News of the Week

The funding threshold for Internal Connections remains at 85%. No Internal Connections funding will be available below 70%. The availability of funding for applicants in the 70-84% range is still uncertain, although funding requests in this range are currently being reviewed by the SLD.

Use of State Master Contracts and State Form 470s

As a general rule, an E-rate eligible service not covered by a telecommunications tariff or available on a month-to-month basis (mobile and Internet services only) must be provided under a contract that was: (a) competitively bid as an outgrowth of the Form 470 process; and (b), signed after the Form 470’s Allowable Contract Date and before the Form 471 was filed. The two basic questions that an applicant must address before filing a funding request for a state contract service in a Form 471 are:

(1) What is the establishing Form 470?

(2) What “contract” is involved?

Establishing Form 470:

Every Form 471 Block 5 funding request must reference the Form 470 that led to the competitive selection of the associated service provider. When a state contract is used, SLD rules permit the applicant to reference either its own Form 470 or the underlying state Form 470 (if available).

Most state contracting agencies file annual Form 470s to make their contracts E-rate eligible. To use a state Form 470, select the one with the latest Allowable Contract Date on or before the award (or renewal) date of the state contract being used.

It is important to note that the SLD’s acceptance of a state Form 470 for individual applicant use is based on the implicit assumption that the state contract was competitively bid. As such, there is no need for an applicant to bid the service itself and, therefore, no need to reference an applicant’s own Form 470.

We believe that the SLD’s assumption may not apply to every type of state contract and that more explicit guidelines may be forthcoming. Specifically:

(1) Some contracts — typically sole-source arrangements — are indeed fully competitively bid. In this case, use of the state Form 470 is clearly acceptable.

(2) Contracts for some types of manufacturer-specific equipment are often based on a minimum list price discount negotiated with the manufacturer and agreed to by various authorized resellers. Users of these contracts are typically required to obtain final price quotes from more than one authorized vendor. It is not clear from current SLD rules whether the second step bidding process required to use these contracts precludes use of the state Form 470.

(3) A third type of contract, often used for professional services, establishes basic “terms and conditions” with, at best, maximum price ceilings. Such contracts are not competitively bid by the state agency; instead, a contract user must conduct some form of “mini-bid” among the authorized vendors (again depending upon contract size). We doubt that the use of a state Form 470 for this type of contract is contemplated in the SLD rules.

The “Contract” Issue:

The contract issue was of major concern earlier in the year after the SLD had denied several funding requests for state contract purchases on the grounds that there was no legally binding agreement between the manufacturer and the applicant itself (only between the manufacturer and the state). This position has been reversed. The SLD’s guidelines now indicate that a “signed master contract between the state and the service provider(s) meets the FCC signed contract requirement.”

This is a welcome change. It permits an applicant to request funding under a state master contract without requiring a direct contract with the state’s contractual vendor. Despite the SLD’s clarification, however, we recommend that an applicant does create some type of formal or informal agreement with a state vendor. In particular:

(1) If, as will be discussed below, an applicant files a funding request based on its own Form 470, considering a state master contract as one of its bids, then we recommend that the applicant document the state contractor’s selection with a simple letter. A sample vendor selection letter (as recommended for New York applicants) is (see E-Rate Central). In no case should the vendor be selected (nor the letter dated) before the Form 470’s Allowable Contract Date.

(2) Regardless of which Form 470 is used, an applicant may want to establish a supplemental contract directly with the state’s vendor. There are at least two situations in which a separate agreement is recommended.

     (a) Services that need to be tailored to an individual applicant (such as a cabling project) and involve detailed specifications and project-specific pricing should be done under an explicit contractual agreement.

     (b) If a state contract is scheduled to expire before the funding year, an applicant-specific extension can sometimes be negotiated to cover the entire year. If the extension is formalized as a separate contract, the E-rate filing process is much simpler. Otherwise, the applicant must follow the state replacement contract procedure.

Recommendations:

Pending additional guidance from the SLD, we suggest the following:

(1) Review carefully the information provided by your state for the use of master contracts generally and for E-rate purposes specifically. A good starting place for this E-rate information is the list of state E-rate Web sites.

(2) For states in which master contracts are not all competitively bid, an applicant’s safest course of action is to rely on its own Form 470s to competitively bid all services. In this case, the state master contract can then be considered one of the bids.

(3) When using any state contract, SLD rules require an applicant to follow all applicable state master contract procedures as well as local and state procurement laws.

(4) Remember that SLD rules may be stricter than state contract rules. This is particularly true with respect to multi-vendor contracts for which state rules require a second step, or “mini-bid,” only on purchases of more than a specific dollar amount. An E-rate applicant, relying on its own Form 470, must consider all competing bids regardless of contract size; an applicant cannot simply pick a vendor just because of its state contract qualification.

Waste, Fraud, and Abuse Task Force Report Released to FCC

Based on the breadth and experience of the Task Force members, the report’s recommendations are likely to be treated seriously. Some of the recommendations are procedural in nature, should be non-controversial, and could be implemented quickly if the SLD and/or FCC agree (see below). Others will surely engender additional discussion and would require rule changes (possibly involving formal FCC rulemaking procedures) before they could be adopted.

The final report includes 29 recommendations on issues of waste, fraud, and abuse. In broad terms, the recommendations fall into four categories.

(1) Basic program issues: changes in the program’s framework designed to preserve the E-rate program’s original goals while reducing the potential for abuse. Specific recommendations included a reduction in the maximum discount rate for Internal Connections, consideration of a ceiling on applicant requests, simpler Form 470s and Form 471s for smaller applicants, and inter-governmental coordination on technology planning.

(2) Rule clarifications: changes to clarify complex program rules and standards to simplify and encourage applicant and service provider adherence to program rules and objectives. The recommended changes include new or revised guidelines on costs of common products and services, on equipment service lives, on warranty and other hardware support services, and on planning and procurement management services.

(3) Enforcement and compliance procedures: improvements in specific enforcement and compliance procedures to address potentially problematic areas. Recommendations deal with consultant disclosure and registration, review of SPIN issuance, applicant review of Internal Connection invoices, and the alignment of audit policies and program rules.

(4) SLD resource usage: recommendations to refocus the limited resources of the SLD (and those of other program stakeholders) to more efficiently address areas that represent the biggest cause for concern. Suggestions include new procedures involving SPIN changes and service substitutions, application reviews and appeals, and applicant access to status information on pending decisions.

The one recommendation most likely to generate political controversy is the suggested reduction in the maximum Internal Connection discount from 90% to 80%. It should be noted that this is actually not a new recommendation. Suggestions to reduce the maximum discount to at least 70% were first made in public comments in response to the FCC’s 2002 NPRM and were reiterated in the most recent 2003 NPRM comments. One rationale for a discount matrix change is the belief by many E-rate stakeholders that the 10% share currently required by 90% applicants provides insufficient incentive to assure cost-effective funding requests and competitive procurement processes. An interesting study on the economic impact of lowering the maximum discount on Priority 2 services (to the 70% level) was done for SECA by E-Rate Central and was included in its NPRM comments to the FCC.

The report’s release to the FCC included an interim response by the SLD indicating the jurisdictional authority for each recommendation (FCC, SLD, or both). In cases of SLD responsibility, the interim report also noted the status of implementation efforts including 13 recommendations that were reported as being either fully or partially implemented.

One recommendation that was deemed implemented, but for which there has been no publicity, is a procedure that permits an applicant to review a Service Provider Invoice (“SPI”) before the SLD will disburse funds to the vendor. Essentially, this gives an applicant the same power of review on a vendor SPI that a vendor now has on an applicant BEAR (through the acknowledgment process). The procedure requires that a special request to be made to the Client Service Bureau (888-203-8100). It applies only to Internal Connections service invoices.