This post talks about the cost allocation of fiber strands when a school or library builds their own fiber network using E-rate funds. From funding year 2015, the FCC allows the school or library to build their own fiber network, if the school or library can show that the build is the most cost effective option. In the E-rate form 470, the school or library that wants to build their own network, must request a construction option and also request a service option from a service provider. The school or library then should compare the cost effectiveness between the two options and should move forward with the solution that is deemed most cost effective. The FCC will provide considerable flexibility to schools and libraries in how they determine cost effectiveness. In other words, you are not going to see a very specific formula from the FCC to follow to determine which provider is most cost effective. This is good, in that it allows schools and libraries to use their own methods to determine cost effectiveness. You should use ‘common sense’ and approaches that are industry accepted when determining the cost effectiveness between solutions.
So lets assume you have determined that a self construction is the most cost effective option. You will probably need just two or four strands between your school and the nearest fiber interconnect point. However, when you buy fiber cable, you typically buy cable containing 12 strands, 24 strands, 48 strands, 96 strands, 144 strands and even higher to 288 and beyond. So, if you self construct a network with 144 strands, but the school only requires 4 strands, you have to cost allocate out the 140 strands per E-rate rules. The question is, what is the cost associated with the 140 strands that needs to be cost allocated out, and hence, that is not subject to E-rate support.
Guidance from the FCC is that the incremental cost of the 140 strands is the cost that should be associated with strands 5 to 144. Or to put it another way, the cost associated with the 140 strands, ie. strand numbers 5 to 144 is (cost of construction for a 4 strand network) – (cost of construction for a 144 strand network).
If you were to get a quote for a 4 strand construction job, your quote will include buying a 12 strand cable bundle (since you cannot purchase as low as a 4 strand bundle), digging up the road, or laying the cable on poles and mobilizing all the equipment necessary for the construction. If you were to get a quote for the 144 strand construction job, many of the activities are exactly the same, in fact, probably the only difference between the two jobs is in the first job, you have to purchase a 12 strand cable bundle and in the second job you have to purchase a 144 strand cable bundle. Hence, the incremental cost of constructing a 144 strand network versus a 4 strand network is the cost difference between a 12 strand cable and a 144 strand cable. And this incremental cost is the cost you need to attribute to strands 5 to 144 and cost allocate out.
I’ll give some concrete figures by way of example. Suppose you want to self construct, and the network distance is one mile. If you only construct what you need for the school, ie. 4 strands, you will buy 1 mile of 12 strand cable for eg $15,000. Then, the construction of burying the 1 mile of cable in the ground, from the fiber interconnect point to your school is $100,000. Hence, the total cost of construction is $115,000.
But you say to yourself (quite rightly) that if I am going to dig up the road, I want to lay plenty of fiber strands, not just for my use, but, perhaps for the communities use also. So you decide to lay a 144 strand cable. You go out and buy 1 mile of 144 strand cable for $30,000. The construction cost for the 1 mile stays the same, at $100,000. Hence, the total cost of construction for a 144 strand network is $130,000.
Thus, in this example, the incremental cost of the additional strands is $15,000. Thus when you are completing your form 471, you would say that for strands 1 to 4 to be used by the school, the cost of this is $115,000. For strands 5 to 144, the cost is $15,000. Hence, you are requesting E-rate funding for the $115,000 cost. If you are at a 70% E-rate discount, then E-rate will provide 0.7 x $115,000 = $80,500 of the cost. And note that you can do whatever you want with strands 5 to 144, since these strands have been cost allocated out ! For example, you could allow your local hospitals or local municipal locations to use these strands. You can sell these strands under an Indefeasible Right of Use or lease the strands to other entities in your community. Perhaps with the sale of these strands, this will help pay for your match. If you have any questions on this, please leave a comment !