Bartlett Brief

The Best Bet on FirstNet

Opting in is less risky for New Hampshire
December 19, 2017

 

On December 7, Gov. Chris Sununu announced his intention to have New Hampshire opt out of the First Responder Network Authority (FirstNet).  In theory, opting out of FirstNet would give the state greater control over its first responder radio network, a factor the governor mentioned in his announcement.  Unfortunately, because of the way FirstNet is legally structured, opting out creates numerous financial and operational risks for the state.  Given the risks that would be incurred by opting out — and only by opting out —  New Hampshire’s best choice is to opt in.  This remains a possibility because the Executive Council has to approve the final contract.

Formed by Congress to fulfill the final recommendation of the 9/11 Commission report, FirstNet’s mission is to create a nationwide broadband network so first responders will have a reliable and secure communications system from coast to coast.  An independent authority in the National Telecommunications and Information Administration (NTIA), FirstNet has contracted with AT&T to build its nationwide broadband network.  States that opt in will have their networks built by AT&T and funded by FirstNet and AT&T.  States that opt out will be legally responsible for building their own networks that meet FirstNet’s coverage requirements and are interoperable with the national network.

There is no financial risk to New Hampshire of going with FirstNet.  The FirstNet Opt-Out Review Committee’s report to the governor provides a good overview of the risks New Hampshire would shoulder should it opt out.  There are 5 points at which the state’s opt-out plan can trigger penalties or other financial risks.

1. The state could fail the Federal Communications Commission’s review of the state’s Radio Access Network (RAN) interoperability.  The risk of failing this first review is considered small, and FirstNet can require AT&T to build a state’s network if it fails this first test.
2. The state could fail the NTIA review that follows the FCC review.  At this stage, states apply to lease the spectrum from FirstNet and can apply for a grant.  As the FirstNet Opt-Out Review Committee noted, “unlike at the FCC level, there is no language in the Act providing for FirstNet to build out the network in the State if the State’s alternative plan fails to pass the NTIA review for funding and achieving a spectrum lease.”
3. After NTIA approval, the state would have to enter into a spectrum manager lease agreement (SMLA) with FirstNet.  The state would lease the spectrum from FirstNet.  A state that opts out would be financially responsible for making those lease payments.
4. The SMLA contains targets that a state would have to meet for first responder adoption and participation.  If those targets are not met, a state would be obligated to make “disincentive payments” to FirstNet.
5. If the state terminates the contract or FirstNet terminates it for cause at any time during the 25-year term of the SMLA, the state would be obligated to pay FirstNet the full cost of building the state’s RAN.  FirstNet’s CEO testified that the bill would cover the actual cost of building out the state’s network, which could total more than $600 million in the worst case scenario.

New Hampshire has chosen Rivada Networks to build the state’s RAN should the opt out become final.  Rivada is a new company that has never built a RAN.  It would have to build an entire network from scratch.  Where it does not build its own towers, it would lease space on another network’s towers.

Rivada proposes to finance its RAN construction and operation through dynamic spectrum arbitrage.  It intends to borrow the money to build the network, then sell the network’s surplus bandwidth on the wholesale market.  It would simultaneously be paying for the bandwidth while trying to sell it.

Rivada says this poses zero risk to New Hampshire because the demand for this bandwidth is so high and because the entire project will be bonded.  In theory, even if the company goes under or otherwise fails to meet its contract obligations, the bonds will protect New Hampshire by ensuring that the costs are covered.

For good reason, the state’s FirstNet Opt-Out Review Committee did not appear convinced that Rivada’s proposed measures for mitigating the risk to New Hampshire were satisfactory.  In addition to the confidential risk mitigation measures recommended by the state’s outside bond counsel, the committee recommended 13 additional conditions for any contract with Rivada.

Rivada’s proposal presents very real risks for New Hampshire.  If this untested business model fails, New Hampshire could be on the hook for hundreds of millions of dollars.  Beyond the financial risk, there are public safety concerns.  If Rivada is slow to complete its network or if the network fails, first responders will be left without a reliable, secure means of communicating.

By contrast, AT&T already has a network in New Hampshire that includes more than 300 towers.  It is reasonable to expect that it will be able to complete its network more quickly.  AT&T also operates on a proven business model that suggests it is less of a failure risk over the 25-year term of the SMLA.  Under the FirstNet contract with AT&T, the financial risks are borne by AT&T.  If AT&T fails to meet the terms of its contract, the company, not the state, would be fined.  By contrast, if New Hampshire opts out, the taxpayers are ultimately responsible for the costs if, for whatever reason (another recession, weak demand for bandwidth in rural New Hampshire, etc.) Rivada and its bond holders cannot cover them.

At the end of the FirstNet Opt-Out Review Committee’s public report (the bulk of its report was confidential), it concluded: “Pursuit of an alternative plan presents legal and financial risks to the State of New Hampshire.”  The seriousness of those risks cannot be precisely determined without access to information that remains confidential under the state’s Right to Know law.  But it is safe to say that the state takes on those potentially substantial risks only if it opts out of FirstNet.  For that reason, opting in is New Hampshire’s safest option.