Post # 12 in USAC’s “File Along with Me” blog (referenced below) includes a brief description of the basic evaluation process for comparing vendor bids for a particular service. Experienced E-rate applicants have been doing this for years using a simple bid evaluation matrix.
The underlying assumption in the traditional bid evaluation process is that the costs being compared are for comparable services. But suppose an applicant is faced with an “apples or oranges” comparison, or worse, several bids for both. The most rational approach to the latter situation is to conduct three bid evaluations to (1) select the best apple bid, (2) select the best orange bid, and finally (3) compare the best apple bid to the best orange bid. The third comparison is likely to involve a host of different factors.
E-rate applicants exploring new fiber options in FY 2016 will be faced with a similar problem. Applicants seeking bids for any type of dark fiber (including long-term IRU leases or self-provisioned systems) must also seek — and therefore compare — bids for traditional lit fiber. There are inherent differences between lit and dark fiber systems that make direct lit vs. dark fiber bid comparisons difficult. As with “apples or oranges,” we believe that a fair comparison may require three (or more) steps in the evaluation process.
For E-rate discount purposes, both lit and dark fiber must actually be in use. The difference between dark and lit fiber depends upon whether the equipment needed to actually light the fiber is owned and operated by the carrier (“lit” fiber) or by the applicant (“dark” fiber). Costs for fiber strands held in reserve (i.e., really dark) must be allocated out of any E-rate discount requests.
From a practical standpoint, lit fiber is a complete service. It typically provides a specified bandwidth at an all-in cost (installation plus monthly recurring costs), monitored and maintained by a carrier for a 3-5 year term. Bid requests for lit fiber are generally straight-forward. Though many applicants issue formal RFPs for lit service, they are not required for E-rate.
With dark fiber (broadly defined to include fiber that is owned or leased by the applicant), there are many more variables. One vendor may provide the basic fiber and installation, often with contracts extending well beyond 5 years. Another supplier may sell the modulating equipment. A third firm may provide ongoing fiber maintenance. Other charges such as pole attachment fees may also apply. For Form 470 purposes, requests for dark fiber services require one or more RFPs.
The end result of requesting bids for both lit and dark fiber is that an applicant may receive multiple sets of bids for lit fiber and dark fiber, and potentially, in the case of dark fiber, separate sets of bids for equipment and maintenance. Each set of bids requires a separate bid analysis using the standard E-rate bid evaluation matrix (see Post #12). At a minimum, this is a two-step process evaluating both sets of lit and dark fiber bids.
A third step — one that has not traditionally been part of the E-rate process — is to compare the winning lit fiber bid to the winning dark fiber bid (or a combination of bids if the dark fiber solution involves separate components). This analysis may not lend itself to a simple evaluation matrix. Two points are particularly important.
- The time line of the two approaches must be the same. The cost of a 3-5 year lit fiber contract cannot be compared directly, for example, to a 15-year dark fiber lease. To make the two time frames compatible, under this example, it would be necessary to estimate the cost of extending the lit fiber contract over an additional 10 years, or dividing the total cost of the dark fiber lease by 3-5 to calculate the equivalent cost for the same time period.
- Total cost of the dark fiber option must be all-inclusive. In addition to equipment costs and ongoing maintenance, other factors to consider may include permits, taxes, pole-attachment fees, etc. — not all necessarily E-rate eligible. Self-provisioned or longer-term dark fiber contracts may also require equipment upgrades or “refreshes” in later years.
USAC has provided little guidance on this third step in the lit vs. dark analysis. (This may make PIA review interesting.) Two other factors regarding the dark fiber option are also up in the air, namely:
- What types of terminating equipment are considered eligible as a Category 1 expense? This is particularly important because the cost of Category 1 equipment does not count against an applicant’s Category 2 entity budget(s). The Eligible Services List for FY 2016 (DA 15-1012) defines eligible Category 1 equipment as “modulating electronics and other equipment necessary to make a Category One broadband service functional.” This is a definition which USAC is likely to define narrowly. The FCC, suggesting a broader view, declined to identify specific equipment eligibility indicating that such a list “could be unnecessarily limiting.”
- What types and costs for fiber maintenance will be deemed eligible? If Category 1 fiber maintenance follows the Category 2 models, fiber maintenance might be limited to time-and-materials type contracts or, more broadly, might permit ongoing managed service contracts. In neither case is there any precedent for what would be considered cost-effective pricing for fiber maintenance.
The best advice we can provide on these dark fiber issues is to allow as much time as possible — if possible, well beyond the 28-day minimum — for the bidding and evaluation process. Joe Freddoso, the USAC consultant on fiber systems, is reviewing Form 470s as posted, and will often offer recommendations for bid improvements and/or ultimate contract structures. We recommend that applicants take these suggestions seriously.