Maximizing the Potential Benefits of E-rate Special Construction Reimbursement in Light of Potential Program Changes

The changes in Washington DC in January, as a new presidential administration takes office, may bring changes to the E-rate program.[1] In brief, E-rate reimbursement for special construction charges may not survive through the incoming administration, and E-rate funding in general may be reduced. To hedge against these potential changes, public entities that can benefit from the E-rate program should act now to secure those benefits in the coming funding cycle.

This memo outlines the opportunities for E-rate reimbursement of fiber construction charges—and explains why both service recipients (school districts and library systems) and potential public sector service providers (like city and county governments) should act quickly to capitalize on the program in the next funding year.

Benefits of E-rate Special Construction Reimbursement

For schools and libraries, an E-rate procurement that includes investment in fiber optics can:

  • Ensure the long-term affordability of network connectivity required to meet growing broadband needs.
  • Hedge against potential increases in price in broadband services.
  • Help school and library facilities reach federal broadband connectivity goals as defined by the most recent E-rate modernization order.
  • Protect against potential reductions in, or elimination of, federal E-rate funding over time.

For local governments that serve their schools and libraries as an E-rate service provider, the special construction reimbursement can be a means to build out a public sector fiber network with significant federal funding. This assumes, of course, that the local government participates in the competitive bidding process (i.e., responds to the school or library’s E-rate RFP) and is selected as the winning, most cost-effective bidder to serve the schools or libraries. While the fiber strands built for the schools or libraries would be dedicated to that purpose, the locality could install additional strands of fiber at the small incremental cost of those materials.

In a similar way, the E-rate special construction reimbursement could create new competition in the local broadband market if the schools or libraries select a private provider to build fiber. In this scenario, as in the scenario in which the local government wins the competitive bidding process, the private provider, answering an eligible E-rate applicant’s bid for leased dark fiber or leased lit fiber, could add fiber strands in addition to the fiber it builds to connect schools. Then the private sector entity could use those additional strands to offer broadband services in the neighborhoods around the schools, and wherever else the fiber reaches.

Brief Overview of Approaches to E-rate Special Construction Reimbursement

The E-rate program provides financial assistance to schools and libraries to obtain affordable broadband. Eligible schools, libraries, and consortia of schools and libraries apply for E-rate support every funding year (July 1 through June 30).

Applicants (schools and libraries) are generally required to seek competitive bids for the services they seek to purchase using E-rate funds; the price of eligible products and services must be the primary factor in selecting the winning bid. City and county governments are eligible to bid and provide services to schools and libraries that utilize E-rate, much as private sector service providers are.[2]

In 2014, the FCC updated the E-rate rules for reimbursement of construction costs, known as special construction charges. The rule changes were designed to expand opportunities for E-rate applicants to select higher bandwidth lit services that may require the construction of new infrastructure by a service provider, or allow applicants to pursue other service options such as dark fiber IRUs and self-provisioning when traditional lit services are unavailable or not as cost-effective.

This E-rate capital funding offers an opportunity for school districts and library systems to enable the construction of fiber optics by the winning bidder of their broadband procurement, so long as the bid that includes the cost of construction is the most cost-effective bid (measured over some period of time that can be as long as 20 years or more).

E-Rate Bidding Process for Special Construction

In this scenario, the school or library system would issue an RFP under the E-rate rules for both “lit” services and for a long-term lease for “dark” fiber. The incumbent provider can bid on this RFP, as can competitors (including public sector competitors) that propose to build and own new fiber, subsidized by the E-rate program, and then to provide to the schools or libraries either lit communications services or a dark fiber lease for a period of time specified in the RFP. (The schools or libraries can then “light” the fiber with equipment funded under E-rate.)

Under the rules of the E-rate program, the winning bidder would be the one that offers the most cost-effective option, measured over a period of time selected by the school district or library system. If a bid to build fiber and then provide services or dark fiber would be more cost-effective than procurement of the same services from other providers, measured over the next, say, 20 years, then the E-rate program would fund construction of the fiber at the community’s standard E-rate discount rate.

In the scenario in which the applicant contracts for dark fiber (as opposed to lit services), it could procure a guaranteed long-term lease of 20 or more years. This approach would serve as a hedge against reduction or elimination of the E-rate program in the future, ensuring that the schools or libraries control sufficient fiber infrastructure to meet their needs at low cost into the far foreseeable future. We think particularly highly of this approach because it entails extremely low risk and relatively low effort for applicants—but gives them long-term security.

Construction of new fiber by the winning bidder enables a school district or library system to meet its own needs for advanced broadband services – and to simultaneously enable its provider to build new infrastructure that can serve as a base for deployment of new services to the public in the neighborhoods around the schools or libraries. (E-rate rules do not allow any fiber strands built with E-rate funding to be utilized for other purposes, but the winning bidder could pay the incremental materials cost to install excess fiber strands alongside the fiber dedicated to the schools or libraries.)

Act Now to Capitalize on Potential E-rate Funding Before Expected Changes to the Program

Based on the outcome of the presidential election and likely changes in leadership at the FCC, we believe that the next chairperson of the FCC will not be as committed to this fiber-based competitive model as is the current chair. Indeed, there is some risk that in the coming year or two, the FCC under new leadership could adjust its direction on special construction funding.

Even if the E-rate program does not see substantial changes in what can be funded, it is likely that that total amount of funding will be reduced. We anticipate an effort in the new administration to lower the cap on the E-rate program (which was raised quite substantially in recent years). If the cap is lowered, there may be insufficient funding for procurements that require special construction. The procurement cycle for the 2017-18 funding year, which will only partially overlap with the new administration, could thus be the last opportunity to seek reimbursement for fiber construction.

For this reason, we strongly recommend that schools and libraries seek to maximize the next E-rate funding year, the process for which has already begun for some districts (i.e., those that are planning their RFPs in advance of the FCC’s upcoming bidding window) and extends into the late spring for funding to begin July 1st.

We note, too, that there is benefit to testing this strategy even if the bids on dark fiber turn out not to be of interest to a school district or library system, or if the applicant chooses to accept a bid for lit services. (Under the E-rate rules, an applicant can test this strategy through an RFP process without being obligated to execute it.) Including the dark fiber option in an E-rate RFP increases the competitive pressure on existing vendors—often leading them to offer lower pricing for lit services. In this scenario, simply the potential for new competition emerging through the dark fiber procurement strategy could reduce a school district or library system’s costs for communications services.

[1] The term “E-rate” is the informal name for the Federal Communications Commission’s Schools and Libraries universal service program.

[2] If the eligible E-rate applicant is part of city or county government, the city or county government should make certain that there is a process of bid evaluation for the E-rate applicant that involves no conflicts with the city or county entity that submits the E-rate bid.  For example, the county IT director should not be part of the E-rate applicant’s bid evaluation process if the county IT department is the operator of the network which is proposed to serve the E-rate applicant’s broadband needs.

Published: Tuesday, January 3, 2017 by CTC Technology & Energy