Let the stimulus challenges begin!

If you thought there was a frenzy over federal broadband stimulus funding before, the next few weeks may prove even crazier.

As of Monday night, the industry is in the 30-day period in which incumbents can challenge applications for funding that involve census blocks within their footprint. Based on what some experts are saying here at the 2009 FTTH Council Conference and Expo in Houston, this challenge period could be very interesting.

The maps, showing which census blocks are involved in applications now pending before the Rural Utility Service and the National Telecommunications and Information Administration, were published Monday night, said Tom Cohen, attorney with Kelly Drye, legal counsel to the FTTC Council and former FCC staffer who headlined a discussion on the federal broadband stimulus Tuesday.

“There will be many challenges,” Cohen said Tuesday. “There are situations where [applicants] are saying, ‘This is an underserved area,’ and incumbents are saying, ‘We’re already there.’”

It would seem to be a straightforward matter: Is broadband service available in a given census block or isn’t it? But does advertising a service in a given area mean it’s available? In the case of rural areas, broadband service may run into distance limits such that broadband can be available in a neighborhood but not to every house. Census blocks are the smallest geographical unit used by the US Census, and there are 82 million of them – many uninhabited. Urban census blocks can correspond to actual blocks, but in rural areas, census blocks are geographically much larger.

At Cohen’s session, one audience member said his company had gone door-to-door in the census blocks it is claiming are underserved before filing its application, and he hopes any challenger would have to do the same thing – a comment which drew laughter.

Geoff Burke, senior director of corporate marketing at Calix, said it’s his understanding that incumbents can challenge based on meeting any one of three criteria: 40% penetration of broadband, an advertised 3 megabit-per-second service or broadband passing 50% of homes in the census block.

“From what we are hearing, most people are focusing on the 40% penetration because it’s the easiest one to defend,” Burke said.

Speculation in Cohen’s audience was running high, however, that some incumbents had suddenly started advertising 3 Mb/s service in new areas, to meet the challenge criteria.

Cohen reminded the audience that the RUS and NTIA folks are “good people tackling a very difficult job.” He added, however, that RUS actually made its own job harder by deciding to use its $2.5 billion in stimulus funding to actually subsidize $7 billion in loans for a total of $9.5 billion in funding, rather than make outright grants. Because rural applicants have to first go through the RUS process before going for NTIA funds – which will be mostly grants, not loans – rural companies that can’t make their projects work with a loan were forced to file applications with both RUS and NTIA.

Some 830 applications sought both RUS and NTIA funds (known as BTOP and BIP) funding respectively, and Cohen believes many of those applications are from companies that hope to quickly fall out of the RUS process and qualify for the NTIA’s BTOP funding.

Cohen credits RUS with having a “tighter” scoring system than the NTIA, based on having more experience issuing grants and loans, but he said the FTTH Council opposed the idea of using the stimulus money to subsidize loans rather than provide grants because it places a heavy burden on the most rural of applicants. And those are the companies that most need federal funding, because they serve areas where it’s too expensive for private commercial interests to make money on broadband.

There is also some indication that if an application is successfully challenged on even one census block, the entire application could be thrown out, Cohen said.

That’ s why he’s advising anyone who already applied to go back and look at their application and see what can be tightened up or improved, whether it’s adding partners such as health care and education authorities or documenting the degree to which an area is unserved or underserved.

Not only will that best prepare applicants for what’s to come after the comment period – which is the due diligence period – but it’s also likely to help applicants who don’t succeed in this round of funding to be ready for the next round – which is now expected to be a single round of funding in 2010, not two additional rounds.