On December 19, the FCC released the text of its Second Report and Order in its E-rate modernization proceeding. The new Order increased the annual spending cap on the E-rate program by an additional $1.5 billion—taking the cap from $2.4 billion to $3.9 billion per year starting in the 2015-2016 funding year. This increase was expected after its prior order in July announced a new two-year initiative to fund deployment of WiFi but stopped short of raising the cap. The FCC predicts that requests for funding will “not... immediately” reach the new cap, although it notes that it is not possible to “perfectly predict” what levels of funding school and libraries will seek in upcoming funding years. (The new Order also extends the $1 billion annual WiFi initiative for an additional three years, without explicitly noting whether those funds are subject to the overall cap.)

Among the key assumptions driving the FCC’s cost model are that there will be ever-increasing demand for bandwidth (driven in part by the FCC’s new speed goals), and that build-out costs for E-rate supported services will range from $600-800 million annually. It predicts that increased demand for bandwidth will continue to increase by “up to” 50% annually, which will only be somewhat mitigated by a 10% predicted annual decline in per megabit pricing. Other assumed mitigating factors are cost savings the FCC hopes to achieve through its recent reform efforts, including the phase out of voice services. Elimination of support for voice services is estimated to save the program approximately $3 billion over the next five years.

The anticipated savings from other reform efforts are more difficult to quantify. The FCC appears to be relying in this Order primarily on predicted cost savings from “equalizing” the treatment of lit and dark fiber, as well as its planned efforts to increase pricing transparency. The new Order authorizes for the first time E-rate funding for the electronics necessary for schools and libraries to utilize dark fiber. The new rules introduce some safeguards to avoid schools and libraries purchasing dark fiber without regard to whether a service provider could more efficiently provide the service through a lit fiber arrangement. For example, the Order requires schools and libraries to solicit proposals for both lit and dark fiber for similar contract periods so that they may make an apples-to-apples comparison. The Order also requires applicants to include in the same funding requests all costs for equipment and maintenance associated with dark fiber so that USAC may more easily determine whether the total cost of dark fiber complies with program rules. The safeguards were introduced in response to comments filed by parties concerned that schools and libraries may not take all the costs associated with lighting dark fiber into consideration, which could lead to a failure to adequately consider lit fiber solutions.

Other measures to increase schools’ and libraries’ access to fiber include providing an additional E-rate funding “bonus” in instances where states provide matching funding, and measures allowing schools and libraries to self-provision in circumstances where that is the most cost-effective option. The various fiber initiatives are intended to drive down the costs to the program of connecting schools and libraries, with a particular emphasis on connecting those located in rural areas.

Another major policy change announced in the Order is a new requirement that carriers that receive High Cost subsidies will now be required to offer high-speed broadband to schools and libraries participating in the E-rate program at rates reasonably comparable to similar services offered in urban areas. This new requirement is meant to increase connectivity to rural schools and libraries, while trying to avoid the use of E-rate funds to overbuild the networks of High Cost recipients.

The Order includes other changes to the program, such as adopting a more expansive definition of which communities are rural for purposes of calculating E-rate discounts, which again is focused on closing the so-called rural fiber gap. It remains to be seen whether this gap is due to cost barriers or whether there is a demand gap that has not been accounted for in the FCC’s analysis.

The new Order was adopted on a sharply partisan 3-2 vote, with unusually caustic dissents by Republican Commissioners Ajit Pai and Michael O’Rielly. Commissioner Pai characterized the new Order as “pour[ing] more money into a broken system,” labeled the $1.5 billion annual cap increase a “17.2% telephone tax increase for American families”—referring to the predictable increase in the USF contribution paid by telephone users to over 20%—and particularly decried the majority’s “crazy” refusal to reduce E-rate funding discounts or require greater matching funding in urban areas and its decisions to fund self-construction of WANs and fund dark fiber without adequate cost safeguards.