An Economic Analysis of Opt-In/Opt-Out : Termination Payments

FirstNet was created to establish a Nationwide Public Safety Broadband Network (NPSBN) to provide reliable, modern and interoperable communications to first responders. Every Governor has the right to “opt-out” of the FirstNet plan for his or her state and develop an alternative plan for the radio access network of his or her state. FirstNet has sought to require opt-out states to pay a “Termination Payment” of up to the entire cost of a greenfield build in that state “in its sole discretion” if it determines that a state has failed “to complete the build of the State Built RAN or fails or ceases to provide any of the Public Safety Services to the Public Safety Entity users on the Band 14 at any time.” Based on a very limited number of available figures, these Termination Payments likely total some $124 billion nationwide. These Termination Payments have three major flaws: i) they contravene the law, ii) they seem unreasonably disproportionate to all available cost estimates, iii) they betray basic economic sense by omitting the revenues that the NPSBN can generate from both public safety and commercial users.A maximum termination payment would consider at most: i) the cost of re-procuring a new contract, ii) the difference between the disbursed grant and the value of the network effectively deployed, and ii) the potential lost profits due to a shorter contract. This establishes a maximum termination payment of $14.6 billion nationwide. A reasonable termination payment would not consider the potential lost profit because potential profits are deemed speculative and are generally not counted in actual damages. This establishes a reasonable termination payment around $2.8 billion for all states nationwide, with each state only a fraction of that total