Note: USAC announced a special webinar entitled Introduction to Fiber and Special Construction to be held Thursday, November 19th, from 3:00 – 4:15 pm EST. This webinar will cover many of the topics discussed in the following article.
Fiber Options, Form 470s, and RFPs:
The FCC’s second E-rate Modernization Order (FCC 14-189), released last December, dramatically increased E-rate support options for new fiber system builds. In addition to continuing to support traditional lit fiber as a service from a carrier, the second Order:
- Equalized the treatment of special construction charges for dark fiber systems.
- Explicitly acknowledged the eligibility of long term fiber leases via IRUs (indefeasible rights of use).
- Permitted the ownership of (i.e., “self-provisioned” or “self-constructed”) fiber systems.
- Included funding for the purchase and installation of “modulating equipment,” broadly defined, as a Category 1 service (thus removing such equipment costs from the budgetary limitations of Category 2).
Although the new rules provide much greater flexibility to applicants in choosing fiber solutions, the trade-off (or challenge) to applicants selecting fiber solutions is to show that their choices are the most cost-effective. Specifically, the rules state that “…if a school or library intends to seek support to lease and light dark fiber, the school or library must also solicit proposals to provide the needed services over lit fiber over a time period comparable to the duration of the dark-fiber lease or IRU.” Similarly, self-provisioned fiber is deemed eligible only under “…limited circumstances when it is demonstrated to be the most cost-effective solution” — again, presumably, when compared with alternative dark and lit fiber systems.
E-rate procurement rules have always required applicants to conduct fair and open competition among potential bidders for eligible services. The new fiber rules, as well as less formal guidance of a “best practices” nature, take this requirement several steps further in an effort to assure fair comparisons between different types of fiber services — be they lit, dark, leased, or self-provisioned. The following points should be noted:
- The new rules explicitly state that “…if an applicant intends to request support for equipment and maintenance costs associated with lighting dark fiber, it must include these elements in the same application as the dark fiber so that USAC can easily review all costs together.”
- The fiber presentation in USAC’s fall training workshops stresses that “applicants must be prepared to explain their assumptions, such as expected useful life,” when comparing alternative fiber solutions. Cost comparisons must include all recurring and non-recurring expenses (e.g., pole attachment fees, construction licenses, etc.).
- For fiber systems of any size and complexity, USAC has advised that “potential bidders need more time to respond to these bids” — i.e., more than the minimum 28-day Form 470 posting requirement.
- Although the rules do not specifically mandate formal RFPs, it is clear that USAC expects applicants to provide detailed network requirements. For any WAN services other than lit fiber, the new EPC version of the Form 470 requires applicants to upload RFPs — in our view, the more detailed the better.
Sample Form 470s and RFPs:
As a guide to applicants requesting bids for fiber services, it may be useful to review a few previously posted Form 470s for lit, dark, and/or self-provisioned fiber. Three good examples, which have been informally cited in presentations by USAC and/or the FCC, are listed below.
Please note the following:
- The links provided above are to the non-EPC versions of the FY 2016 Form 470s and to one or two of the key RFPs associated with each filing. Access to all RFP documents associated with these Form 470s is available via the non-EPC search results display (see USAC’s latest News Brief referenced below) or, better still, directly from the Form 470 displays within EPC.
- Two of these Form 470s were modified after their initial posting dates by uploading additional RFP documents. Such updates are encouraged — as long as they don’t change the underlying nature of the services requested — to provide more information (such as answers to bidder questions).
- Each Form 470 lists separate service requests for “Dark Fiber” and “Lit Fiber Services.” The Caddo Parish Form 470 also lists “Self-provisioning.” Comparing alternative approaches is a critical part of the procurement process, particularly if a non-lit solution is ultimately selected. Comparisons must reflect all relevant service costs over time.
- USAC and the FCC have largely ducked the timeframe issue, leaving it up to the applicants to determine appropriate periods of comparison. Including renewals, the sample RFPs noted specific contract terms of 10–15 years. Arguably, electronic equipment may have to be updated more frequently, while the life of the fiber may be 20 years or more.
- Two of the sample RFPs specify numbers of fiber strands required for non-lit services. Actual installations would likely involve fiber cables with unused strands, but E-rate will support only actual usage within the first year of service. E-rate will fully cover most costs of installation, such as trenching, regardless of the number of strands in the fiber cable. Technically, excess strands in a fiber cable may be ineligible, but USAC has provided informal guidance suggesting that a 12-strand fiber, rather than a fiber with lesser strands, may be more economic and, thus, fully eligible.
- All the RFPs stress the importance of network reliability. This can be a touchy subject from an E-rate perspective because reliability is a function, not only of the fiber and the electronics, but of network design. E-rate does not support “redundant” circuits, but some degree of alternate routing between major network nodes appears to be acceptable. The Caddo Parish RFP, for example, addresses both point-to-point and ring topologies. The Amphitheater RFP considers both “hub and spoke” and “mini-hub” architectures. We particularly liked Amphitheater’s stated goal of a “resilient” solution, using an adjective we expect to hear more often with respect to E-rate eligible networks.
Recurring vs. Non-Recurring Cost Issues:
One interesting issue we did not see addressed explicitly in these Form 470s and RFPs is the trade-off between recurring and non-recurring charges. Generally, the higher the installation charge for a new telecom system, the lower the monthly charge. This is an element that, under the FCC’s new fiber rules, needs to be reexamined.
Earlier FCC rules for large network deployment were biased against high installation charges. For E-rate invoicing purposes, pre-discount installation charges of $500,000 or more had to be amortized over a period of not less than three years. Effectively, that amortization requirement led to higher recurring charges, at least during the first three years.
The new FCC rules, effective FY 2016, represent a complete reversal of its earlier position. If not quite explicitly, the FCC’s rules now encourage high installation charges as a means to lower ongoing recurring service charges. In particular:
- Installation charges of any magnitude are now eligible for discount as incurred. The $500,000 or more amortization requirement is no more.
- Although the discounted portion of an installation charge may be recovered in the first year, the rules permit the applicant’s non-discounted portion to be paid off over a four-year period. This is clearly designed to encourage applicants to lean towards contracts with higher installation charges. It is the first time that FCC rules have departed from the basic concept that an applicant’s non-discounted share of any product or services must be made in the same timeframe that discount payments are made.
Note: One important proviso of this change is that the applicant must explicitly request bidders to accept payment over time of its non-discounted share of the installation charge. When requesting fiber services, the new EPC version of the Form 470 includes a special section in which the applicant can select installment payments over 0–4 years (e.g., see the Amphitheater Form 470). Vendors are under no obligation to offer multi-year payment plans.
- E-rate will provide an additional discount on fiber installation charges — but not on recurring charges — of up to 10% if matched by funding from the applicant’s state. As an attractive example, an applicant with a nominal discount rate of 80% would pay no part of a $1 million installation charge if the state would contribute $100,000 (i.e., 10%). In this case, E-rate would be paying the remaining $900,000 (i.e., 80% + 10%). The FCC has done this, in part, to encourage states to become more actively involved broadband deployment for their schools and libraries.
Note: We understand that five or six states already have, or are actively developing, funding programs that will meet the FCC’s matching criteria. Formal identification of these programs is apparently pending USAC and FCC review.
We recommend that applicants undertaking new fiber procurements include explicit language in their RFPs seeking alternative combinations of recurring and non-recurring charges. Care will be required to compare consistent pricing during the bid evaluation process, but the extra effort should yield long-term benefits.