Pennsylvania hearing focuses on financial risks associated with FirstNet ‘opt-out’ alternative

Pennsylvania would pay almost $1 billion during the next 25 years to lease 700 MHz spectrum from FirstNet under an ‘opt-out’ scenario and likely would be obligated to pay billions more if its opt-out vendor is unable to meet all FirstNet technical and operational requirements in the future, according to panelists speaking yesterday during a state hearing.

Diane Stackhouse, director of the Pennsylvania State Police’s Bureau of Communications and Information Services and the state’s FirstNet single point of contact (SPOC), said that an “opt-in” decision—accepting the FirstNet plan for Pennsylvania, to be built by AT&T—represents a “low-risk option” for the state. Stackhouse noted that an “opt-in” decision would requires no state funding for building, maintaining or upgrading the public-safety LTE radio access network (RAN) within the state’s borders for the next 25 years.

In contrast, an “opt-out” decision would make the state responsible for the RAN in Pennsylvania for the next quarter century. Stackhouse said the state has received alternative-RAN proposals from three bidders but declined any other comment about the ongoing procurement process.

No matter what vendor might be selected, an “opt-out” would include certain financial obligations, Stackhouse said. One key expense would be the payments to access the 20 MHz of 700 MHz spectrum licensed to FirstNet, which would total “almost $1 billion” in a spectrum manager lease agreement (SMLA) over the 25-year period.

An “opt-out” decision by Pennsylvania also would expose the state to potential financial penalties, according to sources. Notably, the state would be required to meet public-safety-adoption targets or pay financial penalties, in a similar manner as AT&T would if the state makes an “opt-in” decision.

“The SMLA is required by FirstNet’s enabling statute to ensure that an opt-out state’s RAN is sustainable and supports the nationwide public-safety broadband network,” according to a FirstNet statement provided to IWCE’s Urgent Communications. “The SMLA terms and conditions are fair and balanced to ensure the state’s network is self-sustaining for 25 years and are in parity with the terms and conditions that FirstNet’s nationwide contractor is expected to meet in opt-in states.”

But these costs could pale in comparison to the potential fee that Pennsylvania would pay if its “opt-out” effort were to fail, whether the reason was vendor bankruptcy or subpar RAN performance within the state. In California, an official last week revealed that the opt-out-termination fee for that state would be $15 billion, while the figure for Vermont has been reported to be $175 million.

While the details of the opt-out-termination penalties are not known, sources indicate that the figures are designed to provide FirstNet with enough money to reconstitute the public-safety LTE network in a state, if its “opt-out” plan is not successful. In addition, the opt-out-termination fee would be different, based on when a failure would occur—for instance, the financial penalty for an opt-out failure in year 23 of the 25-year deal would be smaller than it would be for a failure in year 8, according to sources.

No speakers during hearing indicated they knew how much Pennsylvania’s opt-out-termination penalty would be. However, given Pennsylvania’s population and geographic size, Pennsylvania state Sen. Randy Vulakovich estimated that it could be about $5 billion, which would be very concerning to state officials.

Declan Ganley—CEO of Rivada Networks, which is one of the alternative-RAN bidders in Pennsylvania—said state officials should determine exactly what Pennsylvania’s opt-out-termination penalty would be and consider working with other states to get the fees reduced or eliminated entirely. However, if the opt-out-termination penalty remains in place, the state would not have to pay it, if Rivada Networks were chosen as the alternative-RAN vendor, he said.

“Let’s say the number, for argument’s sake, is $5 billion—none of us know what the number is, it’s a secret number right now,” Ganley said. “What we would then have to satisfy you, I would suggest, is that—in the case that this happens—we have insured that risk and that risk is underwritten to the point that, in the highly unlikely event it took place, that you get that money from our insurers.”