“We actually saw a pretty sizable, almost 30% increase in prices for all of our equipment,” says Ross Petrick, GM & CEO of Garretson, South Dakota-based, Alliance Communications. Speaking at the 2022 Independent Show, Petrick explains some of the financial challenges of expanding broadband to unserved households in rural South Dakota.
At almost $7,700 per household (2020 figures) to cover 23.28 square miles and 413 households, the broadband business model does not make sense without some sort of support, even for a non-profit cooperative like Alliance Communications.¹ Petrick describes how they were able to make the model work through a combination of state and federal funding along with a 50% match from Alliance.
A funding anchor for this broadband initiative is the $1.5M grant from the second round of the USDA’s ReConnect Program. Although the USDA grant was awarded in October, 2020, Petrick indicates that different issues, such as sorting through different rules for state and federal programs, environmental reviews, and Buy American clauses held up approval until June 2022.
In the meantime, inflation hit, greatly impacting the price of some of the equipment and materials Alliance needs to complete the project. Petrick paints a picture of a supply-chain that still has long lead times and pricing that isn’t determined until product delivery. The uncertainty associated with the supply-chain makes planning and budgeting extremely difficult.
Like the shrinkflation in the aisle of a grocery store, the USDA’s solution was to shrink the size of the project to fit the almost $3.2M budget. Petrick calls this approach unfair to those who would remain unserved. He indicates that they are exploring how to use new funding efforts (e.g., BEAD) to fill in the gaps.
One challenge with introducing these new funding mechanisms is navigating the unique rules associated with those programs. For instance, rules to safeguard against double funding of a given area and/or to prevent funding of an overbuild of an existing broadband area, could essentially eliminate this project for consideration in one of these new programs.
In a follow-up email, Petrick stressed that Alliance is unwavering in its commitment to serve all the households in the project area, regardless of whether additional support is available. Petrick wrote:
“We just decided to keep the scope the same and effectively make a 50% grant project a 37% grant project by footing the bill for the increase. SO, we are not covering less customers but kept the same project scope and just covered the increases in cost for this project. The scope of the project remains the same but our equity portion went up for this project as inflation rises.”
Having converted its network to fiber-to-the-home for its cooperative owners approximately a decade ago, the 65+ year old Alliance Communications has the know-how, experience, and grit to overcome the challenges it faces in completing its latest project to bring broadband to the unserved.
¹ To put this in perspective, this area is about half the size of the city of San Francisco with 1/2,000 the population. $7,700 per household is derived from $3.176 million divided by 413 households based on 2020 data from the USDA’s website.
With the cost increases being shouldered by Alliance, the total project cost is closer to $4.3M, as the $1.588M federal contribution now only accounts for about 37% of the total project. From a per household perspective, the total cost in 2022 dollars is greater than $10,000 per household passed.
These figures are just for the upfront construction of the fiber infrastructure and do not include the cost of operations, maintenance, and future upgrades. To put tge upfront costs in perspective, the Idaho Falls Fiber Network, an open access fiber network that serves the city of that name, charges a $25 monthly fee to pay for the basic infrastructure, while connection to the Internet is a separate, additional charge from the ISPs that are part of their network.
If there were no federal support for Alliance’s project and if the $7,700 to $10k costs per household were spread out with a $25/month infrastructure fee, like the relatively urban Idaho Falls Fiber Network, it would take between 307 to 400 months (25 to 33 years) to pay back the cost of the infrastructure. Of course, this doesn’t account for inflation and assumes 100% of the passings turn into subscribers.