Updates to Category 1

Perhaps the most significant change to Category 1 was prioritization of support for fiber connectivity to all schools. Now is the time for school districts to take advantage of the changes and consider upgrading to long-term network solutions to meet future connectivity goals.

At a high level: the new 2016 school year E-rate rules have “equalized” the treatment of lit, leased dark, and self-provisioned fiber options. Equal amounts of funding are available for each of these options, provided applicants can show that they are the most cost-effective solution. Additionally, construction costs associated with any of these options became eligible for E-rate funding for a limited amount of time and applicants were given more flexibility in covering these costs with the creation of the state matching fund.

Defining special construction
In E-rate terminology, special construction refers to the upfront, non-recurring costs associated with the installation of new fiber or microwave towers to or between eligible entities. Applicants may seek funding for special construction charges in connection with leased lit, leased dark, and self-provisioned fiber projects as well as microwave service. Special construction charges eligible for Category One support consist of three components:

  • construction of network facilities
  • design and engineering
  • project management

The term special construction does not include network equipment necessary to light fiber, nor the services necessary to maintain the fiber. Charges for network equipment and fiber maintenance are eligible for Category One support as separate services, but not as special construction.

If new fiber installation or tower construction is not necessary, any one-time costs are considered standard basic installation costs. These costs are typically charges related to testing, tagging, and turn-up of a new service utilizing existing infrastructure. It is possible for a service to require special construction and basic installation charges after construction is completed.

Remember: special construction charges are only eligible for support if the new fiber is lit by the end of the funding year.

  • Excess fiber strands (i.e., fiber strands that are not lit for the applicant’s use in the same funding year) may be installed for the applicant’s exclusive future use.
  • Cost of the fiber strands not lit within that funding year must be allocated out of the funding request.
  • Remaining special construction charges do not need to be cost-allocated.
  • Recurring charges of using the excess fiber strands will be eligible for support in the funding year that they are lit for the applicant’s use.

Please see below for rules and example scenarios of cost allocating excess capacity as part of a special construction project.

Eligible components of each fiber service
Leased Lit Fiber Leased Dark Fiber Self-Provisioned Networks
  • Monthly recurring charges
  • Special construction charges
  • Basic installation charges
  • Monthly recurring lease charges or IRU fees
  • Special construction charges
  • Basic installation charges
  • Fiber maintenance and network operations costs
  • Network equipment to place the fiber into service
  • Special construction charges*
  • Fiber maintenance and network operations costs
  • Network equipment to place the fiber into service

*For self-provisioned networks, constructing 12 strands of fiber per site is eligible. A district is allowed to construct additional strands for future use provided they adhere to the cost allocation rules below.

Network equipment, operations, and fiber maintenance associated with leased dark fiber or self-provisioned projects must all be asked for as separate services in your RFP and Form 470. While it is ok if the same provider bids and is selected for all parts of your project, you CANNOT require that a provider bid for all services you are requesting.

Competitive bidding requirements for each fiber service
For certain fiber services, there is a requirement that a district must also seek bids for other service types.

If you are seeking bids for You must also seek and fairly consider bids for
Leased Lit Fiber None – you are allowed to seek bids just for leased lit fiber service
Leased Dark Fiber (either traditional lease or long-term IRU) Leased Lit Fiber
Self-Provisioned Network Services Provided Over Third Party Networks*

*Services Provided Over Third-Party Networks: This is a new term in the E-rate lexicon, which describes a point-to-point broadband service delivered over a service provider or other third party owned network. This service option is intended to represent any technology-neutral third-party transport medium, including both fiber and non-fiber options (e.g. wireless, copper). This is a fully managed service, with the service provider supplying the equipment, provisioning the bandwidth and providing technical support/management of the service and does not include any fiber based transport mediums. The service is for transport only, and does not include Internet access.

Payment plans for the non-discounted portion of special construction costs
The Second E-rate Modernization Order gave applicants the flexibility to pay the non-discounted portion of special construction costs in monthly or yearly installments over one to four years. This change was meant to assist districts that lack the ability to pay the entire non-discounted portion of special construction costs upfront but can pay smaller amounts over time. USAC has only guaranteed this option through the 2018 E-rate cycle.

Note that service providers are under no obligation to allow a district to pay the non-discounted portion of the special construction costs in installments. Districts must indicate that they are looking for this type of plan in their Form 470 and/or RFP. For example, a district with a 70% discount receives a leased lit fiber bid that includes $60,000 of special construction. E-rate will pay $42,000, or 70% of the special construction costs ($60,000 * .70 = $42,000,) leaving $18,000 that the district must pay. The provider has also agreed to accept annual payments for the remaining non-discounted portion over 4 years. The district therefore must pay the provider $4,500 per year ($18,000 / 4 = $4,500).

Excess Fiber Strands and Cost Allocation

Over the past few funding years, a frequent topic that has come up during special construction projects is the ability of either service providers or applicants (in the case of a self-provisioned project) to install fiber strands beyond what the E-rate applicant requires within the Funding Year in question. While this is allowed, E-rate funds may only be used to pay for services and products used by eligible entities for an eligible purpose (i.e., a primarily educational purpose). All costs associated with fiber installed for use by an ineligible entity or for an ineligible purpose must be allocated out of a special construction funding request. This includes all costs above and beyond what would be incurred if only the fiber required to serve the applicant were installed. In the case of self-provisioning, this would also include strands that are installed but not lit during the Funding Year in question. A proper cost allocation must include a clear delineation of costs, be based on a reasonable, tangible basis that reach a realistic result, and must be supported by documentation.

This guide prepared by the State E-rate Coordinators’ Alliance (SECA) is a great example of how to perform cost allocation of ineligible special construction charges for the following scenarios:

  • Leased Lit Fiber or Leased Dark Fiber
    • Excess strands are solely for the E-rate applicant’s future use
    • Excess strands are for the service provider’s future commercial use
  • Self-Provisioned Fiber
    • A single, eligible entity such as a school district
    • A consortium of all eligible entities such as multiple school districts
    • A consortium of eligible and ineligible “non-public sector entities”
    • A consortium of eligible and ineligible “public sector, municipal entities”