Last Thursday, July 24, the FCC issued the 176-page text of its E-rate Modernization Order (“Order”), which it adopted on July 11 in a sharply divided and partisan 3-2 vote. The Order includes a Further Notice of Proposed Rulemaking (“FNPRM”) that proposes to tackle a number of issues that the FCC deferred in the Order, including the hot-button political issue of whether to increase overall funding of the E-rate program.
The newly released Order focuses primarily on bringing Wi-Fi to more of the nation’s K-12 schools and libraries, although it announced a number of measures applicable to the overall E-rate program in pursuit of the FCC’s overarching goal of “ensuring affordable access to high-speed broadband sufficient to support digital learning in schools and robust connectivity for all libraries.” In addition to addressing cost-containment, efficiency and transparency issues, the Order sets a minimum high-speed broadband connectivity “target” of 100 Mbps per 1,000 students, 100 Mbps for libraries serving less than 50,000 people, and 1 Gbps for libraries serving more than 50,000 people. But it leaves the thorny question of how to pay for such enhanced connectivity to the FNPRM, with comments due on September 15 and reply comments on September 30.
Focus (but not quite a “priority”) on Wi-Fi and other internal connections
Most prominently, the Order sets an annual funding “target” of $1 billion per year to fund Wi-Fi and other internal connections supporting high-speed broadband within schools and libraries. The Order declares that E-rate funds held in “reserve” from prior years will allow the FCC to make $1 billion available over each of the next two years for these connections. Further, to dispel the notion that Wi-Fi is less of an E-rate priority than it has been in the past (when internal connections were classified as a “Priority 2” service—and therefore generally not funded in recent years), the FCC changed its nomenclature for supported E-rate services from “Priority 1” (for connectivity-related services) and “Priority 2” (for internal connections) to “Category 1” and “Category 2,” respectively. But responding to concerns of Commissioner Jessica Rosenworcel and others that a firm funding allocation for Wi-Fi could come at the expense of connectivity, this annual $1 billion per year is deemed a target rather than a fixed allocation. Indeed, the Order “direct[s] USAC to shift funds targeted for category two services to meet all eligible requests for category one services in any funding year in which demand for category one services exceeds available funds.”
Eligible Category 2 services now include managed Wi-Fi services, in addition to Wi-Fi equipment. In addition, caching functionality will be eligible under Category 2. The FCC will evaluate, however, whether to continue eligibility for these items beyond 2016. Among other important limitations on the new Category 2, the Order reduces the maximum discount rate for Category 2 services in areas where over 75% of students qualify for the National School Lunch Program (“NSLP”) from 90% to 85%, stating that this “will spread available universal service funds more widely and increase the incentive for applicants to find the most cost-effective options that meet their internal connection needs.” In addition, for at least the next two funding years (2015 and 2016), the Order sets maximum budgets for Category 2 services. For schools the budget is $150 (pre-discount) per student over five funding years ($30 per student annually), and $2.30 (pre-discount) per square foot for libraries over five funding years, on the rationale that most Category 2 equipment has a typical lifecycle of five years. For now, these budgets have not been extended to Category 1 services. The budgets will be revisited by the FCC in the FNPRM.
Finally, applicants will be required to seek support for Category 2 services on a per-entity (school-by-school and library-by-library) basis, although school districts will use a single district-wide discount rate for all of their schools, as will library systems for all libraries.
Support for voice and other “non-broadband” services eliminated
As expected, E-rate support for voice services (including plain old telephone service, interconnected VoIP, and wireless) will be phased down by 20% over each of the next five years, beginning immediately in funding year 2015. Support for paging, e-mail, web hosting, voicemail, text messaging and directory assistance is eliminated immediately in funding year 2015.
In addition, to focus support solely on internal connections that enable high-speed broadband connectivity, the Order immediately eliminates E-rate support for the following components now on the Priority 2 Eligible Services List (ESL): Circuit Cards/Components; Interfaces, Gateways, Antennas; Servers; Software; Storage Devices; Telephone Components, Video Components, and VoIP or video over IP components, and components such as VPNs that are listed under Data Protection, other than firewalls and uninterruptible power supply/battery backup.
Making the Program More Cost-Efficient, Simpler and Less Burdensome
The Order adopts several measures it claims will lower the costs of E-rate services:
• All E-rate service prices will be posted on the USAC website, which could cause applicants paying high rates to attract new bidders in future years, but it may also discourage service providers from offering deeper discounts to individual applicants.
• The FCC may now approve “preferred master contracts” for internal connection equipment from which applicants nationwide may purchase, in lieu of self-contracting through a competitive-bidding process. Participation in the master contract would not guarantee that a subsidy would be available.
• The Order takes a few small steps to encourage consortium applications to secure lower prices: consortium applications will receive some sort of informal priority in processing time; and schools and libraries may now participate in a consortium even if they do not cede authority to the consortium to purchase service on their behalf. We suspect that most applicants will continue to purchase services individually.
• The Order also warns service providers that the Commission intends to “step up” enforcement of the existing rule that service providers offer E-rate applicants the “lowest corresponding price” for similar services offered to other similarly-situated non-residential customers.
The Order adopted a number of changes to the application process and administrative aspects of the program, with the goal of making it more efficient and less burdensome. While most of the changes are welcome, they may not significantly improve the overall experience of most E-rate participants. The four most significant changes are a new, shorter form to order services for multi-year contracts, permitting schools and libraries to directly invoice USAC to receive their E-rate funding, a new 10-year document retention requirement and district-wide discount rates. These are effective beginning with the 2015 funding year.
With respect to multi-year contracts, participants will only be required to file an FCC Form 471 once—in the first year of the contract. Thereafter, they will file a shorter form that will only provide basic information such as who the applicant is, confirmation that the funding request is based on a multi-year contract, and explanation of any changes to the application (such as any changes in the discount rate). Applicants may use this process for 5 years before needing to submit a new 471 Form.
Invoicing procedures for schools or libraries have also been simplified by eliminating the requirement that all E-rate funds pass through the service provider. Schools and libraries may now choose whether to pay the entire bill and receive the subsidy after payment, or only pay the unsubsidized portion and have the subsidy sent to the service provider. The former system, referred to as Billed Entity Applicant Reimbursement or “BEAR,” routed payment of the subsidy from USAC to the service provider, which then had to forward the subsidy to its customer. The new rules consolidate the process so that USAC may now send payment directly to the school or library.
While the aforementioned changes will somewhat streamline the administrative burdens associated with participating in the E-rate program, schools, libraries, service providers and consortia will now be required to retain documentation relating to their participation in the program for a full 10 years, rather than the current five. In fairness, the other universal service programs have recently increased their document retention requirements to 10 years as well. The Order also requires all appeals of E-rate decisions (except those involving a waiver)—and, for that matter, appeals of USAC decisions in all USF programs (including the CAF, Lifeline and Healthcare Connect Funds)—to be appealed first within USAC. The stated purpose of this requirement is to reduce the backlog of appeals at the FCC, but anecdotal evidence indicates that USAC does not usually overturn its own decisions.
The Order also directs USAC to take certain measures to improve its administration of the program, including speeding review of applications, modernization of its computer systems (including easier tracking of application status) and revising its notoriously confusing forms and documentation to be shorter and drafted in plainer language. It remains to be seen how quickly and effectively such changes will be made. It also creates a program to assist Tribal schools and libraries to more effectively participate in the program, by creating a Tribal consultation, training and outreach program.
Further Notice of Proposed Rulemaking
The Order includes a Further Notice of Proposed Rulemaking (FNPRM) that seeks comment (due Sept 15) on future funding needs, to help build a record on which it might increase the funding cap. It also asks for comment on proposed rules to limit the allowable time periods for multi-year contracts, to require all schools to use the school lunch program to calculate their discount percentages in lieu of other current alternatives, and to require consortia to use a weighted average rather than a simple average of participating schools to determine the discount rate. The FCC asks for input on ways to encourage the use consortia, including offering a 5% additional discount bonus (which is puzzling, given that the FCC’s supposed purpose of encouraging consortia in the first place is to reduce program expenditures). Finally, parties are invited to weigh in on the continuation of the per-student and per-footage funding caps on internal connections beyond 2016.
The Order is the first significant reform of the E-rate program since its inception shortly after the 1996 Telecommunications Act. In light of the complexity of the program on the one hand, and the gap between the current state of broadband connectivity in the nation’s schools and the President’s ConnectED goals on the other, we expect further FCC orders in the E-rate modernization proceeding in the near future. Indeed, there have been persistent rumors that the FCC is planning a further order for late 2014 in which it may increase (or at least propose to increase) E-rate funding on a more permanent basis.