More Guidance on Dark Fiber
Message Posted January 5, 2004
This message is particularly for entities that have existing contracts for
dark fiber.
We have been in discussions over the last few months with the SLD and FCC
relating to how districts can/should modify their existing dark fiber
contracts in order to make them E-rate eligible. We have received some
written guidance in a recent FCC Order, and other verbal guidance on recent
conference calls, that should help applicants as they head into these last
four weeks of the Year 7 filing window.
In the absence of official FCC guidance on outstanding dark fiber conversion
issues, which may arrive too late for FY 2004 application purposes, E-Rate
Central has prepared its best guesses to a set of Frequently Asked Questions
we have heard from applicants on the subject, most importantly: (a) what is
the minimum “modulating electronics” that must be provided by the carrier;
and (b), what procedures must be followed to modify a contract?
The E-Rate Central FAQ (see http://www.e-ratecentral.com/darkFiberFAQ.asp)
is based on a combination of formal and informal information from the FCC
and SLD, and on what we believe is good E-rate common sense. It is also
pasted below.
E-rate Central's FAQ on Dark Fiber
1/5/2003
Overview: In September 2003, the FCC announced that “dark fiber”
transmission services would no longer be eligible for E-rate discounts as of
FY 2004. “Dark fiber” was defined as “…fiber optic cable for which the
service provider has not provided modulating electronics…” (Note: “dark”
fiber is not the same as “unlit” fiber. “Unlit” means that the fiber is not
being used; “dark” means that the modulating electronics are provided by the
user, not the carrier.)
As a result of this eligibility change, an E-rate applicant currently
receiving dark fiber services under a long-term contract must either convert
the contract to cover a lit fiber system, with the necessary modulating
electronics being provided (i.e., owned and maintained) by the carrier, or
forego E-rate discounts on the service beginning July 1, 2004.
To date, neither the FCC nor SLD has fully detailed the steps an applicant
must take to convert an ineligible dark fiber system to an eligible lit
fiber system. The two key questions are: (a) what is the minimum modulating
electronics that must be provided by the carrier; and (b), what procedures
must be followed to modify a contract?
In the absence of more formal instructions, this set of Frequently Asked
Questions is designed to provide preliminary guidance on the dark fiber
conversion process. It is based on a combination of formal and informal
information from the FCC and SLD, and on what we hope is good E-rate common
sense. Applicants should be aware that the conclusions expressed herein are
solely those of E-Rate Central. Applicants should continue to check the SLD
web site for future announcements on this subject.
1. What is the minimum configuration of “modulating electronics” that could
be provided by a carrier to assure that a fiber optic service would not be
considered an ineligible “dark fiber” system?
The FCC’s recently released Third Order (FCC 03-323) states:
“…it is appropriate to provide Priority One discounts on service provider
charges to recoup the cost of leasing optical equipment to light fiber, when
that optical equipment is the single basic terminating component of an
end-to-end network and it is necessary to provide an end-to-end
telecommunications or Internet access service.” [Paragraph 49]
The use of the phrase “single basic terminating component” suggests — but
does not explicitly say — that basic (and generally low cost) “TX to FX
Converters” (e.g., Cisco’s “GBICs”) would qualify as the minimum “modulating
electronics.” Pending FCC or SLD guidance to the contrary, applicants can
assume that, if such converters are provided by the service provider, the
service will not be deemed an ineligible “dark fiber” system.
In some manufacturers’ product lines, the TX to FX conversion function is
integrated into larger pieces of equipment. In this case, the first inline
piece of equipment interfacing with a fiber optic cable should be considered
the “modulating electronics.”
2. Can more than the minimum modulating electronic components be provided
to an applicant as a part of a carrier’s service?
Yes, but such additional equipment will be subject to the FCC’s Tennessee
Decision tests (i.e., it will not necessarily be considered part of a
Priority One service). Indeed, the following footnote in the FCC’s Third
Order suggests that additional equipment will be considered Priority Two:
“To the extent an applicant seeks to lease multiple terminating components,
one would be deemed eligible for funding as a Priority One service and the
remainder would be eligible for funding as Priority Two internal
connections.” [Footnote 91]
Discounts on Priority Two equipment, whether provided by a carrier or owned
by the applicant, are available only as Internal Connections services.
3. To convert dark fiber to lit fiber, may an applicant sell, trade-in, or
otherwise transfer previously purchased modulating electronic components to
the carrier?
Yes, but there are limitations on how the credit for such a transfer may be
utilized. A footnote in the FCC’s Third Order states, in part:
“In cases in which a school or library has previously purchased equipment to
light fiber, such equipment may be traded-in to the service provider and
leased back by the applicant. The applicant may not use the credit for the
trade-in to pay its non-discounted portion of the services.” [Footnote 155]
This guidance raises several important questions, namely:
a -- Do transfer limitations apply to all equipment, or only to equipment
purchased by the applicant with E-rate support?
Although the FCC’s footnote does not make this distinction, applicants
should assume that only the transfer of equipment that was originally
purchased with E-rate support is affected.
b -- At what price may the equipment be transferred?
The FCC Order is silent on this point. Based on discussions of this and
related issues with the SLD, we believe that the transfer price for E-rate
supported equipment must reflect “fair market value,” and that there is a
“rebuttable presumption” that “fair market value” can be defined by a
three-year depreciation schedule (i.e., equal to the original purchase price
less one-third for each year the equipment has been in service).
c -- If the credit can’t be applied to the non-discounted portion of the
applicant’s services, how should it be applied?
Although the FCC has not clarified this point, we believe that the
underlying principle of the restriction is that, if equipment was purchased
with E-rate support, a portion of its sales price should be credited back to
the E-rate fund. Again, based on previous discussions with the SLD, the
easiest way to do this is to credit the transfer price to pre-discount cost
of the fiber transmission services in the year of sale. Suppose, for
example, that the recurring cost of transmission services is $1,000 per
month (or $12,000 for the year), and that the fair market value of the
equipment transferred is $3,000. Then, the applicant should only apply for
discounts that year on $9,000 (the annual service cost minus the equipment
value). In this way, E-rate discounts for the year are effectively reduced
by the discounted portion of the transferred equipment’s sales price.
d -- Does the carrier have to buy the used modulating equipment, or may the
carrier provide new equipment?
There appears to be no prohibition barring the carrier from providing new
modulating electronics, but the added cost of this solution may affect the
“negligible” price factor discussed below in FAQ # 4.
e -- If the carrier provides new electronics, may the applicant transfer the
older equipment to other locations or sell it?
Generally, equipment originally purchased with E-rate discounts as Internal
Connections cannot be sold or transferred. The FCC’s new Third Order
explicitly “…prohibits the sale or transfer of equipment purchased with
discounts from the universal service program in consideration of money or
anything else of value…for a period of three years after purchase.
4. If an existing dark fiber system is to be converted to a lit fiber
system, does the underlying contract have to be reflected in a Form 470 and
re-bid?
Contracts for dark fiber conversions do not have to be re-posted and/or
re-bid if: (a) state and local procurement rules do not require re-bidding;
and (b), under E-rate rules, the required contract modifications are deemed
“minor.” A footnote in the FCC’s Third Order states, in part:
“…a contract modification would be deemed a minor contract modification
under section 54.500(g) of the Commission’s rules if this was within the
scope of the original contract and the change has no effect or negligible
effect on price, quantity, quality, or delivery under the original
contract.” [Footnote 155]
The FCC has not clearly defined either contract “scope” or “negligible
effect” but, given at least one Commissioner’s separate comments on the dark
fiber problem, we would not expect overly restrictive interpretations. As a
general rule, if recurring service charges remain unchanged, or change by no
more than a few percentage points, we believe contracts will not have to be
re-bid.
If the conversion entails significant changes in the “price, quantity,
quality, or delivery” of services, then the applicant must post an
appropriate Form 470, re-bid the contract under state, local and E-rate
rules, and sign a new contract or contract addendum.
Must the conversion of a dark fiber system to a lit fiber system be made
subject to a service substitution request?
If the conversion to a lit system takes place effective July 1, 2004, and
the applicant’s funding request for FY 2004 properly requested funding for a
lit system, then no service substitution is required. In this case, there is
no “substitution.”
The timing of the contract modification, however, is important. If a dark
fiber system was funded for FY 2003, and if the system is being converted to
a lit system during FY 2003, then — at least technically (although probably
not practically) — a service substitution should be requested to assure
funding for the remainder of FY 2003. The basis for this disclaimer is
another footnote in the FCC’s Third Order stating:
“…that a substitution that constitutes a minor contract modification under
our rules will not automatically meet the requirements of our service
substitution rule.”
If a dark fiber system is not converted to a lit fiber system until July 1,
2004, what impact will there be on an applicant’s E-rate funding for FY 2003
or earlier?
There should be no impact. The new rule on dark fiber ineligibility is
effective only for FY 2004 and ensuing years. Dark fiber services, meeting
other E-rate rules for telecommunications (or Internet) services, were and
are eligible though the end of FY 2003.
Julie Tritt Schell
jtschell@comcast.net
(717) 730.7133 (voice)
(717) 730.9060 (fax)
| 
Back to 2004 Archives Main