Friday, May 23rd, 2014 the FCC released a “Cost Allocation of Bundled Services” Order (DA 14-712, “CA Order”) that revises their prior 2010 Clarification Order regarding cost allocation of bundled services in the E-rate Program. Beginning with the upcoming FY 2015, the Commission will again require E-rate recipients to cost allocate ineligible components that are bundled with eligible products or services, even under the limited circumstances previously allowed under the the 2010 Clarification Order. E-rate applicants must deduct the value of all ineligible components bundled with eligible services unless those ineligible components qualify as “ancillary” to the eligible services under the Commission’s rules.
The 2010 Clarification Order produced varying understandings of what could, or could not, be bundled, e.g. some providers began offering free handsets to E-rate and other customers that purchase VoIP (Voice over Internet Protocol) services. E-Rate Central’s weekly newsletter (December 3, 2012) carried several articles about this issue. Both E-rate applicants and service providers sought further clarity on the scope of the guidance that the FCC had provided.
The new Order explains that the State E-rate Coordinators Alliance (SECA) filed a petition seeking clarification on whether certain end-user devices could be purchased in bundles without cost allocation. This was followed an FCC Public Notice seeking comment on the SECA Petition, again receiving significant volume of comments. As the CA Order notes, confusion continued “...over the interplay between that order [2010 Clarification Order] and the Commission’s cost allocation rules,” with many commenters expressing frustration at the continued lack of clarity for products and services other than cell phones that did, or did not, require cost allocation.
In this new Order the Commission makes a clear and firm statement that the prior cost allocation guidance is overturned (at para. 9):
Rescinding the cost allocation guidance of the 2010 Clarification Order and once again requiring cost allocation of all non-ancillary ineligible components of a bundle reflects the best reading of Commission rules and will make it easier for applicants to determine what must be cost allocated.
The CA Order concludes that “Requiring cost allocation for all bundled ineligible components, including cell phones, comports more fully with Commission rules” (at para. 10). The Order references numerous times that applicants must be careful to separate out and deduct ineligible components from their funding requests when they seek discounts for purchases of bundled services. Particular emphasis is made that applicants must be clear and forthright in cases where ineligible components, that are deemed as ancillary to eligible services, are indeed, truly ancillary under the E-rate program’s definition.
One implication of the new Order is that applicants, who have signed multi-year contracts for VoIP services with bundled handsets, will have to cost allocate out a portion of the monthly costs attributable to those handsets beginning with next year. However, depending upon FCC E-rate modernization decisions expected later this summer, this issue may become moot if and when the FCC eliminates or phases out the eligibility of certain “legacy” services.