Don't Commit to Offering Broadband Without a Feasibility Study
Considering Offering Telecommunications Services? You Need a Feasibility Study First
Is your community or utility considering offering telecommunications services? With $65 billion of funds allocated for broadband grants in the 2021 Infrastructure Act, opportunities are available to make entry into these service areas more financially feasible. But, before jumping into this business venture, there is still due diligence that your community should do, just like starting in any new business.
Key Takeaways
A telecom feasibility study evaluates all components of building a business to provide telecom services. The study consists of these steps:
Market analysis and survey
SWOT analysis
Construction plan and cost estimate
Project funding
Expense forecast
Revenue forecast
Implementation plan
Feasibility studies should be performed by an experienced independent 3rd party to remove perceived study bias.
The feasibility study is used to make decisions on whether to implement a plan for telecom services.
The 2021 Infrastructure Act contains matching grant funds for broadband construction, i.e., the organization seeking to provide telecom service will have to provide 25% of the total project cost funding.
Is your community underserved with broadband access?
Many underserved communities do not have adequate broadband service, defined by the Federal Communications Commission (FCC) as a minimum of 25 Mbps (megabits per second) download speed and 3 Mbps upload speed.
With the 2021 Infrastructure Act, there is $50 billion of funding available to underserved communities. This is an excellent opportunity to step up broadband service in many areas.
Not to be a wet blanket or rain on the parade (or any other similar analogy I can come up with), but just because there is funding available doesn't mean a community should jump right into the application process without first doing due diligence. There are several considerations:
The Infrastructure Grant monies are matching funds, meaning that recipients will need to contribute 25% of the project costs. For most communities, this will most likely involve issuing debt that will need to be repaid by broadband customers.
After the system is built, there will be ongoing annual costs of ownership of a broadband system that will need to be funded with broadband customer rates.
These issues should not deter seeking funding, but communities should go into a potential broadband venture with their eyes wide open. This means that a systematic evaluation should be done before applying for funds. The best evaluation tool is to undergo a broadband feasibility study.
What is a feasibility study?
A broadband feasibility study is a report and process that evaluates potential system subscribers, construction costs, rates, revenues, operating expenses, staffing, a SWOT analysis, and all aspects of the potential business. The question to answer is the results if everything goes well, does not go well, and everything in-between. We'll touch on each of these in the remainder of this article.
For best results, a feasibility study should be performed by an independent consultant hired by the community. The consultant should have experience and a track record in conducting similar studies. Having an independent consultant do the study should help dispel any perceived bias in the study results.
What makes up a quality broadband feasibility study?
A comprehensive feasibility study is a business plan that should cover all aspects of the potential telecommunications business. The feasibility study should be the foundation for decisions to be made by management and the oversight body on whether to proceed in providing telecom services. The study generally contains these components:
Justifying the need for broadband services
Once the Infrastructure Act is formally implemented for the distribution of broadband funds, the funds will be distributed based on criteria of service needs. Initial eligibility for funding will be based on Broadband DATA maps provided to the Federal Communications Commission under current statutes. These maps identify served and unserved areas and will be used in defining eligible projects for funding.
If seeking to provide service, documenting this need can be used by the community as part of the funding application process.
Market analysis and survey
Even if there is a need, the number of subscribers willing to pay for telecom services must be identified. Identifying the potential number of subscribers drives the construction plan and funding, staffing, services that can be offered, and rates charged.
Conducting a survey is a method used to identify the potential market and customer penetration rates. The firm hired to do the feasibility study should have experience in conducting surveys and evaluating survey results. As part of the consultant selection process, ask them to present relevant projects and how actual subscriber results compared to their initial forecast.
SWOT analysis
A SWOT analysis evaluates strengths, weaknesses, opportunities, and threats of implementing a telecom business. It should paint a realistic and independent view of each of the SWOT areas and potential outcomes.
Construction plan and cost estimates
The construction plan will detail the infrastructure construction dollar estimate, including fiber routes, homes passed, headend costs, and other equipment needed to serve the estimated subscriber base.
Project funding
Project funding will include grants and a grant matching amount to be provided by the community. The community portion will probably entail debt funding with revenue bonds. The Infrastructure Act requires matching funding of 25% of the grant amount. So, for a $30 million telecom build-out project, $7.5 million of funding would be required to be provided by the community. The feasibility study should identify the potential source of debt funding.
As a telecom venture may be a brand new business, traditional revenue bond funding without a secondary guarantee of payment to bondholders is a common approach. What we see in many communities is that the secondary guarantor is a city utility, generally the electric utility. If this route is followed, the debt borrowed for the telecom business will count towards the electric utility's total debt capitalization (debt/total assets) and may negatively impact the electric utility's bond rating.
Revenue forecast
The study will include a revenue forecast based on the forecasted number of subscribers. The forecasted rates would be developed based on these factors:
Forecasted expenses
Forecasted debt service
Amounts had for routine capital expenditures
A factor for a return on investment
Expense forecast
The study will include an estimate of the operating and other expenses involved with providing telecom services. The main costs include:
1. Content and broadband access costs
Content and broadband access costs are purchased from providers who bundle these packages in different tiers of services and costs. Factors include subscribers and bandwidth.
2. Services delivery
Services delivery includes system hookups, maintenance, and field technical support. The study should detail staffing headcounts and levels of expertise needed to operate a telecom utility.
3. Management and administrative costs
Management and administrative costs include oversight, accounting, information technology, systems, and billing and collections of customers.
4. Sales and marketing
Sales and marketing include advertising, sales teams, customer service discounts, and other marketing costs.
5. Depreciation
Depreciation is the accounting treatment of fixed assets that are "used up" each year. For example, the cable's useful life is 20 years, so each year, 1/20th of the original installation cost of the fiber is part of depreciation expense. This amount is included in customer rates. So, in theory, after 20 years, customers will have paid for the original installed cost of the cable, and those funds could be applied towards the replacement of that cable.
6. Routine capital items
There is routine capital work done each year. This would include replacing system components, swapping out of set-top boxes, replacing fleet vehicles, and other technology. The funding for these routine replacements is through depreciation expense.
7. Debt service
Debt service is the principal and interest payments on the debt that was issued to fund the construction of the telecommunications system.
Feasibility study results
An independent feasibility study does not make a recommendation whether to proceed with providing telecom services. The report's objective is to detail all pros and cons of establishing a telecom utility, along with a financial analysis of expected results under excellent, good, average, and subpar subscriber counts.
The study is used by management and the oversight board to make final recommendations on whether to proceed to the next steps in the process – developing construction cost estimates and funding sources. Once the construction cost estimates are complete, the application process for grant funding can begin. Financial advisors should be brought on board for the preliminary steps in seeking debt funding sources.
Business planning is key to success in providing telecommunications services and sustaining the business
The journey towards proving telecom services can be winding and fraught with some blind curves and detours. But, the roadmap is the feasibility study, which, most importantly, will give a thumbs up or down indication to move ahead and then lead through establishing service. The package involved with government grant programs is up-front funds are provided to construct assets or start programs, but the grant recipients are responsible for the ongoing program operating costs. So, even if your community or utility receives funding under the 2021 Infrastructure Act to do a build-out of a fiber network, a feasibility study is needed to determine future operating costs, which must be paid by customers once the grant funds are used and telecom services are being delivered by the community.
About Russ Hissom - Article Author
Russ Hissom, CPA is a principal of Utility Accounting & Rates Specialists a firm that provides power and utilities rate, expert witness, and consulting services, and online/on-demand courses on accounting, rates, FERC/RUS construction accounting, financial analysis, and business process improvement services. Russ was a partner in a national accounting and consulting firm for 20 years. He works with electric investor-owned and public power utilities, electric cooperatives, broadband providers, and gas, water, and wastewater utilities. His goal is to share industry best practices to help your business perform effectively and efficiently and meet the challenges of the changing power and utilities industry.
Find out more about Utility Accounting & Rates Specialists here, or you can reach Russ at russ.hissom@utilityeducation.com.
The material in this article is for informational purposes only and should not be taken as legal or accounting advice provided by Utility Accounting & Rates Specialists. You should seek formal advice on this topic from your accounting or legal advisor.
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