The pressing question we’ve been receiving lately is: Should I bother applying for Priority 2 discounts for FY 2014?
By way of answer, we will briefly paraphrase an old joke. A man, praying to God to win the lottery, hears a voice on high respond: “Give me a little help here. Buy a ticket!”
The lottery analogy is a useful one. If an applicant doesn’t apply for Priority 2, there is zero chance of getting funded for Priority 2. But even if an applicant applies, it is also probably true for FY 2014 that, just like a lottery, an applicant’s chance of winning is: (a) low and (b) lower still the more tickets are sold (i.e., the more other applicants apply for Priority 2).
To understand this E-rate “lottery” better, it is important to recognize that there are two separate probabilities to consider. The first is the probability that the FCC will pump additional funds (other than the roll-over of unused funds from previous years) into FY 2014. In the FCC Chairman’s speech, reviewed in last week’s newsletter, the only reference to possible new funding was the sentence: “Should it be necessary to increase the permanent funding levels for the E-Rate program, we will do what is appropriate.” We take this to mean that no additional E-rate funding is being planned at the moment.
If funding for FY 2014 is business as usual, the second probability for Priority 2 funding revolves around: (a) the expected demand for both Priority 1 and Priority 2 next year; (b) the amount of roll-over funds which can be generated; and (c) any short-term changes in FCC rules which might be made at this late stage in the FY 2014 funding cycle. Here’s our analysis.
Based on the initial estimates last year, the Priority 1 demand for FY 2013 exceeded the annual E-rate funding cap by over $300 million. The FCC actually rolled over $450 million, earmarked to assure full funding for Priority 1. Ultimately, USAC may need only $200-250M for Priority 1, but any extra will fall well short of fully funding any Priority 2 requests. The initial demand estimate for Priority 2 funding, just at 90%, was approximately $1.75 billion. This is why, as explained last week, USAC recommended — and the FCC is expected to approve — the denial of all Priority 2 funding for FY 2013.
Projecting the availability of Priority 2 funding for FY 2014 starts with estimating Priority 1 demand. Let’s assume that Priority 1 demand for FY 2014 grows another 10-20% to roughly $3.00–3.25 billion. To fully cover potential Priority 1 funding, the FCC would have to roll over $600–850 million in previously unused funds. At this point in the year, with one quarter left to accumulate more roll-over funds before the FCC normally makes its roll-over decision, the current level of available funds is already $600 million. We have little doubt that USAC will find additional funds in the final quarter to fully fund Priority 1 — if only because the FCC Chairman promised to do so in his speech two weeks ago.
But how much extra funding can we expect for Priority 2 in FY 2014? Our answer is “not much” — particularly if the demand for Priority 2 funding at the 90% discount level again comes in at well over $1 billion.
To be optimistic, suppose USAC and the FCC can fund all of Priority 1 with $500 million left over. Under current E-rate rules, our best guess is that the FCC would decide not to fund any Priority 2 and tuck the extra funds away to meet its broadband objectives in future years.
An alternative we have heard others suggest that the FCC might take a lesser amount of available Priority 2 funding and apply it only to WiFi requests. That approach would certainly be in line with the Chairman’s speech. But for that to occur, at least two things would have to happen:
- Currently, the only rule the FCC has to deal with insufficient Priority 2 funds is proration. The FCC would have to change this rule, presumably requiring a full Commission order. One politically sensitive aspect of this process might be to decide whether to fund WiFi requests at less than 90%, while denying otherwise eligible non-WiFi requests of poorer applicants.
- USAC would have to find the WiFi funding requests, many of which are likely to be buried within broader Priority 2 requests. Either USAC would have to review all Priority 2 requests or would have to ask applicants to identify their WiFi requests (perhaps by denying all existing Priority 2 requests and opening a second WiFi-only window).
We suppose all this is possible, but it would have to take place while the FCC is committed to meeting a more important goal of restructuring E-rate for FY 2015. As such, significant program changes for FY 2014 resulting in any Priority 2 funding are unlikely. But as we indicated at the start of this analysis, it takes a “ticket” to have any chance of winning.
Applicants considering applying for Priority 2 funding requests for FY 2014 should weigh the potential costs and benefits. Here are a few recommendations:
- Applicants — at least those qualifying for a 90% discount — planning new Internal Connections projects (and/or ongoing maintenance) for 2014-2015, regardless of the availability of E-rate funding, should make every effort to apply.
- Applicants, who would not undertake Internal Connections projects without E-rate funding, may want to file only if they can do so without a lot of extra effort. Related contracts should reflect contingencies for no or reduced funding.
- As always, requests for Priority 2 funding should be filed in separate Form 471 applications so that Priority 1 funding is not delayed pending USAC/FCC decisions on the availability of Priority 2 funding.
- On the off-chance that some Priority 2 funding would be available on a targeted basis for WiFi projects, such requests should be broken out into separate FRNs or applications. Because we do believe that internal WiFi funding will become a priority for FY 2015, applicants signing contracts for WiFi for FY 2014 should make sure that such contracts are easily extendable into the following year.