On July 1, 2009, the U.S. Departments of Commerce (NTIA) and Agriculture (Rural Utilities Service or "RUS") jointly released their much anticipated Notice of Funds Availability ("NOFA"), which establishes a complex set of application requirements for broadband stimulus funding, and importantly, the criteria to be used by these agencies for evaluating applications for funding in the first of three cycles of stimulus funding. As previously reported in our client alerts, NTIA and RUS were appropriated $7.2 billion by Congress under the American Recovery and Reinvestment Act of 2009 ("Recovery Act") for broadband initiatives. Congress required NTIA and RUS to develop funding procedures for these broadband initiatives, and also to define key terms in the Recovery Act governing the broadband stimulus spending. The 121-page NOFA undertakes that charge. Here are some of the highlights.

$4 Billion for First Cycle of Stimulus Funding

NTIA allocated $1.6 of its $4.7 billion in Stimulus funds to this first cycle NOFA. RUS allocated $2.4 billion of its $2.5 billion. Future NOFAs will be issued in 2010 governing a second and third cycle of funding. The first cycle funds are broken down as follows:

NTIA - $1.6 billion in Grants

--$1.2 billion for Broadband Infrastructure

--$150 million for Sustainable Broadband Adoption Projects (i.e. broadband education, awareness, training, access, equipment or support, "particularly among vulnerable populations")

--$50 million Public Computer Center (i.e., expand computer center capacity at community colleges and public libraries)

--$200 million for a national reserve to augment any of the above.

RUS - $2.4 billion in Loans and Grants

-- $2 billion for (a) Last Mile ($1.2 billion) and (b) Middle Mile ($800 million) Projects

-- For Last Mile Projects, $800 million is available for loans or loan/grant combinations for "non-remote" projects and $400 million in grants for "remote" projects (an unserved rural area 50 miles from the limits of a non-rural area)

-- $325 million "National Reserve" to augment the above.

The Application Process

Most critical is that applications are due no later than August 14, 2009 at 5 p.m. ET, less than six weeks after issuance of the NOFA. This timing favors existing rural broadband providers who have an advantage in preparing their applications because of their greater familiarity with unserved and underserved rural areas. The application process with be a "Two-Step Review Process". Step One will be an initial evaluation phase in which applications are reviewed by three expert reviewers. Applications will be screened for application completeness and scored against objective application criteria.

RUS application evaluation criteria will include: project purpose (proportion of rural residents served in unserved areas), project benefits, project viability, and project budget and sustainability. NTIA grant application criteria include: 1. project purpose (fit with statutory purposes; other Recovery Act program collaboration such as with DOE Smart Grid Investment Program; enhanced service for health care delivery, education and children; and socially and economically disadvantaged small business); 2. project benefits (such as cost effectiveness, broadband performance, affordability of services, and nondiscrimination, interconnection and choice of provider benefits for last mile projects; and for middle mile projects, impact on the area, level of need in the area, capacity of the proposed network, affordability, and nondiscrimination, interconnection and choice of provider).

By October 15, the “most highly qualified" applications will advance for the "Due Diligence" or Step Two phase of consideration, to validate the applications. Additional information will be requested from applicants supporting the application. States will also be provided an opportunity to make recommendations during Step Two, in which the Governor of each state will have 20 days to provide NTIA and RUS a prioritized list of recommended projects, and how they meet the state's greatest needs. RUS and NTIA will announce awards, on a rolling basis, "starting on or about November 7, 2009."

Application forms will be posted on http://www.broadbandusa.gov. All applications for grants over $1 million must be submitted electronically.

Funds Initially Weighted to "Rural" Projects to be Administered by RUS

The NOFA requires that all rural area broadband infrastructure project first be considered by RUS. $2.4 billion of loan and grant money (with substantially more loan than grant funds available) is being made available by RUS in the first round. The NOFA specifies that any application for projects in an area that is at least 75 percent "rural" must be submitted to the RUS program. "Rural area" is defined in the NOFA as "any area, as confirmed by the latest decennial census of the Bureau of the Census, which is not located within: 1. a city, town, or incorporated area that has a population greater than 20,000 inhabitants; or 2. an urbanized area contiguous and adjacent to a city or one that has a population greater than 50,000 inhabitants." (Emphasis added). "Urbanized area" means a "densely populated territory as defined in the latest decennial census of the U.S. Census Bureau". Clearly, ready access to GIS server Census block data will be needed to identify qualifying rural areas.

Significantly, unlike the NTIA "BTOP" program, RUS will only make grant-only awards for "remote" unserved areas that are at least 50 miles from the limits of a non-rural area. For non-remote areas, loans and loan/grant combination awards will be made, but loan/grant combinations will have no more than a 50 percent grant component. RUS applicants may also submit funding applications to NTIA (requiring that they meet additional application criteria), but NTIA will only consider such applications for BTOP funding if RUS rejects the application.

Projects in "Non-Rural" Areas Must be Submitted ONLY for NTIA Funding

Applications to fund broadband infrastructure projects in areas that are less than 75 percent rural "must" be submitted to NTIA. Projects will be funded that deliver broadband service through "Last Mile" or "Middle Mile" facilities to unserved and underserved areas. "Unserved," and particularly, "underserved" areas are purposely defined quite broadly, to qualify as many areas of the U.S. as possible for broadband infrastructure projects:

unserved area - an area, "composed of one or more contiguous census blocks, where at least 90 percent of households in the proposed funded service area lack access to facilities-based, terrestrial broadband service, either fixed or mobile, at the minimum broadband transmission speed."

underserved areas -

(a) Last Mile Projects - an area "composed of contiguous census blocks that fall into one of several categories: (1) no more than 50 percent of households have access to facilities-based terrestrial broadband at greater than the minimum broadband transmission speed; (2) there is no fixed or mobile broadband provider advertising service with speeds of at lest 3 megabits per second downstream; or (3) the rate of broadband subscribership in the area is 40 percent or less. The minimum broadband transmission speed is defined as at least 768 kilobits per second downstream and at least 200 kbps upstream to end users. For middle-mile projects, broadband is defined as "providing sufficient capacity . . . to support the provision of broadband service to end users."

(b) Middle Mile Projects - "Middle Mile" projects must be for an area "of one or more contiguous census blocks" where one interconnection point terminates in a census block area(s) that qualifies as unserved or underserved for a Last Mile project. The predominant purpose of middle mile projects would not be to provide end user services, and would include interoffice transport, backhaul, Internet connectivity, or special access.

"Highly responsive projects" (i.e., meeting application criteria) will need to be technically feasible, sustainable (i.e. offer a plan for the project to recover its ongoing operating costs from revenues for future services) and scalable, and offer substantial benefits to unserved and underserved areas relative to costs. Technical feasibility of projects will "at minimum" require applicants to "submit a system design and project timeline, certified by a professional engineer, for any project requesting funds over $1 million."

CAVEAT - Typically applicants for NTIA Last Mile infrastructure projects "must" provide service to the entire territory of each census block included in the funded service area unless the applicant can provide a "reasoned explanation as to why providing coverage for an entire census block is infeasible." Inability to meet this requirement could create difficulties for non-broadband ISP applicants that intend to provide "last mile" access to non-residential customers, such as strategic institutions like health care facilities, schools or other key institutions. This requirement may inhibit applications for last mile infrastructure grants other than by broadband providers that can commit to provide service to the entire territory of a census block, when even existing terrestrial broadband providers do not. It may also favor wireless broadband solutions given cost limitations and substantial buildout completion deadlines within two years of a grant.

Additional Factors Required of Applicants for Broadband Stimulus Funding

* "Broadband" service must be offered as defined in the NOFA - i.e. two-way transmission speed must be offered of at least 768 kbps downstream and at least 200 kbps upstream to end users or sufficient capacity in a middle mile project to support "broadband" service to end users.

* Commitment to Nondiscrimination and Interconnection Obligations -

(1) adherence to the FCC’s Internet Policy Statement; (2) not favor certain lawful applications and content over others; (3) describe and display any network management policies; (4) connect to the public Internet and not be an entirely private closed network; and (5) offer interconnection, including the ability to connect to the public Internet and physical interconnection for traffic exchange.

* Eligible Costs - Stimulus funds can only be used to pay eligible costs, which must be reasonable, allocable and necessary to the project.

* Buy American" - On June 19, 2009, Commerce Secretary Locke granted a partial waiver of the Buy American provision of the Recovery Act with respect to certain broadband equipment that was found difficult to source competitively in the United States (such as switching equipment, but not fiber cable). A waiver with respect to other equipment can be requested on a case-by-case basis.

In-kind Contributions Can Qualify Under 20 percent Match Requirement for NTIA Grants

Awardees of NTIA grants will be required to provide matching funds of at least 20 percent toward the total eligible project cost, subject to a waiver request on a showing of financial need. In-kind (or non-cash) contributions to a project, such as provision of network facilities or services, "may count toward satisfying the non-federal matching requirement of a project's total budget" but "must be allowable project expenses" that will be accepted it they meet the eligibility criteria under other existing federal rules governing grant awards providing for cost sharing or matching. See, 15 CFR Sections 14.23(a), 24.24(a).

For Profit Corporations Are Eligible for Broadband Stimulus Funding

Though not specified as eligible entities under the Recovery Act, the NOFA states that it is in the "public interest" to allow for-profit corporations and other organizations not explicitly encompassed in the Recovery Act to be eligible for broadband stimulus funding. This finding is a victory for for-profit broadband ISPs who urged this outcome.

Additional clarifications and interpretations from NTIA and RUS are expected. Interested broadband stimulus funding applicants are strongly encouraged to obtain legal and technical advice regarding compliance with the NOFA requirements. The NOFA rules and application requirements are both legally and technically very complex. For example, even on an information level, it will be very difficult to obtain authoritative data to demonstrate that the broadband access and subscribership thresholds for "underserved" or "unserved" areas have been met. Also, first cycle applications --particularly for last mile infrastructure projects-- may prove difficult for all but a limited few of existing providers who are most familiar with the census block areas.