in that situation. Back in the ‘80s when they divvied that out, you had the ability to create a partnership and have a chance to participate in 6% to 10% of that instead of getting it all for yourself, but at least you had a cellular play. I think we at least try to look at that and say, is this another one of those times? Should we look and say that the sum of the parts is a bigger whole on that side?
Jeff Johnston: That was Justin Huebner, CEO and general manager of Solarus, about creative ways to partner with other operators in Wisconsin that will best position the state to take advantage of a once-in-a-lifetime opportunity in the BEAD program.
Hi, I’m Jeff Johnston and welcome to the All Day Digital podcast, where we talk to industry executives and thought leaders to get their perspective on a wide range of factors shaping the communications industry. This podcast is brought to you by CoBank’s knowledge exchange group.
The $42.5 billion in BEAD money that is about to be released makes for incredibly exciting times for rural broadband operators. But it also comes with a good bit of risk and uncertainty. Justin has done his homework on this. And he is leaving no stone unturned as he looks for creative ways to participate in BEAD, while managing his risk exposure and maintaining his best-in-class customer service that his members have come to expect. He has some great insight and ideas to share that I think you will find very helpful.
So, without any further ado, pitter patter let’s see what Justin has to say.
Johnston: Justin, it’s a pleasure to have you here today. Welcome to the podcast.
Huebner: Well, thank you, Jeff. It’s great to be on and, I much appreciate the topics you cover in this. It’s great to be able to participate.
Johnston: Super excited to have you here today. I want to talk about BEAD. It’s fairly topical right now. I think as we move through the months of the year, it’s going to become even more and more topical as money starts to flow and plans firm up a little bit, but I think you’ve got some interesting perspectives on this program.
Let’s start kind of high level. Maybe you could just share with listeners, what do you like about what you’ve seen so far in the BEAD Program and maybe, what sort of changes or things would you like to see done a little bit differently?
Huebner: Yes, absolutely. I’ll probably step back one step just to give you a little bit of a lens and a context of how I am looking at it. Again, in the state of Wisconsin, we’re an independent here in the state of Wisconsin. We’ve had a pretty long-running grant program that’s been very active. In Wisconsin, we’ve had almost 10 years of state broadband grants and they started at very small numbers of $500,000 to $1 million, but over the course of those 10 years, we’ve had about $360 million worth of grant funds.
Some of those came through federal sources, like ARPA, and the grant was facilitated on the state side, but in other situations, it was true dollars that were allocated from the state budgets or from other windfalls that had happened in that situation. We’ve had a very good relationship with our state’s Wisconsin Public Service Commission, now the broadband office under the BEAD, but we also have a context that we view BEAD from. From that perspective, I think the state grant rounds have worked out very well for all the parties involved.
I think the tough part is, we’re looking at that and the sweet spot for the independents was when it was $15 to $30 million at a pop. A lot of times those were one to two grant rounds per year that they were administering. In those examples, we were oftentimes, 60% to 70% of the actual awardees were independent phone companies that have now become ISPs that have had long histories within their communities. Solaris has been around for 128 years. Obviously, I’m a little bit jaded towards those type of companies getting those awards. They’re in those communities. I run into my customers at the grocery store. I have to answer to my customers in that situation. My stockholders are local.
In that world, that’s the gold standard of what we’ve seen happen. Wisconsin’s done a good level of that. Now we’re looking at BEAD funding and BEAD funding will be almost 10 times bigger than the biggest Wisconsin grant round, which is about $125 million. It’ll be three times bigger than all the grants that have ever been awarded in the last 10 years.
That’s the context I’m looking at it. If you’re in the industry, you want to have government funding work out correctly. I think sometimes the motivation on the government side is to get the funding in place. If you’re in the industry, you want that funding to be effective.
You got to be excited about the fact that, this is a once in a generational funding. This is, Eisenhower-- interstate system rolled into electrification because it really does a little bit of both in rural areas. That’s something that you have to be in favor of if you’re in the industry. We’re excited that our state is very much trying to manage this program to the best of ability. We’re ecstatic that they’ve had the experience that they’ve had in running past grant rounds because I think that will only help them manage this federally funded situation with the actual sub-grantees that they’re having to work through. That’s the good news.
I think the bad news is, to those numbers that I was talking about, our state is going to have 365 days to make all the sub-grantee awards. From once they get everything approved and with how they work with NTIA, it’s a lot of hurry up and wait. They’ve got to put together their planning process and then they have to put together their Volume 1 and their Volume 2. Both of those are in for review at this point. Then when things engage, it’s going to happen really quickly.
When you look at it and you say things like, once in a generation funding, 365 days to make all the possible right, best decisions for Wisconsin — I’m just not positive that that’s the best situation to have. I think it does give a little bit of preference to the much larger national companies because at some point the state is going to need to be able to push an “easy button” to take some areas, and make sure they get service because they got to get that 25 by 3 minimum requirement to all areas. They’re hoping to get to 100 by 20. They’re hoping to stay mostly fiber, but they got to cover that bottom tier. In that situation, do they end up having to settle because they can get locations covered versus maybe being able to go with the best possible answer from a local and vested interest, I guess is one of the biggest concerns I have.
Johnston: Great. Okay. As you think about BEAD and some of the challenges associated with it, I guess how much do existing programs, be it ARPA or state programs or enhanced A-CAM obviously is a huge implication to this whole program, but how do you think about all of those existing programs?
Because I’ve heard some operators say, “I’m already full here with ARPA money that I’m trying to deploy, and I’m not even in a position to take advantage of,” as you characterize rightfully so, “a once in a generational opportunity sounds great, but I’ve already got a lot of stuff going on that I’m trying to digest already, so I’m not in a position to be able to go after that.” How do those dynamics play out in your markets?
Huebner: From a Solaris perspective specifically, we’ve tried to land a lot of those planes in preparation for this. We took enhanced A-CAM for both of our ILEC areas and we’ll be done with that in 2024. We’ve got a couple state grant projects that we’re finishing up here in 2024, where we just got the last 20% to 30% to complete in that situation.
We are trying to clear the slate to give ourselves the opportunity to fully participate in BEAD. Now the challenge I have in that situation though is we don’t have a lot of BEAD areas around us specific to some of those other funding mechanisms. We’ve got some traditional ILECs that were A-CAM companies that now elected enhanced A-CAM that are to the west and the east of us.
In that situation, some of them are very much our friends in the network and we wouldn’t have competed against them anyways, but with the way that enhanced A-CAM rolls out and then with RDOF already happening, that binds us in the south portion of our network. We’re in a position where we want to be able to engage, but we don’t have contiguous areas that we’re going to necessarily be able to just do a bump out.
I think one of the biggest questions we’re asking ourselves is, is a bump out the best case for BEAD, or do you really have to have enough at a certain level to quantify all the red tape that goes with it from a federally managed grant system.
Johnston: Yes. That is tough, for sure. I’ve heard some folks, they have that windshield time. If it’s more than an hour outside of my current footprint, I’m just not interested in it. That, plus I’m sure the economics clearly and penetration, assumptions, and all that stuff. Is that how you think about those bump-out opportunities?
Huebner: Yes. That’s exactly where we’re at. I think that’s a rule of thumb for a lot of people. There are areas, like out west, where they just have a lot more windshield time and there’s some huge co-ops out there and stuff like that, but I think, in the Midwest here, that hour to hour and a half, getting much beyond that takes another leap. We do have two separate offices with two separate ILECs that we’ve purchased and they’re about an hour apart.
We can expand that out of each of them, but we’ve got totally different levels of text at different areas. We don’t have redundant, everything at both locations. It is a little bit easier for us to say, “Well, we can go hour and a half from our main location.” It’s a little bit harder for us to say that I really want to stretch a full hour from our smaller portion of our network in that situation. So yes, that’s one of the limiting factors for that bump out play.
Then I think, on top of that, this is going to push some inflationary pressures just because when they award it, it’s going to be the most money that’s ever been awarded. When you think about that multiplier of, well, ultimately, you got to bring at least 25% to the table, you probably got to bring closer to 30%, 40%, 50% depending on being successful in these grants.
That’s just a lot of money going in that I think it’s going to push up some super inflationary pressure, especially related to outside plants just because you can’t ramp up those teams as quickly as some of the other things. Then cost of capital right now is pretty high.
Johnston: Your inflationary comment is really interesting. To your point, if the floodgates open and all this money starts coming into the market, and so good old supply and demand dynamics, it does stand to reason that, especially for labor, which is already tight, that those prices go up. How do you navigate that? Would you characterize that as a risk for folks looking at BEAD because of these inflationary unknowns?
Huebner: Yes. Any of the math that we’ve tried to help look at is, we’re looking at saying, it’s not probably a percent increase. The biggest question is, or at least the labor portion of outside plans, is it going to be a factor increase? Are you ultimately going to spend almost double what you would’ve in the past? The main reason is, there’s only so many outside plant crews available and it isn’t like this is just happening in Wisconsin, this is happening nationwide.
There isn’t the ability to stand up those crews quick enough to be able to ease into this and have it be spread over a long period, which I understand. Ultimately, we want to get this internet deployed as quickly as possible. One of the things I’ve kicked around with my team is there’s a chance that the only building that gets done is BEAD-related or other government subsidy-related.
We may not be able to do any of our business-case competitive, build-outs that we’ve done historically, because ultimately, those business cases depend a lot on cost of capital and the cost to build. So if I’m not getting a subsidy of some variety, that building might stop for a period of four to eight years, depending on how long it takes. I have all those things to reset and come back down to normal.
That’s one of the things we’re considering is, if we’re not participating in a BEAD build out or if someone isn’t finishing their A-CAM or something along those lines, we’re looking at and saying, “Well, we’d love to participate it,” but our backup plan is to say, what operations can we contribute to that battle in the sense that we have an outside plant crew. I could turn it into two different drop crews and I could lease those guys out to other companies that are working in that space.
Ultimately, we have splicers, is that something that we monetize? We don’t do that for anyone but ourselves today, but there’s going to be such a need that if I’m not doing the building, I probably have some operational assets, in the form of human capital, that I’m able to commit to other people’s builds and ultimately, probably have a profitable ability to wholesale those services.
Johnston: That makes total sense. I never even thought about that, or actually, I’ve never heard about anybody talk about it in that context, as a derivative play off of BEAD, if you will. That’s super interesting.
When you look at the State of Wisconsin and the networks that are in place today and where there are holes in Wisconsin, are you optimistic that there are other operators in the state that might be closer to some of these BEAD opportunities, Should we feel good about BEAD being able to make an impact ultimately in the state of Wisconsin?
Huebner: What we’ve tried to do is we did get all of-- for us is WSTA is our state association on that side. It started at that level to say, okay, this is once in a generation, how do we look to take the biggest bite at the apple that we can? Then if that doesn’t make sense, then we could cascade down to lower levels of just bump out or regional plays and stuff like that.
The process we’re currently working through, and again, it’s one of those things where it’s hurry up and wait because we’re looking at, is there an opportunity for-- we have an example of WIN, which is our Wisconsin Independent Network, which is our statewide fiber network. Thirty-one owners, we all came together back in the late ‘90s, and now that’s an entity that has grown to be a very large entity and makes a big play from a regional Midwest perspective for a fiber network.
We’ve all participated in RSAs with our wireless providers in that situation. Back in the ‘80s when they divvied that out you had the ability to create a partnership and have a chance to participate in 6% to 10% of that instead of getting it all for yourself, but at least you had a cellular play. I think we at least try to look at that and say, is this another one of those times? Should we look and say that the sum of the parts is a bigger whole on that side?
That’s the evaluation process we’re going through right now and looking at saying, well, because there are areas that aren’t near anyone, and there are some areas that are regionally close to some people, but do they have the capital and the assets to go after whole counties at a time or multiple counties when today their footprints is about half a county or maybe a county?
Those are some of the things that we’re looking at and saying, all right, any math we do at the statewide level is still going to help us have conversations at the regional level because it might not make sense to do something as a “newco” partnership where we throw it all together and chase a bigger portion. Now we could scale that down and say maybe it’s three or four people that are going together in the southwest portion of Wisconsin, or maybe it’s one company is going to operate it, but ultimately there’s some wholesale services that some of the neighbors can supply in that situation.
Scaling it down lower and lower to say, if there’s an opportunity, a true business case for a bigger grab, let’s figure that out first, then let’s get more and more specific and figure out what the right level is. If I had to guess, I don’t know that the statewide play that we’re going to be able to get there. You take on some operating costs of a newco and some of those things that then-- obviously you can get some scale with that.
That’s some of the math that’s harder to figure out. Then you’ve got that upside risk of costs to actually build those networks that only gets worse based on how much that you win. “Win” might be a relative term depending on where those costs actually get driven with that inflation. That’s how we’re looking at it to try and see, well, what’s the biggest impact we can have? Any of those conversations are only helping in a smaller, regional or individual company conversation that we’ll eventually go to.
Johnston: That’s super interesting. I would think that, for states that might be looking at a similar plan of attack, if you will, having an existing statewide network relationship in place, like you mentioned with WIN, that’s probably, a pretty important precursor to any of this stuff. Because you know each other, you’ve worked together and things like that. Because this feels like this could be a little bit more complicated than building a state-wide fiber network. Maybe I’m wrong.
Huebner: Yes, Jeff, I think it is a lot more complicated than the statewide networks or even the RSAs just because there’s a lot of math that’s going into figuring out what that business case looks like. There is that upside risk, what inflation pressures are there going to be, Wisconsin, we’ve got about 20 companies that are at least interested enough in this conversation to continue to participate in it. Everyone sees the world just a little bit differently. There’s some people that see this as a bigger opportunity. There’s some people that see it as ultimately a bigger risk that may or may not make sense in that situation and so it is a harder conversation to have at that state-wide level.
I think, for me, I don’t want to think about this in five or ten years and wish we would’ve tried harder, so I’m putting my full effort in now. If the answer is that that flavor doesn’t make sense for us at the statewide level, and we proceed down to regional or individual companies that participates, we’ll have at least done as much of the homework as we possibly can and given it as much effort as we could. If we close that door, we close that door, but we close it as educated as we can be with not even having all the rules being finalized yet at this point. That’s always the challenge of that hurry up and wait as well.
Johnston: Again, super creative, really interesting approach. I think it’s great for your members and your community that you’re at least beating the bushes on this thing to see if there’s something there or not. I would think too that when I think about some of the challenges with the BEAD program, it’s like, “Yes, it’s great that they’re going to help us build a network, but there’s ongoing opex in running these networks and in some cases, the math just doesn’t pencil out.” Is that a consideration here? When you look at new different structures and ideas to address some of the shortcomings and can we make it pencil out?
Huebner: No, no, that’s exactly the math we’re trying to run is to say, hey, can we pick up the economies of scale? In that situation, ultimately these are the last areas left to not be built. Wisconsin’s had a pretty active grant program in all those examples, it was, any broadband spaghetti that you can make stick to the wall is a good thing because that means we’re going to serve customers. BEAD is the opposite math. It is, we need to fill all the cracks that are left. In that situation, there’s a reason that those cracks are left because there wasn’t someone close enough or there wasn’t a business case there, or some of these areas were held with RDOF dollars that now have been rescinded in that situation.
It is that challenge of saying, how do we qualify for the points to win, but then how do we get happy and know that we’re going to be comfortable actually operating this company? I think, from an independence lens of a company that’s used to dealing with our customers locally, the biggest question is it doesn’t come without cost to streamline some of those operational purposes. We’re used to having a business office in all the communities we do business in, we’re used to having our team do the installs and we have a 24-hour technical assistance center that we actually wholesale to other providers. All these people are all local in that situation. Those are things that we have founded our business on.
I think as a state, we don’t want to lose that identity by saying, well, the only way we can compete is a race to the bottom, and if that’s the case, are we really producing something better than someone else in that situation? I think that’s the other challenge is, could you make a pencil? You might be able to make a pencil if the only answer is to win and make a pencil. I don’t think for us that’s the only answer. We want to do it with a certain commitment to those customers, and we don’t want the commitment to be drastically different than how we treat our existing customers across all the ILECs that are having this conversation.
Johnston: I got one more question before we go to our wrap-up session. Because I hear a lot about prevailing wage requirements related to BEAD and Made in America mandates related to BEAD. I think NTIA came out recently with a small waiver around the Made in America component, but how much of that is problematic or an issue as you look at the BEAD program?
Huebner: Some of the prevailing wage issues and just some of the administrative overhead related to wages, how you handle your employees is one of the key scoring factors in Wisconsin. That’s something that’s scary for some of the smaller companies in that situation. If you don’t have a large number of employees, there’s some of those federal rules that don’t apply to you. If this is the only reason that it applies to you, you now are taking on cost structures that have nothing to do with fiber that are going to come to bear in your operations in that situation.
For us, we’ve had to jump through some of those hoops. I think the good news is through the state grant programs and then the APRA round, more and more fiery hoops have been put in place. In the state of Wisconsin, the original grant was a couple pages long, now it’s a whole book that you have to sign for your grants agreements. We’ve gotten more and more comfortable with some of those things, but I think it’s going to drive that cost factor up because of the fact that you may incur additional administrative costs to work through those, whether those are one-time or ongoing costs, you’re going to pay higher wages, possibly in the actual build costs related to those.
Then the Made in America I think is a little bit less of a current concern because it seems like NTIA is open to working around that a little bit. Then on top of that, I think our vendors know this is a once-in-a-lifetime opportunity so they already have started making plans as soon as it started coming out to say, well, if we have to onshore certain portions of that, we can make that work.
For us as providers, I think we’ll have less options for those vendors, depending on whether they can pull that off, and we’ll have less SKUs that we’re able to pick on certain equipment because ultimately they won’t be able to bring all operations into qualifications for that.
That’s one of those other ones that. as those things shake out, it may have a really big impact. It’s definitely going to just drive up that inflationary cost just because there’s additional cost of doing business on all levels.
Johnston: Great. It makes total sense. Look, I commend you for, again, taking the “blinders off” and looking at different ways to take advantage of this once-in-a-lifetime opportunity to benefit the residents of Wisconsin. Kudos to you and for all the folks you are working with to try and figure out creative ways to take advantage of this money and get people connected because we know how important that is. Great job. Super exciting. Looking forward to seeing how this all plays out for you guys.
We’ve covered a lot, Justin, here today, but before we wrap it up, I want to just give you an opportunity to share anything that you think we should talk about or that I didn’t ask about. The stage is yours.
Huebner: No, and I thought about this a fair amount just to say, there’s people that are negative on BEAD, there’s people that are positive on BEAD. I don’t think you can be either. I guess what I’m challenging myself with is I’m hoping that the Justin 10 years from now doesn’t hate the Justin of today based on the preparations we take and if there is opportunities to be had, we want to have the ability to chase those opportunities. If those opportunities turn into a poison pill, then I’m happy for my competition to take that poison pill in that situation and we’ll refocus and figure out other ways to continue to have positive impacts on the networks that we can have those positive impacts on.
I think the really hard thing for people is there’s a lot of complexity to this. There isn’t a shoot-from-the-hip answer. People are motivated in action, and there’s this whole waiting process that we’re having to go through to get final rules and get approvals and all those things and I think that’s just hard for people. Because they don’t know whether they’re in or they’re out, and that’s just a hard mindset for people. I guess I would just encourage people to say, yes, the devil’s in the details. No, you don’t want to win something that you actually didn’t want to get, but I wouldn’t write it off.
I would take the time and effort and do your darndest right now to make sure that in retrospect, when you can play Monday morning quarterback on yourself, you did everything you could, you’re happy with what you did. Even whether it is participating in BEAD, whether it’s helping others participate in BEAD, whether it’s being a vendor for someone that’s building out BEAD, you’re going to be impacted. Lack of activity will not protect you from being impacted. Either your competition is going to get that area or someone is going to be closer to you probably than they were before. It’s taxing, but I think you got to stay engaged, and I think you got to figure out which opportunities make sense and not overreach, but still play out everything that you possibly can.
Johnston: Great stuff. Great perspective. Great insight, Justin. What a wonderful conversation, and I’m sure listeners are going to learn a lot from it. Thank you so much for making time to share your thoughts with us today. Really appreciate it.
Huebner: Well, thank you, Jeff. Like I said, thanks for the program, and hopefully, it’s helpful.
Johnston: A special thanks goes out to Justin for being on the podcast today. I love that Justin is not sitting back, throwing up his hands and saying the heck with it, this BEAD thing is a hassle and not worth it. Collaborating with other operators in the state to figure out ways to participate in BEAD is a great idea. Because often these conversations unearth ideas that otherwise wouldn’t have been discovered. And maybe Justin and some of his fellow operators determine that BEAD isn’t for them. At least they can look back years from now without regretting the decision they made. Justin’s thinking around possibly outsourcing some of his assets to operators who are participating in BEAD is interesting. It’s kind of a derivative play off the BEAD program for those who might have some idle capacity in their operations.
Hey thanks for joining me today and watch out for the next episode of the All Day Digital podcast.
