News of the Week

Last Monday’s Wave 23 for FY 2016 totaled $52.9 million. Cumulative national funding through Wave 23 is $1.15 billion. Wave 24 is expected to be released this Monday, December 5th.

Recent EPC System Problems:

Applicants have been reporting the following EPC problems that USAC is working to correct:

1. A number of pending Form 486s have been found to be missing FRNs, apparently lost within EPC. Applicants awaiting Form 486 approvals should check with CSB to make sure that their Form 486s are being viewed as complete. If not, it may be necessary to submit new Form 486s and cancel the originals.
2. USAC is reporting that a number of applications, seemingly larger ones, have completed the PIA process and have been “approved,” but that EPC system problems have prevented the issuance of formal Funding Commitment Decision Letters (“FCDLs”). When this problem is fixed, FCDLs should be available in the following funding wave.

Upcoming 2016 E-Rate Deadlines:

FCC Decision Watch:

The FCC issued its latest monthly set of “streamlined,” precedent-based decisions in Public Notice DA 16-1320. In summary, the FCC:

1. Dismissed
   1. Four Requests for Waiver, which the FCC treated as appeals, but which should have been filed first with USAC. In one case, the applicant was requesting an invoice deadline extension in order to resubmit a corrected BEAR, originally filed before the invoice deadline. Procedurally, the applicant was relying on an instruction in the BEAR Notification Letter reading “If a new BEAR cannot be submitted before the invoice deadline passes, you or your customer may submit a request for a deadline extension.”  This language has not yet been updated to reflect more recent guidance to appeal a BEAR decision directly to USAC as long as the initial BEAR had been timely filed.
   2. Two Requests for Waiver deemed moot.
   3. Eight Requests for Waiver failing to comply with the FCC’s basic filing requirements. Technically, although not always required by the FCC:

      [The] general filing requirements contained in the Commission’s rules which, along with a proper caption and reference to the applicable docket number, require (1) a statement setting forth the party’s interest in the matter presented for review; (2) a full statement of relevant, material facts with supporting affidavits and documentation; (3) the question presented for review, with reference, where appropriate, to the relevant Commission rule, order or statutory provision; and (4) a statement of the relief sought and the relevant statutory or regulatory provision pursuant to which such relief is sought…

   4. Four Petitions for Reconsideration and one Petition for Second Reconsideration not identifying additional reasons for review or not filed in a timely manner (i.e., within 30 days).
2. Granted
   1. One Request for Review involving a late-filed Form 486. Note that applicants with similar issues should consider filing their appeals before January 30, 2017, at which point the FCC’s rules on late-filed Form 486s become stricter (see our newsletter of October 24th).
   2. One Petition for Reconsideration involving improper service provider involvement in the competitive bidding process. In this case, the vendor had mailed the applicant’s Form 470 but, upon review, the FCC accepted sworn statements from the applicant stating that the provider did not assist in the preparation of the Form 470. Note that this decision is the culmination of a 13-year old problem tracing back to a FY 2004 incident that could have been avoided in the first place had the applicant taken full responsibility for the Form 470.
   3. Two Requests for Review or Waiver granting applicants additional time to respond to USAC review questions.
   4. Six Requests for Review for a late-filed Form 471 certification or for late-filed applications submitted within 14 days of the deadline.
   5. Two Requests for Review and/or Waiver involving “legally binding” or “signed” contract requirements.
   6. Five Requests for Waiver for ministerial and/or clerical Form 471 errors involving service category errors, calculation errors, or, in one FY 2003 case, a misunderstanding of the then current technology plan requirements.
   7. Two Requests for Review involving service implementation delay (one only partially granted).
   8. Two Requests for Waiver of the 60-day appeal filing deadline.
   9. Three Requests for Review and/or Waiver of the “price as the primary factor” requirement” when the FCC determined that the applicants had selected the lowest cost vendors and that there had been no evidence of waste, fraud, or abuse.
3. Denied
   1. One Request for Review affirming a USAC decision to deem the allocated cost of cable drops to be used for security cameras to be ineligible. Security cameras themselves have always been ineligible, but it is disturbing to see that their use on a school network would make a portion of that network ineligible. The counter-argument, as reflected in the underlying appeal, appears strong.
   2. Five more Requests for Waivers for invoice deadline extensions.
      
      Editorial comment: We remain disturbed with the FCC’s actions over the past year to enforce a strict invoice deadline rule affecting the payment of E-rate discounts while, at the same time, providing reasonable flexibility on Form 471 and Form 486 deadlines affecting E-rate commitments. Regardless of political leanings, we expect that many applicants are hoping that a change in FCC leadership will lead to a more consistent and applicant-friendly approach to E-rate deadlines.

3. 3. Eleven Requests for Waivers for Form 471 applications filed more than 14 days late, absent “special circumstances.”
   4. One Request for Review to correct an alleged ministerial and/or clerical error.
   5. One Request for Review involving an applicant’s lack of resources “to effectively use the services requested.”
   6. One Request for Review concerning services not covered by the applicant’s Form 470.
   7. One Request for Review related to the use of services outside the funding year.
   8. One Petition for Reconsideration regarding an “unjustified” service implementation delay.
   9. Twelve late-filed Requests for Review or Waiver.
   10. One Request for Review for a violation of the 28-day competitive bidding rule.

E-Rate and the FCC Agency Financial Report:

The FCC recently released its FY 2016 Agency Financial Report. The Report contains substantial data on improper payments, and on the procedural actions being taken to reduce such payments, for all four Universal Service Fund (“USF”) programs. (For specific E-rate information, see pages 3, 8-17, 23-25, 31, and 39-43.)

Based on a statistical sample derived through USAC’s Payment Quality Assurance (“PQA”) program, the estimated rate of improper E-rate payments was well above the established statutory threshold of the Improper Payments Elimination and Recovery Improvement Act (“IPERIA”). Extrapolating this rate to all actual payments made during calendar 2015 would yield an estimated total of $119 million in improper E-rate overpayments. About $9 million of this amount would be attributed to USAC administrative process errors and/or the inability to authenticate eligibility. Breakdowns of the two major components of the remaining $110 million in estimated overpayments are shown in the following tables.

The majority of these problems can be attributed to the competitive bidding process including applicants’ failure to retain bidding documentation and to service provider LCP (“Lowest Corresponding Price”) errors.

In addition to identifying “improper” payments, USAC is conducting payment recapture audits using both outside audit firms and external consultants to assist with equipment inventories. Of 81 such E-rate audits, 32 have confirmed overpayments of $6.5 million in estimated recoveries.

To help avoid overpayments, particularly now that BEAR reimbursements are being made directly to applicants without pre-review by service providers, USAC expects to conduct “service check reviews” on 1,800 BEARs per calendar year. More generally, USAC indicates that it “conducts manual reviews of over 50 percent of invoices submitted to USAC for reimbursement and requires the applicants and/or service providers to provide support for the requested invoice where needed.”

E-Rate Central Welcomes Melinda Van Patten:

E-Rate Central is pleased to announce that Melinda “Mel” Van Patten has joined our team. Mel has over 10 years of E-rate consulting experience with another well-respected E-rate firm and is currently the president of the E-Rate Management Professionals Association (“E-mpa”). She will be working out of our North Carolina office.

USAC’s Schools and Libraries News Brief of December 2, 2016, discusses two important topics.

Definition of “Campus:”

As discussed in our newsletter of September 19th, the Eligible Services List (“ESL”) for FY 2017 (DA 16-1023) included a new definition of “campus” as a “geographically contiguous” property of a single school. This is a critical distinction because the ESL indicates that connections between buildings on two campuses are considered Category 1, whereas connections between buildings on the same campus are considered Category 2. One way to express this distinction is by viewing the campus-to-category relationship as “2-is-1 but 1-is-2.”

The new definition of “campus,” and the Category 1 & 2 distinctions, raised a few issues that last week’s News Brief was apparently designed to clarify. But questions remain.

The News Brief reiterates the basic guidance in the ESL’s FAQ section that connections between separate schools or libraries in a single building would be Category 1. In a small one-building district, for example, this situation might arise if the state considered the district as having a separate elementary school and a junior/senior high school. Although each school would be considered a separate campus, it is not likely that the building’s data network was designed with a unique demarcation between the two schools that could be designated as a Category 1 interface. This raises additional problems.

1. Being able to designate certain intra-building connections as Category 1 might appear to be an advantage, at least on the surface, by removing related E-rate expenses from the schools’ limited Category 2 budgets. This potential benefit, however, is likely to be immaterial, offset by the increasing E-rate complexity of filing for those expenses as Category 1 and cost allocating the same expenses out of the schools’ broader Category 2 network.
2. The News Brief further complicates the issue by making a distinction between the treatment of building classrooms shared or not shared by the schools. Only connections between unshared classrooms are Category 1; connections between shared classrooms are Category 2.
3. One unaddressed problem with treating intra-building connections as Category 1 is that such connections would presumably be considered “self-provisioned.”  For E-rate purposes, self-provisioned fiber connections have to be bid against lit fiber. As nonsensical as it appears, there is no indication that the lit fiber bidding requirement would be waived for intra-building connections.

We understand the theory behind the Category 1 & 2 distinctions for a single building, but question the practicality. At a minimum, although not addressed in the News Brief, we believe that an applicant should have the option of considering all intra-building connections for its own schools as Category 2.

A second problem with the new guidance is that it does little to further clarify a “geographically contiguous” property. Although this phrase had not been used previously, the concept had been embodied in the presumptive assumption that a public right-of-way served as a boundary between two properties. The FY 2017 ESL explicitly rejects this presumption. Last week’s News Brief also rejects the public right-of-way distinction, but suggests that a proper boundary might be a “road” or “major thoroughfare.”

On the same subject, the News Brief contains guidance that single schools or libraries can define separate campuses on the same grounds for their own administrative purpose, as long as they document the basis for their determinations. Why such documentation is important is questionable since the News Brief indicates that, in any event, E-rate will apply its own definition of a “geographically contiguous” property.

Additional guidance will be required on the definitions of “campus” “geographically contiguous,” and on the distinctions between Category 1 and Category 2.

Deadline Extensions for Fiber Implementation:

The FCC’s new rules on fiber system construction indicate that the eligibility of such systems require the fibers to be operational (“used or lit”) within the funding year for which discounts are to be provided. For FY 2016, the funding year ends June 30, 2017. Under certain circumstances for which construction is “unavoidably delayed,” an applicant can request a one year extension.

The question being asked by many applicants who applied for FY 2016 fiber discounts, but who have not yet, or have just recently, been funded, is whether late funding would justify an extension. The News Brief suggests that a “Late FCDL” is an example of when one may seek a service delivery deadline extension, implying, but not explicitly stating, that such a request would be approved.

Please note the difference between the treatment of fiber installations and other types of eligible services involving one-time installation charges.

1. The normal service delivery deadline for other one-time services is September 30th, three months into the following funding year. For fiber, it’s June 30th of the current funding year.
2. FCDLs for other one-time services approved after March 1st of a funding year automatically generate an additional one-year extension of the service delivery deadline. No similar automatic extension is granted for fiber FRNs.

Although not covered in this News Brief, there are at least three other critical aspects of fiber installations that must be noted.

1. Assuming a properly bid contract is in place, the fiber rules permit construction to begin as early as January 1st of the preceding funding year. This is well before an application has been submitted, much less approved. Fiber rules also permit contractual progress payments before July 1st of the funding year. Applicants must recognize that such work and payments are subject to the risk of ultimate E-rate funding.
2. Even after funding is approved, E-rate payments made on fiber work in progress are at risk if the fiber system is not completed by the service delivery deadline.
3. USAC has indicated that the fiber operational requirement applies on a circuit-by-circuit basis. Larger multi-node systems may require more than one year for construction. As such, such systems may have to be segmented and funded over multiple years. Applicants who have applied for large fiber systems in FY 2016 may need to reapply for portions of the same network in FY 2017.