Governors likely will be missing key FirstNet data point, making opt-out decision even more precarious

Conventional wisdom says that only “plus” states should consider the opt-out option—after all, they can generate plenty of revenue to pay for the RAN and its operations. In fact, some states and territories can work with vendors to generate much more revenue than they need for the RAN, and there’s little doubt that state officials would like to get their hands on this revenue.

But FirstNet’s legal staff has indicated that this “excess” money generated should go to FirstNet, so the funds can be reinvested into the nationwide network, including in the “minus” states. In addition, if this calculation were made precisely, there would be no financial reason for a governor to have his or her state opt out.

In its RFP, FirstNet wisely did not try to set the value associated with each state and territory. That is the job of the selected contractor. In its RFP response, each offeror team will assign a value to each state and territory in a spreadsheet that determines how much money the contractor would pay FirstNet.

Offeror teams responding to the FirstNet RFP may value states very differently, based on a number of factors. For instance, an offeror team with a carrier partner that has strong spectrum holdings and excellent market share in New York may value the state differently than an offeror team with a carrier partner that believes it has been unable to compete in the lucrative New York City market because it lacks the necessary spectrum to serve as many customers as it would like. Other factors, such as perceived growth opportunities and access to backhaul assets in the state, could impact the offeror team’s value for a state.

Overall, the winning offeror team—the contractor—must agree to pay FirstNet a minimum of $5.625 billion over 25 years for the nationwide deal, according to the RFP (of course, FirstNet hopes the contractor will agree to pay more). However, if a “plus” state opts out, the contractor would subtract the assigned value for that state—the value established by the contractor in its winning RFP bid—from its payments to FirstNet.

If the contractor complies fully with the terms of the RFP, this contractor-to-FirstNet payment represents the only source of revenue that FirstNet would receive to maintain its operations. As a result, FirstNet would need to have the opt-out state pay FirstNet at least as much money as the contractor had promised to pay, if the governor had accepted the contractor’s state plan. (Some would argue that the opt-out state should pay at least a little more, because there may additional overhead costs associated with coordinating the actions of an opt-out state.)

But here’s the rub: the governor will not know what value the contractor assigned to his state or territory when the opt-out decision has to be made. In fact, the governor may never know.

In other words, the governor will not know what payments his/her state will have to make to FirstNet at a minimum to ensure that FirstNet has the operating revenue it needs to be sustainable, based on the contractor’s RFP response.