News of the Week

Funding Status

The FY 2012 Form 471 filing window is closed and application reviews are underway. As discussed in our newsletter of April 30th, USAC's preliminary estimate of FY 2012 demand showed a total increase of 21.5% over the comparable figure for FY 2011. At this level, funding for Priority 2 may not be fully available even at 90%. The first funding wave for FY 2012 is expected towards the end of May and will include Priority 1 services only.

Wave 45 for FY 2011 will be released on Wednesday, May 16th. Cumulative funding for FY 2011 is $2.15 billion. Priority 2 funding for FY 2011 is currently being provided only at the 90% level and is being denied at 79% and below. An SLD recommendation to begin funding at 89% and above, and denying at 80% and below, is awaiting FCC approval.

No funding wave for FY 2010 is scheduled this week.

FCC Reform of the USF Contributions System

The underlying health and stability of the E-rate program, as well as that of the three other Universal Service Fund ("USF") programs, depends upon the contribution system. This is not a tax-based system. Instead, the USF is financed by an assessment on the interstate and international revenues of telecommunications carriers — historically the long-distance wireline carriers, and more recently cellular carriers and VoIP providers.

The USF contribution system has been under pressure for a number of years. The two basic problems are or were:

1. The demand for funds has been growing. In particular:
   1. High-Cost, the largest of the four USF programs, had been growing almost out of control until it was recently capped. The FCC, however, is in the process of transitioning the High-Cost fund into the Connect America fund to help subsidize broadband deployment nationwide — a goal that could use more funding, if available.
   2. E-rate, the second largest USF program, had been capped at $2.25 billion annually since 1999, but is now indexed to inflation and is growing slowly. The demand for E-rate funds, however, is likely to result in pressure to increase funding.
   3. Reforms in the Lifeline program promise to produce savings, but much of those savings may be funneled into new digital literacy initiatives.
   4. The small Rural Health program is of little consequence from a USF funding standpoint.
2. At the current USF size, the most immediate problem is that the revenue base on which the contributions depend is shrinking, requiring ever larger percentage assessments. In 1998, the year E-rate began, the contribution factor was 5.5%. Since then it has grown to over 17%, blowing well past the 10% level that at one time was considered the politically sacrosanct threshold.

Two weeks ago, to address the second problem, the FCC issued a Further Notice of Proposed Rulemaking (FCC 12-46) seeking comments on proposed reforms of the USF contribution system "in an effort to promote efficiency, fairness, and sustainability."  The Notice requests comments in the following four major areas:

1. What services and service providers should contribute to the Fund?  The FCC explains that:

   In particular, we seek comment on exercising our permissive authority to require contributions from providers of enterprise communications services that include interstate telecommunications; text messaging; one-way VoIP; and broadband Internet access services. Each of these services has found a significant niche in today's communications marketplace.  The question of whether certain enterprise communications services are currently assessable as telecommunications services or non-assessable as information services has led to significant disputes, uncertainty, and incentives for providers to attempt to characterize their services in a particular way in order to avoid contribution requirements, resulting in a pending request for guidance from USAC regarding the treatment of certain services.  Likewise, the question of whether text messaging is currently assessable has been disputed, and there is a pending request for guidance from USAC regarding text messaging.  In contrast, one-way VoIP services and broadband Internet access services are clearly not in the contribution base today, although various parties have argued they should be assessed.  We seek comment on these arguments.

2. How should contributions be assessed?  Currently, contributions are based on a percentage of assessable revenues, but the FCC is considering alternatives including number of connections, phone numbers, or some hybrid approach.
3. How to reduce the cost, promote transparency and increase clarity of the contribution system?
4. Whether consumers would benefit from increased transparency and additional limitations on how providers recover their USF costs?

From the perspective of those in the E-rate community who would like to see additional E-rate funding, the most important aspect of this new inquiry is what it does not address. Specifically, the FCC observes that "although assessing additional providers and services might expand the contribution base and affect the relative obligations of who contributes, nothing we propose…in this Notice will affect the total amount of contributions collected or the overall size of the Fund."

From the standpoint of the overall stability of USF, this is an important proceeding. But those seeking additional funding for E-rate will have to look elsewhere.

E-Rate Updates and Reminders                       

Digital Literacy Pilot Program:

For the past several months, we've been discussing an FCC proposal for a four-year, $50 million per year, digital literacy training initiative involving schools and libraries. As proposed, it would be funded through the Lifeline program, but administered through the E-rate program. Most recently, public reply comments on this proposal were discussed in our newsletter of May 7th.

It should be noted, however, that the FCC already has a smaller, $25 million pilot program underway, also involving digital literacy training, to identify the best ways to increase broadband adoption among low-income Americans. This program is aimed at eligible telecommunications carriers ("ETCs"), but carriers applying for pilot funds are specifically "encouraged to partner with existing broadband adoption programs as well as schools, libraries…"  Such partnering might permit schools and libraries to help support a year's worth of off-campus Internet access, wired or wireless, for their low-income students and patrons. Such support would also be funded through the Lifeline program, not through the E-rate program.

Schools and libraries interested in participating with their local carriers need to act quickly. Application procedures for the pilot program (DA 12-683) were announced last week. Applications are due July 2, 2012.

FCC Appeal Decisions Watch:

The FCC continues to address its backlog of E-rate appeals. Last week's decisions are summarized below.

1. Two single-applicant decisions, actually dated the week before, were posted. One approved appeal (DA 12-716) was based on USAC's "misunderstanding" of a request for digital transmission services. The other (DA 12-708) is more instructive. It overturned USAC denials for alleged competitive bidding violations involving the applicant's reference to a specific manufacturer's equipment in its Form 470. Consistent with its Queen of Peace Order (DA 11-1991) last December, the FCC ruled that beginning with FY 2013, such references must include the phrase "or equivalent," but that prior year references would not be considered violations. In a training session last week, USAC stressed that as of FY 2013, not only must this "or equivalent" language be used, but that equivalency must be fully respected in any competitive bid analysis.
2. The FCC issued two erratum orders adding four additional appeal approvals to decisions originally released last March. The updated decisions involved discount rate calculations (DA 12-300) and cost-effectiveness (DA 12-413). It is not clear whether these four additional appeals were inadvertently left off the original orders, or whether they involve similar issues on outstanding appeals subsequently brought to the FCC's attention.
3. In a decision involving Central Technology Center, et al (DA 12-732), the FCC granted 13 appeals and denied 8 others involving the 28-day posting requirements for Form 470s and/or RFPs. Several individual decisions illustrate the importance of posting requirements in the proper service category of Form 470s. In one case, USAC had changed the category of service to one that had not been included in the applicant's Form 470, and then denied the request. The FCC approved that appeal, but only after deciding that USAC's change of category was incorrect. In another case, the FCC upheld a denial of service because the applicant's service requirements were not listed in the proper category despite extensive applicant documentation indicating that no service providers were misled.

Senate Confirms Two New FCC Commissioners:

Last week, the Senate confirmed President Obama's nomination of two new FCC Commissioners. This will bring the Commission to its full, five-member, strength. The new Commissioners will be:

• Jessica Rosenworcel, most recently a top advisor to Senator Jay Rockefeller (D-WV), Chairman of the Senate Commerce Committee (and the father of E-rate). Ms. Rosenworcel will be replacing her former boss, Commissioner Michael Copps, whose term expired at the end of 2011.
• Ajit Varadaraj Pai, most recently a partner at the law firm Jenner & Block, and with "extensive experience in virtually every bureau at the FCC."  Mr. Pai will replace Commissioner Meredith Attwell Baker, who left the Commission at this time last year.

Cyberbulling Response Guidelines:

Two weeks ago, in a newsletter article on the new CIPA requirements, we referenced a free Cyberbulling Toolkit for Educators prepared by Common Sense Media. Drilling down several links into that toolkit is a useful flowchart labeled "Responding to Cyberbullying: Guidelines for Administrators" that school administrators might like to keep in their desk drawers, if not incorporate into their Internet safety policies.

Schools and Libraries News Brief Dated May 11 – Invoicing for FY 2011

As FY 2011 draws to a close, the SLD's News Brief for May 11, 2012, reviews the invoicing process for recurring service charges. Topics covered include:

1. The two invoicing methods — BEARs for applicant reimbursements and SPIs for service provider discounts.
2. Treating basic maintenance as a recurring service.
3. Requesting service delivery deadline extensions — applicable only to non-recurring services.
4. Requesting SPIN changes.
5. Returning unused funds using a Form 500.
6. Returning funds disbursed in error.